Interoperability allows blockchain networks and protocols to communicate with each other, making it easier for everyday users to interact with blockchain technology.
Each year we see new blockchain networks growing to address specific niches within certain sectors, with each blockchain having specialized functions depending on its purpose. For example, Layer 2 scaling solutions like Polygon are designed to have extremely low transaction fees and fast settlement times.
The increase in the number of new blockchain networks is also a result of the recognition that there is no perfect solution that will be able to meet all the needs associated with blockchain technology at the same time. Therefore, as more and more organizations become aware of this increasing technology and its capabilities, the interconnection of these unique blockchains becomes necessary.
What is interoperability?
Blockchain interoperability refers to a wide variety of methods that allow many blockchains to communicate, share digital assets and data, and work together more efficiently. This allows a blockchain network to share its business with another. For example, interoperability allows the transmission of data and resources across different blockchain networks through decentralized cross-chain bridges.
Interoperability is not something that most blockchains own, as each blockchain is built with different standards and code bases. Since most blockchains are naturally incompatible, all transactions must be performed in a single blockchain, regardless of how much functionality the blockchain may have.
Marcel Harmann, founder and CEO of THORWallet DEX, a non-custodial decentralized financial portfolio (DeFi), told Cointelegraph: “Interoperability can be understood as freedom in data exchange. Currently, entry-level protocols cannot communicate effectively. each other. Layer 1 protocols like Ethereum or Cosmos have smart contracts built into their framework, allowing only secure data exchange within their own ecosystems. Outbound digital asset transfers raise a question: How can one blockchain trust the validity of the status of another blockchain? “
Harmann continued: “The consensus mechanisms on each blockchain decide the canonical history of all transactions that have been validated. This produces extremely large files that must be processed with each block and can only be viewed in the specific native language of the blockchain. L ‘interoperability between two or more blockchains refers to the ability of one or both chains to understand and process the history of the other chain, thus allowing, for example, the exchange of assets between different tier 1 networks.
While it seems obvious that public blockchain projects should be designed with interoperability in mind from the start, this is not always the case. However, organizations are increasingly demanding interoperability due to the benefits of information sharing and collaboration.
Why is interoperability important?
To realize the full potential of decentralization, it is beneficial to
people participating in multiple blockchains must be connected via a single protocol. This reduces the friction for the user as he can access different decentralized applications (DApps) without having to switch networks.
Due to blockchains operating independently of each other, it is difficult for users to enjoy the benefits each network offers. To do this, they must hold tokens supported by each blockchain to interact with the protocols within their network.
Interoperability can solve this problem by allowing users to use one token across multiple blockchains. Additionally, by allowing blockchains to communicate with each other, a user can more easily access protocols across multiple blockchains. For this reason, there is a greater chance that the value of the sector will continue to grow.
Fabrice Cheng, co-founder and CEO of Quadrata, a Web3 passport network, told Cointelegraph:
Interoperability is key as it is one of the main benefits of blockchain technology. Decentralized open source technology enables the creation of interoperable products across chains, allowing more users, businesses and institutions to remain interconnected.
Cheng continued: “People using blockchain technology want to make sure people are vetted, KYC verified and have good credit behavior. DeFi users can access trading options or have access to real-time price feeds. L ‘interoperability is an effective way to eliminate intermediaries for users and allows companies to focus on their core values. ”
When it comes to decentralized finance, offering merchants more ways to use their resources can bring further growth and opportunity to the industry. For example, multi-chain yield farming allows investors to generate multiple returns in the form of passive income on many blockchains for owning a single asset.
The investor would only have to hold Bitcoin (BTC) or a stablecoin such as USD Coin (USDC) and then spread it across multiple protocols on different blockchains via bridge. Interoperability will also improve liquidity across multiple blockchain networks, as it will be easier for users to move their funds across different chains.
Interoperability doesn’t just refer to connectivity between blockchains. Protocols and smart contracts are also interoperable. For example, t3rn, a smart contract hosting platform, allows smart contracts to run across multiple blockchains. It works due to the fact that the smart contract is hosted on the smart contract platform and distributed and executed on different blockchain networks. Interoperable smart contracts make it easier for developers to create cross-chain applications and for users to perform cross-chain transfers.
Interoperable smart contracts will make it easier for users to access multiple decentralized applications as they won’t have to switch networks. For example, suppose a user is using a DApp on Ethereum and wants to access a loan protocol on Polkadot. If the Polkdadot-based DApp has an interoperable smart contract, they access it on Ethereum.
Oracles are another protocol that can take advantage of interoperability. Oracles are entities that link real-world data to the blockchain via smart contracts. Decentralized Oracle platforms like QED can connect oracles to multiple blockchain networks, enabling real-world data sharing between blockchains. Additionally, oracles can take data from an API or sensor and send it to a smart contract to trigger it once certain conditions are met.
For example, a supply chain has multiple organizations using different blockchain networks. Once a component of the supply chain reaches its destination, the oracle can send the data to the smart contract confirming its delivery. Once the delivery is confirmed via an oracle, the smart contract issues a payment. Since the oracle is connected to multiple blockchains, each vendor can use the network of their choice.
Interoperability is also important for the exchange of digital assets between blockchain networks. One of the most common ways to achieve this is to use cross-chain bridges. Simply put, cross-chain bridges allow users to transfer tokens from one blockchain to another.
Wrapped tokens, for example, allow users to use Bitcoin (BTC) on the Ethereum network as Wrapped Bitcoin (wBTC). This is important in the DeFi industry as users can interact with DeFi without purchasing a platform’s native token, which can be more volatile than stablecoins or blue chip coins like BTC or Ether (ETH). ).
Being able to easily move assets between blockchain networks is a great benefit of interoperability. Anthony Georgiades, co-founder of Pastel Network – a non-fungible token (NFT) and a Web3 infrastructure and security project – told Cointelegraph:
Interoperability is vital for the blockchain industry due to the diversity of data and resources present in the crypto ecosystem. Decentralized cross-chain bridges are needed to facilitate transfers between different types of tokens or assets.
The key to the success of blockchain technology will be the level of interaction and integration between the numerous blockchain networks. For this reason, interoperability between blockchains is critical as it lowers the barrier to entry for users who wish to interact with protocols across multiple networks.
Blockchain interoperability will improve productivity in the cryptocurrency industry. Users can quickly move data and resources across blockchain, increasing flexibility for everyone involved. Instead of being tied to a single blockchain, smart contracts can operate across multiple networks, and oracles will send real-world data across different platforms. When combined with the benefits of decentralized public blockchains, interoperability should provide the foundation for widespread adoption and use of the blockchain.
Georgiades continued: “Therefore, interoperability allows users to switch cryptocurrency from one blockchain to another and allows users to publish tokens or NFTs as collateral for other assets. An interoperable Web3 world is a vision towards which we work tirelessly. A multi-chain ecosystem facilitated by seamless cross bridges will take us there and make that vision a reality.