Every year, we see new blockchain networks being developed to address specific niches in specific industries, each blockchain having a specific function based on its purpose. For example, layer-2 scale solution like Polygon is built to have ultra-low transaction fees and fast settlement times.
The increase in the number of new blockchain networks is also the result of the recognition that there is no perfect solution that will be able to meet all the needs related to blockchain technology at once. Therefore, as more organizations become aware of the increasing technology and its capabilities, the interconnection of these unique blockades becomes necessary.
What is interoperability?
Blockchain Interoperability share the various ways that allow many blockchains to communicate, share digital assets and data and work together more effectively. This makes it possible for one blockchain network to share economic activity with another. For example, interoperability allows sending data and assets across different blockchain networks through decentralized cross-chain bridges.
Interoperability is not something that blockchains have in common because each blockchain is built on different standards and codebases. Since most blockchains are not compatible, all transactions must be done in one block, no matter how many features a blockchain may have.
Marcel Harmann, founder and CEO of THORWallet DEX – a noncustodial decentralized finance (DeFi) wallet – told Cointelegraph: “Interoperability can be understood as freedom in the exchange of data. Currently, base layer protocols cannot communicate effectively. Layer-1 protocols like Ethereum or Cosmos has smart contracts built into its fabric, allowing only the secure exchange of data within its own ecosystem.The transfer of digital assets that leave the network raises the question: How can the blockchain trust the validity of other block states?
Harmann continued, “The consensus mechanism in each blockchain decides the canonical history of all transactions that have been validated. This produces a very large file that must be processed in each block and can only be viewed in a specific language that is native to the block. Interoperability between two or more blocks refers to one or two chains being able to understand and process the history of the other chain, making it possible, for example, to exchange assets between different layer-1 networks.
Although it seems obvious that public blockchain projects should be designed with interoperability in mind from the start, this is not always the case. However, the organization increasingly calling for interoperability because of the benefits of sharing information and working together.
Why is interoperability important?
To realize the full potential of decentralization, it is beneficial to
people participating in several blocks to be connected through a single protocol. This reduces friction for users as they can access multiple decentralized applications (DApps) without having to switch networks.
Because the blocks work independently of each other, it is difficult for users to use the benefits that each network provides. To do so, they need to hold tokens supported by each blockchain to participate in the protocol on the network.
Interoperability can fix this problem by allowing users to use one token on multiple blockchains. Additionally, by enabling blockchains to communicate with each other, users can access protocols across multiple blockchains more easily. Because of this, there is a better chance that the value of the industry will continue to grow.
Fabrice Cheng, co-founder and CEO at Quadrata – the Web3 passport network – told Cointelegraph:
“Interoperability is important because it is one of the main advantages of blockchain technology. Decentralized open-source technology allows the creation of products that can be operated on the entire chain, so that more users, businesses and institutions stay connected.
Cheng continued, “People using blockchain technology want to make sure people are screened, KYC-verified and have good credit behavior. DeFi users can access trading options or have access to real-time price feeds. Interoperability is an efficient way to remove middlemen for users and allow businesses to focus on their core values.
When it comes to decentralized finance, giving merchants more ways to use their assets can increase growth and opportunities for the sector. For example, multichain yield farming enables investors to generate multiple returns as passive income across multiple blockchains as they own a single asset.
Investors only need to hold Bitcoin (BTC) or stablecoins like USD Coin (USDC) and then distribute it in multiple protocols in various blocks through a bridge. Interoperability will also increase liquidity in multiple blockchain networks as it will make it easier for users to move funds across different chains.
Interoperability does not only refer to connectivity between blockchains. Protocols and smart contracts are also interoperable. For example, t3rn, a smart contract hosting platform, enabling smart contracts to operate on various blockchains. This is made possible by smart contracts hosted on smart contract platforms and distributed and executed across various blockchain networks. Interoperable smart contracts facilitate developers to create cross-chain applications and users to open cross-chain transfers.
Interoperable smart contracts will make it easier for users to access various decentralized applications because they don’t have to change networks. For example, suppose a user uses a DApp on Ethereum and wants to access the lending protocol on Polkadot. If Polkdadot-based DApps have interoperable smart contracts, they access them on Ethereum.
Oracles are another protocol that can benefit from interoperability. Oracles are entities that connecting real-world data to the blockchain through smart contracts. Decentralized oracle platforms like QED can connect oracles to multiple blockchain networks, allowing real-world data to be shared between blockchains. In addition, the oracle can take data from an API or sensor and send it to a smart contract to activate when certain conditions are met.
For example, a supply chain has multiple organizations using different blockchain networks. Once a component in the supply chain reaches its destination, the oracle can send the data to a smart contract that confirms the delivery. Once the delivery is confirmed via oracle, the smart contract releases the payment. Since oracle is connected to multiple blockchains, each supplier 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 do this is to use it cross bridge. In simple terms, a cross-chain bridge allows users to transfer tokens from one block to another.
Wrapped tokensfor example, allowing users to use Bitcoin (BTC) on the Ethereum network as Wrapped Bitcoin (wBTC). This is important in the DeFi industry because users can participate in DeFi without buying the platform’s native tokens, which may be more stable than stablecoins or blue chip coins like BTC or Ether (ETH).
Being able to move assets easily between blockchain networks is a key benefit of interoperability. Anthony Georgiades, founder of Pastel Network – a nonfungible token (NFT) and Web3 infrastructure and security project – told Cointelegraph:
“Interoperability is very important for the blockchain industry due to the diversity of data and assets found in the crypto ecosystem. Decentralized cross-chain bridges are necessary to facilitate transfers between different tokens or assets.
The key to the success of blockchain technology will be the level of interaction and integration between many blockchain networks. Because of this, interoperability between blockchains is important because it lowers the barrier to entry for users who want to participate in protocols across multiple networks.
Interoperability between blockchains will increase productivity in all crypto sectors. Users can move data and assets quickly across blockchains, increasing flexibility for everyone involved. Instead of being tied to a single blockchain, smart contracts can be used across multiple networks and oracles will deliver real data across different platforms. When combined with the advantages of public decentralized blockchains, interoperability should provide the basis for widespread blockchain adoption and utilization.
Georgiades continued, “Therefore, interoperability allows users to send cryptocurrency from one block to another and allows users to send tokens or NFTs as collateral for other assets. The interoperable Web3 world is a vision that continues tirelessly. A multichain ecosystem facilitated by a cross bridge that mulus will take us there and bring that vision.