Blockchain

What Is Interoperability?

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2022-07-08 | 5m

What Is Interoperability?

In general terms, blockchain interoperability is defined as the process of operations between two or more blockchains. In layman's language, blockchain interoperability is the communication mechanism between two or more blockchains.

Technically, blockchain interoperability may be defined as the ability to see, access, and share information across different blockchains or blockchain networks. Many blockchain projects want to implement interoperability to make their process easier and more transparent. Also, the implementation of this process will increase the communication rate of their blockchains.

In this article, we will explore everything about blockchain interoperability. Let’s get started!

Interoperability Definition

Blockchain technology offers promising results, but overcoming obstacles to widespread adoption remains a challenge, with the technology yet to reach enterprise maturity. Moreover, many existing solutions within the supply chain are using blockchain for relatively simple use cases, while realizing there are numerous other possible opportunities both within and adjacent to the supply chain. Other industries where blockchain could be relevant include finance, food safety, and insurance, among others.

Consequently, inter-blockchain communication has become a hot topic to ensure various supply-chain stakeholders are less dependent on sound design choices over technology stacks. In short, this expresses the need for solving the challenge of interoperability – a characteristic that allows a user to trust that “I know what I see is what you see” both within a single system and across systems.

Put simply, interoperability is: (a) the ability for computer systems to exchange and make use of information and (b) entailing the ability to transfer an asset between two or more systems while keeping state and uniqueness consistent.

The latter part is what makes an otherwise straightforward concept complex in the context of blockchain. Ideally, blockchain interoperability should allow knowledge to be shared without sending copies of data or compromising fairness in the ordering of transactions and accessibility to data. There should also be the codification of common rules to the point where compliance becomes a non-issue.

Types of Interoperability

Blockchain-to-blockchain interoperability comes in two types, each of which carries considerations distinct from ones that organizations must typically address with traditional, non-distributed systems.

For blockchain, the two types are:

- Exchanging digital assets: This is the ability to transfer and exchange assets originating from different blockchains without trusted intermediaries such as centralized exchanges. An example of this would be making bitcoin spendable in distributed applications (Dapps) built on Ethereum. Digital assets exchange is the ability to transfer and exchange assets originating from different blockchains without trusted intermediaries such as centralized exchanges. An example of this would be making Bitcoin spendable in Ethereum decentralized applications (Dapp).

- Exchanging arbitrary data: This is the ability to do something on one blockchain that affects another blockchain. What is tracked is not necessarily an item of value but could be an event. It also lets us create synthetic versions on one chain of an asset that is home to another chain, making that asset usable on a state machine that occupies a different part of the trade space.

As most blockchains are passive systems unable to produce a signature verifiable-by-others blockchains, the arbitrary data exchange is the more difficult sort of interoperability to achieve. However, the use cases enabled by arbitrary data exchange can be more advanced than what digital asset exchange makes possible.

Blockchain interoperability is not a set rule book. It refers to a broad range of techniques that allow different blockchains to listen to each other, transfer digital assets and data between one another, and enable better collaboration. There are decentralized cross-chain bridges that facilitate the transfer of data and assets between Ethereum, Bitcoin, EOS, Binance Smart Chain, Litecoin, and other blockchains.

Currently, the main use cases of interoperability are: first, the transmission of a given cryptocurrency’s liquidity from one blockchain to another. Second, allowing users to trade an asset on one chain for another asset on another chain. Third, enabling users to borrow assets on one chain by posting tokens or NFTs as collateral on another chain.

Each bridging technique makes its own design compromises in terms of convenience, speed, security, and trust assumptions. Each blockchain operates on different sets of rules and bridges serve as a neutral zone where users can switch between one and the other. It greatly enhances the experience for users. For end-users, these trade-offs may not be easy to understand. Furthermore, the risks associated with each bridge technique may compound each other whenever an asset crosses several bridges to reach the hands of the end-user.

Important Uses and Advantages of Blockchain Interoperability

Customizable Web3 services: The ability of blockchain protocols and applications to mix and match different “lego pieces” is key to creating entirely new Web3 instruments and platforms that aren’t possible with legacy industries and business models of the Web2 era. Many experts argue that interoperable smart contracts could supercharge industries like healthcare, law, or real estate, for instance, by allowing important business information to be sent back and forth between private networks and public networks in a customizable and controllable manner. Blockchain interoperability may also eventually enable multi-token transactions and multi-token wallet systems, which would greatly streamline the crypto user experience.

A more decentralized ecosystem: While pure decentralization within individual blockchain networks is a top priority for many blockchain projects, the ability to establish network interoperability across multiple blockchains presents an even more advanced embodiment of blockchain technology’s promise to decentralize systems and economies. Instead of having one blockchain like Ethereum processing all the transactions for thousands of decentralized applications, there could one day be thousands of application-specific blockchains that communicate with one another through a decentralized main hub.

Enhanced cross-industry collaborations: Blockchain technology has a wide range of industry-specific use cases, but ultimately the primary benefits come down to data transparency and verifiability, smart contract execution, and decentralized consensus. Once blockchains used by different organizations and industries are able to interact with one another, independent markets and business applications that were previously considered entirely separate will be able to more easily transfer data and value. This means organizations and communities that wouldn’t typically interact with one another would be able to exchange information, leverage each other’s strengths, and cultivate innovation more effortlessly and effectively.

Following are other important uses and advantages of interoperability in blockchain transactions.

Increases the success of blockchain technology

Blockchain technology works on sharing and integration. Interoperability increases the ease of sharing and integration of data and thus strengthens blockchain technology. This further encourages blockchain transactions.

Enhances the future of emerging projects

Blockchain interoperability can help to increase the advent and success rate of existing and emerging projects in the field. Especially for the projects where the value chain is important like healthcare, finance, trade, aviation, etc.

Cross-Chain transactions

By allowing blockchains to share their data with one another, interoperability has eased the process of cross-chain transactions.

Multi-token transactions

Blockchain interoperability has also improved multi-token transactional operations.

Privacy and security

The interoperability of blockchains is a safe and secure process. There are minute or no chances of fraud.

As much as interoperability has its importance, it however has some disadvantages that need to be addressed to make blockchain more attractive for its users.

Disadvantages of Blockchain Interoperability

Of course, there are also some difficulties faced in the process of blockchain interoperability.

The reverse flow of blockchain is not possible

A blockchain registered on a network cannot go back to its original location. Thus, it is too essential to validate the data before submitting a starting node.

Interoperability is not possible between two different networks

Blockchain interoperability currently works for the different blockchains of the same network. For example, Ethereum and Ripple cannot exchange their data with each other. This drawback needs to be considered immediately for ensuring a good future of blockchain interoperability around the globe.

Functions are highly restricted

The process of blockchain interoperability is highly restricted in nature. Though this feature ensures safety while transferring data, sometimes it becomes more complex and complicated for the users.

Working Principles of Blockchain Interoperability

Most existing layer-1 blockchains lack built-in features that support cross-chain interoperability. However, there are a variety of tools today that are increasing the level of interoperability between blockchain networks:

Sidechains: A type ofLayer-2 platform, sidechains are separate blockchain networks that are compatible with a single mainchain. Each sidechain has its own consensus mechanism, security parameters, and tokens. These side chains generally have their own specific use cases that are distributed accordingly in order to improve the overall ecosystem’s processing efficiency and self-sovereignty. Several major crypto projects, such as Polkadot and Cosmos, were designed from the ground up to be comprehensive cross-chain infrastructure solutions, with the ultimate goal being to establish an interoperable “network of networks.”

Oracles: Within the context of blockchain technology, oracles bridge the information gap between on-chain and off-chain environments. Decentralized oracle services likeChainlink and API3 play a crucial role in feeding off-chain data to blockchain-enabled smart contracts and contribute to blockchain interoperability by ensuring that different ecosystems are referring to a common source of truth.

Bridges and swaps: Cross-chain bridges enable a digital asset owned by a party to be locked on one chain while an identical asset is “minted” on another chain and sent to an address owned by the original owner. In contrast, atomic swaps enable users to exchange tokens from different blockchain networks in a decentralized manner. Both are automatically enabled through the use of smart contracts and play a central role in facilitating seamless cross-chain value transfers.

Interoperability and Blockchain Future

As far as blockchain technology is concerned, interoperability helps solve the problem of assets and data interacting across multiple chains. Although exchanging data and value digitally between two parties has become a straightforward process when using the same blockchain platform, such as Bitcoin, Litecoin, or Ethereum, the same cannot be said when different parties use different blockchain platforms. Indeed, given that the businesses around the world utilizing blockchain technology are operating within an increasingly diverse array of blockchain networks, the process of digital transfer is made considerably more problematic. Interoperability, however, is anticipated to do much to alleviate such problems, making it much simpler for parties to transact across various blockchains.

So, which projects offer the best hope for an interoperable, multichain future? Among the most hotly anticipated is Polkadot, which has emerged as one of the biggest projects within the blockchain space. Founded by Gavin Wood, a co-founder of Ethereum alongside Vitalik Buterin, Polkadot strives to solve key limitations currently plaguing his former project. For one, it adopts the main chain for the system, which it calls a “relay chain” that connects and supports various ancillary, application-specific blockchains, or Parachains, allowing for inter-chain communication and cross-chain transactions. The parachains generate blocks for transaction validators on the relay chain before the blocks are added to the final chain, thus providing sufficient security. And different parachains can run parallel transactions without any interference, which helps Polkadot to be scalable. Although still undisclosed, the parachains for the ecosystem will be determined imminently.

The Avalanche project, meanwhile, aims to bridge all blockchains under one interoperable system. According to John Wu, president of Ava Labs, the company behind the Avalanche blockchain, it doesn’t see itself as a competitor chain to Ethereum but rather a compatible one with users able to transfer assets between the two platforms and perform beta tests on the lower cost Avalanche before scaling up through Ethereum. “A lot of these next-generation smart contract platforms should start viewing these things in that matter,” Wu recently told online digital-asset news publication Blockworks. “We should be working at creating interoperability, creating efficiencies, and allowing us to take some of the developers from these other places and grow that market.”

Other blockchain projects focusing on achieving interoperability that also deserves a mention include Cosmos, which claims proven success in this area with chains operating in its ecosystem encompassing Terra and Binance Smart Chain (BSC); Polygon, which aims to connect all Ethereum-compatible chains; and Solana, which uses its interoperability protocol Wormhole to facilitate interactions between the Solana, Terra, Ethereum, and Binance Smart Chain ecosystems.

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Disclaimer: All products and projects listed in this article are not endorsements and are provided for informational purposes only. This article is for educational purposes only and is not intended as investment advice. Qualified professionals should be consulted prior to making financial decisions.

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