What Is Blockchain Interoperability

In recent years, distributed ledger technology has attracted widespread attention, not just for being the platform that underpins cryptocurrencies like Bitcoin and Ether, but as a potential game-changer when it comes to bringing a vast number of industries and services into the Web 3.0 era. Driven by the promise held by capabilities and functionalities of this technology, the number of blockchain platforms has continued seeing a rapid rise.

However, despite recent advancements and a generally positive reception, the fact is that the blockchain industry remains heavily fragmented, with platforms following wildly different approaches and adopting diverging protocols. This has put the issue of blockchain interoperability at the forefront of developer’s priorities.

Just how will this unfold remains a question mark, but today we will be walking you through all you need to know about interoperability and the paths being followed to achieve it.

Let’s dive in.

What Is Blockchain Interoperability?

Blockchain interoperability is the integration of the operations of multiple blockchain networks - or simply put, it’s the ability of blockchains to communicate with each other and perform tasks like accessing and sharing data, executing smart contracts, transferring digital assets and enhancing collaboration.

A good way of picturing interoperability, often also described as cross-chain interoperability, is imaging a bank whose use is limited if its customers can only carry out transactions with other accounts within the same bank versus a bank that will let you engage with accounts in other banks. Most of us will agree that the latter is much more preferable.

Interoperability is a feature that isn’t present in most blockchains due to differing existing protocols and standards, meaning that no matter the number of functionalities they might have, all operations can only be carried out within a single blockchain.

While the idea of sharing information freely and performing transactions involving more than one blockchain network seems practical and needed, the fact is that most public blockchain projects don’t necessarily start out with interoperability at its core.

However, recognizing the benefits of communication and the sharing of information, the vision of interoperability is being increasingly defended by companies behind the development of private networks.

Leading blockchain software technology Consensys, a major proponent of interoperability, has warned against a phenomenon it dubbed the “Balkanization” of blockchain, that is, that networks would just become a “series of unconnected systems operating alongside, but siloed from, each other—in the face of competition and commercial pressure”.

It’s clear that a blockchain network that only allows transactions to take place between entities using the same network faces severe limitations. Realizing this dynamic, technology platforms are adopting the vision of interoperable blockchains to enable functionalities such as:

Integration with existing networks

The basis of blockchain interoperability is the integration of a new network with existing networks. This integration must be carried out so that it is possible to exchange information without the intervention of an intermediary. This is how true decentralization, the central tenant of blockchain, is achieved and preserved.

Initiating transactions on other networks

Through blockchain interoperability, it will be possible to initiate transactions on any of the multiple blockchain platforms that have been put together. Users can then benefit from having a higher degree of flexibility when choosing which of the networks they would like to work with.

Conduct transactions with other networks

Blockchain interoperability enables cross-chain transactions, whereby its users can tap into different blockchain networks with little to no barriers.

The Three Eras of Blockchain

Blockchains have only been around less than 15 years and the first iteration saw these networks being used for traditional monetary purposes. However, the launch of the Ethereum blockchain in 2015 saw the beginning of Blockchain 2.0 and the rise of smart contracts with widespread applications. And currently, we’re going through the Blockchain 3.0 era, with a strong emphasis on sustainability, privacy, scalability and interoperability.

Let’s take a closer look at the evolution of blockchains so far:

Blockchain 1.0

The emergence of the first blockchains was primarily tied to the introduction of the concept of decentralization, the improvement of the world’s traditional financial system and as an alternative to fiat money. In this sense, most will associate Blockchain 1.0 with Bitcoin and other cryptocurrencies This phase saw the rise of networks centered on peer-to-peer transactions, highly secured and anonymized.

The promise held by the technology helped inspire developers to work towards its next iteration.

Blockchain 2.0

A new era in Blockchain was inaugurated with the launch of the Ethereum network at the hands of programmer Vitalik Buterin. This helped shine light on smart contracts, stability and the opportunity of building dApps. More specifically, the Ethereum blockchain gave developers open-source and permissionless tools in the context of developing and deploying smart contracts.

This was a significant step forward as it fueled crucial innovations in crypto like non-fungible tokens (NFTs), decentralized autonomous organizations (DAOs), decentralized finance (DeFi) and initial coin offerings (ICOs).

Blockchain 3.0

Working towards maximizing efficiency, scalability and interoperability, the current era of blockchain has seen the release of many different blockchain networks with applications targeted at the wider global economy and key industries and services. It is also seeing blockchains moving away from the Proof-of-Work (PoW) mechanism toward Proof-of-Stake (PoS).

With hundreds, if not more, of blockchains emerging, the capability from them to communicate with each other has become more significant. That said, the existence of an interoperability protocol that can be used across the industry is yet to be fully realized.

There are some platforms specialized in interoperability, like Polkatot, that enable cross-blockchain transfers of not just tokens but any type of data or digital asset without a centralized third-party.

Currently, there are great efforts to expand the notion of interoperability beyond blockchain-to-blockchain transactions to the connection of traditional infrastructures to blockchain networks. Such is the case of many big financial institutions like JP Morgan and HSBC rolling out their blockchain networks and developing interoperability standards.

Blockchain 4.0

If Blockchain 3.0 is being developed towards making transactions faster, more efficient and cost-effective, the future will see the technology becoming optimized for large-scale industrial use.

Blockchain 4.0 will leverage features like privacy, automation, integration of execution frameworks, automated record-keeping and industry-targeted functionalities.

Moreover, this phase of the technology will also see major steps towards improving user experience. Some of the industries that will likely benefit from blockchain in this context are healthcare, supply chain and data management.

Why Is Blockchain Interoperability Important

As we’ve discussed so far, one of the biggest challenges of existing blockchains is their inability to share information between each other as a result of protocol incompatibilities, which has a severe impact on the future of the technology.

As of late, we’ve seen blockchains becoming more widespread, leading to issues like processing speed and scalability being called into question. And if blockchain networks operate independently, each siloed from one another, it’s likely that the benefits and full potential of this technology might never be reached.

Increasingly, blockchains are being seen as a significant means of transferring value, making the need for interoperability paramount. In fact, network interoperability is crucial to the creation of new services, products and platforms that can pool the strengths and benefits from many different networks at the same time.

All things said, blockchain interoperability is ultimately about broadening access to blockchain technology and laying out a sound pathway for mainstream adoption.

How Can Blockchain Interoperability Be Achieved?

It's already pretty clear by now that blockchain interoperability is a positive thing. The question becomes, then, how to make it a reality. This is no easy task, particularly when we have competing blockchain projects that are unwilling to embrace interoperability out of fear it will somehow diminish their own networks.

Still, different approaches to blockchain interoperability exist:

Cross-Chain Technology

The idea behind Cross-chain technology is that it acts as a bridge between networks and enables transactions between them. Let’s take Bitcoin and Ethereum, two separate networks that have no means of communicating. Cross-chain technology, through cross-chain protocols, could technically enable the creation of a network that can bridge Bitcoin and Ethereum and enable the exchange of information directly between them. For now, one of the biggest challenges remains the issue of compatibility as creating a network that can respond to the unique characteristics of different blockchains requires a high level of complexity.

Sidechain Technology

As explained by Ethereum, a sidechain is a “separate blockchain that runs independent of Ethereum and is connected to Ethereum Mainnet by a two-way bridge”. In other words, the technology consists of a network parallel to the main blockchain where the sidechain network keeps its nodes and code connected to the main network, meaning it's fully interoperable. Sidechains are often used to test network features, to speed up transactions and lower costs.

Blockchain Interoperability Projects

While we are in the process of achieving blockchain interoperability, there are projects that are getting close to it. Most will adopt either a cross-chain or sidechain mechanism, or simply both.

Here are some of platforms worth looking at:

Polkadot

The leading blockchain interoperability project is Polkadot, the brainchild of Ethereum co-founder Gavin Wood. Polkadot focuses on developing ‘parachains’, or parallel chains, that can interact both with each other and with external blockchains. This helps relieve congestion of the main network, boost speed and promote scalability.

Cosmos

Much like Polkadot, Cosmos is a cross-chain solution that boasts a unique feature for the exchange of information between networks - the Inter-Blockchain Communication Protocol (IBC), which has emerged as one of the most trusted interoperability solutions currently available. The IBC can be best understood as an open-source protocol used to relay messages between independent distributed ledgers, linking one blockchain to another. As the vast majority of networks can’t yet support the IBC protocol, Cosmos is able to work around this challenge by using a ‘peg zone’, an account-based blockchain which bridges zones within Cosmos to external chains like Bitcoin or Ethereum. In addition, the platform offers another blockchain interoperability solution in the form of a software development kit (SDK) that makes it easy for coders to create their own decentralized apps (dApps) and deploy them across the blockchain through smart contracts.

Blocknet

Blocknet is, according to its developers, a decentralized network that connects blockchains, similar to how the internet connects computers, while offering blockchain solutions to achieve interoperability. The platform’s protocol is aimed specifically at maximizing interoperability between different blockchains through two different components - XBridge, a decentralized exchange layer that connects any blockchain asset via cross-chain atomic swaps and s XRouter, which connects external blockchain networks to dApps, that is, decentralized apps.

Aion

Aion went live in 2018 and was considered the first public blockchain interoperability network. The platform is a multi-tier blockchain network that allows the participating networks to form chains between them and its bridges can connect public as well as private networks.

Wanchain

Wanchain aims to promote interoperability with a strong focus on decentralized finance. To do this, it uses a mechanism that enables the exchange of native tokens between different networks. This is achieved by taking tokens from a blockchain network and “re-packaging” them in Wanchain's token, WETH.

Benefits of Blockchain Interoperability

Once the blockchain interoperability model is finally realized, we can expect that it will lead to a whole new range of applications within the blockchain, as a result of a number of advantages brought forward, including:

Customization of Web 3.0 services for users and industries

New platforms and assets can be created as a result of “mixing and matching” different blockchains, which can be a massive asset in the Web 3.0 ecosystem. Industry experts have gone as far as to predict that interoperable smart contracts have the potential to revolutionize industries such as healthcare and law, allowing professionals from these areas to exchange essential information in a safe, efficient and adapting manner through different blockchain systems. This would also be enhanced by further advancements like multi-token wallet transactions, among many other features.

Decentralization of ecosystems

Decentralizing systems and economies is one of the main advantages of using any blockchain, and the more applications are able to be interoperable, the more outcomes can be derived from the decentralization model and drive widespread adoption.

Enhanced collaboration

Blockchain technology brings many benefits to the table when compared to other technology, namely privacy, data transparency, smart contract execution and verifiability. As mentioned earlier, there are multiple industries that can make use of the technology to enhance their processes. With interoperability at play, sectors that once were separate entities could more easily communicate with each other and exchange data in a bid to foster innovation and collaboration.

Challenges to Blockchain Interoperability

While an aspirational goal worth pursuing, bringing blockchain to life is, at the end of the day, easier said than done. For starters, it's worth considering that the technology can still be seen as fairly new and that a big chunk of the challenge is reaching a common protocol or consensus between those blockchains. Interoperability is a logistical and technologically complex process that has raised a number of concerns, including how security can be ensured in such an ecosystem. A core pillar of blockchain technology is about protecting data integrity during exchanges, ensuring that it’s never compromised when within a network. If data cannot be secured, the system would collapse. In addition, not all blockchains are suited for interoperability and may not be able to accommodate the needs that come with it.

Bottom Line

Blockchains provide a number of benefits to those adopting the technology and they hold the potential to act as a disruptor across a number of fields. Much like other emerging technologies, blockchain is still experiencing growing pains, with the lack of interoperability between networks being a hurdle yet to be surpassed. However, interoperability will be much needed if blockchain aspires to be widely implemented one day. From sharing records to transferring digital assets, interoperability is key to realizing the full potential of this technology. And while we might still be far from a viable solution, the industry has come a long way in such a short period of time that it would be reasonable to expect some advancements to be made sooner than expected.

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