What is Blockchain Interoperability?

In 2009, when the first block of Bitcoin was mined, the Bitcoin network was the only blockchain network that existed. That is no longer the case today. There are now hundreds of other blockchain networks, each with unique use cases and objectives. These blockchains sometimes need to communicate with one another to make up for their deficiencies and enable more widespread adoption. How do they achieve that? Through a process known as blockchain interoperability.

Blockchain interoperability is the ability of blockchains to interact freely and share data actively with one another. As simple as the concept sounds, it is not so easy to implement. This is because many blockchains were designed to be stand-alone protocols. Therefore, they are usually incompatible with external technologies, including other blockchains.

Nevertheless, various platforms have been devising ways to enhance efficient communication among blockchains due to its potential. This article will address the technology behind blockchain interoperability and how it works. We will also discuss the advantages and drawbacks of this mechanism.

How Does Blockchain Interoperability Work?

Because each blockchain is different, no universal mechanism is used to achieve interoperability. Instead, blockchain developers and engineers have developed various tools and protocols that address the problem on a chain-to-chain level.

While these tools may differ in scope and operation, one thing is common - they all avoid the integration of blockchains with third-party platforms. They do this to maintain decentralization, one of the critical pillars of blockchain technology. Here is a summary of how some of the most popular blockchain interoperability tools work.

Sidechains and Parachains

Sidechains spawn from a main blockchain and are designed to maintain two-way communication with the parent chain. A sidechain is a separate entity with its token system, consensus mechanism, and operating method. It benefits the parent chain by handling some of its functionalities, freeing up space for more efficient operation. Polygon (MATIC) is an example of a sidechain project. It functions as a sidechain and a layer-2 blockchain based on the Ethereum network.

Parachains are similar to sidechains in that they are also separate blockchains connected to a main chain. However, a fundamental difference is that parachains can interact with one another in addition to the parent chain. This differs from sidechains that can only maintain communication with the parent chain. Thus, parachains are more interoperable than sidechains. The Polkadot and Kusama ecosystems are examples of projects that support parachains.

Oracles

Oracles are smart contract protocols that enable communication between a blockchain and the outside world. They can transmit data from the outside world to the blockchain or the other way around. Nevertheless, they are capable of much more. They can also relay information from one blockchain to another, thus enabling interoperability between them. Chainlink and the Band protocol are good examples of cross-chain oracles.

Cross-chain Bridges

A cross-chain bridge is a provision that allows tokens to be transferred or ‘bridged’ from one blockchain to another. It is one of the most important mechanisms that facilitate blockchain interoperability. Most bridges operate by locking or burning tokens on one blockchain and releasing an equal amount of tokens on the other.

Some cross-chain bridges use a wrapping protocol to achieve their aim. They encapsulate the value of one token into another and make it possible for that token to be used in other ways. An example is the case of Wrapped BTC. Even though it is redeemable for BTC on a 1:1 basis, it is an ERC-20 token and can thus be used on Ethereum-based protocols. That is the power of blockchain interoperability.

Other cross-chain bridges, like the Celer network, use liquidity pools to transfer tokens from one blockchain to another. Bridges like this also offer earning opportunities to investors ready to provide liquidity to facilitate transfers.

Atomic Swaps

An atomic swap (or atomic cross-chain trade) is a peer-to-peer swapping mechanism where assets from one blockchain are swapped for assets on another blockchain. The process is entirely decentralized and governed by smart contracts. The entire process is also completed within a specific timeframe. If that time elapses and the contract conditions have not been met, the transaction cancels automatically.

Inter-Blockchain Communication Protocol (IBC)

This is an interoperability module developed by the Cosmos ecosystem to enable communication among connected blockchains. It was designed to be the internet of blockchains and is living up to its name. The blockchains connected through this mechanism do not have to interact directly with one another. They only send packets of information through decentralized channels regulated by smart contracts.

Even though IBC was launched in March 2021, it is currently enabled on 54 networks with about 114,000 daily transactions. These 54 blockchain networks can communicate seamlessly with one another and exchange tokens as needed.

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       **_An overview of the 54 crypto projects currently on the IBC protocol_**

Blockchain Interoperability Solutions

Token Swaps

Token swaps enhance interoperability by exchanging tokens across different blockchain networks. They can be implemented in various ways, with the most common being atomic swaps and cross-chain automated market makers (AMMs).

An atomic swap (or atomic cross-chain trade) is a peer-to-peer swapping mechanism where assets from one blockchain are swapped for assets on another blockchain. The process is entirely decentralized and governed by smart contracts. The entire process is also completed within a specific timeframe. If that time elapses and the contract conditions have not been met, the transaction cancels automatically.

Cross-chain AMMs are built on top of cross-chain bridges to enable the connection between different blockchains. They have separate liquidity pools on each blockchain and use this liquidity to facilitate token swaps. An example is the AMM associated with THORChain, which enables inter-blockchain swaps between eight chains.

Programmable token bridges

These are token bridges that also implement arbitrary messaging through smart contract calls. This makes for more efficient cross-chain bridging. It also allows more complex functions like swapping, lending, and staking to be performed in the same transaction as the bridging function.

Contract calls

This happens when the smart contract function on the source chain calls out to the smart contract function on the destination chain. This communication forms a basis for more complex interactions between blockchain networks. Token swaps and bridges are built on these interactions.

Native payments

Native cross-chain payments involve originating a transaction on a blockchain network and making payments on another blockchain network in the native token of the source blockchain. This allows data and assets to be easily transferred from one blockchain to another. It also facilitates decentralized applications and reduces the need for centralized exchanges.

Projects of Blockchain Interoperability

Polkadot

The parachain mechanism is native to the Polkadot ecosystem. Each parachain connects to the main or relay chain through a process known as ‘Bonding.’ Different parachains bonded to the same relay chain can also communicate with one another, thus enhancing interoperability.

There are currently about 186 different blockchains in the Polkadot ecosystem. The interconnection among these blockchains means users can access them through a single wallet and user interface. This saves much time and stress that would have otherwise been spent shuttling among the blockchains if they were not interconnected through the Polkadot interface.

Cosmos

The Cosmos ecosystem designed the Inter-Blockchain Communication protocol. This is an interoperability module that enables communication among connected blockchains. It was designed to be the internet of blockchains and is living up to its name.

The blockchains connected through this mechanism do not have to interact directly with one another. They only send packets of information through decentralized channels regulated by smart contracts. Even though IBC was launched in March 2021, it is currently enabled on 54 networks with about 114,000 daily transactions. These 54 blockchain networks can communicate seamlessly with one another and exchange tokens as needed.

Cardano

Cardano is a third-generation blockchain platform that supports the creation of sidechains to communicate seamlessly with the mainnet blockchain. In addition to that, Cardano allows data transfer between blockchains through the implementation of cross-chain bridges. These bridges connect the Cardano network with the Ethereum, Bitcoin, and other networks. Examples are the REN protocol and SundaeSwap bridges.

Plasma Bridge

The Plasma Bridge is a layer-2 scaling solution that uses child chains to increase the efficiency of the Ethereum network. Like parachains and sidechains, child chains take some load from the parent chain while maintaining communication with one another and the parent chain. How does the Plasma bridge work?

When a user wants to transfer an asset from the child chain to another blockchain network, he creates an NFT on the child chain to represent asset ownership. He then locks the NFT in a smart contract vault and mints a corresponding NFT on the destination blockchain network.

When he transfers this newly-minted NFT to the recipient, the recipient can redeem it for the crypto asset the NFT represents.

Lisk

While Lisk is not explicitly designed as an interoperability project, it does offer some interesting solutions. For example, it enables developers to create sidechains that connect with the Lisk main chain. It also supports cross-chain messaging that allows different blockchains to communicate seamlessly.

Lastly, the final stage of the Lisk roadmap - known as the Diamond Phase - is designed to make the Lisk network directly compatible with other blockchains. This will enable developers to create decentralized applications on Lisk that will be useable on the Ethereum, Polkadot, and Cosmos blockchains.

Benefits of Blockchain Interoperability

More Potential for Mainstream Adoption

If most of the world’s population adopts crypto, it will likely not be on only one blockchain. Therefore, blockchain interoperability ensures that there will be seamless communication between the blockchains, no matter how many they turn out to be. This communication will ensure more use cases for crypto assets, catalyzing greater growth and distribution of blockchain technology.

Increased Scalability for Crypto Projects

Blockchain scalability is the ability of a cryptocurrency to expand and take on more transaction volume than it is used to. Scalability is one of the choicest properties of a coin because it shows that it is ready for increased adoption. Blockchain interoperability helps with this because it ensures that a token is not held back by the limitations of the blockchain on which it is built.

Take the wrapped BTC case, for example. On its own, Bitcoin only manages about five to seven transactions per second (TPS). However, when wrapped as an ERC-20 token, its TPS doubles, potentially reaching 100,000 when Ethereum’s upgrades are done.

Increased Decentralization

Crypto is all about decentralization. And that is what interoperability ensures. Through the various protocols and mechanisms we have discussed, there is a provision for trustless transactions free from any intermediary. It also ensures that no one chain has a monopoly over crypto transactions. Since there is no need for centralized supervisors, people can freely migrate assets from one chain to another, distributing wealth and technology along the way.

This also encourages healthy competition among blockchains. After all, people and projects can not be ‘stuck’ on a blockchain. If a blockchain is not meeting up to expectations, the projects on it can migrate to another. A recent example is the migration of DeGods and Y00ts from Solana to Ethereum and Polygon, respectively.

Challenges and Limitations

Incompatibility of Blockchains

When two blockchains with different working mechanisms and tokenomics have to work together somehow, there may be compatibility problems. This is especially true regarding the trust system the blockchains employ. For example, many believe the Proof-of-Work consensus mechanism is the most secure. People with this belief may be less inclined to bridge PoW assets to a blockchain that uses the Proof-of-Stake mechanism.

Transaction Limitations

Some connected blockchains are only as fast as the slowest member, especially during high traffic. If transactions become clogged on one of the blockchains, it may set in place a ripple effect that will stretch across all the blockchains in that connection. This will slow things down considerably.

Conclusion

Blockchain interoperability is a hot topic in the crypto world. It will likely be one of the most significant catalysts in propagating the crypto idea among the mainstream populace. Thus, there is good reason to believe there will be more innovations in this crypto sector.

For example, some blockchains that incorporate interoperability into their core mechanisms are already being developed. An example is the Quant network. This project launched in 2018 and allows blockchain developers to create smart contracts that can exist on multiple blockchains. Other examples are Cronos, Flare, and AllianceBlock. These projects are built with interoperability in mind and already have real-world applications.

Notably, substantial challenges and bottlenecks still need to be overcome. Still, as long as blockchain developers do not rest on their laurels, the future of blockchain interoperability seems bright.