Each year, we see new blockchain networks being developed to tackle specific niches within certain industries, each blockchain having specialized functions predicated on its purpose. For instance, layer-2 scaling solutions like Polygon are designed to possess ultra-low transaction fees and fast settlement times.
The upsurge in the amount of new blockchain networks can be due to the recognition that there surely is no-one perfect solution that’ll be in a position to meet all the needs connected with blockchain technology all at one time. Therefore, as more organizations notice this rising technology and its own capabilities, the interconnection of the unique blockchains is now necessary.
Blockchain interoperability identifies a multitude of methods that enable many blockchains to communicate, share digital assets and data and interact better. This allows for one blockchain network to talk about its economic activity with another. For instance, interoperability allows transmitting data and assets across different blockchain networks via decentralized cross-chain bridges.
Interoperability isn’t a thing that most blockchains have because each blockchain is made with different standards and code bases. Since most blockchains are naturally incompatible, all transactions should be done inside a single blockchain, regardless of just how many features the blockchain may have.
Marcel Harmann, founder and CEO of THORWallet DEX a noncustodial decentralized finance (DeFi) wallet told Cointelegraph: Interoperability could be understood as freedom in data exchange. Currently, base layer protocols cannot talk to one another effectively. Layer-1 protocols like Ethereum or Cosmos have smart contracts included in their fabric, only permitting secure data exchange of their own ecosystems. Digital asset transfers that leave the network pose a question: How do a blockchain trust hawaii validity of another blockchain?
Harmann continued, Consensus mechanisms on each blockchain decide the canonical history of all transactions which were validated. This produces extremely large files that must definitely be processed with each block and will only be looked at in the precise language native to the blockchain. Interoperability between several blockchains identifies one or both chains having the ability to understand and process the annals of another chain, thus enabling, for instance, the exchange of assets between different layer-1 networks.
Though it seems obvious that public blockchain projects ought to be made with interoperability at heart right away, this is simply not always the case. However, organizations are increasingly calling for interoperability due to the great things about sharing information and working together.
How come interoperability important?
To understand the entire potential of decentralization, it really is good for
people taking part in several blockchains to be linked by way of a single protocol. This reduces friction for an individual given that they can access different decentralized applications (DApps) without needing to change networks.
Because of blockchains operating independently from one another, its problematic for users to make use of the benefits presented by each network. To take action, they have to hold tokens supported by each blockchain to activate with the protocols of their network.
Interoperability can fix this issue by enabling users to utilize one token across multiple blockchains. Furthermore, by enabling blockchains to talk to one another, a user can access protocols on multiple blockchains with greater ease. For this reason, there exists a better chance that the industrys value will continue steadily to grow.
Fabrice Cheng, co-founder and CEO at Quadrata a Web3 passport network told Cointelegraph:
Interoperability is vital because it’s among the key advantages to blockchain technology. Decentralized open-source technology allows the creation of products which are interoperable across chains, enabling more users, businesses and institutions to remain interconnected.
Cheng continued, Individuals who use blockchain technology desire to make sure folks are screened, KYC-verified and also have good credit behavior. DeFi users can access trading options or get access to real-time price feeds. Interoperability is an effective solution to remove intermediaries for users and allows businesses to spotlight their core values.
With regards to decentralized finance, giving traders more methods to use their assets may bring additional growth and opportunities to the sector. For example, multichain yield farming enables investors to create multiple returns as passive income on many blockchains for running a single asset.
The investor would just need to hold Bitcoin (BTC) or perhaps a stablecoin like USD Coin (USDC) and spread it across multiple protocols on different blockchains via bridges. Interoperability may also improve liquidity across multiple blockchain networks because it will undoubtedly be easier for users to go their funds across different chains.
Interoperability will not only make reference to connectivity between blockchains. Protocols and smart contracts may also be interoperable. For instance, t3rn, a smart contract hosting platform, enables smart contracts to use on multiple blockchains. This functions by the smart contract being hosted on the smart contract platform and being deployed and executed across different blockchain networks. Interoperable smart contracts ensure it is easier for developers to generate cross-chain applications and for users to perform cross-chain transfers.
Interoperable smart contracts can make it easier for users to gain access to multiple decentralized applications given that they wont need to change networks. For instance, suppose a user runs on the DApp on Ethereum and really wants to access a lending protocol on Polkadot. If the Polkdadot-based DApp comes with an interoperable smart contract, they get access to it on Ethereum.
Oracles are another protocol that may reap the benefits of interoperability. Oracles are entities that connect real-world data to the blockchain via smart contracts. Decentralized oracle platforms like QED can connect oracles to multiple blockchain networks, allowing for real-world data to be shared across blockchains. Furthermore, oracles may take data from an API or sensor and submit it to a good contract to activate once certain conditions have already been met.
For instance, a supply chain has multiple organizations that use different blockchain networks. Once an element in the supply chain reaches its destination, the oracle can submit data to the smart contract confirming its delivery. Once delivery is confirmed via an oracle, the smart contract releases a payment. Because the oracle is associated with multiple blockchains, each supplier may use the network of these choice.
Interoperability can be very important to the exchange of digital assets between blockchain networks. Probably one of the most common ways that is done is by the usage of cross-chain bridges. Basically, cross-chain bridges allow users to transfer tokens in one blockchain to some other.
Wrapped tokens, for instance, allow users to utilize Bitcoin (BTC) on the Ethereum network as Wrapped Bitcoin (wBTC). That is important in the DeFi industry since users can build relationships DeFi without investing in a platforms native token, which might be more volatile than stablecoins or blue chip coins like BTC or Ether (ETH).
Having the ability to easily move assets between blockchain networks is really a major advantage of interoperability. Anthony Georgiades, co-founder of the Pastel Network a nonfungible token (NFT) and Web3 infrastructure and security project told Cointelegraph:
Interoperability is of vital importance to the blockchain industry because of the diversity of data and assets found within the crypto ecosystem. Decentralized cross-chain bridges are essential to facilitate transfers between different types of tokens or assets.
The main element to the success of blockchain technology would be the degree of interaction and integration between your many blockchain networks. For this reason, interoperability between blockchains is essential because it reduces the barrier to entry for users who would like to build relationships protocols across multiple networks.
Interoperability across blockchains will enhance productivity through the entire whole crypto sector. Users can easily move data and assets across blockchains, increasing flexibility for everybody involved. Rather than being linked with an individual blockchain, smart contracts can function on multiple networks and oracles will submit real-world data across different platforms. When combined with benefits of public decentralized blockchains, interoperability should supply the basis for widespread blockchain adoption and utilization.
Georgiades continued, Therefore, interoperability allows users to transmit cryptocurrency in one blockchain to some other and enables users to create tokens or NFTs as collateral for other assets. An interoperable Web3 world is really a vision we have been tirelessly working towards. A multichain ecosystem facilitated by seamless cross-chain bridges are certain to get us there and bring that vision to fruition.