What Is Blockchain Interoperability and How Does It Work?Reading Time: 5 minutes
Interoperability enables seamless communication between different blockchains. Here’s how it works.
Blockchain technology continues to take forward strides in disrupting major industries such as finance, real estate, healthcare, etc. This has led to the creation of several blockchains to meet the unique needs of different industries.
This increase in new blockchains has necessitated the need for interoperability between them, so as to leverage the unique features of each blockchain. Blockchain interoperability allows blockchains to communicate with each other and share information, data, and assets.
Here’s a look at how blockchain interoperability works, its benefits, and why blockchain technology is important for global adoption.
What Is Blockchain Interoperability?
Blockchain interoperability refers to various ways that enable different blockchains to communicate with the aim of sharing data and digital assets while incorporating transactions effectively.
Blockchain interoperability is an important component of decentralization. It ensures secure, efficient, and transparent information sharing between blockchains. This makes it possible for one blockchain to share its activities with another blockchain using pre-defined protocols.
How Does Blockchain Interoperability Work?
The bedrock of blockchain interoperability is cross-chain messaging protocols. This enables blockchains to read and/or write data from one blockchain to another blockchain.
These cross-chain messaging protocols allow the creation of cross-chain decentralized applications (DApps). These DApps can function across multiple smart contracts which are executed on different blockchains.
There are four key ways blockchain interoperability is currently achieved:
Most of the legacy blockchains such as Ethereum, Solana, and Avalanche are Layer-1 blockchains that provide base-level blockchain services. Sidechains are Layer-2 protocols that are built to be compatible with a Layer-1 blockchain.
The sidechain has its own features which include a consensus algorithm, security framework, and native token. However, they can also function as pathways for blockchain interoperability. The main chain and side chain are linked via a cross-chain messaging protocol with each chain keeping a log of assets. Blockchain projects such as Cosmos and Polkadot are examples of chains built with integrated cross-chain infrastructure to support interoperability.
Oracles are specifically designed protocols that offer incredible benefits for interoperability. They are able to connect real-world data to any blockchain through smart contracts.
Chainlink is an example of a blockchain oracle that plays a key role in providing off-chain data to smart contracts, making it possible for data to be shared across different blockchains. This contributes to interoperability by making sure that the different blockchains are all referring to a centralized source.
Bridges enable cryptocurrency users to seamlessly transfer tokens and digital assets between blockchains. This is done by enabling a digital asset to be locked on the originating chain while an identical asset is ‘minted’ on the receiving chain. An example is how wrapped tokens work. Users can use Ethereum on the BNB Chain as Wrapped Ethereum (wETH). This is critical for decentralized finance as users can engage across several blockchains without having to buy the blockchain’s native token.
Swaps offer users the ability to exchange tokens from different blockchain networks. These cross-chain token swaps are done using swap protocols and/or automated market makers (AMMs) that control liquidity pools on each blockchain to simplify the swap.
Importance of Blockchain Interoperability
The major use case of blockchain interoperability is facilitating the seamless interaction of data and digital assets across different blockchains. When two interacting parties make use of the same blockchain, such as Ethereum, data and value exchange are straightforward. However, achieving the same across different blockchains is quite a herculean task.
Interoperability removes the barriers across blockchains. This is a major component for global crypto adoption, as users can take advantage of different features across multiple blockchains. Interoperability eliminates the barrier to entry for entities who want to engage with several protocols across multiple blockchains.
Interoperability greatly enhances productivity in the development of new decentralized applications (DApps). Smart contracts can function across multiple chains and oracles can input real-world data into different blockchains. Combining this with the transparent nature of blockchains will see the rise of global blockchain utilization and adoption.
Advantages and Disadvantages of Blockchain Interoperability
Blockchain interoperability brings with it a lot of advantages. A few of them include:
- Connectivity between blockchains: Interoperability ensures seamless communication between systems, processes, and data on different blockchains.
- Cross-chain collaborations: The use-case of interoperability extends beyond just connecting blockchains. Blockchain protocols and smart contracts also benefit from interoperability. Interoperable protocols and smart contracts provide blockchain developers with a solid launchpad to create cross-chain DApps.
- Enhanced Decentralization: Blockchain is built on the core principle of decentralization and interoperability strengthens this to great effect. Linking several blockchains together advances blockchain’s guarantee of decentralizing systems and industries. For example, instead of having just one blockchain processing millions of transactions for decentralized applications, there can be several smart contracts linked together across multiple blockchains to provide this service and reduce network congestion which typically leads to high gas fees.
While interoperability definitely has a number of advantages, there are still a few areas to be worked on:
- Vulnerable to Exploits: Interoperability exposes blockchains to hacks during cross-chain activities. A 2022 study by crypto analytic firm Chainalysis shows that over $1.9 billion was stolen in cross-chain hacks. Security on cross-chain bridges and swaps will need to be firmed up to avoid more exploits.
- Complex Process: Interoperability is still developing and it involves a lot of complex processes that require specialized skill sets. This has the potential to slow down its scale and adoption.
Platforms Offering Blockchain Interoperability
Wormhole is a decentralized interoperability protocol with support for multiple blockchains including Ethereum, Solana, BNB Chain, etc. Wormhole also provides an ecosystem and platform for developers to leverage standalone modular swap-ins for building unique interoperable DApps.
2. Rootstock (RSK)
Rootstock (RSK) facilitates interoperability through its RIF gateways and RSK-ETH bridge. RIF gateways are a range of protocols that provide fast and secure connections between blockchains. RSK-ETH bridge is a cross-chain bridge for swapping tokens from Ethereum to RSK and vice versa. RSK is pegged to Bitcoin, so it essentially facilitates token swaps between Ethereum and Bitcoin.
3. BTC Relay
BTC Relay offers a platform for developers that require interoperability between Ethereum and Bitcoin. Developers can build DApps that allow users to pay in Bitcoin for Ethereum DApps.
T3rn offers a platform for easy and seamless integration between blockchains. T3rn makes multichain decentralized finance possible and highly secure. Users are able to execute transactions across blockchains through multi-chain smart contracts ensuring funds are never stuck or lost.
Interoperability Will Rapidly Advance Blockchain Adoption
Blockchain interoperability offers a plethora of opportunities for entities seeking to use blockchain for technological advancement. The ability to seamlessly move data and digital assets across blockchains gives users a one-size fits all solution. Developers also benefit from cross-platform development features using smart contracts and protocols. This will encourage scale across industries as user adoption and application development continue to increase.
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