Interoperability allows blockchain networks and protocols to communicate with each other, making it easier for everyday users to engage with blockchain technology.
Every year we see new blockchain networks grow to tackle specific niches within certain industries, with each blockchain having specialized functions depending on its purpose. For example, Layer 2 scaling solutions like Polygon are designed to have ultra-low transaction fees and fast settlement times.
The increase in the number of new blockchain networks is also a result of the recognition that there is no perfect solution that will be able to meet all the needs associated with blockchain technology at the same time. Therefore, as more and more organizations become aware of this rising technology and its capabilities, the interconnection of these unique blockchains becomes necessary.
What is interoperability?
Blockchain interoperability refers to a wide variety of methods that allow many blockchains to communicate, share digital assets and data, and work together more efficiently. This allows one blockchain network to share its economic activity with another. For example, interoperability allows data and assets to be transmitted across different blockchain networks through decentralized cross-chain bridges.
Interoperability is not something most blockchains have, as each blockchain is built with different standards and codebases. Since most blockchains are naturally incompatible, all transactions must be performed in a single blockchain, regardless of how many features the blockchain might have.
Marcel Harmann, Founder and CEO of THORWallet DEX – a non-custodial decentralized financial (DeFi) wallet – told Cointelegraph: “Interoperability can be understood as freedom in the exchange of data. Currently, base layer protocols cannot effectively communicate with each other. Layer 1 protocols like Ethereum or Cosmos have smart contracts built into their structure, only allowing secure data exchange within their own ecosystems. Transfers of digital assets leaving the network raise a question: how can a blockchain trust the validity of the state of another blockchain? »
Harmann continued, “Consensus mechanisms on every blockchain decide the canonical history of all transactions that have been validated. This produces extremely large files that must be processed with each block and can only be viewed in the specific language native to the blockchain. Interoperability between two or more blockchains refers to the ability of one or both chains to understand and process the history of the other chain, thus allowing, for example, the exchange of assets between different layer 1 networks.
While it seems obvious that public blockchain projects should be designed with interoperability in mind from the start, this is not always the case. However, organizations are increasingly demanding interoperability because of the benefits of information sharing and collaboration.
Why is interoperability important?
To realize the full potential of decentralization, it is advantageous for
people participating in multiple blockchains must be linked through a single protocol. This reduces friction for the user since they can access different decentralized applications (DApps) without having to switch networks.
Due to blockchains operating independently of each other, it is difficult for users to enjoy the advantages presented by each network. To do this, they must hold tokens supported by each blockchain to engage with the protocols within their network.
Interoperability can solve this problem by allowing users to use one token across multiple blockchains. Additionally, by allowing blockchains to communicate with each other, a user can more easily access protocols across multiple blockchains. For this reason, there is a better chance that the value of the industry will continue to grow.
Fabrice Cheng, co-founder and CEO of Quadrata – a Web3 passport network – told Cointelegraph:
Interoperability is crucial as it is one of the main advantages of blockchain technology. Decentralized open source technology enables the creation of interoperable products across chains, enabling more users, businesses, and institutions to stay interconnected.
Cheng continued, “People using blockchain technology want to make sure people are screened, KYC verified, and have good credit behavior. DeFi users can access trading options or have access to real-time price feeds. Interoperability is an effective way to cut out the middleman for users and allows companies to focus on their core values. »
When it comes to decentralized finance, giving merchants more ways to utilize their assets can bring additional growth and opportunity to the sector. For example, multi-chain yield farming allows investors to generate multiple returns in the form of passive income across many blockchains for owning a single asset.
The investor would only have to hold Bitcoin (BTC) or a stablecoin like USD Coin (USDC) and then spread it across multiple protocols on different blockchains via bridges. Interoperability will also improve liquidity across multiple blockchain networks, as it will be easier for users to move their funds across different chains.
Interoperability does not only refer to connectivity between blockchains. Protocols and smart contracts are also interoperable. For example, t3rn, a smart contract hosting platform, allows smart contracts to run on multiple blockchains. It works by the fact that the smart contract is hosted on the smart contract platform and deployed and executed on different blockchain networks. Interoperable smart contracts make it easier for developers to build cross-chain applications and for users to execute cross-chain transfers.
Interoperable smart contracts will make it easier for users to access multiple decentralized applications since they won’t have to switch networks. For example, suppose a user is using a DApp on Ethereum and wants to access a lending protocol on Polkadot. If the Polkdadot-based DApp has an interoperable smart contract, they access it on Ethereum.
Oracles are another protocol that can benefit from interoperability. Oracles are entities that connect real-world data to the blockchain via smart contracts. Decentralized Oracle platforms such as QED can connect oracles to multiple blockchain networks, allowing real-world data to be shared between blockchains. Additionally, oracles can take data from an API or sensor and submit it to a smart contract to activate it once certain conditions are met.
For example, a supply chain has multiple organizations that use different blockchain networks. Once a supply chain component 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. Since the oracle is linked to several blockchains, each supplier can use the network of their choice.
Interoperability is also important for the exchange of digital assets between blockchain networks. One of the most common ways to achieve this is to use cross-chain bridges. Simply put, cross-chain bridges allow users to transfer tokens from one blockchain to another.
Wrapped tokens, for example, allow users to use Bitcoin (BTC) on the Ethereum network as Wrapped Bitcoin (wBTC). This is important in the DeFi industry since users can engage with DeFi without buying a platform’s native token, which can be more volatile than stablecoins or blue chip coins like BTC or Ether (ETH). ).
Being able to easily move assets between blockchain networks is a major benefit of interoperability. Anthony Georgiades, co-founder of Pastel Network – a non-fungible token (NFT) and Web3 infrastructure and security project – told Cointelegraph:
Interoperability is of vital importance to the blockchain industry due to the diversity of data and assets found in the crypto ecosystem. Decentralized cross-chain bridges are needed to facilitate transfers between different types of tokens or assets.
Key to the success of blockchain technology will be the level of interaction and integration between the many blockchain networks. For this reason, interoperability between blockchains is crucial as it lowers the barrier to entry for users who wish to engage with protocols across multiple networks.
Blockchain interoperability will improve productivity across the cryptocurrency industry. Users can quickly move data and assets across blockchains, increasing flexibility for everyone involved. Instead of being tied to a single blockchain, smart contracts can operate on multiple networks, and oracles will submit real-world data across different platforms. When combined with the benefits of public decentralized blockchains, interoperability should provide the foundation for widespread blockchain adoption and usage.
Georgiades continued, “Therefore, interoperability allows users to pass cryptocurrency from one blockchain to another and allows users to post tokens or NFTs as collateral for other assets. An interoperable Web3 world is a vision we work tirelessly towards. A multi-chain ecosystem facilitated by seamless cross-chain bridges will get us there and make that vision a reality.
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Why interoperability is key to mass adoption of blockchain technology | Cryptocurrency
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