What Is Blockchain Interoperability?
Blockchains have quickly become the basis of many cryptocurrencies, such as Bitcoin. Furthermore, their potential application in diverse fields like healthcare and supply chain tracking has attracted significant research and development projects.
There is considerable division within the blockchain sector, allowing customers to select multiple, incompatible technologies for different functionalities like sending tokens to another party and executing intelligent contracts; however, due to an absence of standards and protocols regulating interoperability among multiple chains, specific capabilities like sending them must only be performed within one chain.
Interoperability refers to an individual blockchain's capacity for exchanging data freely with another blockchain, documenting every asset owned and transaction made on that chain. With effective interoperability solutions, economic activities in one chain can easily be replicated in another, and economic potential spreads from chain to chain.
One of the earliest contributions made towards blockchain interoperability was trustless cryptocurrency trading through atomic cross-chain swaps. Users from different cryptocurrencies can exchange digital assets using these trustless exchange mechanisms without fear of token transfers; instead, assets from one blockchain are destroyed before being (re-)created on another - effectively making exchanges trustless.
Unlike their transfer counterparties, atomic swaps allow tokens to be traded across blockchain boundaries without transference. Atomic swaps always require someone willing and available who wants to trade tokens; online markets offer this form of trading tokens; however, this would need a centralized entity (such as an exchange). Because blockchain's nature is decentralized, cross-chain technology has emerged as the go-to way of increasing interoperability among blockchains.
This article presents what is blockchain interoperability and ways to achieve blockchain space interoperability and its associated challenges and benefits.
What Is Cross-Chain Technology?
Interoperability refers to the capability of Distributed Ledger Technologies (DLTs), or Distributed Ledger Networks (DLNs) such as Ethereum, to exchange or receive data with external systems such as other DLTs or external services such as Cross Chain Technology enabling Interoperability between DLTs or external services; cross Chain technology making this exchange more straightforward while improving security, flexibility and solving performance issues within a DLT ecosystem.
Sharding can effectively solve problems of low throughput or scalability by splitting a distributed ledger into small chunks that can be independently managed, thus enabling parallel processing of transactions that improve performance and scale.
Cross-chain technologies can be utilized for asset transfers, cross-chain oracles, and Smart Contracts. Asset transfers involve moving assets between distributed ledgers. In contrast, cross-chain oracles simply transmit information between distributed ledgers rather than changing assets themselves.
Cross-chain oracles serve to verify events (like transactions) that took place on another distributed database. At the same time, smart contracts that execute across chains increase automation by running on more than one ledger simultaneously. Cross-chain contract execution differs from oracles in that transactions must be issued on each destination ledger to modify the state of each distributed ledger.
People may wonder what is cross chain technology and who has been taking advantage of cross-chain tech. Ripple, for instance, has attempted to explore trans-chain transactions as it assists banks in settling cross-border payments using fiat currency and cryptocurrency.
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How Does Blockchain Interoperability Work?
Cross-chain protocols simplify data sharing across different blockchain networks and ensure interoperability between them. Users can also communicate directly with each other; similarly structured blockchain networks can even exchange information and value without third parties being involved in the transactions themselves.
How blockchain interoperability varies across networks depends upon their respective methods since no uniform solution applies uniformly. Each network employs its method for blockchain interoperability to facilitate transactions without recourse to third-party interfaces.
As previously discussed, atomic swaps allow two parties to exchange tokens across several blockchains without incurring transaction costs or transaction history fees. Relays allow blockchain networks to monitor activities on other chains through nodes operating between chains; contracts act as central authority. Asia Pacific is expected to record the highest CAGR during the forecast period. Clients acting across chains instead of required distributed nodes and validate central headers. In contrast, relay methods may cost significantly more to operate and maintain than alternatives.
Why Does The Interoperability Of Blockchain Matter?
The Web3 landscape has become more complex and multilayered over time, featuring over 100 base layers (layer-1), along with more layer-2 and layer-3 networks on top. Layer-2 networks anchor security to base layers such as rollups.
An environment driven by design has led to an explosion of layer two and base layers as a direct consequence of blockchain technology. To remain competitive for developers, blockchains optimize their protocols to support certain features at the expense of others - some prefer decentralization or censorship-resistance at the bottom layer over throughput or composability; other blockchains opt for native privacy features at the cost of security assumptions.
Blockchains can be optimized by testing different consensus protocols and execution environments, allowing developers to test various assumptions related to cost, data availability, performance, crypto-economics, and security. Private Blockchains may also differentiate by supporting specific programming languages targeting particular geographies and using cases or developing brands that resonate with audiences.
Optimization options vary among blockchains depending on how they plan to scale their ecosystem, which includes tactics such as:
- One single base layer blockchain with high performance that can handle decentralized applications across industries.
- Blockchain networks that support modularized blockchain applications through layers 2 or 3 offer highly decentralized platforms with ample support for multiple modularized apps.
- Each application, smart contract, or use case can run on its respective blockchain network or sovereign layer 2.
Check out the blog, Blockchain Scalability: Consensus, Execution, and Storage, to gain more insight into blockchain interoperability solutions.
Given the variety of blockchain ecologies, it is vital that different on-chain ecosystems can interoperate. This is particularly crucial for developers wanting to build cross-chain/modularized applications that maintain one global state and liquidity pool across numerous on-chain environments; also essential are developers taking advantage of unique assets or features each blockchain industry ecosystem offers.
Interoperability protocols for independent blockchains are equally vital to traditional systems that rely on communication with multiple blockchains via their backends, including those developed on web2. Systems or apps developed on Web2. Systems if they want to interact with cross-chain features; otherwise, Web2 systems, DApps, and applications would have to create individual implementations in-house for each cross-chain feature they want - an arduous and resource-intensive task that would incur hefty development fees as they develop separate implementations on each chain for interactions they want between chain - something web2-systems, DApps, and applications can do without in terms of resource efficiency.
Read More: Unlocking the Potential: Why a Multichain Approach is the Future of Blockchain
How Is Blockchain Interoperability Achieved?
Most layer-1 blockchain development industries possess internal features to facilitate cross-chain interaction. As we will see below, various strategies are available to increase blockchain network interoperability.
Sidechains
A sidechain allows two blockchains to communicate. Here, one blockchain ecosystem - usually the mainchain - sits apart from another but is linked through the cross-chain protocol, so both keep an inventory of assets on each chain. Sidechains provide two-way asset transfer between mainchain and sidechain, making interoperability initiatives like Mimblewimble and BTC Relay feasible; other examples are the Poa network, RSK network, etc.
Notary Schemes
This technique relies on notary services as an impartial intermediary to oversee any lack of trust during transactions. Notaries can be controlled, or networked exchanges - their integrity determines their success. Notary schemes contain a central element, even though their members can decentralize it; this weakness exists within notary schemes like Binance and Cobase, which involve cryptocurrency exchanges that rely heavily on notaries as intermediaries for decentralizing processes.
The Oracles
Oracles exist to bridge the informational divide between blockchain on-chains and off-chains. Services like Chainlink ensure that off-chain data is used to power blockchain-enabled intelligent contracts by connecting multiple ecosystems to one source of truth.
Blockchain Routers
Multiple blockchain networks can communicate using Blockchain routers. Based on architecture, various blockchains, including Bitcoin, Ethereum, and others, are considered terminal components known as sub-chains within a routing network. Routers are necessary to connect sub chains. As they cannot directly communicate between chains, using protocols enabling cross-chain communication allows communication among sub chains via blockchain routers - much like bridges of trust allow communication across sub chains via sub chains themselves.
Industrial Solutions
Examples of interoperability protocols include Cosmos and Polkadot. Polkadot provides an inter-chain translation system that facilitates interactions among various chains; special sidechains, as well as open ones, may interact freely via Polkadot, while Cosmos allows blockchain creation without prior permission via hubs, zones, and winter-blockchain protocols that communicate among each other.
Hashed TimeLocks
Hashed TimeLock Contracts (HTLCs) can also serve as blockchain interoperability tools, creating smart contracts to modify payment channels and modify smart contracts that modify them. An HTLC, when applied in cryptocurrency transactions, implements transactions that have time-bound payments; should recipients fail to submit cryptographic receipts within specified times, they will forfeit all payments owing them, and their transaction becomes null. A TimeLock effectively blocks a certain number of cryptocurrencies until its set duration has elapsed - effectively canceling out transactions or locking specific cryptocurrencies until it's time frame has elapsed.
Bitcoin Lightning Network uses hashed timestamps for off-chain transactions. As part of an interconnected payment channel system known as Lightning Network, users can transfer funds between themselves even when not directly linked through payment channels; this process is known as network routing.
Interoperability Of Blockchains: Benefits And Challenges
Cross-blockchain compatibility provides many benefits and blockchain interoperability challenges. Interoperable innovative contract technology enables industries like law and healthcare to exchange data across private and public Blockchains - creating web3 platforms that were previously impossible. Furthermore, interoperability between blockchains may allow multiple-token wallets and transactions that provide seamless user experiences for cryptocurrency.
Interoperability between blockchains enables application-specific chains to communicate through a central hub. It will also enable independent companies, which were once considered entirely separate entities, to transfer information and value between each other quickly.
However, once registered into a network, blockchains are non-changeable. Therefore, verifying data before submitting nodes for registration. Blockchain interoperability only offers limited data security solutions; unfortunately, nothing in today's technology-driven society can guarantee the total protection of such services.
Each blockchain has its trust model; some require only two miners, while others might support more. When information moves between ledgers of differing trustworthiness, the transfer may expose more secure blockchains to outside influence and cause inconsistencies or manipulation by outside forces.
Interoperability Of Blockchains: The Future
Interoperability and efficacy will dictate how blockchain technology is employed within cryptocurrency trading, with numerous projects supporting interoperability between blockchain platforms.
Cosmos or Polkadot commercial systems need more stability to become widely adopted since how these platforms interact may remain unknown even after their success; hence, there is greater demand for standardization, APIs, and technologies that facilitate extensive interoperability between blockchain platforms.
Many nations do not acknowledge the legality of the cryptocurrency ecosystem. Interchain interoperability only becomes possible with regulatory environment support; transactions in the financial industry, related sectors, or businesses need adequate legal and regulation procedures to operate successfully.
Conclusion
This post explores why interoperability has become so crucial, breaks down different types of interoperability into their core elements, and gives a high-level overview of some projects working to maximize blockchains' efficacy. Each approach taken has both strengths and limitations that we will discuss herein.
Notary schemes are the most centralized solution of the three. Yet, they are relatively straightforward, and interoperability is easy to achieve. Relays offer similar capabilities but in a less trustful environment; however, compatibility limitations limit their application within current networks, making this an alternative path toward blockchain development company evolution. HTLCs provide less trust but may only be used to exchange values between ledgers rather than represent assets across them all.
Interoperability will have the most significant immediate effect in value exchange markets since the programmable currency is one of the primary uses for blockchains. We anticipate HTLC (Lightning Network and Interledger), built upon it, will become the first regarding widespread adoption rate. Relay chains may play a more significant role in making cryptocurrency widely usable; Interledger is compatible with Cosmos, Lightning Network, Polkadot, and Polkadot, while Cosmos serves to build bridges; connecting all these blockchain networks is made possible with digital signatures and proofs of cryptography.
