Blockchain Interoperability: What is it and Why Does it Matter?

by | Sep 6, 2022 | Blockchain, Blog

The concept of blockchain interoperability, often referred to as cross-chain, can refer to various things, and it is pointed to as a new major step for blockchain technologies.

Generally speaking, the term blockchain interoperability describes any type of connection between two or more blockchain platforms, which can come in the form of specific applications that use multiple blockchains or a technology that creates bridges among different blockchains.

At a broader level, cross-chain can also represent the idea of a fully interconnected blockchain world, where people can make seamless transactions across multiple cryptocurrencies and tokens from different platforms without significant costs or obstacles.

Although this might sound like a simple and obvious step for blockchain technologies, it takes exceptional amounts of effort to figure out the technological and financial intricacies required for all blockchains to be connected.

Once this happens, it could be the key that finally opens the door to blockchain mass adoption, representing a technological revolution without precedents.

Why is Blockchain Interoperability so Difficult to Implement?

Today, it is possible to move money and tokens across blockchain platforms, however, it normally takes either specialized intermediaries dedicated to these types of operations or users to make multiple transactions across different traditional and decentralized platforms to finally get their assets into a different blockchain. 

These types of processes carry costs that are generally too high to be worth it for the average user, making the entire crypto space be perceived as a cumbersome and expensive way to make monetary transactions.

There are various reasons why it’s difficult to have direct and seamless connections between blockchains. Each blockchain has a programming protocol that can differ widely from others. Furthermore, each blockchain has its own tokens with particular values and exchange rates.

Although there are protocols known as cross-chain bridges that allow for blockchain interoperability, they carry certain risks, as the protocols leave certain room for vulnerability to hacks and breaches. 

Most cross-chain bridges operate in a centralized manner, relying on small groups of administrators or entities to manage the process of burning and minting tokens to get them to new blockchains. This makes it so that the bridges have a single vulnerable point of failure, defeating the purpose of having blockchains in the first place.

Why is Cross-Chain Important?

Interoperability is one of the biggest problems that have emerged in the blockchain space as more cryptocurrencies and platforms are created and compete to get a pie of the market. Cross-chain technologies seek to solve this problem.

Diverse blockchains have provided a plethora of options for users and developers, but the lack of interoperability makes it difficult and expensive to carry tokens and assets across chains, making the whole blockchain space less attractive for potential new users and investors.

With better interoperability, blockchain platforms could be fully integrated, not just among themselves, but also with traditional financial platforms, allowing users to seamlessly transfer their money and assets across banks, blockchains, and DeFi applications.

Another important aspect of interoperability is transaction transparency, which is one of the main tenets of decentralization and blockchain as a whole.

Although transactions within a single blockchain are recorded on the distributed ledger and accessible by all users, this is not the case when users move their assets from one blockchain to another, as this process still requires intermediation.

When the costs and obstacles for making transactions across different blockchains are reduced, or even fully removed, blockchain technologies would take a huge leap toward true mass adoption.

If fully developed cross-chain technologies become the norm across the blockchain space, we would be closer than ever to a globalized decentralized blockchain system, serving not just financial operations but all manner of new blockchain-based technologies.

The Current State of Cross-Chain Interoperability Protocols

There are many companies today working on cross-chain interoperability protocols and technologies, some of the most notable of which include Ripple, Polkadot, Cosmos, and Harmony, which are offering interoperability solutions for other networks.

Each of these solutions works in a different way, tackling a different problem related to interoperability and including its own particular blockchains. Here are a few examples of the most common blockchain interoperability solutions currently being employed:

Merged Consensus 

This is the type of cross-chain protocol used by blockchains such as Ethereum and Cosmos, which is an efficient way to provide interoperability between two chains.

As its name suggests, a merged consensus is based on the use of a singular consensus mechanism for two or more blockchains, which is a highly efficient cross-chain method, but it is usually required to be built into a blockchain from the start.

Hence, it’s not possible for it to be the ultimate blockchain interoperability solution to connect all the current existing blockchains. 

Relays

These are one of the most commonly used methods of cross-chain interoperability. It allows for smart contracts within one chain to verify some of the activities taking place in other chains. In turn, this is a fairly quick way to implement interoperability within existing blockchains.

The catch of relays, however, is that their protocol requires them to sacrifice a certain degree of security to reduce operational costs. If users want secure cross-chain transactions using relays, the costs tend to be quite high. 

Atomic Swaps

One of the main advantages of atomic swaps is the fact that they need no intermediation whatsoever. They’re direct swaps of cryptocurrencies among two parties, which require special wallets or exchange services. 

Atomic swaps are one of the most useful and direct methods to conduct cross-chain transactions, however, they require high coordination among the parties carrying it, due to the specific timeframes in which they both have to confirm the transaction.

Federations

Cross-chain federations are groups of users or entities who get together to validate transactions from one blockchain within another one. 

This is one of the most practical ways to make cross-chain transactions, but it relies on a third party. So there needs to be a high amount of trust involved and can carry some important risks when the federation isn’t trustworthy enough.    

In Conclusion

There is still a long way to go before there can be full cross-chain support among the variety of blockchains in the current market. If the full potential of cross-chain technologies is sought, it could represent another major milestone for the mass adoption of blockchain technologies.

The current methods that exist for cross-chain transactions allow for a small degree of interoperability among specific blockchains, but there is still a high level of intermediation, high transaction costs, or significant security problems that pose important challenges for seamless blockchain interoperability. 

Interoperability blockchain projects are being created and advancing every day, and the idea of a fully interconnected blockchain world is quickly becoming a central topic of discussion among most of the world’s major blockchain analysts.

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