Over the last five years, numerous blockchain platforms have emerged, driven by favorable price action resulting from the success of projects like Bitcoin and Ethereum, increased demand for technology, and ongoing blockchain innovation.
The Need for Interoperability Protocols
As the blockchain and cryptocurrency environment becomes increasingly fragmented, the need for interoperability protocols becomes inevitable. Among the low-hanging fruits of interchain interoperability is the concept of automatic cryptocurrency switching, commonly referred to as an atomic swap.
In practical terms, interoperability refers to integrating ecosystem users, developers, and applications to operate across multiple blockchain platforms. This integration unleashes a diverse range of functionalities within a larger multiverse of chains, stimulating economies of scale and encouraging innovation.
Understanding DeFi, Smart Contracts, and DEXs
To fully grasp interoperability, we must understand three key elements: DeFi, Smart contracts, and DEXs. DeFi represents the financial layer of an interoperable blockchain ecology, while smart contracts act as the legal layer, programmatically initiating and executing various functions in a transparent and verifiable manner. Decentralized exchanges (DEXs) enable non-custodial cryptocurrency trading through a peer-to-peer format.
Web3 and the Challenge of Fragmentation
Since the coining of the term Web3 by Ethereum’s co-founder in 2014, it has gained significant traction, driven by factors such as the spread of blockchain technologies, the rise of the NFT market, venture capital investments, and a growing push to challenge the dominance of Web2 or Big Tech. However, a fragmented ecology poses a significant threat to Web3’s expansion, emphasizing the importance of cohesion and synergy in shaping the Next Internet.
Communication is vital for the survival of complex systems. In an interoperable blockchain ecosystem, different notions move from one terminal to another, akin to a plane transporting ideas across a network of networks. This closed-loop system operates much like a black-box recording the events of a plane’s transit.
Beyond the Network: Infrastructure and Governance
The infrastructure supporting a blockchain network goes beyond the network itself, encompassing governance frameworks, business models, application functionality, and middleware that connect end-user experiences to the blockchain’s performance. The market, according to the World Economic Forum, may centralize around sectoral coalitions, potentially suffocating other networks. Donna Haraway’s concepts of the Capitalocene and Chthulucene further contextualize the matter of “cui bono.”
Despite being designed as decentralized technology, individual blockchain networks are not necessarily open. As blockchain adoption expands in sectors like finance, government, and heavy industry, the need for secure and accessible information traffic becomes indispensable, particularly in supply chains. Global institutions and companies are utilizing blockchain to improve the global supply chain, which underpins the world’s economy.
Promise and Potential of Interoperability
Interoperability holds the promise of a more user-friendly interface, smoother data sharing, easier smart contract execution, and enhanced partnership opportunities. DeFi, in particular, stands as a prominent use case for blockchain interoperability, offering financial access and inclusion on a massive scale without geographical limitations.
The challenge of blockchain opacity impedes communication between blockchains, preventing true interoperability. To overcome this restriction, wrapping tokens, like Wrapped Bitcoin (WBTC), were introduced. These tokens represent native assets issued on a non-native blockchain and allow for their use on specific networks.
While wrapping tokens are a step towards interoperability, true interchain communication remains a complex endeavor. Future use cases that leverage real operability may include Web3 services with smart contracts capable of real interoperability, decentralization efforts to improve international financial friction, and cross-industry collaboration.
In the future, envisioning wrapped Ethereum and wrapped Bitcoin being available on the XRP Ledger offers the prospect of eliminating transaction delays and high gas fees, offering clear benefits to the crypto and NFT fields.
A Snapshot of an Interoperable Blockchain Future
Polkadot: Embracing Game-Changing Elements in Blockchain
Polkadot stands at the forefront of a paradigm shift in blockchain technology, harnessing multiple game-changing elements such as multichain interoperability, democratic governance, and a highly upgradeable and modular substructure.
Understanding Cross-chain in Crypto
Cross-chain technology plays a pivotal role in facilitating the exchange of information and value between various blockchain networks, enhancing their interconnectedness and breaking down the walled barriers that separate them. This results in a dispersed yet linked ecosystem.
The Independent Nature of Cross-chain
A cross-chain system operates independently of the connected platforms, avoiding inheriting the flaws of its interfaced connections. When it comes to transmitting money, inter-blockchain technology seeks to eliminate the need for intermediaries, ushering in greater efficiency and security.
Can Different Blockchains Communicate?
Currently, there are no standardized rules for blockchains to communicate seamlessly with each other. The lack of tools for systematically studying exchanges across numerous blockchains poses challenges in assessing and benchmarking interoperability solutions.
The Potential of Blockchain Merging
Blockchain technology can be integrated with other innovative technologies, such as AI/machine learning and the Internet of Things (IoT), laying the foundation for sophisticated computer software and processes.
The Current State of Interoperability Solutions
While API solutions show more development progress, the interoperability scenario for blockchain-to-blockchain solutions in enterprise use remains underdeveloped, and it may bring about its own set of challenges.
Addressing Problems with Interoperability
Interoperability addresses significant problems in the cryptocurrency and blockchain space:
- Encouraging wider adoption of cryptocurrency among organizations, corporations, and individuals.
- Promoting the growth of standardized blockchain construction practices.
- Reducing friction in liquidity provision and other DeFi use cases.
Challenges in Cross-chain Systems
Cross-chain systems encounter several challenges:
- The complexity of managing trust differences between diverse blockchains.
- Disparities in blockchain ledgers, making the system susceptible to external tampering.
- Transaction rate constraints when connecting with multiple chains, potentially choking network throughput capabilities.
The Economic Benefits of Blockchain Interoperability
A 2020 paper by the World Bank Group highlights how blockchain interoperability can benefit the economy in various sectors:
- Central banking and digital payments: Blockchain interoperability facilitates faster and more convenient monetary transactions, as demonstrated by tests conducted by monetary authorities of countries like Singapore, Canada, the European Union, and Japan.
- Identity in the digital realm: Interconnected blockchains empower users to govern data, settle agreements, and authenticate their identities in a globalized world, providing greater control over personal information.
- Supply chains: Blockchain unification streamlines data sharing among parties engaged in logistical processes, enhancing the efficiency of supply chains.
- Healthcare: Blockchain implementation in healthcare allows better access to medical information and supports data sharing for improved research and analysis.
The Promise of Blockchain Interoperability
Despite being in its early stages, blockchain interoperability has piqued the interest of industry experts and organizations like Deloitte and the World Economic Forum. Its inevitability holds a solid case, and as the global landscape evolves toward interdependence and interconnection, numerous sectors and industries are leading the way.
Embracing the Unseen Advantages
Blockchain interoperability’s potential is far-reaching, with numerous advantages and use cases yet to be fully imagined. As the technology continues to evolve, we eagerly anticipate the emergence of even more features and benefits, propelling us towards a truly interconnected and innovative international economy.