Description: Here we consider blockchain interoperability: what it is, how it works, the basic types, benefits, and risks of its usage, as well as future outlooks.
Blockchain technology is based on peer-to-peer technology using shared public ledgers. It is the basis for moving from disjointed, isolated systems to interconnected value networks. But a critical ingredient in bringing this to pass is blockchain interoperability.
What is blockchain interoperability? In short, interoperability in blockchain allows users to trust that "what I see is what you see" for two separate networks. So here we examine the implementation of cross-chain interoperability and what the most efficient interoperability schemes are.
Blockchain interoperability is the capability that two or more blockchains have to communicate with each other in a trustless way.
This is like when you write an email in Gmail and send it to a Yahoo inbox: there's nothing wrong with that interop. Interoperability is what chips away at the “walled gardens” of decentralized systems and begins to open the spigots of collaboration.
Each blockchain, be it Bitcoin, Ethereum, or some other, has its own protocol and rules. Without interoperability protocols, these systems are siloed and unable to benefit from each other’s innovations. Blockchain interoperability solutions, in fact, are bridges that provide seamless communication and cooperation between different blockchain systems.
For example, assume a user wants to move assets from an Ethereum-based DeFi platform to a game operating on a different blockchain. It would all be awfully long and complicated if it weren't for the mutual connection. With interoperable blockchains, such transfers can occur instantaneously and seamlessly, making user payments more efficient and less cumbersome.
Blockchain interoperability solutions are crucial in interchain communication. They are based on:
Basically, interoperability protocols allow different blockchains to work together. But why would this be so important for the future of blockchain? Let's explore that.
A multi-chain and multi-layer Web3 landscape is on its way. Today, we’ve got more than 100 layer-1 blockchains (base layers) and their layer-2 and emerging layer-3 children. These layer-2 and layer-3 solutions work as stand-alone blockchains that partially secure themselves thanks to base layers, like rollups that are secured by layer-1 chains.
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In a competition for developers and applications, blockchains are differentiated by the trade-offs made in the design of their architecture to enable certain features at the cost of others. Blockchains could also differentiate themselves by supporting specific programming languages, focusing on certain geographies or use cases, or by establishing unique branding and community values.
Interoperability in web3 is critical to allowing these varieties to interconnect, especially where traditional systems might want to interact with multiple chains from a single backend. These protocols are at the core of blockchain abstraction layers, a sort of middleware that facilitates Web2 systems and dApps to interact with any blockchain through a single interface.
Without this level of abstraction (interoperability in blockchain), a custom, in-house development of the cross-chain integration would be necessary every time. Abstraction levels of the blockchain make this process far easier and faster, and thus it is becoming a solution within numerous sectors of the economy and the environment where decentralized technologies may be helpful in improving the process.
Cross-chain bridges allow various networks to communicate and transfer data, assets, or programming with one another. Two key and closely related factors in this domain are economic security and flows of liquidity.
In the context of blockchains, economic security generally refers to the economic assurances that the network can offer against bad actors. It is mainly made from staked capital (in PoS systems), mining costs (in PoW systems), and validator incentives. When implementing interoperability, the economic security becomes more complicated once there's a shared risk agreement across chains.
DeFi ecosystem needs liquidity as much as a human being needs air to breathe. Liquidity is influenced by interoperability in the following manner: liquidity is divided across chains, making capital less efficient. Bridging assets adds friction, which can be through slippage and time delay. Tokenized representations (e.g., wBTC, bridged USDC) tend to be less trusted and/or liquid than native assets.
The classification of the various types of crypto interoperability in blockchain systems is important for evaluating the security model, trust assumptions, and performance of the systems. Here’s a brief overview of the four primary types of interoperability in blockchain from least to most trust-minimized.
It's based on off-chain, central servers to verify and enable cross-chain communications. A trusted intermediary (e.g., server, company, or small set of validators) watches for events on one chain and sends messages about them to the other chain. This agent must not lie and cannot be compromised by its users. The examples include Binance Bridge, multisig-based bridges (like AnySwap), and centralized exchanges.
It employs its own set of validators (not related to either of the chains) to forward and verify messages. Middleware refers to external networks such as oracles or independent validator sets like Chainlink and Axelar. This validation is decentralized, but economic security is not intrinsically tied to source/destination chains. The users trust that the external set of validators is honest and secure. Chainlink CCIP, Axelar, and LayerZero are the examples of these.
The destination chain operates a light client for the source chain and verifies messages on-chain with cryptographic proofs. There are no intermediaries in this structure: the recipient chain is able to verify Merkle or zk-proofs pertaining to the sending chain’s state. Light clients maintain a header chain and validate the presence of transactions therein. The examples are zkBridge and Cosmos IBC near the Rainbow Bridge.
The two chains, which have a similar validator set or consensus layer, can cross-validate the messages natively. The validators who secure one chain also secure the other one. This works only if chains are in the same ecosystem (e.g., Polkadot parachains, Cosmos Hub, and consumer chains). Also, it is not easily applied to an autonomous or L1-to-L1 bridge. The instances are Polkadot’s XCMP, Cosmos Interchain Security (ICS), and node subnets (shared validator sets).
Web2 and external validation are more efficient but less secure. Local and native validation provide stronger assurance but are more complicated and computationally expensive.
There are several notable advantages of blockchain interoperability:
It's hard for isolated blockchain networks to exchange data with each other and swap data. The issues are not only technological but also associated with poor standardization, low security, challenges to scale, and regulation. Solving these problems is the key to unlocking blockchain's potential and further winning hearts and minds.
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There are several different types of interoperability protocols, each with a different role to play in the blockchain space. Let’s take a look at them.
They were developed so that users could swap assets between blockchains without using a centralized exchange. They are based on a smart contract known as Hashed Timelock Contracts, which is a time-limited contract where each party hashes out the details of the transaction on their own blockchain. Atomic swaps were the first example of interoperable token swaps, but cross-chain DEXs, which came after, provided the same capability.
Bridges are protocols or dApps that facilitate the exchange of assets and data between the blockchains they are connected to. A bridge generally works through a burn-and-mint or lock-and-mint system, where the original asset is locked on the host chain and a mirrored version is created on the receiving chain. After the asset makes the trip back over the bridge, the mirrored copy is either burned or locked.
There are already several blockchain projects developed for solving this problem, so-called “multi-coin” or “cross-coin” systems, created to make cross-chain operations and transfers easier within their own environments. The most notable ones are Cosmos and Polkadot. Both offer a protocol stack and a set of developer tools that allow developers to build new blockchains and connect back to a main chain for the ability to interact with other nodes, security, and consensus.
Software like this, which is leaned on by layer 2s and sidechains, is designed to work with a base layer or main chain. For example, Arbitrum and Optimism are two Ethereum Layer 2s that batch transactions sent to the main Ethereum chain. While not as user- or dev-friendly as the above solutions are, these protocols interoperate with another blockchain, which offers scalability for them as a feature.
The blockchain interoperability field has a solid future with a lot of exciting technologies that are becoming a reality. With new protocols and technologies in decentralized systems, cross-chain interaction between blockchains can be even more efficient, less delaying, safer, and give better control for end-users over their funds. Such developments are expected to bring blockchain interoperability in a more efficient, safe, and mass-adopted manner and will see the implementation of blockchain applications across varied sectors.
As technology ages, decentralized systems such as blockchain technology become more and more applicable and pertinent with respect to interoperability. In this context, we shall witness a variety of inter-blockchain applications launched in the industry, and some of them are more complex and powerful products, which will promote innovation in the industry.
If decentralized technology is to have a future, interoperability blockchain projects are the key to it. They establish a way for diverse networks to talk, collaborate, and share the power they have. Using emerging technologies, however, to address technical, security, and regulatory concerns in this manner will be instrumental for stimulating a cohesive and productive blockchain ecosystem that will be expected to ensure innovation in the space. We will see adoption and effects spread across the planet with the increasingly interconnected blockchain world we are entering, and soon we will open the floodgates that will give birth to applications and use cases worldwide.
