Topics Blockchain
Bybit Learn
Bybit Learn
Beginner
Jul 13, 2022

Blockchain Interoperability: What It Is & Why It’s Essential

Web 3.0 is a term used to describe the next generation of the internet. In theory, it will run on verifiable digital ledgers called blockchains and provide users with a truly decentralized network. In order for this grand idea to come to fruition, however, different blockchains must be able to exchange data and digital assets. 

That’s where blockchain interoperability comes in. By devising ways to connect different blockchains, engineers can build an interconnected Web 3.0 ecosystem. In this article, you’ll learn how this new technology is evolving — and how it could change the world.

What Is Blockchain Interoperability?

Blockchain interoperability is the capacity for blockchains to exchange and leverage each other’s data while seamlessly transferring digital assets. Cross-chain technology can connect networks and facilitate the development of exciting new products.

How Does Blockchain Interoperability Work?

Because every blockchain is different, multiple approaches to interoperability are necessary. What all the approaches share is an absence of third-party integration, thereby maintaining Web 3.0’s status as a decentralized technology. One common tactic to complete transactions across blockchains is called an atomic swap, a practice that revolves around peer-to-peer (P2P) crypto exchanges. Another popular mechanism, a relay, connects two blockchains and allows smart contracts on each of them to check for activity on the other.

While atomic swaps and relays are the main strategies for implementing blockchain interoperability, other methods are beginning to gain traction. This technology is still in its earliest stages of development — and there’s no telling what innovations the future has in store.

Why Is Blockchain Interoperability Important?

By definition, networks grow with greater levels of interconnectedness. Investors, gamers and anyone else involved with Web 3.0 will be able to get more out of blockchain technology if blockchains are connected to each other. The whole point of crypto is to avoid intermediaries, so third-party institutions that oversee transactions between blockchains aren’t an acceptable solution. Only by actually connecting the networks in an integral way can interoperability be achieved without sacrificing the main objective: Decentralization.

Blockchain interoperability will increase efficiency throughout the Web 3.0 ecosystem. It will allow users to quickly exchange data and assets across blockchains, thereby increasing flexibility for everyone involved. Instead of being stuck on a single chain, smart contracts will be functional on different systems. These advances will have beneficial consequences for everyday users. As new technologies overcome the existing constraints to blockchain interoperability, Web 3.0 will come closer to fulfilling its potential.

How Is Blockchain Interoperability Achieved?

In a perfect world, all blockchains would contain built-in features that allow for simple blockchain interoperability. Unfortunately, most blockchain technology still lacks these integral features. Engineers have consequently come up with several alternative methods to achieve blockchain interoperability. These special tools can connect blockchain networks and facilitate the easy transfer of data between them.

Sidechains

Sidechains are blockchain networks designed for compatibility with a single “mainchain.” This networking approach provides the basis for many blockchain interoperability projects. Each blockchain has its own system, replete with a unique token, consensus mechanism and security parameters. Every chain serves different purposes and gives users distinct advantages. Connecting these sidechains to a single mainchain creates an interoperable blockchain network with greater flexibility and adaptability than a single chain.

Oracles

Oracles are pieces of technology that connect the data on a blockchain with the off-chain world. Smart contracts on blockchains often require off-chain information in order to run properly. Oracles provide a tidy way to give these on-chain mechanisms the data they need. Not only do oracles help smart contracts run properly, but they can also provide a common reference point for separate blockchains.

Bridges and Swaps

Bridges and swaps give traders exciting ways to transfer assets across blockchains. As the name suggests, cross-chain bridges connect two blockchains in a way that lets an asset effectively “cross over.” The technology works by locking the asset on one blockchain, then minting an identical asset on the other. While the asset doesn’t actually move from one chain to the other, the buyer on the receiving end still receives the asset they’ve paid for while the seller loses access to it.

Atomics swaps, mentioned above, allow traders to exchange assets across blockchains in a decentralized manner. Like cross-chain bridges, these transactions are completed within the structure of smart contracts, making them fair and secure. These are just the types of creative solutions that could revolutionize blockchain technology.

Benefits of Blockchain Interoperability

Cross-chain technology could have a monumental impact on the larger Web 3.0 ecosystem. As it currently stands, the crypto world consists of separate blockchains, each with its own set of rules and norms. If people can connect those blockchains once and for all, the resulting network will provide people of all customs and inclinations with an incredible slate of new opportunities.

Exciting New Services for Web 3.0

Interoperability is Web 2.0’s most attractive feature. In order for Web 3.0 to gain mainstream popularity, smart contracts, DApps and other programs will need to operate across the entire blockchain ecosystem. Once blockchains are connected, private and public networks will be able to share information in a controlled manner. Digital services will accept different types of tokens, and digital wallets will gain multi-token capabilities. All of this will significantly increase the value of blockchain networks for users.

Greater Collaboration Across Industries

Practically every industry has a use for blockchain technology. Companies working within separate industries would like to communicate with each other and share data, but it becomes difficult if they’re working in separate blockchains. When chains are connected within a single network, industries can exchange data, learn from each other’s strengths and forge a shared culture of innovation. Over time, working within such an interconnected digital space could help companies invent new products and services.

Increased Decentralization

While decentralization has long stood at the center of Web 3.0’s ethos, the concept has primarily been applied to individual blockchains. Cross-chain technology promises to expand the decentralizing mission to the entire crypto ecosystem. If data and assets can pass seamlessly between blockchains, people won’t flock to the handful of predominant chains that overpower the market and dominate the news cycle. An interconnected network of smaller chains would give people greater choice — and prevent any particular chain from gaining excessive power and influence.

Unrestricted Flow of Data and Assets

There’s a reason generations of economists have been extolling the virtues of the free market. Whatever the political and social ramifications of free-market policies, it’s hard to deny that free trade facilitates the transfer of goods and services around the world. In the crypto ecosystem, the abundance of distinct blockchains makes free trade impossible. If you have a particular asset, you can’t sell it to someone whose crypto wallet operates on another chain. Blockchain interoperability eliminates this barrier to trade, giving digital goods greater freedom to flow from one corner of the cyberworld to another.

Enhanced Scalability

A technology or token that exists on a single blockchain can only grow as large as the chain that supports it. The limiting factors that apply to the chain will also apply to anything that’s built on top of it. With blockchain interoperability, technologies can suddenly grow beyond the borders of their original chains. Not only will these dynamics allow individual tools to reach more users, but they’ll also help the entire crypto ecosystem to grow with unprecedented speed. When people can buy, sell and interact across blockchains, it will become much easier to do bigger, more exciting things.

Challenges of Blockchain Interoperability

Blockchain technology is still in its infancy, and uniting distinct chains remains a significant challenge. Despite the recent proliferation of new technologies, experts still have plenty to figure out before blockchain interoperability is achieved. While these challenges are certainly imposing, talented individuals around the world are already working hard to find solutions.

Bridging Distinct Trust Systems

Every blockchain has its own mechanisms in place for ensuring trust in its system. Some chains derive trust from thousands of miners, while others rely on just a few. When traders make an investments on a particular chain, they expect their investments to be backed by the levels of trust they’ve been promised. This poses a challenge for innovators who want assets to move seamlessly between blockchains.

Transaction Bottlenecks

Each blockchain has its own transaction capacity. When chains are interconnected, a sudden glut of transactions can overstretch one of the chains on the blockchain network. Like a traffic jam in the middle of a city, this single bottleneck can clog up the entire system.

Blockchain Interoperability Solutions

Achieving blockchain interoperability will be an enormous undertaking. The challenges associated with the project are genuinely formidable, and the process is still in its earliest stages. Nevertheless, there are plenty of avenues for engineers and experts to pursue as they seek lasting solutions.

It’s still too early to tell exactly what the future will look like for blockchain technology. What we can predict with relative certainty is that the following strategies will be part of the equation.

Open Protocols

There’s no reason blockchains must be self-contained protocols with their own unique standards. Engineers can explicitly design and produce chains that interact with different blockchain networks. By creating more of these open protocols in the future, experts can develop a crypto ecosystem that’s better suited to interoperability.

Atomic swaps perfectly illustrate the potential benefits of open protocols. When blockchains are designed for interacting with other systems, it becomes easy for traders to engage in peer-to-peer (P2P) transactions. There’s no need for an intermediary, and smart contract technology helps ensure that nobody is cheated. An ecosystem that’s full of open protocols will promote interoperability and increase flexibility for users.

Multichain Frameworks

Multichain frameworks allow different blockchains to combine and form intricate, all-inclusive networks. While the engineering is a bit more complicated than what open protocols require, the technology promises to revolutionize the crypto world. When blockchains plug into a multichain framework, they can share data and value. Users can easily transfer assets from one chain to another, and sellers suddenly have access to many more potential sellers when they’re trying to sell a digital product.

Multichain frameworks can create a standardized system in which all blockchains follow the same rules and procedures. In a way, the approach resembles the American highway system. Interstate highways connect every state in the nation, and every road has the same general norms and regulations. Speed limits might change when you cross state lines, but you know that you’ll still be expected to drive on the right side of the road. Just as American highways form a single, interconnected network of roads, blockchain networks can form a multichain framework with the shared norms necessary for interoperability.

Blockchain Interoperability Projects

Developers are already working assiduously to create the blockchain interoperability projects that Web 3.0 needs to flourish. Each project has its unique approach to the problem of cross-chain technology. Some are focused on interchain communication, while others see scalability as the principal objective. All are working to create a world of interconnected blockchains where users can connect and thrive.

As research and development continue, you can expect more projects to develop. For now, these are the projects we’d all do well to focus on. Sooner or later, some of them are likely to change the world.

Polkadot Blockchain

Created by Ethereum co-founder Gavid Wood, the Polkadot blockchain is developing cross-chain technology for smart contract data. The Polkadot model uses multiple sidechains to send data from one principal chain to another. Each secondary chain has its own set of unique characteristics, and every transaction can spread through a relatively wide area. Despite this apparent exposure, the system remains secure throughout the transaction process. With its focus on scalability and governance, Polkadot stands to seamlessly connect public and private blockchains.

Aion

Aion aims to provide a standardized space where different blockchains can freely exchange data and assets. The goal is to develop a neutral protocol, then establish that protocol as a standard for multiple blockchains. Each chain will benefit from the standardization process by gaining access to the other chains on the blockchain network. Users, meanwhile, will gain access to a wider variety of digital assets. Aion’s developers hope to create a multi-tiered system that can accommodate various types of blockchain projects.

Cosmos Blockchain

Cosmos blockchain endeavors to become a comprehensive provider of blockchain-based solutions. The group’s main focus, of course, is to enhance blockchain interoperability. Beyond that principal goal, Cosmos also wants to provide new software development tools that can help blockchains overcome limits to scalability. Cosmos blockchain’s model includes several zones of chains all connected to a central hub. This approach to cross-chain technology promises to enhance interchain transactions and provide unique opportunities for users.

Wanchain

Wanchain, which markets itself as the first online solution for blockchain interoperability, intends to house all digital financial assets on a single unifying blockchain. While this objective might seem overly ambitious, it’s just the type of project that could make digital finance a revolutionary force. The project’s multi-party computing system could bring distinct currencies together and rebuild the financial ecosystem. 

Wanchain’s engineers are leveraging the power of cryptographic theories to produce exciting cross-chain technology. They’re also using a novel proprietary protocol to unite public and private blockchains. Together, these remarkable innovations could turn Wanchain into a powerful force for change in the world of finance.

Blocknet

Blocknet’s developers see interchain communication as the key to producing a decentralized cryptocurrency exchange. Some of the project’s mechanisms for blockchain interoperability seem promising, and new innovations are inevitable. By continuing to improve the system’s foundational infrastructure, engineers could create a decentralized exchange. Such a system would help further the goals of the larger decentralized finance movement.

Chainlink

This aptly named project uses an oracle network to connect different blockchains within a single interoperable system. The technology leverages off-chain resources like smart contracts and settlement outputs to provide interoperability. Chainlink’s special nodes can take data from public APIs and transfer them to smart contracts, which connects the associated blockchains with the outside world. 

Not only is Chainlink useful as a standalone technology, but its developers are also working in conjunction with other projects like Polkadot and Wanchain. By providing technologies that other interoperability projects can assimilate, Chainlink promises to be a transformative force in the blockchain ecosystem.

hybrix

hybrix is a blockchain interoperability project with two main focuses. First of all, the project’s developers want the technology to facilitate communication between blockchains. Secondly, they want to make it easier for future innovators to create platforms that operate on multiple chains. With these goals in mind, engineers are building the network’s HY tokens, which can connect blockchain throughout the crypto ecosystem. These tokens would act as a shared currency that traders could use to make transactions across blockchains.

The Future of Blockchain Interoperability

Blockchain interoperability is sure to be a major focus in the years ahead. They’ve already exploded in popularity, and more people than ever before are trading in cryptocurrencies. NFTs have become a global phenomenon, and people are beginning to appreciate the potential benefits of blockchain technology. Now that blockchains are such a hot topic, it’s time for experts to figure out how all these different chains can be brought within a single system.

Blockchain interoperability won’t happen overnight. The challenges, while not insurmountable, are substantial. Developers are just starting to tinker with cross-chain technology, and more innovation is necessary before massive blockchain networks will be possible. That being said, it’s encouraging to see that so many blockchain interoperability projects are already underway. People recognize the central problems, and intelligent developers are increasingly finding adequate solutions.

Innovation is never fast or simple. It requires years of sweat, tears and experimentation. When it comes to blockchain interoperability, there are many reasons to expect that all the hard work will eventually pay off.

The Bottom Line

Blockchains have developed quickly over the past decade, but there’s still much work to be done. Blockchain interoperability would allow users to exchange data and assets from one chain to another. Creating the cross-chain technology to make this happen might not be easy, but the necessary developments are well underway. Sooner rather than later, blockchains might be interoperable in ways that users can scarcely imagine today.