The cryptocurrency launch a decade ago started to transform the global economy, which is inevitably moving towards a digital ecosystem. Institutional investors now view Bitcoin as a safe-haven asset, while many new networks have been launched that outperform BTC in terms of speed, fees, and usability. The lack of blockchain interoperability, however, is one big shortcoming that prevents users from taking advantage of a handy decentralized environment.
Blockchain of the early Bitcoin era is often dubbed as blockchain 1.0. In 2015, blockchain 2.0 became available, allowing trustless interaction between users. Platforms that offer this functionality, however, are based on siloed blockchains, which restrict money and data exchange between networks. This problem is solved by blockchain interoperability and, along with enhanced security and scalability, will bring blockchain 3.0 — a state of technology that will allow its global adoption.
What is blockchain interoperability?
Interoperability technologies allow different blockchains to interact with each other directly or via some intermediaries.
Among the features of cryptocurrencies are cross-chain atomic swaps that allow exchanging various cryptocurrencies directly and without a third party’s involvement.
However, blockchain is also finding application in other fields of the economy as well: supply chain management, digital identity, internet of things, and more. In these areas, interoperability is crucial too as it breaks down silos and walled gardens of data, enabling organizations from different fields to merge and analyze data. It can contribute to the advancement of management, science, healthcare, and finance.
Cross-chain atomic swaps
How does interoperability enhance cryptocurrency and other blockchain-based use cases?
- Crypto can gain more users as it becomes easier to use. The interoperable future will allow users to swap coins from different blockchains directly within their wallets, without having to find an exchange service. Yield farmers will find more freedom in moving their assets across chains while seeking more profitable strategies.
- More corporations will adopt blockchain technology as it becomes more accessible. The lack of standards in building blockchains hinders their interoperability, as stated by giants like IBM. Implementing easy-to-set-up, widely accepted blockchain solutions would reduce this barrier to adoption.
In a report by the World Bank Group published in 2020, the following examples are given of how blockchain interoperability could benefit the economy:
- Digital payments and central banking. Money transfers in the modern day are slow and cumbersome, which was especially apparent during the coronavirus lockdown. The monetary authorities of Singapore, Canada, the European Union, and Japan have carried out a series of experiments, showing the potential of blockchain interoperability in facilitating digital payments.
- Digital identity. Internet users today barely have any control over their identities: it is not always obvious how their data is used by corporations and governments. Digital identities built on interoperable blockchains would allow users to control data, settle agreements, and verify their identity in an interconnected environment.
- Supply chains. For logistical processes to run smoothly, all parties involved need to be able to exchange data frictionlessly. Using blockchains, fragmented supply chains can be unified.
- Healthcare. Today’s patients keep their health records across a variety of medical institutions, while organizations struggle to gather statistics and conduct research when data exchange between them is restricted. HIMSS, a non-profit organization in the United States that studies and develops healthcare information systems, has recently investigated the use of blockchain in healthcare.
Here are four solutions to make blockchains more interoperable
A hot topic today is creating more interoperability in the blockchain space, and new methods are emerging and evolving. We will review 4 solutions that make blockchains more interoperable today:
- Atomic swaps allow for intermediary-free coin exchange between separate blockchains
- Polkadot and Cosmos are the platforms that make it easy to create customizable interoperable blockchains
- Chainlink offers a protocol for cross-chain smart contracts’ communication
Let’s take a closer look at each of these.
Currently, the only way to exchange your Bitcoin for Ethereum is to find a trusted exchange service. Through atomic swaps, it is possible to exchange coins from different blockchains in a trustless manner, without having to deal with third parties and their fees.
The concept of atomic swaps was first introduced in 2012 when 99% of today’s crypto projects didn’t exist. This technology has now been around for 9 years: users initiate a transaction, creating two multisignature vaults, transferring coins to each other, and confirming they have received the coins.
With Atomic swaps, the “all-or-nothing” rule applies. If one of the users fails to send and confirm receiving coins by the deadline, the transaction will be canceled automatically.
Because atomic swaps don’t use any cross-chain intermediaries, they’re implemented by the community and coin developers. To date, these types of exchanges have not been widespread, and the first real swap occurred in 2017 when Litecoin’s founder Charlie Lee exchanged LTC for BTC:
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An increasing number of networks are becoming interoperable via atomic swaps. In August 2021, the first swap between Bitcoin and Monero was carried out, despite increased privacy in Monero transactions. We can expect to see more news of this type in the future.
With Polkadot, separate blockchains get the opportunity to communicate in a trustless way. Through the protocol, enterprises have access to interoperable blockchains that can be customized, while in the meantime, they can become interoperable with the existing networks.
There are two infrastructure levels in Polkadot that allow businesses to leverage interoperable blockchains. The first is the Relay chain, Polkadot’s main network, system core, and mediator. On the second level are parachains, which are independent blockchains that can be customized by developers and businesses. Parachains are built using one standard, so they are easy to set up, and the entry barrier is relatively low.
Bridges are the third level of infrastructure that allow Polkadot to communicate with established networks like Bitcoin and Ethereum. Currently, this technology is being tested as a way to swap coins between these chains in a trustless manner.
Cosmos is an environment of independent blockchains running in parallel, which is quite close to what Polkadot is. The Cosmos platform enables custom blockchain development, and its primary goal is to build a network of blockchains that are easily interoperable.
Today, to build a decentralized application on Ethereum, for instance, you would have to develop a smart contract that was designed to cover many use cases, meaning that such an approach is inflexible. Cosmos SDK allows you to build an application-specific, customizable blockchain.
Moreover, a Cosmos-based blockchain boasts sovereignty, one of the key concepts in Cosmos — it operates with its own set of validators, which makes it independent from the Cosmos mainnet. All blockchains built on Cosmos can interoperate with the Inter-Blockchain Communication protocol (IBC).
Chainlink is a protocol that brings off-chain data on the blockchain — something that is in a high demand in the crypto world. It uses a network of oracles to retrieve data from off-chain APIs and route it to smart contracts, thus creating a bridge between the on-chain and off-chain worlds (which is also important to the blockchain 3.0 philosophy). Google, SWIFT, and Oracle are among Chainlink’s partners.
Chainlink introduced the Cross-Chain Interoperability Protocol (CCIP) in August 2021, which allows smart contracts from different blockchain platforms to communicate and exchange data. It enabled decentralized messaging, data transfers, and token movements between blockchains. The release of these smart contracts will enable new use cases that were previously impossible, according to Chainlink’s co-founder Sergey Nazarov.
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Eventually, will all blockchains be interoperable?
Blockchain interoperability remains in its infancy, despite the latest developments. Watching how Polkadot implements bridges between the largest blockchains and how Chainlinks’ CCIP works will give us a glimpse into the future of interoperability.
In the present context, it’s clear from the DOT price dynamics that the community is very enthusiastic about blockchain interoperability. The world as a whole is striving towards interconnection, even though we don’t yet have robust cross-chain bridges. We might even say blockchain interoperability is inevitable — and it may be implemented through solutions we’ve never thought of yet.
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Why Is Blockchain Interoperability The Future Of Cryptocurrency? was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.
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