What is blockchain interoperability and how does it work?
June 10, 2024
6
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Since various blockchains often operate in isolation, the need for interoperability arises to answer the challenge of exchanging information and assets between blockchains. Therefore, the concept of Blockchain interoperability is essential in the world of blockchain and cryptocurrency because there are many different blockchain platforms, each with its own unique features, protocols, and consensus mechanisms.
The concept refers to the ability of different blockchain networks to communicate seamlessly, allowing different chains to interact and share data, which makes it easier to use different blockchain networks. It's like making sure people who speak different languages can still understand and help each other. This makes using blockchain technology more flexible and powerful.
Financial systems often rely on diverse blockchains, causing difficulties for firms and clients in the financial services industry to engage and transact. If these blockchains can communicate, data and funds can be transferred between financial ecosystems efficiently, quickly, and securely.
Blockchain interoperability addresses the challenge of assets and data exchanging across different blockchain networks. When two parties use the same blockchain, like Bitcoin, it's easy to share digital information and value. However, when they use different blockchains, this process becomes complex. Therefore, interoperability aims to simplify this by enabling cross-blockchain transactions, benefiting parties by making blockchain interactions smoother.
The specific mechanisms for achieving interoperability depend on the protocols and the technology used, but the purpose of this interoperability is to overcome the limitations through the following approaches:
Sidechains are a means for two operational blockchains to interact with each other. Within sidechains, there are both a primary blockchain (mainchain) and an auxiliary blockchain (sidechain), and they are connected through a cross-chain communication protocol. Both the mainchain and sidechain maintain a record of assets.
To achieve interoperability, communication channels between different blockchain networks should be established to enable users to transfer information and assets (such as cryptocurrencies or tokens) from one blockchain to another without the need for intermediaries like centralized exchanges. Some projects tend to build an interoperability layer on top of an existing blockchain to facilitate cross-chain transactions and communication without altering the underlying blockchain. However, communication channels can take various forms, such as interoperability protocols and blockchain bridges:
Interoperability Protocols: Some blockchain projects, such as Polkadot and Cosmos, create a framework that allows multiple blockchains to communicate through a standardized protocol. Polkadot enables independent chains to securely perform transactions with each other without a trusted third party and securely exchange messages. It also unites a network of heterogeneous blockchains called parachains and parathreds. On the other hand, Cosmos creates independent blockchains called zones that connect to the main blockchain called Cosmos Hub, which monitors and maintains the record of the state of each zone. The project also enables blockchain applications to scale to millions of users through horizontal and vertical scalability solutions.
Blockchain Bridges: Blockchain bridges are designed to create a link between two or more blockchain ecosystems that may have distinct protocols, consensus mechanisms, and functionalities. They are specialized software, protocols, or networks that facilitate the interoperability and transfer of assets and data between two or more separate blockchain networks. Blockchain bridges enable the creation of a network of interconnected blockchains, expanding the possibilities for decentralized applications (DApps), cross-chain transactions, and innovative use cases that involve multiple blockchain networks.
Triggering smart contracts on one blockchain based on data from another is a more complex case of interoperability. In this context, smart contracts and oracles come into play; oracles are trusted data sources that feed external information into smart contracts, which allows them to make decisions based on real-world data. For instance, a smart contract on Ethereum could trigger an action on the Binance Smart Chain.
Interoperability solutions often require mechanisms to reach consensus between different blockchains to ensure that transactions and data transferred between blockchains maintain the security and integrity of the participating networks. This can involve a set of validators or nodes that ensure security and accuracy by confirming the transfers of data and transactions between chains.
This method allows peer-to-peer exchanges of assets between different blockchains. Users can directly swap assets between two blockchains without relying on an intermediary through the use of cryptographic techniques to ensure that either both parties involved in the swap receive their agreed-upon assets, or the swap doesn't occur at all.
Notary Schemes have a specific use case, offering versatility in exchanging data. In this process, external entities retrieve data, such as transactions, states, events, or dedicated cross-chain messages, from one blockchain. Then, they sign this data and submit it to another blockchain for further processing. These notaries can be either a single trusted entity or a group of participants. To discourage dishonest behavior, notaries often deposit a certain amount of collateral that can be reduced if fraudulent activities are detected. Some implementations rely on well-trusted entities to instill trust in the relayed data. After the signed data is submitted to the target blockchain, the corresponding signatures are verified. Some implementations require a specific number of signatures to accept relayed data.
Notary schemes offer great flexibility as they are independent of the consensus algorithms and other technical details of the underlying blockchain. Moreover, they can provide timely data, and the on-chain validation of signatures is cost-effective compared to chain relays.
Chain relays aim to achieve broad interoperability between blockchains without relying on trust in intermediaries. Instead of depending on external auditors, they execute the hash chain of the source blockchain on a target blockchain, often within a smart contract. Unlike notary schemes, chain relay users only need to trust the functional implementation of the chain relay. This makes them a trustless means of cross-chain data exchange. This process reduces costs but comes with the overhead of validating entire hash chains, which can be burdensome because the source blockchain's consensus protocol is typically executed for every block header of the source chain, leading to significant overhead.
Some projects create wrapped versions of assets on different blockchains. For example, Wrapped Bitcoin (WBTC) is a token on the Ethereum blockchain that represents Bitcoin. Users can trade WBTC on Ethereum's DeFi platforms while still maintaining exposure to Bitcoin's value.
Interoperability between different blockchains enables the exchange of data between private and public blockchains through interoperable smart contracts, which has the potential to revolutionize industries, leading to the creation of Web3 platforms that were previously unimaginable. Blockchain interoperability also opens up the possibility of multi-token transactions and wallet systems, greatly simplifying the user experience in the cryptocurrency realm.
Application-specific blockchains can communicate with one another through a central decentralized hub. Moreover, independent businesses, which were once considered entirely separate, can more easily share data and value if various blockchains used by different companies and industries can connect.
The process of achieving blockchain interoperability is tightly restricted, and although it can be intricate and complex for users, it ensures the safety of data transfers. Due to the novelty of this field, it can be challenging for blockchain integration companies to find enough qualified professionals for assistance.
Moreover, there is no interoperability across distinct networks; presently, blockchain interoperability is achievable only among different blockchains within the same network. The movement is also irreversible; once a blockchain is registered on a node, it cannot return to its original location.
It’s important to note that blockchain interoperability serves as a pivotal bridge in the world of blockchain and cryptocurrency. It enables the seamless exchange of data and assets across a multitude of blockchain platforms, overcoming the challenges posed by their unique features and protocols. This technology unlocks a realm of possibilities, from the creation of Web3 platforms to simplifying user experiences through multi-token transactions and wallet systems. Nevertheless, achieving interoperability is no easy feat, as it comes with significant technical constraints and the demand for skilled professionals in this emerging field. Additionally, current interoperability solutions are limited to blockchains within the same network, and once a blockchain is registered, it cannot be reversed. As blockchain technology continues to evolve, addressing these challenges and achieving broader interoperability will be crucial for its widespread adoption and continued growth in various industries.
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