Introduction

Although Blockchain technology has gained significant attention in recent years, there are still issues that are hindering the growth of blockchain and related technologies. One of the key factors preventing their mass adoption is the apparent lack of interoperability between different blockchain networks.

As companies and enterprises around the world explore the potential of blockchain, the need to connect different blockchain networks and streamline data flows has become critical. Fortunately, an increasing number of Web3 projects are working to create solutions that allow numerous blockchains to work together, enabling seamless integration. As a result, these solutions could help blockchain and related technologies achieve the mass adoption they deserve.

In this article, we will discuss what cross-chain technology is, how Blockchain Interoperability is achieved, its benefits, and the challenges it faces.

What is blockchain interoperability?

Blockchain interoperability refers to the ability of blockchains to communicate with each other, facilitating the smooth transfer of data and crypto assets. The concept aims to enable web3 users to seamlessly switch from one blockchain to another. In other words, data and transactions can be easily transferred between different blockchain platforms with no central authority or intermediary required.

For example, every asset that has an owner and every transaction that is completed are recorded on a particular blockchain. No matter what economic activity takes place on one blockchain, it can be spread to another blockchain with the right interoperability solution. This is one of the key features of blockchain interoperability solutions.

The foundation of blockchain interoperability is cross-chain messaging protocols, which allow blockchains to read data from and write data to other blockchains. Cross-chain messaging protocols also support the creation of decentralized applications (dApps) that can operate across multiple different blockchains. Cross-chain dApps are not the same as multi-chain dApps because the latter deploy the same application on multiple blockchains, where each instance is an isolated set of smart contracts with no connection to other blockchains.

As for cross-chain dApps using cross-chain messaging protocols, they can be limited in scope. Token bridges exist only to allow tokens on a source blockchain to be transferred to a target blockchain. However, arbitrary data messaging protocols provide more general cross-chain functionality that can support more complex dApps, including cross-chain decentralized autonomous organizations (DAOs), cross-chain decentralized exchanges, cross-chain NFTs, etc.

Overall, the concept of blockchain interoperability is relatively new and still evolving. However, it is likely to lead to the creation of a truly decentralized global economy.

The importance of blockchain interoperability

In terms of blockchain technology, interoperability helps solve the problem of assets and data interaction across multiple chains. When two entities use the same blockchain platform, such as Bitcoin or Ethereum, digital data and value transfer is an easy process. On the contrary, this is impossible when two parties use different blockchain platforms.

Currently, the digital transfer of data is a complicated process because different companies around the world use different blockchain networks. However, interoperability is designed to significantly reduce these issues, making it much easier for companies to transact across blockchains and take advantage of blockchain interoperability.

Blockchains are being used in a wide range of industries, from education and finance to logistics and healthcare. In each industry, blockchains serve a completely different purpose. In order to customize certain features, developers tend to give up some other important functionality. With blockchain interoperability, there will be no need for such compromises, which will lay the foundation for mass adoption of blockchain-based web3 applications.

Coming back to finance, blockchain interoperability can enable the smooth exchange of data and money between different economies, significantly reducing costs. This could encourage more people to participate in cross-border transactions.

What is cross-chain technology?

Interoperability is the ability of a distributed ledger technology (DLT) design to receive data from or exchange data with external systems. Cross-chain technology is an emerging technology that facilitates data exchange between DLT designs and external systems, resulting in the achievement of interoperability. In fact, such data exchange can improve the security of DLT designs, increase flexibility, and solve performance issues.

For example, you can use sharding to solve the problems of poor scalability and low throughput. Sharding divides a distributed ledger into small chunks that can be controlled separately, thus enabling parallel transaction processing to improve performance and scalability.

Potential use cases for cross-chain technology include asset transfers, cross-chain oracles, and cross-chain smart contracts. In asset transfers, assets are transferred from one distributed ledger to another. On the contrary, cross-chain oracles provide data from one distributed ledger to another, as opposed to changing assets.

As for cross-chain oracles, they can be used to confirm that certain events, such as transactions, took place on another distributed ledger. Cross-chain smart contracts refer to the ability to initiate the execution of a smart contract on another distributed ledger, thereby increasing automation. Unlike cross-chain oracles, to execute cross-chain smart contracts, you must issue a transaction on the target chain. This chain will change the state of the distributed ledger.

At this point, you may be wondering who is using cross-chain technology. Ripple is an example of a blockchain project that attempts to implement cross-chain transactions. Ripple helps banks around the world accept cross-border payments using fiat money and cryptocurrencies.

Cross-blockchain compatibility

Cross-chain protocols establish interoperability between blockchains, facilitating the exchange of information and value between different networks. Combined with the strengths of public decentralized chains, these protocols should pave the way for blockchain mass adoption and use.

Cross-blockchain compatibility allows different blockchains to communicate directly with each other. Therefore, blockchains that share similar networks will be able to transfer value between each other.

What’s more, cross-blockchain compatibility makes it possible for companies to do business with customers using compatible blockchains. This eliminates downtime and expensive transaction fees. Just as in the case of the Internet of Value, cross-blockchain compatibility will make blockchain networks an effective means of transferring value.

How does blockchain interoperability work?

The cross-chain protocol enables data sharing across different blockchain networks and facilitates interoperability between various blockchain networks. With the cross-chain protocol, users can interact directly with each other. Therefore, blockchains with similar networks can share information and value.

However, there is no single versatile approach that can be implemented in the same way across all networks, so the approach varies from network to network. To streamline transactions without using third-party interfaces, each network uses a unique method for blockchain interoperability.

Atomic token swaps allow users to exchange their digital assets across different blockchains. In addition, blockchain networks can use relays to monitor activity occurring on other chains. Relays work on a chain-to-chain basis, allowing a single smart contract to act as a central client to other nodes across different chains without using distributed nodes. As a result, it can instantly verify certain central headers and the entire history of transactions. Unfortunately, running and maintaining the security of a relay is expensive.

How is blockchain interoperability achieved?

The majority of layer-1 blockchains lack internal capabilities that enable cross-chain interoperability. However, there are several techniques that can help improve interoperability between blockchain networks. Let’s take a closer look.

Sidechains

Let’s start with sidechains. A sidechain is a method that allows two active blockchains to communicate with each other. In sidechains, the main chain and the side chain are two different blockchains. Therefore, a cross-chain communication protocol connects the main chain and the side chain, each of which maintains an inventory of assets.

Using a mechanism to transfer assets between the main and side chains, sidechains act as a two-way peg. Some prominent examples of blockchain interoperability projects include BTC Relay, Mimblewimble, Poa network, and RSK.

Notary schemes

In this method, transactions rely on a third party. For example, a trusted exchange can act as a notary, managing the lack of trust between two parties involved in the transaction. Overall, a network of exchanges or a controlled exchange can act as a notary entity. The integrity of this entity is the only factor influencing how well a notary system works.

Furthermore, the system contains a centralized component, even if a collection of notaries decentralizes it, which is another weakness of the approach. Binance, Coinbase, and other centralized cryptocurrency exchanges are prominent examples of notary schemes.

Oracles

As for the role of oracles, they bridge the information gap between on-chain and off-chain environments in the context of blockchain. Decentralized oracle services such as Chainlink ensure that different ecosystems refer to a single source of truth. As such, they ensure that off-chain data is fed into blockchain-based smart contracts.

Blockchain routers

Blockchain routers allow different blockchain networks to communicate with each other. Numerous blockchain networks, such as Bitcoin, Ethereum, and others, are considered terminal components called sub-chains in the routing network according to the architecture of the blockchain router.

As for sub-chains, they can only connect to a blockchain router and not directly to each other. For example, a blockchain router uses a cross-chain communication protocol to enable communication between sub-chains. All data recorded on a sub-chain is stored on a blockchain. The blockchain router creates a trust bridge between chains and facilitates communication between sub-chains.

Industrial solutions

The Cosmos and Polkadot networks are examples of cross-chain interoperability protocols. Polkadot is a heterogeneous multi-chain translation system that allows specific side chains to communicate with open blockchains. However, you can use Cosmos to create blockchains with or without permission. Cosmos consists of hubs and zones that use the cross-blockchain protocol to communicate with each other.

Hashed TimeLocks

Hashed TimeLock Contract (HTLC) is another solution that enables blockchain interoperability. It is used to build smart contracts that can change payment channels. HTLC typically implements time-locked transactions in the crypto space.

For example, the recipient will not get any money, and the transaction will be void if they do not create a cryptographic proof of receipt of payment within a specific window. Therefore, TimeLock specifies that a certain number of cryptocurrencies will be blocked from use until a certain or predefined amount of time has elapsed.

Off-chain transactions are executed using the hashed time lock through the Bitcoin Lightning Network. The Lightning Network uses interconnected payment channels to allow users to send funds even if they are not directly connected through a payment channel. This process is called network routing.

Types of blockchain interoperability solutions

Token swaps

Token swaps entail trading one token on a source chain and receiving another token on a destination chain. Cross-chain token swaps are typically enabled by atomic swap protocols and/or cross-chain automated market makers that have separate pools of liquidity on each blockchain to pave the way for the swap.

As for atomic swaps, they are a decentralized exchange mechanism that allows two parties to trade their tokens on different blockchains without a centralized intermediary. Instead, atomic swaps allow users to trade their tokens directly on a peer-to-peer basis, ensuring that transactions are either fully completed or not initiated at all.

Token bridges

Token bridges allow users to move assets from one blockchain network to another, increasing the utility of tokens by enabling cross-chain liquidity. In other words, token bridges involve burning or locking tokens via a smart contract on a source chain and minting or unlocking tokens via a separate smart contract on a target chain.

Let’s take a closer look at the token handling mechanisms that enable token bridges. They are the lock and mint mechanism, the burn and mint mechanism, and the lock and unlock mechanism.

• Lock and mint token bridges lock tokens in a smart contract on the source chain. Next, the wrapped versions of the tokens are minted on the target chain. The tokens are often referred to as bridged assets. Conversely, the wrapped tokens on the target chain are burned to unlock the original coins on the source chain.
• As the name implies, burn and mint token bridges burn tokens on the source chain. After that, they reissue the same tokens by minting them on the destination chain.
• Finally, lock and unlock token bridges lock tokens on the source chain and then unlock the same tokens from a pool of liquidity on the destination chain. These types of token bridges typically attract liquidity on both sides of the bridge through revenue sharing and other incentive programs.

Native payments

Native payments occur when an application on a source chain triggers a payment on a destination chain in its native token. Cross-chain payments can also be made on the source chain in its native asset based on data from a separate blockchain. The majority of such payments often represent some form of settlement and can be based on blockchain data or external conditions.

Contract calls

Smart contract calls involve a smart contract on a source chain calling a smart contract function deployed on a target chain, possibly based on data coming from the source chain. Contract calls can be combined to create a more complex cross-chain application that can include token swaps and bridging.

Programmable token bridges

Programmable token bridges are a combination of token bridging and arbitrary messaging. However, a smart contract call can be made as soon as tokens are transferred from the source chain to the target chain. This is done in a single transaction, allowing for richer cross-chain functionality such as staking, exchanging, or depositing tokens into a smart contract on the target chain as part of completing the bridge function.

Projects rapidly advancing blockchain interoperability

Cosmos

Cosmos is an ecosystem of applications and services. It is designed for decentralized ecosystems. Cosmos uses the Inter-Blockchain Communication protocol to ensure blockchain interoperability. The IBC protocol supports a variety of services, allowing users to freely exchange assets and data across blockchains.

Cosmos provides a top-tier Software Development Kit (SDK) for blockchain developers. This allows developers to build innovative applications on the Cosmos hub that contribute to interoperability.

Chainlink

Chainlink is a web3 platform that provides oracle services that can power smart contracts on any blockchain. Chainlink’s oracle networks enable easy integration of smart contracts with existing APIs. This provides companies from various industries with a universal gateway to any blockchain. Decentralized applications built on blockchain can be seamlessly integrated with legacy web2 systems using Chainlink.

Polkadot

The Polkadot network is an ecosystem of interoperable parachains deployed on the Relay Chain, Polkadot’s central hub. Parachains are individual layer-1 blockchains that can work together with the Polkadot ecosystem. Each parachain relies on a central shard within the ecosystem for cross-chain interaction and security. Therefore, as long as that side of the chain is secure, the parachains will also operate securely within the network.

This scheme is called pooled security. Parachains can exchange data if validators from the central shard can verify that it is correct against a state transition function. Thus, if all the information that is exchanged can be verified, it is passed on to the appropriate parachain.

Hybrix

Hybrix is an open-source cross-chain platform focused on unifying all digital ledgers. It allows users to store, exchange, and transfer tokens across different blockchains. In addition, developers can create dApps that integrate with different blockchains.

Hybrix also offers an all-in-one crypto wallet that allows anyone to store, send, and receive tokens across various native blockchains. Therefore, users don’t have to create multiple wallets on different blockchains. This wallet facilitates ETH, BCH, BNB, and other token transfers from Hybrix to any other wallet. It also enables value exchange between different tokens.

Loom Network

Loom Network is a developer-centric interoperability platform that allows them to build high-performance, user-centric dApps with multi-chain scalability. Decentralized applications built on Loom can be used on different blockchains concurrently, as it offers seamless integrations with Bitcoin, Ethereum, Tron, and other blockchains.

LOOM is the network’s native token used by developers to pay for hosting dApps on the network. Unlike other blockchains, developers pay a fixed monthly fee to host their dApps, so users don’t pay any transaction costs.

Wanchain

Wanchain claims to be the first online solution for blockchain interoperability. It aims to store all digital financial assets on a single blockchain. The project has a multi-party computing system that can unite different currencies and revolutionize the financial ecosystem.

Wanchain drives cross-chain activity through decentralized direct bridges that facilitate the seamless transfer of tokens and digital assets between blockchains. The solution is compatible with the Ethereum Virtual Machine (EVM), making it easy for developers to build cross-chain applications using Solidity.

Harmony

Harmony is an open-source and scalable blockchain that provides cross-chain bridges to the Binance Chain, Ethereum, and other blockchains. To achieve this, Harmony uses a layer-zero bridge architecture that enables seamless token transfers between blockchains. Harmony has very low gas fees and an estimated transaction time frame of 2 seconds, making its cross-chain bridge one of the fastest token bridges.

Blocknet

The developers behind Blocknet see cross-chain communication as the key to creating a decentralized cryptocurrency exchange. The team is also implementing strategies that may change the way we think about blockchain today.

Blocknet aims to decentralize all components and improve the basic infrastructure of the system to create its own decentralized exchange. In addition, the project backers aim to optimize the cross-chain platform to serve as an infrastructure.

Lisk

Lisk is a solution that uses sidechain technology to enable interaction between chains. The solution is based on a series of cross-chain messages that are collected before a transaction is sent to another application. When these messages reach the destination platform, they are verified and added to the block.

Cross-chain messages collected at different times can validate the state transition to ensure that the information is valid over time. This enables seamless chain state verification and approval in a separate network.

Cardano

Cardano is one of the most widely used chains promoting interoperability. From the beginning, Cardano supported the development and functionality of smart contracts, so the concept of bridges to other chains was imminent. In addition, Cardano adopts a cross-chain certificate standard for its solution, which is mainly focused on proof-of-stake chains.

Cardano uses sidechain technology and begins to show the possibilities of interaction with chains such as Algorand and the Nervos system. Even though this is limited to PoS chains with very specific requirements, it shows the potential for future development.

Benefits and challenges of blockchain interoperability

Cross-blockchain compatibility has many benefits. For example, the healthcare and legal industries can exchange data between private and public blockchains with interoperable smart contracts. Blockchain interoperability can also enable multi-token transactions and wallet systems, streamlining the cryptocurrency user experience.

Blockchain interoperability also allows application-specific blockchains to communicate with each other through the central decentralized hub. In addition, independent companies will be able to more easily transfer data and value when blockchains used by different companies and industries are connected.

However, once a blockchain is deployed in a network, it becomes immutable. Therefore, users must carefully verify all data before submitting a start node. Another challenge is that blockchain interoperability is a very limited process. Even though this feature ensures data security during the transfer, nothing can be guaranteed for sure.

Finally, every blockchain network has a different trust model. For example, thousands of miners support some blockchains, while only a few miners support other blockchains. Therefore, transferring information from a less trustworthy network to a more trustworthy one can leave the latter open to third-party manipulation and other vulnerabilities.

Closing thoughts

Blockchain interoperability and cross-chain technology are essential components of the future of blockchain. These technologies have the potential to transform the way we interact with decentralized systems. As blockchain and related technologies continue to evolve, it will be critical for businesses to leverage the latest innovations and work together in a more connected, efficient, and secure ecosystem.

Therefore, we need to connect different blockchain networks and enable seamless communication and data transfer, as this will help overcome existing limitations and unlock more benefits of decentralized systems, such as improved user experience and scalability, expanded functionality, and smooth asset transfers.

Feel free to contact our blockchain developers if you have any questions or ideas to share.

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