Blockchain technology has inspired enthusiasm worldwide as many industries have discovered its potential value. Businesses have found that they can use blockchain technology to streamline their processes, implement fresh business models, and reshape industries for the future.
Many businesses that specialise in payments, data storage solutions, smart contracts, and supply chain management have adopted blockchain technology as part of a more efficient operational model. These blockchains are private or public and may vary regarding security, decentralisation, scalability, unique governance, and a specific consensus algorithm.
At the moment, though, there are several degrees of separation between the various applications because different developers and parties are behind them. A partial solution to this is blockchain interoperability, which we discuss in detail in this article.
What Is Blockchain Interoperability?
We can describe interoperability as the ability of software to exchange information between different ecosystems.
While blockchain was first created as a decentralised technology, individual blockchain networks like hashing algorithms, types of transactions, and consensus models cannot communicate with each other. This issue amplifies when you consider different networks that operate with differing governance rules, blockchain technology versions, and regulatory controls.
For example, consider the steps you take before switching from gambling with ETH to BTC at the best crypto casino.
This means that various unconnected blockchain ecosystems exist and operate next to each other but are siloed. In terms of blockchain interoperability, these ecosystems must be able to communicate with each other. This would enable these networks to see, share, and access information from each other across different blockchain networks without the intervention of a centralised exchange to facilitate it.
Why Is Interoperability Important?
In a world where technology is advancing at unprecedented levels, people and businesses have increasingly relied on collaboration and interaction. In light of this, interoperability is crucial to any software system that aspires to operate to its optimal potential. It means that different software systems must be able to communicate with each other effectively.
Regarding blockchain technology, getting the most out of blockchain investments would mean getting the maximum value out of enterprise blockchain. This would facilitate effortless sharing of information, smoother execution of smart contracts, an opportunity to create new partnerships, easier sharing of solutions, and an overall user-friendly experience.
For blockchain technology to truly succeed and flourish, different blockchain networks must be able to interact and integrate effectively. For example, suppose a person sends information from one blockchain to another. In that case, the recipient must be able to read that information, understand it, and respond to it with the least effort.
While every effort is being made to make this interoperability between blockchain networks a reality, Bitcoin and Ethereum blockchains have stated that this is not possible now. There are emerging projects attempting to solve this problem so that blockchain networks can communicate with each other without needing a centralised intermediary network or any third party.
Once this problem is solved, this will open the door to a fully decentralised system.
Where Is Blockchain Interoperability Required?
When looking at how interoperability can transform the way we currently operate, the value chain is an ideal place to start with industries like supply chain, aviation, healthcare, finance, and trade. One blockchain network cannot provide for all the needs of any given transaction in these industries.
Multiple blockchain networks that each provide specific values must be incorporated to cater sufficiently for this. These networks must be able to communicate easily with each other for data to be routed between networks and complete transactions.
In addition, this must be done without creating a one-to-one integration. Moreover, digital assets must be capable of transferring between blockchains without creating redundant information.
With the end goal being to get all blockchain networks to communicate without relying on a centralised platform or third party, it is thought that similar blockchain networks may be able to transfer value much easier at the beginning. When analysing the business ecosystem, businesses will no longer be limited to interacting with clients who fall under their network but can also interact with clients from compatible blockchain networks.
In an ideal world, these interactions will occur without interruptions, downtime, or costly transaction fees.
Approaches To Interoperability
The approach to blockchain interoperability can be split into two distinct categories, i.e., APIs and network-of-networks models.
API’s
One option that can be explored to bring together blockchain networks and solutions is through a mashup application. With this, blockchain networks and solutions will only interact with one application programming interface (API) and will not require multiple APIs for each network.
This mashup application will have a range of capabilities that can be defined in data models and smart contracts. More importantly, it will be the link that joins the different networks. There is no governance structure with APIs, allowing for flexibility and practicality. The flip side is that it is not an ideal option for organising interoperability in the long term.
Network-Of-Networks Model
A very scalable and efficient method of developing interoperability is through a collaboration of establishing industry standards and identifying a network-of-networks structure from which industry networks can unite around.
If an organisation has a blockchain network, it is a web of interconnected networks. With this architecture, an organisation can connect and transact with various solutions. They will not be limited to a single network only, which is key in opening up the interoperability of blockchain networks across different solutions.
Organisations can use their peer to link up with a multitude of blockchain networks through channels. This will drastically lower the complexity of the process. On top of that, it will optimise the organisation’s interaction with various blockchain networks.
The concept of a network of networks to facilitate interoperability has become increasingly popular, especially with natural blockchain hubs emerging.
Opportunities For Blockchain Interoperability
Fantastic opportunities would arise with the interoperability of blockchain networks, specifically in terms of communication and an exchange of value between blockchains.
Below, we explore some functionalities that could emerge with blockchain interoperability.
Atomic Swap
An atomic swap is simply a transfer or exchange of token ownership on two blockchains. With interoperability, this would enable a secure transfer of ownership through peer-to-peer.
Essentially, it is a swap of assets, and it is atomic. In this case, atomic would mean that the exchange is executed fully or not executed at all. There is no possibility of partial exchange, which indicates that one party may not receive value without the other party getting value in return.
Asset Portability
With asset portability, users can move a token, or part of that token, from one blockchain to another. The great thing about this is that token’s history will be maintained on the original blockchain.
To illustrate this better, we could look at an example of patient records on a healthcare ledger. If the healthcare ledger securely stores the entire health portfolio of a patient and needs to share all or some of that information with another ledger, like a doctor, it can do so effortlessly.
The data quality would improve as it is recorded and aggregated on one blockchain. At the same time, the patient retains ownership of the information on the healthcare ledger.
Cross-Chain Oracles
Cross-chain oracles enable one blockchain to determine an event observed on a different blockchain.
When considering an example such as supply chain management, a business can employ a blockchain supply chain management solution for critical roles such as waiting for a supplier to deliver certain products. This would continuously inform the relevant parties about the order tracked through the supplier blockchain.
In this way, businesses can effectively plan for production. Moreover, tracking stock levels at a company is helpful and can automatically generate orders for stock that is approaching low levels. This system is capable of linking with many different blockchains. With the interoperability of blockchain networks, there would be one location to interact from instead of other bilateral solutions across multiple locations.
Asset Encumbrances
With asset encumbrances, a user can lock up an asset on one blockchain and unlock that asset on another blockchain only if a specific condition is met. Interoperability would enable atomic transactions that eliminate the risk for all concerned parties.
Challenges Of Interoperability On Blockchain Networks
Developing communication links between multiple blockchain networks is different from traditional APIs in vogue these days. APIs enable a single application to create, read, update, and delete data in a separate application.
While creating and reading data on a blockchain is relatively straightforward, blockchain technology discourages updating history. In light of this, updating or deleting data from a blockchain can become difficult.
In essence, when a transaction takes place on the blockchain, you cannot change it in any way afterwards. The implications of this are that there must be some sort of guarantee that both parts of the transaction take place simultaneously, and the transactions must be atomic. Moreover, the inputs of the transaction must be final.
When it comes to blockchain APIs, a waiting period is required before a user can confirm the response as being valid. For example, if we look at bitcoin, it operates on a probabilistic finality and not a deterministic finality. This means that a specific number of boxes need to be finalised before a user can confidently assume that the contents of that particular blockchain will not be altered in any way. In other words, that specific blockchain is now final.
With a blockchain being final, the data can securely be linked to a totally different blockchain without the risk of hitting a fork.
Besides the need for atomicity and finality with blockchains, interoperability must also consider the diverse nature of individual blockchains. Since blockchains have no standard, their identity and all events are recorded uniquely on that specific blockchain.
If there is to be an interoperable solution, it must be a universal one capable of reading data and extracting information for all types of blockchains.
XRouter Technology
An exciting development is XRouter technology, which hopes to develop an internet of blockchains. Its long-term vision is to ensure that all payments can be made using any cryptocurrency and create an opportunity for social, economic, and technological transformation.
The Blocknet is developing XRouter technology to provide Avalanche with a decentralised indexing system. This sophisticated model enables DApps to leverage Avalanche contracts and transactions with other blockchains.
With multiple DeFi platforms in emergence, if a contract or DApp succeeds on one platform, it immediately demands that any other platform interoperate. Since the various platforms all have fluctuating performance and cost differences, it then becomes beneficial for developers to orchestrate contracts across multiple blockchains.
Indexing services are pivotal for enabling decentralised applications to provide what users are searching for. Employing XRouter technology will ensure that it maintains its decentralised nature during the process.
The Blocknet appears to be the only active project that allows interoperability with all existing blockchains and is decentralised at the interchain stage. Exciting times indeed!
The Bottom Line
The blockchains’ interoperability can potentially transform the landscape that we’ve become familiar with. This evolution will make it simpler for users to transact across different blockchains easily.
This is in heady contrast to the current environment, where users can only transact on one blockchain at a time.
A key factor will be diverse functionalities that will enable the interoperability of multiple blockchains for transactions such as payments. Due to blockchain interoperability, the development of multi-token wallet systems could also allow users to facilitate multi-token transactions. All-in-all, blockchain interoperability has incredible potential that could form the core of an exciting digital economy.
