Blockchain technology has inspired enthusiasm around the world 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 specialize 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 either private or public and may vary in terms of security, decentralization, scalability, unique governance, and a specific consensus algorithm.
At the moment though, there are several degrees of separation between the various applications due to the fact that 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 for software to exchange information between different ecosystems.
While blockchain was first created as a decentralized technology, individual blockchain networks like hashing algorithms, types of transactions, and consensus models are unable to 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 you can switch from gambling with ETH to BTC at the best crypto casino.
All of 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 centralized exchange to facilitate it.
Why Is Interoperability Important?
In a world where technology is advancing at unprecedented levels, people and businesses have become increasingly reliant 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.
When it comes to 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 with each other effectively. As an example, if a person sends information from one blockchain to another, the recipient must be able to read that information, understand it, and respond to that information with the least amount of effort.
While every effort is being made to make this interoperability between blockchain networks a reality, both Bitcoin and Ethereum blockchains have stated that this is not possible at the moment. There are emerging projects attempting to solve this problem so that blockchain networks can communicate with each other without needing a centralized intermediary network or any third party.
Once this problem is solved, this will open the door to a fully decentralized 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 is incapable of providing for all the needs for any given transaction in these industries.
In order to cater sufficiently for this, multiple blockchain networks that each provide specific values must be incorporated. These networks must be able to communicate easily with each other in order for data to be routed between networks and complete transactions.
In addition, this must be done without the need to create 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 being reliant on a centralized platform or third party, it is thought that similar blockchain networks may be able to transfer value much easier at the beginning. When analyzing the business ecosystem, this means that businesses will no longer be limited to interacting with clients who fall under their network but can interact with clients from compatible blockchain networks as well.
In an ideal world, these interactions will take place without any 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.
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 serve as the link that joins the different networks together. With APIs, there is no governance structure, and this allows for flexibility and practicality. The flip side is that it is not an ideal option for organizing interoperability in the long term.
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 organization has a blockchain network, it is actually a web of interconnected networks. With this architecture, an organization can connect and transact with a variety of solutions. They will not be limited to a single network only, and this is key in opening up interoperability of blockchain networks across different solutions.
Organizations will have the ability to 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 optimize the interaction of the organization with a variety of blockchain networks.
The concept of a network-of-networks to facilitate interoperability has become increasingly popular, more so with natural blockchain hubs emerging.
Opportunities For Blockchain Interoperability
There are fantastic opportunities that would arise with the interoperability of blockchain networks, specifically in terms of communication and an exchange of value between blockchains.
Below, we explore some of the functionalities that could emerge with blockchain interoperability.
An atomic swap is simply a transfer or exchange of token ownership on two separate 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, and this indicates that one party may not receive value without the other party getting value in return.
With asset portability, users will be capable of moving 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.
Overall, the data quality would be much improved as it is recorded and aggregated on one blockchain. At the same time, the patient retains ownership of their own information on the healthcare ledger.
Cross-chain oracles enable one blockchain to determine an event that is 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 that is tracked through the supplier blockchain.
In this way, businesses can effectively plan for production. Moreover, it is helpful to track stock levels at a company 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.
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, it can become difficult to update or delete data from a blockchain.
In essence, when a transaction takes place on the blockchain, you cannot change it in any way afterward. 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 in nature. 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 finalized 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 be linked to a totally different blockchain securely 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 there is no standard with blockchains, its 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.
An exciting development at the moment is XRouter technology that 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.
XRouter technology is being developed by The Blocknet and is used to provide Avalanche with a decentralized indexing system. This sophisticated model enables DApps to leverage Avalanche contracts and transactions together with other blockchains.
With multiple DeFi platforms in emergence, if a contract or DApp succeeds on one platform, it immediately creates a demand for that on any other platform to 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 decentralized applications to provide what users are searching for. By employing XRouter technology, this will ensure that it maintains its decentralized nature during the process.
The Blocknet appears to be the only active project that allows interoperability with all existing blockchains and is decentralized at the interchain stage. Exciting times indeed!
The Bottom Line
The interoperability of blockchains has the potential to transform the landscape that we’ve become familiar with. This evolution will make it simpler for users to transact across different blockchains with consummate ease.
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. The development of multi-token wallet systems could also allow users to facilitate multi-token transactions due to blockchain interoperability. All-in-all, blockchain interoperability has incredible potential that could form the core of an exciting digital economy.