Why interoperability is key to mass adoption of blockchain technology

Every year we see new blockchain networks being developed to serve specific niches within specific industries, with each blockchain having specific functions depending on its purpose. For example, Layer 2 scaling solutions like Polygon are designed to have extremely low transaction fees and fast settlement times.

The rise of new blockchain networks also stems from the realization that there is no perfect solution that can meet all the needs of blockchain technology at once. As more companies become aware of this emerging technology and its capabilities, connecting these unique blockchains becomes more necessary.

What is interoperability?

Blockchain interoperability refers to a variety of methods that allow many blockchains to communicate, share digital assets and data, and work together more effectively. This allows one blockchain network to share its economic activity with another. For example, interoperability enables the transfer of data and assets across different blockchain networks via decentralized cross-chain bridges.

Interoperability is not something that most blockchains have, as each blockchain is built with different standards and codebases. Since most blockchains are inherently incompatible, all transactions must be performed within a single blockchain, no matter how many features the blockchain may have.

Marcel Harmann, founder and CEO of THORWallet DEX — a no-custodial wallet for decentralized finance (DeFi) — told Cointelegraph, “Interoperability can be understood as the freedom to exchange data. Currently, base layer protocols cannot effectively communicate with each other. Layer 1 protocols like Ethereum or Cosmos have smart contracts built into their structure that only allow secure data exchange within their own ecosystems. Transmissions of digital assets leaving the network raise a question: how can one blockchain trust the state validity of another blockchain?”

Harmann continued, “Consensus mechanisms on each blockchain decide the canonical history of all validated transactions. This creates extremely large files that need to be processed with each block and can only be viewed in the specific language of the blockchain. Interoperability between two or more blockchains refers to one or both chains being able to understand and process the history of the other chain, enabling, for example, the exchange of assets between different Layer 1 networks.”

While it may seem obvious that public blockchain projects should be designed for interoperability from the start, this is not always the case. However, due to the benefits of information sharing and collaboration, organizations are increasingly demanding interoperability.

Why is interoperability important?

To realize the full potential of decentralization, it is beneficial for

Individuals participating in multiple blockchains intended to be connected by a single protocol. This reduces friction for the user as they can access different decentralized applications (DApps) without having to switch networks.

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Because blockchains operate independently, it is difficult for users to take advantage of each network. To do this, they must hold tokens supported by each blockchain to interact with the protocols on their network.

Interoperability can address this issue by allowing users to use a token across multiple blockchains. Additionally, by allowing blockchains to communicate with each other, a user can more easily access logs on multiple blockchains. Because of this, there is a better chance that the value of the industry will continue to grow.

Fabrice Cheng, co-founder and CEO of Quadrata – a Web3pass network – told Cointelegraph:

“Interoperability is crucial because it is one of the main benefits of blockchain technology. Decentralized, open-source technology enables the development of products that are interoperable across chains, allowing more users, businesses, and institutions to stay connected.”

Cheng continued, “People using blockchain technology want to make sure they are vetted and KYC verified and have good credit history. DeFi users can access trading options or access real-time price feeds. Interoperability is an efficient way to remove intermediaries for users and allows organizations to focus on their core values.”

When it comes to decentralized finance, providing traders with more ways to leverage their assets can bring additional growth and opportunity to the sector. For example, multichain yield farming allows investors to generate multiple returns as passive income on many blockchains for owning a single asset.

The investor would only need to hold Bitcoin (BTC) or a stablecoin like USD Coin (USDC) and then bridge it across multiple protocols on different blockchains. Interoperability will also improve liquidity across multiple blockchain networks as it will be easier for users to move their funds across different chains.

Interoperability does not just refer to connectivity between blockchains. Protocols and smart contracts are also interoperable. For example, t3rn, a smart contract hosting platform, allows smart contracts to run on multiple blockchains. This works by hosting the smart contract on the smart contract platform and deploying and running it across different blockchain networks. Interoperable smart contracts make it easier for developers to build cross-chain applications and users to perform cross-chain transfers.

Interoperable smart contracts make it easier for users to access multiple decentralized applications by not having to switch networks. Suppose a user is using a DApp on Ethereum and wants to access a credit log on Polkadot. If the Polkdadot-based DApp has an interoperable smart contract, they access it on Ethereum.

Oracles are another protocol that can benefit from interoperability. Oracles are entities that connect real-world data to the blockchain via smart contracts. Decentralized oracle platforms like QED can connect oracles to multiple blockchain networks, allowing real-world data to be shared across blockchains. Additionally, oracles can take data from an API or sensor and send it to a smart contract to activate it once certain conditions are met.

For example, a supply chain has multiple organizations using different blockchain networks. Once a component in the supply chain reaches its destination, the oracle can send data to the smart contract to confirm its delivery. As soon as the delivery has been confirmed via an oracle, the smart contract releases a payment. Since the oracle is linked to multiple blockchains, each provider can use the network of their choice.

Interoperability is also important for exchanging digital assets between blockchain networks. One of the most common ways to do this is by using cross-chain bridges. Simply put, cross-chain bridges allow users to transfer tokens from one blockchain to another.

For example, wrapped tokens allow users to use Bitcoin (BTC) on the Ethereum network as Wrapped Bitcoin (wBTC). This is important in the DeFi industry as it allows users to interact with DeFi without purchasing a platform’s native token, which can be more volatile than stablecoins or blue-chip coins such as BTC or Ether (ETH).

The ability to easily move assets between blockchain networks is a major benefit of interoperability. Anthony Georgiades, co-founder of the Pastel Network — an infrastructure and security project for non-fungible tokens (NFT) and Web3 — told Cointelegraph:

“Interoperability is critical for the blockchain industry due to the diversity of data and assets in the crypto ecosystem. Decentralized cross-chain bridges are necessary to facilitate transfers between different types of tokens or assets.”

The key to the success of blockchain technology will be the level of interaction and integration between the many blockchain networks. For this reason, interoperability between blockchains is crucial as it lowers the barrier to entry for users who wish to engage with protocols across multiple networks.

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Interoperability across blockchains will boost productivity across the crypto sector. Users can quickly move data and assets across blockchains, increasing flexibility for everyone involved. Instead of being tied to a single blockchain, smart contracts can operate on multiple networks and oracles will transmit real-world data across different platforms. Combined with the advantages of public decentralized blockchains, interoperability should form the basis for widespread blockchain adoption and use.

Georgiades continued, “Therefore, interoperability allows users to transfer cryptocurrency from one blockchain to another and allows users to deposit tokens or NFTs as collateral for other assets. An interoperable Web3 world is a vision we are working tirelessly towards. A multichain ecosystem facilitated by seamless cross-chain bridges will get us there and make that vision a reality.”

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