Blockchain technology has the potential to disrupt every industry we can think of. This innovative technology promises to transform and create new systems from the ground up. It has been rapidly evolving and has seen tremendous growth in the past few years. Needless to say, every growing ecosystem faces challenges that it needs to resolve as it moves forward.
Vitalik Buterin, the famous co-founder of Ethereum, famously cited the “Blockchain Trilemma.” According to him, a blockchain should have three core parameters: Decentralization, Scalability, and Security. However, it is very difficult to achieve the full potential of all three at the same time.
The initial projects like Ethereum are strongly decentralized and secured, but they cannot scale. As a result, we have high gas fees. More and more new blockchain projects started developing solutions to solve this problem. Still, these new projects have made trade-offs in one of the three parameters to achieve the full potential of the other two. These blockchains have different architecture and rules. They use different technologies and governance methods. They solve different needs. With time, the blockchains became fragmented, siloed from each other.
This is a hindrance to global adoption. We need an integrated blockchain or a network of integrated blockchains for easy flow of information, transfer of value, and a seamless network. This is where blockchain interoperability comes into the picture.
What Is Blockchain Interoperability?
Blockchain interoperability is a system that enables different unique blockchains to communicate with each other. Users can seamlessly view and access information in multiple blockchains, all the time, maintaining the rules of each.
Let us take an example of a Bitcoin user. Bitcoin is mainly used for payments (and a store of value). However, just in case, if the user wants to earn yield by using a decentralized finance platform, he can not do so in the Bitcoin blockchain. Bitcoin does not have smart contracts. As a result, the user needs to move to another smart contract-supported blockchain, for example, Ethereum. These two blockchains are technologically different. If the user sends the BTC directly to an Ethereum address, he will lose the amount. However, if he converts the BTC to WBTC, using an interoperable solution, he can use that WBTC to earn yield in Ethereum. And the WBTC is pegged to BTC in a 1:1 ratio. So, the user can get back his BTC anytime he wants.
This is where the concept of interoperability needs to broaden to accommodate interim solutions. The concept of interoperability is to enable two blockchains to work together. This means that the ledgers of the two blockchains must be dependent on each other. A transaction made from one blockchain to another should have an impact on both the chain’s ledgers. For example, if I move 1 BTC from the Bitcoin chain to Ethereum, the Bitcoin chain should ideally have 1 BTC locked or burned and the Ethereum chain should have one extra BTC. However, as the blockchains are different, Ethereum needs a compatible asset. Hence, it will use Wrapped BTC instead of BTC.
The Importance of Interoperability in Blockchain
As mentioned earlier, every blockchain focuses to solve particular problems. As a result, decentralized applications of different use cases are built on different blockchains. For example, a blockchain game mainly focuses on speed and, hence, is ready to make a trade-off on decentralization. They can choose a blockchain like Binance Smart Chain, which has fewer validators. However, an institutional-grade decentralized finance platform will choose security and will focus to build on Ethereum.
- A normal user, hence, needs to jump between multiple blockchains to take advantage of all these apps.
- Interoperability solutions can also get rid of 3rd parties. For example, if you want to withdraw FTM (Fantom) and reinvest in BNB (Binance Smart Chain), you will have to convert FTM to fiat using a centralized exchange or a fiat gateway and then transfer the same to Binance Smart Chain to purchase BNB. In case you use interoperable solutions, you can directly transfer between chains. This also keeps the blockchains decentralized and has fewer failure points.
- Interoperability brings in adoption. The more flexibility a user gets, the more breadth he can explore and the higher the chance of him to stay and reuse.
- As interoperability creates direct bridges, it has lower fees and also reduced operational costs.
- Advanced blockchains can also include multi-token transactions as a part of interoperability. Multiple tokens can be transferred in the same transaction.
In Part 2 of this article series, Different Types of Blockchain Interoperability, we will talk about different interoperability approaches and some top projects working on interoperability.
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