Why interoperability is the key to mass adoption of blockchain technology

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

The increase in the number of new blockchain networks is also a result of the recognition that there is no perfect solution that can meet all the needs associated with blockchain technology at the same time. Therefore, as more organizations become aware of this rising technology and its capabilities, the interconnection of these unique blockchains becomes necessary.

What is interoperability?

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

Interoperability is not something that most blockchains have because each blockchain is built on different standards and code bases. Since most blockchains are naturally incompatible, all transactions must take place within a single blockchain, no matter how many features the blockchain may have.

Marcel Harmann, founder and CEO of THORWallet DEX, a non-custodial decentralized finance (DeFi) wallet, told Cointelegraph: “Interoperability can be understood as freedom in data sharing. Currently, the base layer protocols cannot communicate with each other effectively. Layer 1 protocols like Ethereum or Cosmos have smart contracts built into their fabric, only allowing secure data exchange within their own ecosystems. Transfers of digital assets leaving the network raise a question: How can one blockchain trust the validity of another blockchain’s state?

Harmann continued: “The consensus mechanisms on each blockchain decide the canonical history of all transactions that were validated. This produces extremely large files that must be processed with each block and can only be viewed in the specific native 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, allowing, for example, the exchange of assets between different Layer 1 networks.”

Although it seems obvious that public blockchain projects should be designed with interoperability in mind from the outset, this is not always the case. However, organizations are increasingly demanding interoperability due to the benefits of sharing information and working together.

Why is interoperability important?

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

people participating in multiple blockchains to be linked through 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 work independently of each other, it is difficult for users to take advantage of the benefits that each network presents. To do so, they must have tokens compatible with each blockchain to interact with the protocols within their network.

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

Fabrice Cheng, co-founder and CEO of Quadrata, a Web3 passport network, told Cointelegraph:

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

Cheng continued: “People who use blockchain technology want to make sure that people are screened, KYC verified, and have good credit standing. DeFi users can access trading options or have access to real-time price feeds. Interoperability is an efficient way to cut out the middleman for users and allows companies to focus on their core values.”

When it comes to decentralized finance, giving merchants more ways to use their assets can lead to additional growth and opportunities for the sector. For example, multi-chain yield farming allows investors to generate multiple returns as passive income on many blockchains from owning a single asset.

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

Interoperability doesn’t 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 operate on multiple blockchains. This works because the smart contract is hosted on the smart contract platform and is deployed and executed on different blockchain networks. Interoperable smart contracts make it easy for developers to build cross-chain applications and for users to execute cross-chain transfers.

Interoperable smart contracts will make it easier for users to access multiple decentralized applications as they will not have to switch networks. For example, suppose a user uses a DApp on Ethereum and wants to access a lending protocol 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 through smart contracts. Decentralized oracle platforms like QED can connect oracles to multiple blockchain networks, making it possible for 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 once certain conditions have been met.

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For example, a supply chain has multiple organizations that use 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. Once delivery is confirmed through 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 the exchange of digital assets between blockchain networks. One of the most common ways to do this is through the use of cross-chain bridges. In simple terms, cross-chain bridges allow users to transfer tokens from one blockchain to another.

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

Being able to easily move assets between blockchain networks is a major benefit of interoperability. Anthony Georgiades, co-founder of Pastel Network, a non-fungible token (NFT) and Web3 infrastructure and security project, told Cointelegraph:

“Interoperability is critically important to the blockchain industry due to the diversity of data and assets found within the crypto ecosystem. Decentralized cross-chain bridges are needed 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. Because of this, interoperability between blockchains is crucial as it lowers the barrier to entry for users who want to interact with protocols on multiple networks.

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Blockchain interoperability will improve productivity across the crypto industry. Users can quickly move data and assets across blockchains, increasing flexibility for everyone involved. Instead of being linked to a single blockchain, smart contracts can work on multiple networks, and oracles will send real-world data across different platforms. When combined with the advantages of public decentralized blockchains, interoperability should provide the foundation for the widespread adoption and use of blockchains.

Georgiades continued: “Interoperability therefore allows users to transmit cryptocurrencies from one blockchain to another and allows users to post tokens or NFTs as collateral for other assets. An interoperable Web3 world is a vision we are working tirelessly towards. A multi-chain ecosystem facilitated by seamless cross-chain bridges will get us there and make that vision a reality.”