Blockchain Interoperability: Why It Matters

Are you one of those captivated by blockchain technology and its promise to change industries for the better? You’re likely not the only one. After all, blockchain has many amazing benefits, from securing transactions without intermediaries to enabling precise tracking of goods in supply chains.

But there’s one major limitation—most blockchains operate like isolated islands, unable to share information or assets with one another.  Imagine having different apps on your phone that can’t share files or communicate. This lack of connection limits the technology’s full capabilities. 

This is where the concept of blockchain interoperability comes in, offering a way to connect these systems, unlock their full potential, and drive more innovation.

Want to know more? Read on as we discuss:

• What blockchain interoperability is and how it works.

• The practical benefits of interoperability.

• The technologies that make interoperability possible.

• The challenges that must be overcome to achieve seamless blockchain communication.

• The exciting potential of interoperability.

At the end of this article, you’ll understand why blockchain interoperability is important to achieve a more connected and efficient future.

What Is blockchain interoperability?

At its core, blockchain interoperability refers to the ability of different blockchain networks to communicate and exchange information seamlessly. Think of it as a universal translator that helps blockchains “speak” to each other. Without it, moving data or assets between blockchains can be a cumbersome process.

Take Bitcoin, for example. It’s the first and most famous cryptocurrency, mainly used for secure, decentralized transactions. However, Bitcoin’s blockchain is limited to basic transactions and doesn’t support advanced programs like decentralized applications (dApps). These dApps run on blockchains like Ethereum, which is designed for flexibility and lets developers create apps that are transparent and automated through smart contracts.

This is where Wrapped Bitcoin (WBTC) helps. WBTC is a token that represents Bitcoin but works on the Ethereum blockchain. Each WBTC is backed 1:1 by real Bitcoin stored safely elsewhere, so it has the same value as Bitcoin. 

By turning Bitcoin into WBTC, users can use their Bitcoin on Ethereum-based apps for things like lending, borrowing, or earning interest—things Bitcoin’s own blockchain can’t do. This example demonstrates how interoperability bridges the strengths of different blockchains, unlocking greater possibilities for users.

Benefits of interoperability

Blockchain interoperability extends beyond just moving assets between chains, which is the example above. Here are a few more benefits.

Simplified user experience

Using blockchain technology can sometimes feel overwhelming, especially with the need to manage multiple wallets and navigate varying transaction processes. Interoperability simplifies this by allowing users to interact with multiple blockchains through a single interface. For instance, MetaMask, a popular crypto wallet, lets users seamlessly switch between Ethereum, Binance Smart Chain, and other blockchain networks. This simplicity lowers barriers to entry and makes blockchain technology more user-friendly.

Boosting decentralized applications (dApps)

Interoperability strengthens dApps by allowing them to leverage the unique features of multiple blockchains. For instance, a financial dApp might use Ethereum’s strong security for transactions and Solana’s high-speed, low-cost blockchain, which is designed for speed and efficiency, for real-time data processing. This combination makes dApps more versatile, enabling innovative applications across blockchains.

Better risk management

Interoperability means you can quickly move your assets to a different blockchain if problems arise. For example, if one blockchain is having technical issues or facing a security threat, you can transfer your assets to a safer chain right away. It's like having an emergency exit; you're not trapped on one blockchain when things go wrong.

Improved market efficiency

When cryptocurrencies can move seamlessly between blockchains, it improves trading conditions by allowing traders to access the best prices across networks. This is similar to instantly transferring money between banks to get better exchange rates, ensuring more consistent pricing. By enabling quick asset transfers, blockchain interoperability helps create fairer markets for everyone.

Drives innovation in various industries

Interoperable blockchains have already begun driving innovation in certain industries, with the potential to revolutionize many more:

• Healthcare: Some hospitals are exploring the use of blockchain to securely share patient records between institutions. For example, Estonia’s national eHealth system uses blockchain to integrate medical records from various providers.

• Supply chain management: Companies like Walmart have adopted blockchain to track goods through their supply chains. By integrating private and public blockchains, they can monitor products from production to sale, ensuring transparency and efficiency.

• DeFi and financial services: Platforms like Curve Finance allow users to lend and borrow assets across multiple blockchains. This has created a more inclusive financial ecosystem, but broader interoperability could unlock even greater opportunities.

How to achieve blockchain interoperability

Now that you understand the benefits of blockchain interoperability, you might wonder—how can these benefits be achieved? Here are some of the most prominent methods:

Cross-chain bridges

Cross-chain bridges connect different blockchain networks, allowing seamless movement of assets and data. For instance, the Avalanche Bridge lets users transfer Ethereum tokens to Avalanche, offering faster transactions and lower fees without complex conversion processes.

The technology behind cross-chain bridges typically involves two main methods: lock-and-mint and burn-and-mint. In a lock-and-mint process, an asset is locked on the source blockchain, and an equivalent token is minted on the destination blockchain—for example, the aforementioned example of creating Wrapped Bitcoin (WBTC) on Ethereum. Burn-and-mint reverses this process, where the wrapped token is burned on the destination chain, and the original asset is released on the source chain.

Oracles

Oracles were created to solve a big problem for blockchains: they can’t access real-world information on their own. As mentioned, blockchains are closed systems; while they’re great for storing data and running programs like smart contracts—programs that automatically execute actions when certain conditions are met—they have no way to reach outside for information they might need. Oracles connect blockchains to the outside world and enable them to interact with real-world data or even with other blockchains. 

For example, imagine a smart contract that pays farmers automatically if there’s a drought. A blockchain doesn’t know if it rained because it can’t access weather data. An oracle can fetch this information from a trusted weather service and deliver it securely to the blockchain. 

Similarly, oracles play a critical role in decentralized finance (DeFi) apps—financial applications built on blockchains that operate without traditional banks or institutions. DeFi apps let users lend, borrow, trade, or earn interest on cryptocurrencies directly from their wallets. A cross-chain oracle could allow a DeFi app on Ethereum to access price data from Solana, combining the strengths of both blockchains and enabling seamless interactions. 

Hub-and-spoke models

Hub-and-spoke models, used by platforms like Polkadot and Cosmos, make blockchain interoperability possible by connecting multiple blockchains through a central hub. The hub acts as a middleman that helps the spokes (individual blockchains) share data, assets, and resources without needing direct links to each other.

This system is especially useful for smaller blockchains, which can use the hub’s resources, like shared security, instead of building their own. For example, Polkadot lets connected blockchains share its security and communicate easily, enabling apps on one blockchain to use assets or services from another.

Challenges to overcome

Despite its potential, blockchain interoperability faces significant challenges that must be addressed:

Security risks

Cross-chain bridges are often targeted by hackers due to their critical role in connecting blockchains. In 2022, the Ronin Bridge, which links Ethereum with Axie Infinity, was hacked, resulting in around a $600 million loss. Strengthening the security of bridges and other interoperability tools is crucial to gaining user trust.

Technical complexity

Since each blockchain is like an island in itself, it means every blockchain has its own rules, coding languages, and protocols. Integrating these diverse systems is a technical challenge that requires innovative solutions. Developers must build systems that can handle these differences without compromising performance or security.

Lack of universal standards

Currently, there’s no universal “language” for blockchains to communicate. This lack of standardization slows down progress and makes interoperability more difficult to implement. Establishing common protocols and frameworks will be essential for creating a truly connected blockchain ecosystem.

Scalability issues

Interoperability adds an extra layer of complexity to blockchains, which can strain networks that are already struggling with scalability. For example, Ethereum’s network congestion could worsen if more cross-chain transactions are introduced without optimization.

Final thoughts

The future of blockchain interoperability is filled with potential as projects like Polkadot and Chainlink pave the way for seamless communication between networks. These platforms are addressing key challenges such as security, scalability, and standardization, bringing the blockchain ecosystem closer to a fully interconnected future. With these advancements, blockchains will no longer operate in isolation but will collaborate to create more efficient, powerful, and versatile systems.

This transformation is essential for making blockchain technology mainstream. Seamless asset transfers, cross-chain applications, and improved user experiences will drive the adoption of blockchain across industries. These developments hold the promise of unlocking new possibilities for innovation, empowering businesses, and creating a more interconnected digital world. 

Exciting to think about, isn’t it?