- Compatibility: Interoperability enables various blockchains to be compatible with each other and allows integration of multiple blockchains in one system.
- Collaboration: Thanks to interoperability, various blockchains can be utilized together to build complex systems.
- Data Transfer: Interoperability facilitates easier and faster data exchange between blockchains
- Standardization: Interoperability supports protocol standardization, enabling new systems can smoothly integrate with the ecosystem.
- Innovation: Interoperability facilitates the creation of cross-chain Decentralized Finance (DeFi) and Decentralized Exchange (DEX) platforms.
The Problem of the Internet’s Data Silos
Companies store billions of pieces of data across various systems and platforms. However, the explosion of data has given rise to one of the biggest problems in the digital world today: data fragmentation.
This refers to how data is stored in closed systems known as data silos. It slows down access to data, reduces efficiency, and potentially compromises data integrity.
Blockchain Interoperability as a Solution for Data Silos
Blockchain is the solution to data silos by providing a new way of storing data that is transparent and decentralized. Now, data is no longer stored in isolated silos, but distributed across a network of nodes.
That way, every node has access to real-time data. Blockchain also does not require a central third party for data management.
A DHL Trend Research shows how blockchain is being used to overcome data silos in various industries.
- Public Services: Blockchain can be used as a database to securely store public identities and prevent data leaks or manipulation.
- Retail: The supply chain becomes more transparent, providing consumers with better understanding of how the goods they purchase are produced.
- Healthcare: Patient data is stored on a secure, immutable blockchain. Each patient can also control their own medical data.
- Automotive: The digital twin innovation allows users to document physical assets based on historical, current, and future performance
- Energy: Enables more efficient energy management, for example, through individually managed utility grids or peer-to-peer energy exchanges.
Blockchain Interoperability Technology
Various technologies have been developed to achieve blockchain interoperability.
Cross-Chain Bridge
The most common approach to blockchain interoperability. A bridge is a protocol or smart contract that facilitates the transfer of data between two or more blockchains.
The bridge works by “locking” data from the source blockchain and minting a wrapped version of the asset on the destination blockchain.
For example, to transfer BTC from the Bitcoin blockchain to Ethereum, users lock BTC in a smart contract. Then, they receive wBTC (Wrapped Bitcoin) on Ethereum.
A bridge is categorized into:
- Trusted Bridge: The mechanism is run by a trusted central entity, such as an exchange or clearing house.
- Trustless Bridge: Operated by a network of smart contracts and relayers that work together to connect blockchain networks.
Sidechain
A sidechain is a secondary blockchain connected to the main blockchain by a two-way peg. Assets can be transferred between the sidechain and the main chain.
Sidechains can have the same or different consensus as their parent chain. This technology is often used as a testing ground for new features without affecting the main chain.
Relay Chain
A key component in a multi-chain architecture (known as a parachain). The relay chain is the backbone that enables different blockchains to communicate and share information.
Atomic Swap
A method that enables cross-chain transactions based on Hashed Timelock Contracts (HTLC), a type of smart contract that requires the recipient's approval within a certain time frame.
Atomic Swaps involve two HTLCs on the two blockchains involved in the transaction. Hash locks and time locks are used to ensure that transactions occur simultaneously and automatically on both sides.
Oracle
An oracle is a third-party service that provides smart contracts connected to real-world data.
Its function is to connect blockchains (which are based in the virtual world) with external information, allowing smart contracts to be executed based on real-time data.
Interoperability Protocols
Various protocols are designed specifically for blockchain interoperability.
- Polkadot: Uses parachains and relay chains to enable blockchain networks to communicate with each other.
- Cosmos: Uses the Inter-Blockchain Communication (IBC) protocol to facilitate interoperability.
- LayerZero: Facilitates instant and cost-effective cross-chain communication.
- Chainlink: Uses the Cross-Chain Interoperability Protocol (CCIP) to enable the effective transfer of data, commands, and tokens across blockchains.
Challenges of Blockchain Interoperability
Blockchain interoperability is not yet infallible. Here are some of the challenges faced in achieving blockchain interoperability.
Security
Many cross-chain bridges still prioritize speed over security. Bridges serve as communication links between two networks. Therefore, weaknesses or errors in one blockchain can affect other blockchain ecosystems.
Different Trust Models
Each blockchain has a different trust model. Some are verified by thousands of miners, while others are supported by only a few dozen.
If assets are transferred from a more vulnerable blockchain to a secure one, the stronger blockchain could be manipulated by outside parties.
Complex Technology
Each blockchain has different security solutions, consensus algorithms, and programming languages. Maintaining interoperability between various layers and bridges can affect network performance as the scale increases.
Lack of Standardization
There is still no standardization for protocols that enable interoperability. Therefore, the integration of various projects is still slow, and liquidity in each blockchain also varies.
Impact of Blockchain Interoperability on the Web3 Ecossytem
Blockchain interoperability has a major impact on applications and platforms in the Web3 ecosystem. Here are some of the things that can be achieved with blockchain interoperability.
Better User Experience
Transferring assets from one blockchain to another becomes faster and easier. For beginners in the world of Web3, interoperability makes the Web3 ecosystem easier to understand and explore.
Improved Liquidity
Before interoperability technologies, a token could only be used within its own blockchain ecosystem. This created competition between blockchains.
However, interoperability offers a solution by allowing tokens to be transferred between blockchains and increasing their liquidity. Additionally, the applications of a token become much broader.
Accelerated Innovation
Developers can innovate more easily because they have comprehensive access to various blockchains with different functions and features. In the future, the integration of many blockchains may give rise to advanced dApps (Decentralized Applications) that we have never imagined before.
Vast Token Pools
With blockchain interoperability, developers can implement token pools containing various types of tokens that can easily move between networks. Developers only need to manage one large pool instead of many small pools on different blockchains.
Faster Inter-Blockchain Communication
Essentially, blockchains are closed systems that cannot access information outside the chain. However, with interoperability technology, information can be transmitted more easily.
In addition, various blockchains can communicate and cooperate to design complex systems.
Also Read: What is Web3 Crypto: The Future of Internet and A Decentralized Digital Economy
FAQ
Is blockchain interoperability secure?
Blockchain interoperability can create security gaps because it connects two different blockchains. Vulnerabilities in one blockchain can affect other blockchains connected to it.
However, this does not mean that blockchain interoperability is not secure. Developers must be careful when connecting different blockchains and ensure that both blockchains have undergone third-party audits.
How to achieve blockchain interoperability?
Blockchain interoperability can be achieved through the implementation of comprehensive and reliable cross-chain bridges. Various protocols, such as Polkadot, Cosmos, and LayerZero, are specifically designed to connect different blockchains and achieve interoperability.
What are data silos?
A data silo is a term for a collection of data that is isolated from other departments, systems, or business units. Data stored in silos is more difficult to access, analyze, and manage.
What is the future of blockchain interoperability?
As technology advances, the need for blockchain interoperability will continue to grow. Decentralized Finance, NFTs, and blockchain companies will continue to develop interoperability solutions to meet the ever-increasing needs of blockchain on a large scale.
Conclusion
Interoperability in blockchain is not just an additional feature for convenience, but a crucial element in building an efficient, fast, and interconnected Web3 ecosystem based on blockchain.
Interoperability enables fast transactions, data transfers, and communication between blockchains, allowing the digital economy and dApp innovations to advance rapidly.
Interoperability is a crucial factor in building a sophisticated Metaverse. What is Metaverse? Read a full explanation of Metaverse in the article: What is Metaverse: A New Digital World in the Era of Web3 and Blockchain.
