Every year, we see new blockchain networks being developed to tackle specific niches within certain industries, each blockchain having specialized fun
Every year, we see new blockchain networks being developed to tackle specific niches within certain industries, each blockchain having specialized functions based on its purpose. For example, layer-2 scaling solutions like Polygon are built 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 one perfect solution that will be able to meet all of the needs associated with blockchain technology all at once. Therefore, as more organizations become aware of this rising technology and its capabilities, the interconnection of these unique blockchains is becoming necessary.
What is interoperability?
Blockchain interoperability refers to a wide variety of methods that enable 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 transmitting data and assets across different blockchain networks via decentralized cross-chain bridges.
Interoperability is not something that most blockchains have because each blockchain is built with different standards and code bases. Since most blockchains are naturally incompatible, all transactions must be done within a single blockchain, no matter how many features the blockchain might have.
Marcel Harmann, founder and CEO of THORWallet DEX — a noncustodial decentralized finance (DeFi) wallet — told Cointelegraph: “Interoperability can be understood as freedom in data exchange. Currently, base layer protocols cannot communicate with each other effectively. Layer-1 protocols like Ethereum or Cosmos have smart contracts built into their fabric, only permitting secure data exchange within their own ecosystems. Digital asset transfers that leave the network pose a question: How can a blockchain trust the state validity of another blockchain?”
Harmann continued, “Consensus mechanisms on each blockchain decide the canonical history of all the transactions that were validated. This produces extremely large files that must be processed with each block and can only be viewed in the specific language native to 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, thus enabling, for example, the exchange of assets between different layer-1 networks.”
Even though it seems obvious that public blockchain projects should be designed with interoperability in mind from the start, this is not always the case. However, organizations are increasingly calling for interoperability because of 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 several blockchains to be linked through a single protocol. This reduces friction for the user since they can access different decentralized applications (DApps) without having to change networks.
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Due to blockchains operating independently from each other, it’s difficult for users to take advantage of the benefits presented by each network. To do so, they need to hold tokens supported by each blockchain to engage with the protocols within their network.
Interoperability can fix this problem by enabling users to use one token across multiple blockchains. In addition, by enabling blockchains to communicate with each other, a user can access protocols on multiple blockchains with greater ease. Because of this, there is a better chance that the industry’s value will continue to grow.
Fabrice Cheng, co-founder and CEO at Quadrata — a Web3 passport network — told Cointelegraph:
“Interoperability is crucial because it’s one of the key benefits to blockchain technology. Decentralized open-source technology allows the creation of products that are interoperable across chains, enabling more users, businesses and institutions to stay interconnected.”
Cheng continued, “People who use blockchain technology want to make sure people are screened, KYC-verified and have good credit behavior. DeFi users can access trading options or have access to real-time price feeds. Interoperability is an efficient way to remove intermediaries for users and allows businesses to focus on their core values.”
When it comes to decentralized finance, giving traders more ways to use their assets can bring additional growth and opportunities to the sector. For instance, multichain yield farming enables 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 spread it across multiple protocols on different blockchains via bridges….
cointelegraph.com