What is Blockchain Interoperability?

Some estimates put the number of blockchains at more than 1,000. While this growing digital ecosystem allows for specific use cases, it also means we have more than 1,000 distinct markets or stores of information. However, the inability to share data or transact across blockchains creates roadblocks and limits blockchain adoption.

Blockchain interoperability solutions aim to clear the roadblocks. In this guide, we’ll answer the question, “What is blockchain interoperability?” We’ll also discuss current crypto interoperability solutions and the challenges that remain to be solved in the future.

Although the problem of isolated data (and capital) became apparent early on in blockchain’s evolution, we still struggle with it today. Bridges offered one of the earliest solutions to isolated capital trapped on a given chain.

While bridges are still a common way to connect blockchains, newer solutions center on sharing data or blockchains built for interoperability. Before we explore these in more detail, let’s start with a few key takeaways regarding blockchain interoperability.

Blockchain Interoperability in Detail

What is cross-chain interoperability? Blockchain interoperability and cross-chain interoperability refer to the ability of different blockchain networks to communicate, exchange information, and transact with each other.

On a broad level, each blockchain still exists as an island unto itself. Although bridges can help connect these islands, they also create a single point of failure and limit connectivity when transferring capital from Chain A to Chain B (the destination chain) and back again. Newer initiatives to provide better interoperability in blockchain hope to solve the problem of sharing data and even enable cross-chain smart contracts as well.

One of the primary problems blockchain networks face with interoperability centers on the lack of standardization. Different blockchains feature distinct architectures, consensus mechanisms, and programming languages. For example, Ethereum uses Solidity as its programming language, whereas Solana uses Rust.

This structural difference makes it challenging for these chains to interact with each other directly. The two chains also diverge in the way they confirm transactions.

Ultimately, the various cross-chain solutions seek to solve several key parts of the puzzle, most of which stem from three main goals.

1) Straightforward Asset Transfer

Each chain holds assets. How can users put those assets to work on other chains without selling assets from Chain A and buying assets on Chain B? This functionality is seen as fundamental for the widespread adoption of blockchain. Bridges offer a partial solution, although with some caveats that we’ll discuss later.

2) Cross-Chain Smart Contracts Functionality

Countless chains support smart contracts, which are conditional programs that run on the blockchain: “If this condition is met, then do that”. These decentralized apps (dApps) form the basis of decentralized finance (DeFi) and Web3 gaming. However, although smart contracts can interact within a given blockchain, the industry still hasn’t fully solved the problem of making these contracts interoperable across chains.

3) Reduced Ecosystem Fragmentation

Reduced fragmentation incorporates the first two goals but also expands to other elements that improve the user experience and foster innovation. Data sharing becomes just as central to this effort as the ability to move your funds or make transactions.

Think of the money you have in your bank. You can spend that money anywhere. You can also send that money to another bank. If a third party needs to confirm a balance, our banking system provides a way to do so. Blockchain networks still lack the standardization that allows all of these things we take for granted with traditional assets.

The goal centers on breaking down the “silos” between blockchains, fostering a more unified and efficient decentralized web.

Benefits of Blockchain Interoperability

Cross-chain interoperability protocols aim to unify blockchain ecosystems by bridging isolated networks. While no universal solution exists yet, several projects target individual pieces of a larger puzzle. Targeted advantages include reduced network congestion, improved decentralized exchange (DEX) liquidity, cross-chain wallets, gas cost abstraction, among other advantages. Let’s discuss some of the key advantages and implementations.

Reduced Network Congestion

The most common solution to network congestion in the context of interoperability centers on Layer 2 blockchains. For example, the Base blockchain handles transactions on its own chain, passing on the transactions in bulk to Ethereum for security (ensuring no changes occur after the fact).

Similarly, Polkadot’s parachains share security via the Relay Chain, allowing parallel transaction processing. This enables specialized parachains to serve different use cases while optimizing network congestion. For example, the Acala chain can focus on DeFi applications, while Moonbeam executes a broader range of EVM-compatible smart contracts.

Improving Liquidity

One of the better examples of blockchain interoperability centers on bridges. These protocols improve liquidity by making blockchain assets available on multiple chains.

For example, the Trump meme coin launched on Solana. Shortly after the launch, an equivalent token also became available on Base. The Wormhole protocol made this possible by locking TRUMP tokens on one side of the bridge and issuing an equal number of tokens on the Base blockchain. This opened up trading to more traders, and a vibrant decentralized exchange (DEX) liquidity market sprang up around the token on both networks.

THORchain provides a different solution, allowing cross-chain swaps using liquidity pools. The protocol uses RUNE as a settlement asset, giving liquidity providers a single cryptocurrency in exchange for ETH, BTC, or other Layer 1 coins. Although the underlying mechanics differ, the concept is similar to how XRP acts as a settlement asset for international currencies.

Cross-Chain Wallet Management

Thousands of blockchains could mean that users need multiple wallets to manage their crypto assets. Although the tech is still evolving, crypto wallets addressed this usability problem years ago.

Crypto wallets like Best Wallet, Trust Wallet, and Atomic Wallet provide cross-chain support natively. MetaMask, while primarily focused on EVM (Ethereum-compatible) chains, now supports Solana and Cosmos ecosystem chains through add-ons called MetaMask Snaps. In many cases, users can swap across chains using these wallets.

Gas Cost Abstraction

Gas fees represent one of the toughest hurdles to mainstream adoption. Many users remain unfamiliar with the concept of paying blockchain fees for everything. Several competing strategies aim to make this easier.

For example, Polygon’s “gasless transactions” allow dApps to pay users fees in MATIC. As another example, Rabby Wallet allows users to use USDC for any fee on any of its supported networks, drawing from a single USDC deposit.

How do Blockchains Interact?

Several approaches work toward achieving blockchain interoperability, each with its own strengths and weaknesses. Let’s explore some of these solutions.

Atomic Swaps

Atomic swaps enable cross-chain transactions between two blockchains without needing a trusted intermediary. This is achieved through a Hash Time-Locked Contract (HTLC) that locks the assets on both blockchains and releases them only when the swap is complete. For example, Bitcoin and Litecoin can be swapped using an atomic swap protocol.

Cross-Chain Bridges

Cross-chain bridges connect two or more blockchains, enabling the transfer of assets between them — “cross-chain transactions”.

For example, WBTC (wrapped BTC) represents Bitcoin on the Ethereum chain and Layer 2 EVM chains. WBTC uses a consortium to manage the bridge DAO (decentralized autonomous organization), while Bitgo provides secure custody for the Bitcoin. One locked Bitcoin held by the custodian equals one WBTC token on the Ethereum network. Bitcoin backing ensures WBTC holds its peg to BTC.

Decentralized bridges, such as Wormhole, work similarly, locking tokens on the source Blockchain A and issuing tokens on Blockchain B. However, Wormhole uses a network of validators to verify transactions rather than relying on a trusted intermediary. The Wormhole protocol supports dozens of chains, making it one of the most popular solutions for bridging tokens.

Cross-Chain Messaging Protocols

While bridges make cross-chain asset transfers possible, cross-chain communication protocols allow different blockchains to communicate with each other by sending and receiving information across chains.

Several protocols, including Cosmos’ Inter-Blockchain Communication (IBC) protocol and Chainlink’s Cross-Chain Interoperability Protocol (CCIP), aim to solve blockchain communication challenges.

IBC targets blockchains using Cosmos’ architecture, whereas Chainlink CCIP aims to connect a broader range of chains. Hedera, a fast-growing blockchain with smart contracts support, has already adopted Chainlink’s standard.

This data-sharing capability can power smart contracts. For instance, as these protocols evolve, collateral on one chain can back trades or loans on another chain.

Intent-Based Interoperability

Blockchain, as it exists today, often feels like it requires users to know how everything works. This contrasts with traditional finance, where we tap to pay, and somehow, the vendor gets paid. We don’t need to know how cross-chain transactions work.

Intent-based interoperability describes a crypto ecosystem closer to the convenience we now enjoy in traditional finance. For example, you tell an app you want to swap BTC for ETH, and it just happens. In the background, the system finds the most efficient route for the swap. This already exists today within dApps and wallet apps, although in many cases, it is limited to one chain

The goal of intent-based interoperability is to enable different blockchains to understand each other’s intent or purpose. This means developing a common framework or language that allows blockchains to express their intent and interact with each other accordingly.

Chain Abstraction – The Future of Interoperability?

The earlier example of tap-to-pay (in which the vendor somehow gets paid) demonstrates abstraction. We don’t need to know the intricate details of how it works, and many don’t want to know. It just works.

Chain abstraction speaks to this desire for simplicity and a “just works” crypto ecosystem. When we tap to pay for a coffee, we don’t know which banks send money to each other in the background. We also don’t know the supply chain details for the coffee itself.

Chain abstraction pursues a similar goal. We want to do X, which may require interacting with several blockchains in the background. To the user, it’s as simple as tapping to pay for a delicious coffee.

Popular Blockchain Interoperability Solutions

Several blockchain interoperability solutions now seek to address to connect different blockchain networks, although with differing strategies. Two of these (Polkadot and Cosmos) involve blockchain frameworks that support communication and asset transfers across compatible chains. By contrast, Chainlink targets both data and token transfers between dissimilar networks, such as Ethereum and Solana. Let’s compare these solutions and the problems they aim to solve.

These differing approaches highlight one of the primary challenges of cross-chain transactions: There is no accepted standard, making it difficult to scale. Next, let’s examine some of these challenges in more detail.

Challenges to Blockchain Interoperability

Although blockchain interoperability faces several challenges, the primary one is the lack of standardization. With more than 1,000 existing blockchains, a common framework or standard keeps most chains isolated. Let’s analyze some of the key challenges that remain.

• Technical challenges: Today’s blockchains use varying architectures, consensus mechanisms, programming languages, and token standards. Ensuring seamless communication between widely divergent blockchain networks creates a significant hurdle.
• Lack of standardization: As shown in the earlier table, four leading interoperability blockchain projects use vastly different strategies or architectures. Some also bypass support for today’s leading chains. Establishing a standard would greatly help the cause.
• Scaling: Countless new tokens launch every day, creating a challenge in tracking new and existing assets and their ever-changing market values.
• Security: Three of today’s leading blockchains (Bitcoin, Ethereum, and Solana) all use different consensus mechanisms to validate transactions and secure the chain. Any widely adopted cross-chain interoperability solution would need bulletproof security, although crypto as a whole still hasn’t settled on one method for validation.
• Smart-contract risk: Despite audits, clever hackers find ways to exploit both smart contracts and crypto bridges. In 2023, the Wormhole bridge suffered an exploit in which hackers stole 95,000 ETH.

Standards may be the largest hurdle, but security poses the most risk. Imagine a network of validators that are responsible for cross-chain transactions on today’s largest blockchains. The counterparty risk could affect the entire crypto ecosystem.

The Future of Blockchain Interoperability

Blockchain interoperability is a multifaceted challenge that may require various solutions to address the different needs and use cases of multiple blockchain networks. The lack of standardization, technical challenges, and security concerns are just a few of the hurdles the industry must overcome. However, the open-source nature of blockchain creates an environment in which projects borrow ideas from each other. This willingness to borrow a good idea could lead to a first step toward a standard.

Absent a chain-level standard or “hook,” several promising initiatives aim to achieve cross-chain interoperability. One such initiative is Chainlink’s CCIP, which focuses on messaging and asset transfers across disparate types of blockchain networks. Cross-chain swaps in particular will likely involve a combination of different solutions and approaches, each with its own strengths and weaknesses.

For example, Polkadot’s XCM protocol and Cosmos’ IBC protocol have made significant strides in enabling interoperability solutions between chains built with specific frameworks. As the blockchain ecosystem evolves, we’ll likely see a mix of these approaches to enable interoperability between different networks.

To reach a “just works” crypto utopia, blockchain interoperability solutions will play a critical role in unlocking the full potential and broader adoption of blockchain technology. Blockchain promises permissionless transactions and inclusion by design, but the complexity of its design counters those goals.

The industry is well aware of its challenges, which affect usability and liquidity. Several of the solutions already being developed — and those not yet imagined — may pave the way to a crypto ecosystem that’s robust yet easy, and where you don’t need to a rocket scientist to carry out cross-chain transactions.

FAQs

References

1. Relay Chain (polkadot.network)
2. Meta transactions (polygon.technology)
3. Hash Time Locked Contracts (bitcoin.it)
4. Wrapped Bitcoin (WBTC) (wbtc.network)
5. Wormhole supported blockchains (wormhole.com)
6. Hedera Adopts Chainlink Standard for Cross-Chain Interoperability To Accelerate Ecosystem Adoption (hedera.com)
7. Lessons from the Wormhole Exploit (chainalysis.com)

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Jose Rafael Aquino is a Filipino writer and entrepreneur that specializes in finance, technology, cryptocurrency, and sports. Versed in the startup tech space, he has written for websites such as The GUIDON, TradingPlatforms, StockApps, and BuyShares. Read More

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