What is interoperability?
In the context of blockchain systems, interoperability implies the ability of different networks to interact, exchange data and complete transactions. In particular, it allows you to transfer assets between different chains, bypassing intermediaries such as centralized exchanges.
One of the main obstacles to the mass adoption of blockchain and Web3 remains the fragmentation of networks. Users who choose a separate blockchain (e.g. Ethereum) are able to work seamlessly with decentralized applications (dapps) within that network, but interaction with other systems (Polkadot, Avalanche, etc.) can be difficult. This forces liquidity to be shared between different networks, and developers scatter resources when supporting projects across several blockchains at once.
Solutions aimed at ensuring interoperability are designed to eliminate the fragmentation of existing networks, ensuring their effective interaction.
Establishing common standards and protocols helps create a more interconnected ecosystem in which assets and information flow seamlessly between different platforms. This functionality is implemented through the use of specialized technologies that eliminate barriers between isolated blockchain systems.
What are the benefits of interoperability?
We list the main benefits that can be achieved through interoperability:
Increasing liquidity and accessibility of ecosystems
Cross-chain interoperability increases liquidity and the availability of assets to users, allowing them to move between different blockchains. This opens up new investment horizons by enabling exposure to a wider range of assets across multiple platforms and facilitating portfolio diversification.
Cross-chain interoperability also strengthens the infrastructure of decentralized applications, facilitating their widespread adoption.
< h3 class="wp-block-heading">Scalability and efficiencyDistributed networks regularly face challenges due to limitations in bandwidth and processing speed. Cross-chain interoperability protocols are used to solve these problems by dispersing transactions across multiple chains.
This improves the overall scalability and efficiency of networks. Blockchain ecosystems are empowered to meet the evolving needs of users and applications without compromising overall performance.
Fostering innovation
Cross-chain collaboration creates an enabling environment for collaboration , where developers can take advantage of different blockchains for innovative solutions.
By stimulating the development of projects related to the interoperability of distributed systems, the evolution of decentralized technologies is accelerating. Developers are able to easily implement the functionality of various blockchains, which opens up new use cases for dapps.
Reducing counterparty risk
Using CEX and other centralized platforms involve counterparty risk when making transactions.
Cross-chain compatibility eliminates the need for intermediaries, reducing this type of risk and increasing security interaction with various blockchains. With the interoperability of direct communication protocols, users can conduct transactions reliably and securely without relying on trusted third parties.
Drive business growth
Using interoperability solutions , crypto companies can:
optimize financial transactions; reduce costs; transparently exchange assets and data. < /ul>Seamless cross-chain transactions optimize supply chains and simplify cross-border payments, opening up new business opportunities.
Improved user experience
Interoperability technologies provide a single, integrated blockchain environment, facilitating wider adoption of the technology. As a result, the TVL of the DeFi segment increases and the problem of liquidity fragmentation decreases.
What solutions help achieve interoperability?
With the development of the DeFi segment and the cryptocurrency market as a whole, various technologies have emerged that simplify inter-network interaction. Each of them has its own unique approach and characteristics.
Atomic swaps
An atomic swap is a decentralized cryptocurrency swap where two parties directly exchange assets without intermediaries. The transaction occurs instantly and atomically. The latter means that either both parties receive the desired coins, or the exchange does not take place.
Atomic swaps use a time-locked hashing contract (HTLC). It requires the payee to confirm receipt of funds by generating a cryptographic proof of payment before the end of a specified period. Otherwise, the transaction is invalidated and the funds are returned to the sender.
Such operations can be carried out both on-chain, that is, directly between the blockchains of different cryptocurrencies, and off-chain, outside the distributed system.
Atomic swaps can be used for:
decentralized trading; on-chain transfers; dapps.Advantages:
security: no need to trust a third party, there is no risk of fraud; confidentiality: personal data users are not disclosed; decentralization: transactions are not subject to censorship and are not limited geographically; efficiency: exchange occurs quickly and with minimal commissions.Internetwork protocols
IBCprotocols simplify interaction between blockchains, creating a unified environment for routing payments among different networks. These solutions enable the free movement of value between independent ecosystems, facilitating the development of a unified financial infrastructure.
By establishing common rules and routing mechanisms, cross-chain protocols enable seamless transactions between different blockchains. These are effective ways to ensure cross-chain compatibility.
LayerZero is one of the most well-known IBC protocols. It aims to remove barriers to communication between blockchains without compromising security and decentralization. According to the developers, the omnichain solution combines the economic efficiency of Polkadot and the security of Cosmos.
Since its founding, the project has raised a total of $263 million (based on the results of five rounds). Its valuation is $3 billion.
Examples of infrastructure services based on LayerZero: Gas.zip, Telos Bridge and Decent.
Cross-chain bridges< /h3>
Cross-chain bridges are decentralized applications that allow you to move assets between different blockchains.
They interact with tokens of various standards (ERC-20, BEP-20 and others) between networks. There are also cross-chain bridges that allow you to transfer funds between blockchains built using different technologies (Bitcoin, Ethereum, Litecoin, Dogecoin), as well as second-level scaling solutions (Arbitrum, Optimism).
For cross-chain transfers Wrapped assets can be created, liquidity pools can be used across multiple ecosystems. Also, the transfer of funds can be carried out by relay nodes that have funds in different blockchains.
What others are there? technologies for cross-chain compatibility?
Chainlink's CCIP
Cross-Chain Interoperability Protocol (CCIP) is an open-source, decentralized protocol developed by Chainlink. It is intended to become a unified interoperability standard for the Web3 ecosystem, allowing smart contracts on any network to seamlessly interact with each other.
CCIP is used in famous Web3 projects:
Synthetix : decentralized synthetic asset exchange; Aave: leading decentralized lending protocol.Wormhole
Wormhole - is a decentralized protocol that allows for seamless transfer of assets between different blockchains.
The solution ensures seamless data exchange between distributed systems, which can be useful for developers creating dapps with multi-chain functionality.
The Wormhole protocol was launched in 2021. Since then, the network processes over 2 million cross-chain transactions daily for an approximate amount of $35 billion.
At the end of 2023, the project raised $225 million at a valuation of $2.5 billion.
Hyperlane
This is a DPoS-based protocol that provides a mechanism for verifying and securing cross-chain communications through flexible consensus methods.
Network validators verify transactions on each blockchain connected to the ecosystem. Hyperlane provides a fraud detection system that uses Watchtowers to confirm the correctness of inter-network messages.
Avalanche Warp Messaging
Avalanche Warp Messaging ( AWM) is a data exchange protocol. It allows any subnetwork in the Avalanche ecosystem to send and verify messages from other subnetworks or specialized blockchains.
Cross-Consensus Message Format
Cross-Consensus Message Format (XCM) provides communication between consensus systems on Polkadot.
XCM allows you to implement various cross-chain interaction scenarios:
the technology makes it possible to safely and without intermediaries transfer tokens between parachains and other blockchains; the solution allows smart contracts on different parachains to interact with each other, creating new opportunities for decentralized applications; the protocol can be used to manage parachains and other blockchains, e.g. voting on proposals or changing configuration.Thanks to XCM, the Polkadot platform becomes not just a set of independent blockchains, but a single ecosystem where all participants can seamlessly interact with each other.
Axelar
Axelar is positioned as a scalable engagement platform for Web3 using a PoS algorithm. The project aims to eliminate blockchain silos by offering a decentralized network of validators and a set of tools for developers.
The technology makes it easier to move assets among dapps and interact between different networks. The platform provides enhanced security and allows complex cross-chain transactions.
Axelar partners include MetaMask, Trust Wallet, Celestia, Lido, Uniswap, Microsoft and Circle.
What are the barriers to interoperability?
In recent years, interoperability technologies have shown significant progress, but their application is still associated with a number of difficulties.
Cross-chain bridges are complex mechanisms that work with different ecosystems that can use completely different programming languages. They also involve the concentration of assets in a single smart contract on a specific blockchain. The implementation features of such solutions offer ample opportunities for hackers.
Ensuring the immutability of data when blockchains interact is also not an easy task. Differences in consensus mechanisms and network governance models create potential inconsistencies and vulnerabilities. To maintain the integrity and security of shared data in decentralized systems, reliable solutions and interoperability standards are required.
Different blockchains operate with different trust models and security protocols. This complicates interaction, because it is necessary to integrate disparate systems without reducing security and the level of decentralization.
Another challenge is legal regulations and their compliance. Regulatory uncertainty, the need to comply with the rules of different jurisdictions - all this serves as an obstacle to implementation solutions for interoperability.