This page is designed to provide the reader with a high-level overview of interoperability within the blockchain sphere. Interoperability can simply be defined as a set of techniques that enable different blockchains to communicate and transfer digital assets between each other. As each blockchain has been designed to operate on a different set of rules, having the possibility of connecting or performing transactions between them opens up a myriad of possibilities. For example, these consist of such invaluable use cases as being able to transfer one type of cryptocurrency from one completely different blockchain to another, and also allowing the trading of an asset on one chain for a different asset on another chain.
Blockchain interoperability can be characterized by having the capability to freely, efficiently, trustlessly, and securely exchange data and information with other blockchains. As we have previously learned, every transaction performed and every asset held is recorded on a specific blockchain. With interoperability, all of these actions occurring on blockchain ‘A’ can then be represented on blockchain ‘B’. This will prove enormously beneficial in the future and will open up the possibility for many new and diverse use cases to come to fruition.
The goal of blockchain interoperability will result in the seamless transmission of data across different chains. This data will contain information related to the state of a blockchain that can be reproduced in a secure and efficient manner on a completely different blockchain. This can be particularly useful when transferring an asset, for example, a crypto asset, such as LSK, ETH, or ADA. So with an interoperability solution, an asset or token that is transferred from one chain to another cannot be double-spent when performing the transfer, as it will remain locked on the originating blockchain in the case whereby it is used on the receiving chain. Naturally, as public interoperability solutions are built with decentralization in mind, this will enable a connection of blockchains to have access to the relevant information from each other without any limits or compromise on decentralization. Ultimately this will result in connected blockchain ecosystems becoming the norm, as opposed to silo-based blockchain ecosystems.
The benefits of interoperability allow different blockchain networks to seamlessly connect, communicate, and share information. In addition, this further fosters collaboration, scalability, and expands the utility of decentralized applications across an interconnected and unified ecosystem.
A vast improvement in efficiency can be realized by allowing different blockchain networks to interact, coupled with the possibility to utilize additional complex smart contract based applications.
Blockchain interoperability has the potential to establish a more streamlined and efficient Web3 ecosystem, facilitating value transfer across diverse blockchain platforms and seamless sharing of data. For example, the possibility exists for private blockchains to have read access to data from public blockchains.
Interoperability will result in a more connected and extensive blockchain ecosystem, ultimately leading to a wider range of use cases.
Seamless transfer of data and assets can be realized between different blockchains, specifically within the DeFi (Decentralized Finance) arena.
Having access to multiple blockchains would offer a wider range of capabilities and features, which could assist developers in building more advanced and innovative applications.
The adoption of interoperability could result in security concerns as vulnerabilities in one single blockchain have the potential to impact interconnected blockchains. Furthermore, smart contract vulnerabilities could propagate throughout interconnected networks.
Cross-chain transactions and asset transfers could raise compliance and regulatory issues. For example, different jurisdictions may have conflicting regulations.
At present, as there is still a lack of standardization this could result in incompatibility and fragmentation between different blockchain networks.
With the increased complexity and necessary communication between the interconnected networks, this could lead to performance issues such as reducing the transaction speed and possibly increasing the costs.
Achieving blockchain interoperability is a dynamic and continually evolving field, with continuous development of new solutions and enhancements. Determining the interoperability strategy hinges on certain factors such as the specific use cases, security prerequisites, the characteristics and attributes of the blockchain in question, and the preferred degree of decentralization. As the blockchain landscape evolves, it is evident that interoperability solutions will become more sophisticated in order to support a broader range of use cases and applications. There are at the time of writing several approaches and different solutions to achieve interoperability, and a high-level overview geared more towards the Lisk solution is described below in this section.
A sidechain is in effect an autonomous blockchain, which is linked to the main blockchain through a two-way peg or bridge. A two-way peg serves as an intermediary, securing an asset in one blockchain until its transfer to the other is finalized. Sidechains employ distinct consensus algorithms and possess unique native tokens. This in turn enhances scalability by processing a portion of the main blockchain’s data. In addition, these secondary blockchains feature distinct consensus protocols, enhancing a blockchain network’s privacy while simultaneously reducing the reliance on additional trust to uphold the network. This enables the transfer of digital assets, such as tokens, between blockchains, empowering projects to organically expand their ecosystem in a decentralized manner.
A good example of this particular methodology is the Liquid network, which was designed to facilitate faster and more private transactions in comparison with the original Bitcoin network. The two-way peg system enables the transfer of Bitcoins in both directions between the main Bitcoin blockchain and the Liquid sidechain. This acts as an additional supplementary layer resulting in a beneficial use case for fast trading and exchange-related activities, coupled with privacy enhancements whilst simultaneously remaining anchored to the BTC blockchain.
What is commonly referred to as a cross-chain bridge, consists of the separate blockchain being able to expedite the seamless exchange of data, assets, and messages between these networks, hence eliminating the necessity for intermediaries. This separate blockchain, is in effect positioned between the two blockchains wishing to exchange data and upholds a cryptographically timestamped, secure ledger, that records messaging and transactional activities between them.
Various interoperability tools exist, for example, general-purpose bridges to hub and spoke models are utilized, in order to realize the required connectivity between the blockchains in question. However, other methods being more commonly utilized also exist, such as chain-specific bridges, wrapped tokens, and multiple chains.
Various blockchain projects and companies deploy cross-chain bridges such as Avalanche, Cosmos, and Wanchain. However, Polkadot is a multi-chain network known for its parachain and relay chain architecture. As Polkadot supports cross-chain smart contracts, this opens up the possibility for various use cases allowing DeFi projects to gain access to a wider range of services and assets. To briefly summarise, via its cross-chain bridges, the network is then able to facilitate seamless communication with other custom blockchains.
Further reading and more information on these solutions can be found here regarding other solutions for cross-chain bridges.
Token bridges enable users to transfer assets seamlessly between different blockchain networks, and the specific process can vary across different bridges. Certain bridges employ a lock and mint mechanism, which basically results in deploying a smart contract on the blockchain that locks a crypto asset, while simultaneously another smart contract on the receiving blockchain network mints an identical version of the asset.
Generally speaking, Token bridges can be defined into two categories, trust-based bridges, and trustless bridges.
Firstly, trust-based bridges are commonly referred to as custodial bridges, or trust-based federation bridges that operate under the control of a group of mediators or a central entity. Users that wish to convert one asset/token into a different asset/token, are reliant on the members of the federation to authenticate and validate the transaction. With this methodology the mediator’s prime objective is the smooth flow of a transaction, hence their focus on preventing or identifying any fraudulent behavior is secondary. Trust-based bridges offer a fast expedient and relatively cheap solution. So the main incentive is to facilitate the transaction with relative ease and in a timely manner.
Trustless bridges are also referred to as decentralized bridges and hence rely on smart contracts to perform and execute the required transaction. These types of bridges involve the participation of individual blockchain networks to validate the transactions. Trustless bridges offer an enhanced level of security and flexibility.
To summarise here, the difference between the two types of bridges described in this section, are that token bridges frequently utilize a cross-chain messaging protocol designed specifically in order to transfer tokens between different blockchains. Whereas cross-chain bridges commonly requires the burning or locking of tokens on the source chain using a smart contract, this is then succeeded by the unlocking or minting of tokens on the destination chain via a separate smart contract.
A well known blockchain project deploying token bridges is Wrapped Bitcoin (WBTC). Briefly, the process involves a token bridge whereby a participating user’s BTC is locked on the Bitcoin blockchain. This results in an equivalent amount of WBTC being minted on the Ethereum blockchain. On the other hand, when the user wants to redeem their Bitcoin, they can burn the WBTC tokens on the Ethereum blockchain, and the corresponding amount of Bitcoin is released on the Bitcoin blockchain. This technique opens up the possibility for a variety of use cases, as users are then able to access decentralized applications (DApps) and smart contracts using their BTC holdings on the Ethereum platform.
Atomic swaps can be thought of as facilitators that manage the exchange of tokens across multiple blockchains. With this method, peer-to-peer token exchanges can be deployed, whereby transactions occur directly between chains, eliminating the need for any centralized intermediaries such as CEXs. Although this methodology does not offer seamless cross-chain communication, it does provide a technique whereby direct transactions can take place between different blockchains.
To give a very brief example, an atomic swap allows the trustless exchange of token 'x' on one chain to token 'y' on a different chain. It is not necessary that verification from either chain is required, as the data is exchanged between the involved peers.
One example of a blockchain project using atomic swaps is Decred (DCR). Briefly, the usage of atomic swaps requires cross-chain compatibility between the tokens in question, and to accomplish this, Hashed Time-Locked Contracts (HTLCs) are deployed. HTLCs ensure that the swap is atomic, hence, it either happens entirely or not at all. This involves a time lock and a hash lock, which enables both parties to create time-bound contracts with certain conditions that allow parties to create time-bound contracts in a specified timeframe.
To gain more in-depth knowledge of how this mechanism functions, please read this description of atomic swaps.
Oracles can best be described as bridges or links that connect the blockchain to external entities, namely the outside world. They enable smart contracts to incorporate data from a wide array of sources such as stock prices, weather information, flight details, etc. In theory, this could be any type of real-world data so the possibilities of a wide variety of use cases exist ranging from DeFi, and Cross-chain services to NFTs, to name a few. Furthermore, oracles offer a means for the decentralized Web3 ecosystem to connect with established data sources and legacy systems. Since blockchains lack inherent access to what is known as 'off-chain' data by themselves, oracles play a pivotal role and hence, provide a valuable third-party service that significantly expands the use cases for smart contracts.
The potential of decentralized oracles lies in their ability to introduce protective mechanisms that could result in significantly reducing systemic risks. Hence, the secure and trustworthy implementation of blockchain oracles can be considered as a crucial element, that is essential for aiding and promoting the reliable and secure growth of the blockchain ecosystem. To summarise, ultimately they are the link between on-chain and off-chain data, and certain types of oracles exist from inbound and outbound, to centralized and decentralized oracles.
Although oracles are primarily utilized to provide smart contracts with external data, thus augmenting their potential functionalities rather than directly enabling interoperability, certain projects exist leveraging oracles in order to facilitate cross-chain communication and retrieve external data. Chainlink (LINK) is one such entity that operates a decentralized oracle network, whereby it acts as a bridge between on-chain and off-chain data sources that enables smart contracts on a variety of blockchains to connect in a secure manner with real-world data, payment systems, and APIs.
More in-depth information can be found here in this guide to oracles.
The Lisk interoperability solution facilitates communication with other Lisk chains built within the Lisk ecosystem, via the concept of cross-chain certification, and deploys the cross-chain bridge methodology as described earlier on this page. Fundamentally, cross-chain certification involves submitting information from one chain to another, through a signed object known as a certificate. For a more detailed description, please read the Lisk Interoperability page, and also the Lisk interoperability blog post.
Furthermore, the Lisk interoperability solution was designed with the following key attributes in mind, scalability, security, flexibility, and efficiency:
There are no limits on the amount of sidechains that can be connected to the Lisk mainchain.
Cross-chain update transactions can be transmitted at any frequency, for example, whether it’s every few seconds or just once a month. As the creation and transmission of these transactions are not limited to validators or any specific roles, this gives further flexibility. In addition, the Lisk interoperability solution allows the sending of arbitrary cross-chain messages.
Despite routing all sidechain-to-sidechain cross-chain messages through the mainchain, it doesn’t impose any encumbrance or excessive load, as the mainchain merely relays the messages without engaging in resource-intensive processing.
The future of blockchain interoperability is continuing to evolve, and technological advances have made a revolutionary impact on unlocking the full potential of blockchain. Just in the financial sector alone, providing a secure and decentralized ledger for transactions is a game changer. However, as Web3 extends its reach beyond finance into sectors such as supply chain management, healthcare, IoT, gaming, social media, and identity management, it becomes apparent that blockchain alone cannot meet the demands.
The outlook for blockchain interoperability appears highly promising, as this is key to the growth of the Web3 ecosystem. Interoperability enables different blockchain networks to share transaction data, unlocking a plethora of possibilities. The significance here becomes evident in the creation of new innovative, and pioneering applications. For example, applications such as Axie Infinity, and Stark Defi, are accessible through conventional user interfaces and are completely reliant on interoperability, hence, subsequently further accelerating the adoption of Web3.
In the near future, collaborative efforts among various blockchain networks is predicted to lead to the establishment of a truly interoperable ecosystem. This advancement holds the potential for more seamless and efficient data sharing and value transfer across diverse blockchain platforms, enhancing the overall security and efficiency of the web3 ecosystem.
For the blockchain industry to realize its full potential, global governments and regulators must work towards establishing a consensus on web3 regulations. This concerted effort is crucial in facilitating the evolution and maturation of the blockchain industry.
Finally, the potential of Web3 coupled with blockchain interoperability extends to unlocking unparalleled economic productivity, democratizing access to financial services, and returning control to users. It is predicted that nations that adopt and embrace Web3 are poised to thrive, fostering further innovation in this ever-evolving arena.