The Importance of Interoperability for Blockchains
Blockchain, considered the cutting-edge technology of today, has developed greatly since the inception of Bitcoin back in 2008. With the promise of disintermediation, transparency and empowerment, blockchain supports various use cases and applications across a broad range of sectors. Today, we are witnessing the verticalization of blockchains whereby the technology has been crystallized into specific categories covering financial, human, and machine data. There are currently hundreds of independent public and permissioned (private) blockchains in existence, with no common mode of communication.
The next step in the evolution of blockchain is interoperability, the notion of separate blockchains communicating with one another to form a universal ecosystem of interlinking networks, which will make such communication possible.
The Significance of Interoperability
Interoperability refers to the ability to freely communicate and share information across different systems. Interoperability allows users from different networks to interact with each other without the need of an intermediary. In an interoperable blockchain environment, users from a particular blockchain network, (for example Bitcoin), can transfer BTC to another user currently in another blockchain, (for example, the Ethereum network).
Decentralization, a core foundation of blockchain technology, allows networks to establish their own systems, which often differ greatly from one blockchain to the next. Given that each blockchain – whether permissioned or permissionless – is focused on a particular use case or application, the underlying codes of each blockchain protocol are different.
For example, Bitcoin’s objective is to remove middlemen from the monetary system through a peer-to-peer digital currency. Ethereum, on the other hand, was founded to expand the potential of blockchain technology by creating a universal platform for the development of decentralized applications (dApps) and smart contracts. The codes, consensus algorithms, and economic mechanisms underlying Bitcoin and Ethereum are vastly different, creating an information silo between these two independent blockchains.
The inability to communicate is not limited to these two networks but given the vibrancy and vastness of the industry, is replicated by hundreds of disparate blockchains and their accompanying networks — posing a threat to standardization.
The Promise of Blockchain
Each of these blockchain networks has its own native currency but cannot interoperate with other blockchains since their underlying codes and protocols are different. To fully harness the promise and potential of blockchain technology, interlinking bridges between each network must be established. The interoperability of the networks enables blockchains to communicate with each other, and fosters standards that would reduce friction within the cryptocurrency ecosystem. With thousands of coins and tokens in use, reducing friction for users and improving transactions for merchants will greatly facilitate crypto adoption and usage.
Projects Focused on Interoperability
Numerous projects are designed to foster interoperability, some of the most significant of which are discussed below.
Widely regarded as the first cross-chain bridge in the market, POA bridge is a decentralized application developed on the POA Network. POA native tokens can be easily transferred from the POA Network to the Ethereum network in a seamless and cost-effective manner. The transfer of POA tokens to the Ethereum network necessitates the creation of a newly minted token for the Ethereum blockchain called POA20, which has the properties required to work with Ethereum’s ERC20 bridge.
With the objective of tearing down walls between different siloed blockchains, Quant Network aims to foster interoperability through its native blockchain software Overledger. Overledger facilitates access across different blockchain networks. This allows the creation of multi-application chains (MApps) that can leverage the functionalities of different blockchains. For example, developers can pick a particular feature of one blockchain, such as high throughput, and couple it with a feature derived from another blockchain, such as decentralization. This is done to optimize the agnostics (the ability of one blockchain to interact with another) of the application. Overledger is designed to be future proof, which it accomplishes by isolating the transaction layers between blockchains. Indeed, this is a core feature of Overledger; it is a protocol that runs on top of other blockchains rather than being a blockchain itself.
One of the first projects focused on interoperability, Cosmos began developing solutions in 2014. Cosmos’ underlying technology is called Tendermint, a byzantine fault tolerance (BFT) consensus algorithm integrated with a peer-to-peer (P2P) gossiping protocol. Cosmos was established to create an internet of blockchains where networks can communicate with each other in a decentralized manner. In order to facilitate this, Cosmos offers a set of open source tools for developers to create applications on Tendermint Cosmos, a novel technology that packages a blockchain’s networking and consensus layers into a generic engine. This allows developers to focus development only on the application layer, saving tremendous resources as well as facilitating the creation of an interoperable network.
Polkadot is a well-regarded project established by Dr. Gavin Wood, a co-founder of Ethereum and creator of its native programming language, Solidity. Known as the network that connects blockchains, Polkadot promotes the idea of a scalable and heterogeneous multi-chain framework that revolves around a central chain called the relay chain. Other, specialized chains, parachains, are connected to the relay chain and leveraged on a shared pool of common validators, or blocks. Polkadot’s architecture operates through a trust-minimized federation structure, which is also geared towards scalability.
A founding member of the Blockchain Interoperability Alliance (BIA), AION is a multi-tier blockchain that aims to become a common protocol for blockchain networks. The network allows custom blockchain architectures while facilitating cross-chain interoperability. Using an interchain framework that supports message relays between blockchain networks in a trustless manner, AION facilitates the transfer of computing logic, value, and liquid assets among participants in the network without the need for intermediaries.
Wanchain, also a founding member of BIA, is focused on providing access to all digital assets on disparate blockchain networks, similar to banks offering access to a variety of fiat currencies. Wanchain aims to unite siloed blockchain structures through the use of cross-chain smart contracts, essentially being a middleware that facilitates transactions between blockchains. Like most of the other projects dedicated to interoperability, Wanchain uses a Proof-of-Stake (POS) consensus mechanism. A core differentiator — Wanchain utilizes three functional modules: a registration module, a cross-chain transaction data transmission module, and a transaction status query module.
Komodo is a dynamic blockchain protocol that facilitates interconnectivity between blockchain networks as well as their native communities. Komodo is a multi-chain platform that allows developers and projects to create a customizable, dedicated blockchain with completely independent infrastructure and smart contract functionality. All projects or blockchains under the Komodo ecosystem are equipped with support for atomic swaps and cross-chain smart contracts that facilitate interoperability. Komodo uses a delayed Proof-of-Work (dPOW) consensus mechanism, leveraging on the security strength of the Bitcoin network.
At the end of 2017, the Blockchain Interoperability Alliance (BIA) was formed to establish links between independent blockchain networks. It was created by Wanchain, AION, and ICON with the goal of advancing standards that would foster a greater degree of connectivity between disparate blockchains, address the issue of scalability, and establish best practices for inter-chain communication within the industry. Each of BIA’s members are dominant within a specific geographic region: ICON is focused on the South Korean market, AION on the North American market, and Wanchain on the Chinese market.
During the formative years prior to the internet, the world used thousands of disparate networks called an intranet, a siloed ecosystem that facilitates the transfer of information, data and messages within its own system. Because it was siloed, there was no connection from one network to another. This changed with the creation of the TCP/IP infrastructure layer and web browsers, which made possible global interconnectedness and harnessed the potential of digital networks. Blockchain technology today is at that same early stage: There are numerous disparate siloed networks unable to communicate with one another. To reach the same level of impact and disruption the internet had on technology and society, there must be an infrastructure layer that facilitates interoperability between blockchain networks. The cryptocurrency market is moving towards that future, with multiple projects and ventures focused on bridging the communication gap between networks.
* The information above does not constitute any form of financial or investment advice and should not be relied upon. Investing in Digital Assets carries risk. For more information please see our risk warning.