Blockchain Interoperability: The Race For Global Adoption
Interoperability amongst blockchains and existing financial infrastructure has proven to be a critical bottleneck when it comes to global institutional adoption. Where is the path to intertwinement? From Chainlink’s CCIP to LayerZero and even the World Economic Forum (yes, really) let’s see how the global financial system may eventually move on-chain.
The Problem: 🍎’s & 🍊’s
First and foremost, it cannot go without being mentioned the future is inherently going to be multi-chain. (If you’d like to take a deeper dive on this topic, check out this podcast episode from Blockworks).
Currently, blockchains struggle as it pertains to communication between them. Although a downside, this is by design. The Blockchain Trilemma states that blockchains are forced to make compromises that prevent them from reaching the holy trinity: decentralization, scalability, and security. In short, typically two out of the three are attainable. However, when it comes to centralized systems that an institution would be interested in (e.g. Central Bank Digital Currencies) the aspect of decentralization is null because by default, the system must toggle between private and public chains. With decentralization out of the way, how can scalability be improved so that institutions with a need for some centrality may enter the on-chain world, and thus bring on all the liquidity that would come along with it?
In traditional finance, there is a growing perspective that blockchain has the capability to improve efficiency, reduce costs, and create opportunities for the industry. Private markets, for example, have historically been dependent on old legacy systems. This adds costs and deters investors. Through improving settlement and operations more broadly, blockchain has serious potential to bring more investors into the private markets and thereby increase liquidity.
However, trading tokenized assets is still an extremely niche activity in the regulated space. For scalability to continue, financial institutions must be able to interact with multiple blockchains with ease. Not to mention, in a secure and trusted way just as they do today when facilitating the trading of traditional assets. Here in lies the problem… interoperability.
How great would it be to have all of the positive qualities of blockchain in the global financial system, yet with the seamless transferability of money in something we as end-users take for granted like Venmo? Well, that’s something already being seriously deliberated by those at Swift and the World Economic Forum. This dynamic ultimately creates a situation in which there is an over abundance of opportunity and a lack of time. Whomever is able to secure themselves as the leading interoperability solution will win out in grandeur style. Opportunity in relation to time is well represented by the graph below:
The Solution(s): CCIP vs. LayerZero
Before cross-chain messaging protocols, the interoperability problem was typically tackled through centralized bridges. In 2022 alone, Chainalysis estimated that $2 billion in cryptocurrency was stolen across 13 separate cross-chain bridge hacks. In addition, this approach led to extensive fragmentation as most of these bridge solutions were application-specific services between two distinct chains. Not for any and all.
Chainlink’s Cross-Chain Interoperability Protocol, aka CCIP is a project that has been going on largely under the radar for sometime now. However, at the time of writing, CCIP recently launched on mainnet with DeFi players Aave and Synthetix as early adopters.
As previously mentioned, Swift and over a dozen financial institutions have already begun working with CCIP for messaging and token transfers across both private and public chains. Some of these institutions include but are not limited to: BNY Mellon, Australia and New Zealand Banking Group, Citi, and The Depository Trust and Clearing Corporation (DTCC). Through this collaboration, the aim is to send value between banks and from banks onto public blockchains… in a similar fashion to how Swift manages transfers between over 11,000 banks today. This would establish a foundation for connecting the global financial system to financial products on-chain. Through iteration, a globally accepted interoperability standard can be established.
CCIP is leveraging the existing infrastructure of Chainlink through its industry leading oracles. This infrastructure has already helped secure tens of billions of dollars in value within the DeFi economy. In addition, CCIP is being further secured through Chainlink’s Anti-Fraud Network. This network is composed of various Decentralized Oracle Networks (DONs) that are each made up of an independent committee of nodes. These are completely separate from those facilitating CCIP bridges. The sole purpose of the Anti-Fraud Network is to monitor CCIP services for nefarious activities and network conditions (e.g. block reorgs). This focus on security certainly had to have played a large role with CCIP’s institutional adoption. For further technical information, check out the docs here!
LayerZero, in a similar fashion, is also a cross-chain interoperability protocol. Just the other day, LayerZero surpassed 50 million cross-chain messages which is quite the accomplishment. LayerZero deploys a set of smart contracts on each chain that is to be supported (aka Endpoints). These contracts then sync up all of LayerZero’s supported chains (via oracles) and can then be deployed on new chains. LayerZero works on the condition that if two independent entities can verify that a transaction on ‘Chain X’ is valid, then ‘Chain Y’ can be positive that the transaction on ‘Chain X’ is and then fulfill the transaction on ‘Chain Y’. However, this design relies on independent oracles.
Speaking of oracles, it would be an absolute disservice not to reference this article whereby LayerZero announces they’ve integrated with Chainlink’s oracles. Their services surrounding oracles are bar none the best in the space. Now that the two are frontrunners for interoperability, how will competition affect dynamics such as this? This brings up a pivotal difference between the two that arguably puts Chainlink at such an advantage… Chainlink has plenty of technical components already established.
If you’re interested in taking a deeper technical dive on LayerZero, their docs can be found here.
This article focuses on Chainlink and LayerZero. However, some other honorable mentions are:
- Ripple (In case you missed it, XRP was just declared NOT a security)
- Cosmos
- Polkadot
The Implications: The Future of Money
As we alluded to, there is an overabundance of opportunity and an extremely limited amount of time. The battle is on for the best interoperability solution.
You might be asking, does a world exist where the end user sees value in holding LayerZero and Chainlink for the same functionality with variance in performance? This is a question also brought up by Jason Yanowitz on the Empire Podcast which you can watch here. Whichever solution is the most robust, secure, and efficient should win out. Granted, there is still so much more to come when it comes to an on-chain future, anything can happen. However, we can be certain the floodgates will be open once institutions can interact with any chain with ease.
The rest of 2023 and 2024 will be fascinating to observe as it pertains to this topic. Swift announced that more research will be published by the end of the year. Stay tuned.
With love, for researchoooors, buildoooors, and investoooors alike…
- Tyler
Written without LLM’s :)
