Blockchain Interoperability and how it is unlocking blockchain’s full potential
Lack of interoperability has been a persistent challenge for the blockchain ecosystem. According to Forbes, it is one of the top reasons hindering the technology from reaching its full potential and wider mainstream adoption. With the rapid proliferation of blockchain use cases, particularly around Web3, DeFi, and tokenization the demand for robust interoperable solutions has become significant.
Blockchain interoperability ensures the seamless exchange of messages, tokens, and assets between different blockchains. Typically, blockchains operate as isolated networks with their own tokens, security measures, consensus mechanisms, and protocols. However, this segregation results in isolated pools of assets within each blockchain ecosystem. Interoperability solutions bridge these isolated asset pools, unlocking scalability potential and unlocking new use cases, as well as increasing the utility and liquidity of digital assets. Be it CBDC facilitating cross-border settlements between bank or improving usage of digital rewards and assets in web3 loyalty programs and decentralized social media platforms, blockchain interoperability is consequential for various ongoing projects and many other use cases.
Interoperability solutions can be classified into two main categories: Multi-chain and Cross-chain.
Multi-chain Solutions enable the transfer of assets and communication between similar chains that follow a uniform protocol to some extent, using formats or mechanisms native to the protocol. However, they are unable to transact with blockchains that follow a different protocol.
Cross-chain Solutions facilitate the exchange of assets and messages between different blockchains through an external intermediary. However, this solution is highly susceptible to attacks, making cross-chain security highly contested and a major areas of concern. In one of the recent incidents, Orbit Chain lost $81 million due to a cross-chain bridge exploit. Unfortunately, such incidents are not isolated, highlighting the necessity for robust security measures.
In terms of offerings, many interoperability solutions exist in the market. For instance, Polkadot utilizes Cross-Consensus Messaging (XCM) to communicate between Polkadot native parachains and relay chains and with external blockchains through bridges. Parachains are application-specific blockchains connected to relay chains, which are the core blockchains responsible for the security, consensus, and coordination of interactions between parachains and external blockchains.
Cosmos aims to enable interoperability in the internet of blockchains through the Inter-Blockchain Communication (IBC) open-source protocol to transact with different heterogeneous chains.
Similarly, Chainlink is also developing the Cross-Chain Interoperability Protocol (CCIP) to standardize messaging and token transfers between blockchains.
There are just a few examples and there are many more diverse solutions out there. Some solutions also enable the offloading of computation from the main chain through sidechains. Sidechains are separate blockchains connected to the main chain with their own tokens, protocols, security, and consensus mechanisms to share some tasks from the main chain, such as running dApps or sharing computation loads
The space has also been experiencing an absence of standardized methods and tools to benchmark interoperability solutions and more development needs to happen to prepare benchmarking datasets, methodologies, and evaluation criteria.
Interoperability addresses the scalability aspect of the blockchain trilemma — security, scalability, and decentralization. However, there is a pressing need for security-first solutions, as value loss due to exploits and theft will slow down adoption and increase distrust in the tech. The global blockchain interoperability market size is projected to grow from $0.3 billion in 2023 to $1 billion by 2028 at a CAGR of 27.2%, it would be interesting to see how solutions will evolve and projects will incorporate all three aspects of the trilemma into these solutions.
