The launch of cryptocurrency a decade ago began to transform the global economy, which is inevitably shifting into a digital ecosystem. Institutional investors now view Bitcoin as a safe haven, while many new networks have been launched that outperform BTC in terms of speed, fees, and usability. However, the lack of blockchain interoperability is a major loophole that prevents users from enjoying a useful decentralized environment.
The first Bitcoin blockchain is often referred to as the 1.0 blockchain. In 2015, blockchain 2.0 became available, allowing trustless interaction between users. The platforms that offer this functionality, however, are based on siled blockchains, restricting the exchange of money and data between networks. This problem is solved by blockchain interoperability and with improved security and scalability will bring blockchain 3.0, a state of the art that will allow its global adoption.
Interoperability technologies allow different blockchains to interact with each other directly or through certain intermediaries.
Among the characteristics of cryptocurrencies are chain-to-chain atomic exchanges that allow the exchange of multiple cryptocurrencies directly and without the participation of a third party.
However, blockchain also finds applications in other areas of the economy: supply chain management, digital identity, Internet of things, etc. In these areas, interoperability is also crucial, breaking down silos and closed gardens of data, allowing organizations from different areas to merge and analyze data. It can help promote management, science, health, and finance.
Atomic exchanges between strings
Crypto can gain more users as it becomes easier to use. The interoperable future will allow users to exchange currencies from different blockchains directly in their wallets, without having to find an exchange service. Yield producers will have more freedom to move their assets through chains while seeking more profitable strategies.
More and more companies will adopt blockchain technology as it becomes more accessible. The lack of standards in the construction of blockchains makes their interoperability difficult, as giants like IBM claim. Implementing widely accepted and easy-to-configure blockchain solutions would reduce this barrier to adoption.
In a World Bank Group report published in 2020, the following examples are given of how blockchain interoperability could benefit the economy:
Digital payments and central bank. Money transfers are slow and cumbersome today, which was especially evident during the coronavirus lockdown. The monetary authorities of Singapore, Canada, the European Union and Japan have conducted a series of experiments showing the potential of blockchain interoperability to facilitate digital payments.
Numerical identity. Today’s Internet users have little control over their identity: it is not always easy to know how companies and governments use their data. Digital identities created on interoperable blockchains would allow users to control data, establish agreements and verify their identity in an interconnected environment.
Supply chains. For logistics processes to run smoothly, all parties involved must be able to exchange data transparently. By using blockchains, fragmented supply chains can be unified.
Health care. Today’s patients keep their medical records at various medical institutions, while organizations struggle to collect statistics and conduct research when data sharing between them is restricted. HIMSS, a non-profit organization in the United States that studies and develops health information systems, recently investigated the use of blockchain in healthcare.
A hot topic today is creating more interoperability in the blockchain space, and new methods are emerging and evolving. We will review 4 solutions that make blockchains more interoperable today:
Atomic swaps allow exchange of currencies without intermediaries between separate blockchains
Polkadot and Cosmos are the platforms that facilitate the creation of customizable interoperable blockchains
Chain Link offers a smart contract communication protocol between chains
Let’s take a closer look at each of them.
Currently, the only way to exchange Bitcoin for Ethereum is to find a trusted exchange service. Thanks to atomic swaps, it is possible to trade currencies from different blockchains reliably, without having to deal with third parties and their fees.
The concept of atomic swaps was first introduced in 2012, when 99% of current crypto projects did not exist. This technology has been around for 9 years: users initiate a transaction, create two safes with multiple signatures, transfer coins to each other, and confirm that they have received the coins.
With atomic exchanges, the “all or nothing” rule applies. If one of the users does not send and confirm receipt of the parts before the deadline, the transaction will be automatically canceled.
Since atomic swaps do not use cross-chain intermediaries, they are implemented by the community and coin developers. To date, these types of exchanges have not gone mainstream, and the first real exchange took place in 2017 when Litecoin founder Charlie Lee exchanged LTC for BTC:
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An increasing number of networks are becoming interoperable thanks to atomic swaps. In August 2021, the first exchange between Bitcoin and Monero took place, despite the increased privacy of Monero transactions. We can expect to see more news of this type in the future.
With Polkadot, independent blockchains have the ability to communicate without trust. Thanks to the protocol, companies have access to interoperable blockchains that can be customized, at the same time that they can become interoperable with existing networks.
There are two layers of infrastructure in Polkadot that allow companies to take advantage of interoperable blockchains. The first is the chain of relays, the backbone, the heart of the system, and the Polkadot mediator. At the second level are parachutes, which are independent blockchains that can be customized by developers and companies. The parachutes are manufactured as standard, so they are easy to install and the barrier to entry is relatively low.
Bridges are the third level of infrastructure that allows Polkadot to communicate with established networks like Bitcoin and Ethereum. Currently, this technology is being tested as a way to reliably exchange coins between these chains.
Cosmos is an environment of independent blockchains running in parallel, which is pretty close to what Polkadot is. The Cosmos platform enables the development of custom blockchains and its main goal is to create a network of easily interoperable blockchains.
Today, to create a decentralized application on Ethereum, for example, one would have to develop a smart contract designed to cover many use cases, which means that such an approach is inflexible. Cosmos SDK allows you to create a customizable, application-specific blockchain.
In addition, a Cosmos-based blockchain has sovereignty, one of the key concepts of Cosmos: it works with its own set of validators, making it independent from the main Cosmos network. All blockchains created in Cosmos can interact with the Blockchain Communication Protocol (IBC).
Chainlink is a protocol that brings off-chain data to the blockchain, which is in high demand in the world of cryptocurrencies. It uses a network of oracles to extract data from off-chain APIs and route it to smart contracts, creating a bridge between the on-chain and off-chain worlds (which is also important to the blockchain 3.0 philosophy). Google, SWIFT and Oracle are among Chainlink’s partners.
Chainlink introduced the Inter-Chain Interoperability Protocol (CCIP) in August 2021, which enables smart contracts from different blockchain platforms to communicate and exchange data. It enabled decentralized messaging, data transfers, and token movements between blockchains. The launch of these smart contracts will enable new use cases that were previously impossible, according to Chainlink co-founder Sergey Nazarov.
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Blockchain interoperability is still in its infancy, despite the latest developments. Examining how Polkadot implements bridges between the largest blockchains and how CCIP Chainlinks works will give us an insight into the future of interoperability.
In the current context, it is clear from the DOT pricing dynamics that the community is very excited about blockchain interoperability. The world as a whole is striving to achieve interconnection, although we do not yet have solid bridges between the chains. One could even say that blockchain interoperability is unavoidable and can be implemented through solutions we never thought of.
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