Blockchain platforms are emerging at a rapid rate however, the lack of interoperability is diminishing the network effect that could exist between these platforms.
Primer – Blockchain technology is seizing much-needed attention and its potential can be corroborated by the rate at which new platforms are cropping up. The technology with its ability to provide a transparent, efficient, secure, and decentralized ecosystem has failed to spur mass adoption. This failure can be attributed to the inability of the platforms to function together. A closer look reveals these platforms aren’t inherently open and are unable to communicate properly with each other hampering the technology’s development and preventing it from reaching its full potential. The major deterrent is the lack of interoperability.
Each platform boasts its own set of features and characteristics incorporated to fulfill a specific need or to deliver a sophisticated product/service. The adoption of varied governance rules and regulatory controls adds to the complexity. Everything from the language to transaction schemes, consensus models, and hashing algorithms differ resulting in a plethora of blockchains siloed from one another. The need of the hour is to break down the walls and move away from a siloed and fragmented landscape to one that is unified and connected i.e. interoperable.
Blockchain Interoperability
The power and value of exclusivity enable individual platforms to attract users but prohibit the industry to unlock its full potential. For a global economy that is becoming increasingly digital and data-driven, it is imperative for individual blockchains to be able to communicate with each other to ensure the large-scale acceptance of blockchain-based applications.
To oversimplify, interoperability refers to the ability of disparate ecosystems to seamlessly exchange data and transfer relevant information between each other sans any centralized entity/intermediary. This move is essential to alleviate the roadblocks that stifle potential growth.
Implementation of interoperability between blockchains serves as a collaborative tool to fulfill Web3’s promise of decentralization and accelerates its adoption by stimulating innovation. It facilitates the creation of products and services that leverage and operate on and across multiple blockchains sparking a new spirit of collaboration for the greater good.
To summarize, it fosters an environment providing the following advantages
– Universal communication sans barriers
– Easy execution of smart contracts
– Seamless exchange and transfer of information
– Cross-industry collaboration
– Multi-token transactions and multi-token wallets
– Enhanced user experience
Fulfilling this vision requires the integration of a number of functionalities and abilities including but not restricted to
– Easy switching between different chains
– Assimilation and exchange of relevant information between chains
– Initiating and conducting transactions with other chains
– Linking private enterprise chains with public chains in a controlled manner
Achieving interoperability is of paramount importance as dependence on legacy architecture or business models of the Web 2 era is inefficient, costly, and risky, especially for enterprises utilizing blockchain technology with the hope of expanding and delivering smooth and efficient services to clients.
How is Interoperability Achieved?
Currently, the highly fragmented landscape necessitates mechanisms for interoperability to eradicate the obstacles to the mass acceptance of blockchain technology. At the core of interoperability is cross-chain technology. Cross-chain entails the transfer and exchange of multiple data types as well as tokenized assets between independent blockchain platforms.
There is no standard form or existing feature incorporated within blockchains that support communication between platforms; however, various tools have emerged to increase the level of interoperability.
Oracles
In the Web3 space, oracles are third-party services that provide blockchain smart contracts access to off-chain data thus bridging the information gap that exists. Blockchain smart contracts aren’t equipped to access off-chain data making them dependent on oracles for trustless execution. Examples of blockchain oracle projects include Chainlink, API3, Augur, etc. While oracles exist to bring reliable and secure off-chain data to blockchain platforms they have certain drawbacks listed below-
– Utilization of centralized oracles goes against decentralization
– Risk of manipulation when using oracle
However, oracles fulfill an important use case in DeFi as they relay real-world data essential to trigger execution in financial smart contracts.
Side-Chains
Sidechains refer to blockchain platforms that are not only compatible but run parallel to the mainchain within the same ecosystem. Sidechains tend to have their own tokens, security measures, and consensus mechanisms. These are Layer 2 solutions designed to scale Layer 1 blockchains. They enhance the overall ecosystem’s transactional efficiency while ensuring safety and security. With interoperability built-in, these chains are equipped to handle and support large-scale network traffic without congesting the main chain. Examples of sidechains include projects like Cosmos, Polygon, Bitcoin RSK, etc.
Bridges
Blockchain Bridges or Cross Chain Bridges are inter-blockchain applications that permit the flow of digital assets from one platform to another. Cryptoverse is home to thousands of blockchains each designed with a specific purpose but confined to its own ecosystem. Bridges enable the exchange of assets (tokens, NFTs, and other data) between these chains that are otherwise siloed.
Bridges are either trusted (centralized) or trustless (decentralized). Their inception has been instrumental in facilitating the transfer of cryptocurrencies from one platform to another without having to change it to fiat currency. These porting tools have played a vital role in enabling investors who move between blockchains in search of higher yields to achieve the desired result efficiently without facing complexities. Several platforms have integrated bridges within their ecosystem so users do not have to leave the platform.
Let’s dive deeper into Trusted and Trustless Bridges.
Trusted Bridges -Wrapping
Wrapping enables the creation of wrapped tokens whose value is pegged to the underlying token. In the case of wrapping, the original token is put in a secure digital vault and a wrapped version of it is created for use on another blockchain. Wrapped BTC or wBTC is a perfect example of a wrapped token that can be traded on the Ethereum network. Users can issue wBTC by giving their original BTC to a protocol (custodian) that stores it and instead issues wBTC by wrapping it in an ERC 20 contract. A major risk associated with using wrapped tokens is giving up control and locking your original asset with a centralized entity.
Trustless Bridges -Locking and Minting
Trustless bridges as the name suggests are decentralized and do not require users to place their trust in a centralized entity. These bridges through a two-step procedure enable interoperability between independent blockchains. The procedure involves locking (step 1) the digital asset on one chain while new tokens of an equivalent amount are minted (step 2) on the receiving blockchain.
Wrapped Bitcoin is an example of a unidirectional or one-way bridge that supports the transfer of assets to the target blockchain and not the other way around meaning BTC can be sent to Ethereum but ETH cannot be sent to Bitcoin. Whereas, Wormhole is an example of a bidirectional or two-way bridge that permits the conversion of assets to and from blockchains meaning SOL can be sent to Ethereum and ETH can be sent to Solana.
Numerous benefits associated with the use of bridges include:
– Execution of dApps across multiple blockchain platforms
– Ability to conduct cheaper, faster transactions in otherwise congested networks
– Greater efficiency, innovation, and user adoption
However,
– Bridges create opportunities for exploitable bugs due to the complexity of the code.
– Censorship risk and Custodial risk in case of Centralized bridges.
It’s important to note bridges aren’t restricted to the transfer of cryptocurrencies and include the transfer of NFTs and smart contracts as well. Some notable examples of bridges include Binance Bridge, cBridge, AnySwap, etc.
Swaps
Fostering interoperability through greater decentralization, atomic swaps facilitate the swapping of cryptocurrencies across different platforms sans intermediaries. It is a peer-to-peer (P2P) method that utilizes Hash Timelock Contracts (HTLC). In less technical terms, HTLC ensures both parties involved conform to the protocol and verify the transaction (hashlocks) before the swap takes place. If one party fails to do so or deviates from the agreed-upon terms or is unable to do it within the stipulated timeframe (timelock) the contract is not executed and the assets are returned to the original owners.
Major advantages associated with the use of atomic swaps include retaining control over your assets, swapping at lower rates, enhanced security as well as user experience. However, the issue of finding users with the same needs can be a taxing process and limited liquidity doesn’t make it easier. Moreover, only HTLC-compatible blockchains can be involved in swaps. DEXs integrating and supporting atomic swaps may enable users to leverage the aforementioned benefits.
The growing need for interoperability has led to the introduction of multi-chain solutions that offer considerable functionalities and opportunities. In the following section, we shall cover a few that deserve mention.
The first one is DFINITY foundation’s Internet Computer which offers Native Integrations with Bitcoin and Ethereum.
Internet Computer
Poised to be the third great innovation in blockchain after BTC and Ethereum’s smart contracts, IC’s claim to fame is its ability to directly integrate with the Bitcoin network bypassing the use of bridges. But before we get into further details, let’s understand what the Internet Computer is and how it achieves trustless Bitcoin Integration.
Internet Computer is an infinitely scalable general-purpose blockchain aimed at delivering a decentralized Internet by running smart contracts at web speed. It permits developers to install smart contracts and dApps directly on the blockchain. It can be referred to as a sovereign decentralized network sans cloud computing services (read AWS) to deliver web content.
Hosted on node machines and operated by independent parties who’re geographically separated, the internet computer nodes run on ICP (Internet Computer Protocol). ICP is a secure cryptographic protocol that ensures the security of the smart contracts running on the blockchain. The Internet Computer is a network of sorts comprising individual subnet blockchains that run parallel to each other and are connected using Chain Key cryptography. This implies canisters (smart contracts on IC) on one subnet can seamlessly call canisters hosted on other subnets of the network. Another notable feature is the network’s decentralized permissionless governance system NNS (Network Nervous System) which runs on-chain. NNS is designed to scale the network capacity when required. It does so by spinning up new subnet blockchains.
Internet Computer unlocks immense potential for value creation by introducing direct integration with the Bitcoin network. Displacing bridges and the need for wrapping, the Internet Computer through the use of Chain Key cryptography establishes a direct connection with the BTC ledger providing a trustless foundation for DeFi projects utilizing Bitcoin. It empowers developers to create canister smart contracts equipped to communicate with Bitcoin. Essentially, the ECDSA (Elliptic Curve Digital Signature Algorithm) suite of protocols by Internet Computer enables canisters to obtain ECDSA public keys and securely sign messages under that public key utilizing Chain Key cryptography. Thus, canister smart contracts with a Bitcoin address and the ability to sign transactions effectively serve as Bitcoin wallets that can receive, hold and send BTC.
Eliminating trust assumptions by removing intermediaries and providing direct integration with the Bitcoin blockchain, Internet Computer aims to give developers access to smart contract utility on the world’s largest blockchain. However, the journey to deliver on this vision isn’t going to be easy. If Internet Computer succeeds it will bring about a paradigm shift allowing native Bitcoin to flow into DeFi. This will translate to more adoption and pave way for a whole range of possibilities. IC’s plan does not end with Bitcoin and it aims to leverage its unique offering to Ethereum as well.
But listed below are what seem like major roadblocks on this path
– Security review is still in the works
– Balancing out security and usability to scale will be crucial
– Competition from Cosmos and Polkadot
Bringing us to our next project, Cosmos.
Cosmos and the Inter-Blockchain Communication Protocol
Cosmos IBC (Inter-Blockchain Communication) protocol has connected over 40 chains making it the largest interoperability protocol in the industry. Built to facilitate communication between standalone distributed ledgers sans intermediaries, Cosmos is being dubbed the Internet of Blockchains.
Cosmos deliverables go beyond seamless interaction between different blockchains and include the provision of tools that simplify the process of developing interoperable blockchains. The utilization of Hubs, IBC, Tendermint Byzantine Fault Tolerance (BFT) Engine, and the Cosmos Software Development Kit (a framework for building application-specific blockchains) enables Cosmos to provide the necessary infrastructure for creating interoperable blockchains. While some interoperability solutions involve the use of smart contracts, Cosmos offers open-source tools for the development of independent blockchains referred to as zones. These zones connect to the main blockchain referred to as the Hub. Zones communicate via the hub through the use of IBC. The state of each zone is monitored and maintained by the hub and vice versa. Zones operate autonomously and have their own validators which validate transactions. Cosmos Hub, a Proof of Stake platform, was the first blockchain on the network and is powered by ATOM coin.
Cosmos interoperability is not limited to Tendermint chains but extends to blockchains that do not have fast-finality (read Proof-of-Work) thanks to a special kind of proxy chain referred to as Peg Zone. Peg Zones can track the state of another blockchain and are compatible with IBC as they have fast-finality themselves. Peg Zones act as bridges and can communicate with other chains by linking zones and hub networks together.
Thus, Cosmos makes blockchain development easy with Tendermint BFT and the modularity of the Cosmos SDK while providing an ecosystem that permits blockchains to seamlessly communicate through IBC and Peg Zones without compromising sovereignty.
With a multi-chain future on the horizon, the timing of Cosmos Interchain accounts couldn’t be better. Developed by Interchain GmbH, Chainapsis, Informal Systems, and Confio, Interchain accounts expand IBC functionality from mere token transfers to facilitate the creation of new products and mechanisms to coordinate between networks. To put it simply, Cosmos ecosystem blockchains can access and control accounts on separate chains as well as carry out actions native to that chain. Essentially, Interchain Accounts grant access to all IBC-enabled Cosmos chains (based on either Cosmos SDK or Tendermint) from one Cosmos Hub account. The addition of this feature will enable networks to test true application interoperability as well as enhance user experience.
The Cosmos platform and ecosystem secure over $120 bn in digital assets and boasts names like Terra, Osmosis, Binance Smart Chain, Binance DEX, Evmos, and Thorchain amongst many others.
While Cosmos is touted as the Internet of Blockchains, Polkadot seeks to be Blockchains of Blockchains.
Polkadot
Polkadot is a leading multi-chain technology in the field of blockchain interoperability. Founded by Gavin Wood (one of the founders of Ethereum), Polkadot envisions itself as a next-generation blockchain protocol that unites an entire network of purpose-built blockchains, allowing them to operate seamlessly together at scale. Furthermore, it seeks to facilitate the easy development of new chains via the Substrate framework and provides bridges to networks such as Bitcoin and Ethereum.
Its ecosystem is composed of a relay chain (the main chain for the system) that connects and supports several ancillary, application-specific blockchains referred to as parachains. These parachains are full-fledged blockchains boasting different characteristics. These chains run parallel to the relay chain and are dependent on it for consensus. Parachains are similar to Zones on Cosmos with one major difference, they share the same set of validators providing unified and strengthened security across the network through the relay chain however, zones connected to the hub do not have access to the same security as the hub. While Polkadot and Cosmos are both multi-chain projects they differ in their focus as Polkadot with its shared validation logic is focused on shared security whereas Cosmos with its bridge-hub model is more focused on easy adoption and development of interoperable blockchains.
Polkadot’s newly launched cross-chain communications (XCM) is far superior to the bridging mechanism prone to hacks. XCM format defines a language around how the message transfer between two interoperating blockchains should be performed. With the new format of XCM, Polkadot manages to deliver on its objective of being a fully interoperable multi-chain and allows the transfer of data and assets between the parachains. Secured at the same level as the Relay chain, XCM channels will serve as a stable and reliable inter-chain messaging channel between parachains themselves as well as smart contracts.
Other projects that deserve mention include
Polygon – Connects all Ethereum-compatible chains
Solana – Utilizes Wormhole to facilitate communication between Solana, Ethereum, Terra, and Binance Smart Chain
Future of Blockchains: Multi-Chain or Cross-Chain
Interoperability is essential for blockchain technology to truly thrive. At present, the industry is composed of siloed blockchains confining users to the independent network. Several solutions have emerged to create an inclusive space that fosters growth and innovation. Some solutions like cross-chain technology solve part of the problem while others focus on connecting blockchains that share similar technologies. The existing solutions can be classified as cross-chain or multi-chain with both trying to achieve the same end goal – the seamless transfer of data and other information between different blockchains.
Cross-chain technology (read bridges) has managed to alleviate the problem of interoperability however, this technology is far from perfect. While this solution is yet to realize its full potential, one can’t negate its importance. Bridges are the most widely used tool for cross-chain transfer, however, in their current state as Vitalik had mentioned are extremely prone to exploitations (Wormhole bridge hack). They form the weakest link in the chain. Another issue relates to centralization leading people to believe that multi-chain is the future. However, multi-chain solutions like Polkadot and Cosmos prove effective within their space but the moment the two need to communicate a bridge is required. It is possible that bridges may be replaced with a newer and safer version or with a different technology that solves this problem. For now, the future is not multi-chain OR cross-chain but multi-chain AND cross-chain.