Blockchain Interoperability: Building cross-chain ecosystems at scale

Petar Stoykov

February 14, 2024

Blockchain, over the years, has proven to have brought about a shift in how we perceive the exchange of value and data, underscoring the power of a distributed, transparent, and secure ecosystem. While the range of blockchains currently in existence offers a variety of tools and platforms for the development of decentralized applications, the lack of interoperability between these networks can decrease their overall potential and limit user experience.

This is where the concept of “Blockchain Interoperability” comes into play. Being one of the most talked-about subjects in recent years in the context of blockchain evolution, it aims to enhance the way blockchains communicate with each other and effectively share information. Let’s dip your toes into the fascinating world of Blockchain Interoperability.

What is Blockchain Interoperability?

Blockchain Interoperability refers to the ability of different protocols to communicate and interact with each other in a seamless and integrated manner. It enables a connected and cooperative ecosystem wherein data and value can be fluidly transacted across multiple chains.

In practical terms, Blockchain Interoperability means that transactions and general information can be broadcast across multiple blockchains, bringing a new level of connectivity between these separate networks. This allows blockchains, even with different protocols and designs, to verify transactions from other chains, share data, trigger actions, and communicate seamlessly.

Figure 1: What is Blockchain Interoperability; Source: 101blockchains

The potential applications and benefits of achieving Blockchain Interoperability are enormous. It could lead to an improved user experience, foster a collaborative blockchain ecosystem, and drive innovation across the space.

However, achieving interoperability among the diverse, sparsely connected Web3 universe is no small feat. Considering most protocols have been independently developed to serve a variety of purposes, they usually operate as isolated entities and tend not to interact with each other.

As more companies, organizations, and individuals begin to build, innovate, and secure assets on multiple blockchains, the need for these networks to communicate becomes more eminent than ever. Just as the internet enabled the global exchange of data and information, Blockchain Interoperability aims to enable the exchange of value and information across different blockchain networks.

Why is Blockchain Interoperability important?

Blockchain Interoperability is essential because it allows for a seamless user experience across multiple blockchain networks. Currently, each blockchain operates in a silo, similar to an isolated island. Each has its unique operational procedures and protocols, which essentially forces users to know and understand the processes behind each blockchain to be able to use them effectively.

Figure 2: Cross-chain smart contracts workflow; Source: Chainlink

Moreover, the lack of interoperability presents a challenge in terms of time and cost. Suppose a user wants to perform a transaction that involves different blockchains. In that case, they must go through a status change in one blockchain and then begin a new process in the other, which is both time-consuming and expensive.

With interoperability, users can freely and quickly move across blockchains. This feature is particularly important to average users who don’t have the technological expertise to navigate through different blockchains.

Interoperability also removes barriers to innovation. Developers and entrepreneurs can release products and services on various blockchains, knowing that their users will be able to access and use them regardless of the blockchain network they primarily operate on.

Advantages of Blockchain Interoperability

There are numerous potential benefits to achieving better interoperability between blockchains. Some of these include:

Simplified transactions: Interoperability can navigate transactions to be completed faster and in an automatic manner, regardless of the blockchain network an asset is from.
Increased value: Assets can gain more value as they can be utilized more flexibly across various platforms instead of being confined to a single blockchain.
Cooperation among chains: Blockchain networks can cooperate in unprecedented ways, such as sharing mechanisms for consensus, which enhances security and sustainability.
Empowers greater decentralization: The potential to facilitate value transfers and trigger events in other blockchains empowers DApps to be more decentralized and functional across many blockchains.

Blockchain Interoperability challenges

While the concepts and technology for Blockchain Interoperability have made significant strides, they’re not without their challenges. Some of these include security concerns, especially given the increase in cross-chain interactions and the inherent complexities associated with different blockchain platforms.

Moreover, the lack of industry standards creates obstacles to timely adoption and scalability. However, through collaborative efforts by developers, regulators, and businesses, it’s fair to believe these challenges can be met, and Blockchain Interoperability can elevate the blockchain industry to new heights.

How Blockchain Interoperability works

Blockchain Interoperability is far from just a theoretical concept or idealistic vision. It embodies a set of technologies, protocols, and methodologies that work together to facilitate interaction between different blockchain networks.

Interoperability is realized through specific protocols that cater to cross-chain communication. These allow for assets and information to be transferred across different networks, facilitating seamless interaction between them. The degree of interoperability hinges on the compatibility between these protocols and the blockchains they communicate with.

Figure 3: How interoperable blockchain works; Source: Cointelegraph

Interoperability isn’t just about blockchains communicating with each other, however. It also involves distributed ledger technology (DLT) interfacing with external systems for data exchange. This is where cross-chain technology comes in.

What is cross-chain technology?

As the name implies, cross-chain technology provides the means for different blockchains to interact with one another. It enhances Blockchain Interoperability by allowing data interchange between DLT designs or external systems, building a more integrated, secure, and flexible blockchain ecosystem.

Its work hinges on achieving interoperability among divergent blockchains, thereby solving the problem of asset and data exclusivity kept within individual chains. By enhancing interoperability, cross-chain technology essentially allows for multi-token transactions, the operation of cross-chain contracts, and a host of other possibilities.

Cross-chain methods for Blockchain Interoperability

The specific methods used for establishing interoperability can vary greatly depending on the specific characteristics and mechanisms of the blockchain network in question. Techniques such as atomic swaps, which permit the exchange of tokens across multiple blockchains, and relays, which allow blockchain networks to monitor activities occurring on other chains, vary in their implementations and costs across different networks.

In all these scenarios, what remains a constant is the aim to eliminate the need for third-party interfaces and to facilitate direct communication and transactions using these specific methods for Blockchain Interoperability.

Here are some applications of cross-chain technology in the context of Blockchain Interoperability:

Atomic swaps
(Programmable) token bridges
Validator frameworks
Blockchain routers
Native payments
Contract calls
Hashed TimeLock contracts (HTLCs)
Oracles

There’s no one-size-fits-all when it comes to how cross-chain technology operates. Every network employs a unique method to facilitate transactions, and there’s a wide array of variations when considering how different blockchain networks use cross-chain protocols. Let’s explore each of these in greater detail in the following sections.

Atomic swaps

Archetypal examples of Blockchain Interoperability in action, atomic swaps enable users of different cryptocurrencies to exchange assets in a trustless manner. While efficient and highly secure, atomic swaps don’t support the transfer of tokens from one blockchain to another. They function more as a means to exchange tokens across blockchain boundaries.

(Programmable) token bridges

Token bridges facilitate the transfer of assets between blockchains through the use of smart contracts, enhancing token utility by enabling cross-chain liquidity. There are three primary mechanisms for managing tokens within these bridges:

Lock and mint: This approach involves locking tokens into a smart contract on the originating blockchain. Subsequently, equivalent wrapped tokens are created on the target blockchain, known as bridged assets. To reverse the process, wrapped tokens are destroyed on the target chain, releasing the original tokens on the originating chain.
Burn and mint: In this model, tokens are permanently destroyed (burned) on the originating chain and then recreated (minted) on the target chain, preserving the token’s total supply across ecosystems.
Lock and unlock: Tokens are locked on the originating chain and subsequently made available from a liquidity pool on the target chain. This method often relies on incentives, such as profit-sharing, to maintain liquidity on both sides of the bridge.

In turn, programmable token bridges combine token transfers with complex messaging, allowing for immediate contract execution upon token receipt on the target chain. This facilitates advanced cross-chain interactions such as staking, token swaps, or deposits into contracts as part of the bridging process, enabling seamless multi-chain operations.

Validator frameworks

Validator frameworks represent a direct method for enabling interoperability between blockchains. Within these frameworks, a group of validators is appointed to monitor and validate transactions occurring on different blockchains. When a transaction is executed on one blockchain, these validators, who have the ability to observe the transaction, relay and validate the information on the secondary blockchain to ensure that proper procedures are followed.

Although validator frameworks offer a streamlined approach to Blockchain Interoperability, they reintroduce a degree of trust into the system. Users are required to trust in the integrity and fairness of the validators to act in the best interest of all parties involved.

Blockchain routers

Blockchain routers take a different approach to interoperability. They serve as a universal plug-and-play solution that connects to multiple blockchains and allows them to communicate and interoperate.

Working similarly to a traditional web router, blockchain routers offer a scalable and efficient solution for Blockchain Interoperability. They can connect to multiple blockchains at once, manage data between them, and even allow cross-chain operations, all while maintaining the decentralization and security attributes that characterize blockchain technology.

Native payments

Native payments enable transactions on one blockchain to trigger payments in the native currency of another blockchain. This can be based on the activities within the originating blockchain or external inputs, serving as a means of settlement across chains.

Contract calls

Contract calls allow a smart contract on one blockchain to activate a function within a contract on another blockchain, based on data from the first chain. These calls can be linked together for complex cross-chain operations, including token exchanges and transfers.

Hashed TimeLock contracts (HTLCs)

HTLCs are a method for facilitating “trustless” swaps, a term that refers to the ability to have a transaction without a trusted third party. They ensure that the swap either happens fully or not at all, so neither party can cheat the other. Atomic swaps and Lightning Network payment channels use Hashed TimeLock Contracts.

Oracles

Oracles are cross-chain communication methods that act as agents that verify real-world information for blockchain contracts. Oracles can feed real-world information to one blockchain from another, allowing for data and transactions to flow across ecosystems.

Chainlink’s Cross-Chain Interoperability Protocol (CCIP)

Chainlink, well-known for its decentralized oracle network which securely connects smart contracts with real-world data and services, has recently introduced its Cross-Chain Interoperability Protocol (CCIP). This novel solution aims to increase the interoperability capabilities of the existing Chainlink Network.

The Cross-Chain Interoperability Protocol is designed to extend the capabilities of Chainlink’s decentralized oracle networks. It allows smart contracts to interact with any other smart contract, irrespective of the blockchain network the latter resides on. This promises to extend the capabilities of smart contracts dramatically, enhancing the appeal of blockchain as a versatile solution for many industries.

Figure 4: Chainlink CCIP workflow diagram; Source: Chainlink

Advantages of using CCIP

CCIP facilitates secure cross-chain computation and data transfer, presenting several advantages:

Permissionless messaging across chains: CCIP provides a general-purpose, platform-agnostic interface for sending messages between chains.
Increased functionality: By allowing smart contracts to interact cross-chain, CCIP effectively increases their functional depth and usability.
Enhanced applications: With CCIP, developers have the opportunity to devise applications with increased efficiency, utilizing the strengths of different chains to suit different applications.

Use cases for Chainlink CCIP

CCIP can be used not only for data delivery but also for value delivery, potentially involving multiple networks. For example, a bet on a sports event could be agreed upon on one blockchain, monetary assets could be transferred from a second blockchain, and the result of the sporting event could be obtained from a third blockchain. The result will then trigger the transfer of value, and the winner of the bet gets paid.

Figure 5: Chainlink cross-chain stack; Source: Chainlink

It’s obvious from this that CCIP could significantly impact decentralized finance, gaming, supply chain management, and many other industries. Here are some of its core use cases:

Token transfers: CCIP facilitates the programmatic movement of tokens between blockchains through lock-and-mint or burn-and-mint processes, allowing for the inclusion of arbitrary data commands.
Gaming interoperability: CCIP supports the interoperability of Web3 games on various blockchains, enabling gamers on one blockchain to compete with those on another.
Web3 usernames: Through CCIP, Web3 naming protocols achieve full interoperability, letting users register on-chain names on one blockchain and extend them across others.
Cross-chain DeFi: CCIP empowers DeFi platforms to accept tokens from one blockchain as collateral on another, opening up cross-chain borrowing and lending markets.
DeFi liquidation prevention: CCIP offers a mechanism to safeguard DeFi positions on multiple blockchains by automatically transferring assets to another chain’s DeFi protocols to avert liquidation risks.

Future of Blockchain Interoperability

The Web3 landscape is continually evolving, and with it, the prospects for Blockchain Interoperability. Such a unified environment would greatly amplify the functionality and capabilities of blockchains, fostering innovation and efficiency across various industries and applications.

Given the current pace of development, it isn’t far-fetched to anticipate that Blockchain Interoperability will soon become a standard feature in the blockchain ecosystem. More and more projects will likely focus on developing solutions that promote cross-chain interactions to enhance efficiency and collaboration within the blockchain space.

Further, the foreseeable future might see most if not all, decentralized applications become multi-chain or cross-chain applications. This could considerably enrich the user experience, open up new avenues for blockchain adoption, and accelerate the mainstream adoption of blockchains.

Bringing it all together

Blockchain technology, with its inherent features of immutability, transparency, and security, has opened up a plethora of opportunities, but it is the concept of “Blockchain Interoperability” that has taken center stage in recent discussions around the future of blockchain. The idea of interconnected blockchains operating side-by-side, sharing and validating data, and executing complex multi-chain smart contracts is fascinating. It holds the promise of unlocking significant potential in creating a seamlessly connected, integrated future.

With the tremendous strides made in this field, from atomic swaps to validator frameworks, and innovative solutions like Chainlink’s CCIP, we are closer than ever to achieving this vision. Nonetheless, the quest for perfect interoperability is an ongoing one that certainly warrants attention and investment.

As we continue to navigate the digital frontier, it’s clear that Blockchain Interoperability isn’t just about the advancement of the technology; it’s also crucial for its wider adoption and the maximization of its benefits. By breaking down the boundaries that separate individual blockchains, we open the door to a multitude of possibilities for innovation, efficiency, and growth.

Regardless of the challenges that lie ahead, it is evident that the future of Blockchain Interoperability is a fundamentally promising one—a future that heralds a new era of connectivity, functionality, and cooperation in the blockchain universe.