every year, We see new blockchain networks being developed to address specific niches within certain industries, with each blockchain having specialized functions based on its purpose., For example, Layer 2 scaling solutions like Polygon are built for ultra-low transaction fees and fast settlement times.
The increase in the number of new blockchain networks is also a result of the recognition that there is no one perfect solution that can meet all the needs of blockchain technology at once. So, As more organizations become aware of this emerging technology and its capabilities, the interconnection of these unique blockchains becomes essential.
What is Interoperability?
Blockchain interoperability refers to a variety of ways that allow multiple blockchains to communicate, share digital assets and data, and work together more effectively., This makes it possible for one blockchain network to share its economic activities with another. For example, interoperability allows data and assets to be transmitted across different blockchain networks using a decentralized cross-chain bridge.
Interoperability is not something that most blockchains have as each of them is built with different standards and code bases. Since most blockchains are inherently incompatible, all transactions must take place within the same blockchain, regardless of the characteristics of the blockchain.
Marcel Hermann, founder and CEO of THORWallet DEX—a non-custodial decentralized finance (DeFi) wallet—told Cointelegraph: “Interoperability can be understood as the independence in data exchange. Currently, base layer protocols can interoperate with each other. Cannot effectively communicate with Layer 1 protocols. Ethereum or Cosmos have smart contracts built into their Fabric, which only allow secure data exchange within their own ecosystem. The transfer of digital assets leaving the network raises a question: How can one blockchain trust the legitimacy of the state of another blockchain?
Harman continued: “The consensus mechanism of each blockchain dictates the authenticity history of all transactions that were valid. This generates very large files that must be processed with each block and viewed only in the specific native language of the blockchain. Interoperability between two or more blockchains means that one or both chains can understand and process the history of the other chain, thus allowing, for example, the exchange of assets between different Layer 1 networks. gives.”
While it seems obvious that public blockchain projects should be designed with interactivity from the outset, this is not always the case. However, heOrganizations are increasingly demanding interactivity because of the benefits of sharing information and working together.
Why is interoperability important?
To harness the full potential of decentralization, it is beneficial for people participating in multiple blockchains to be connected via a single protocol. This reduces friction for the user as they can access various decentralized applications (dApps) without having to switch networks.
Since blockchains operate independently of each other, it is difficult for users to take advantage of the benefits each network offers. To do this, they need to have tokens backed by each blockchain to participate in their network protocols.
Interoperability can solve this problem by allowing users to use the same token across multiple blockchains. Too, By allowing blockchains to communicate with each other, users can access the protocols of multiple blockchains more easily. Thanks to this, there is a greater chance that the value of the industry will continue to grow.
Fabrice Cheng, co-founder and CEO of Quadrata – a Web3 passport network – told Cointelegraph:
“Interoperability is important because it is one of the key benefits of blockchain technology. Decentralized open source technology enables the creation of products that are interoperable across chains, keeping more users, businesses and institutions connected.”
Cheng continued: “People using blockchain technology want to make sure people are screened, KYC verified, and have good credit standing. DeFi users can access trading options or access real-time prices can. Interoperability is an efficient way for users to remove the middleman and allow companies to focus on their core values.”
When it comes to decentralized finance, giving traders more ways to access their assets could provide additional growth and opportunities in this area. For example, multi-chain yield farming allows investors to generate multiple returns in the form of passive income on multiple blockchains from owning the same asset.
The investor only needs to hold bitcoin (BTC) or a stable currency such as USD coin (USDC) and then spread it through bridges across multiple protocols on different blockchains. Interoperability will also improve liquidity across multiple blockchain networks as it will be easier for users to move their funds across different chains.
Interoperability is not just about connectivity between blockchains. Protocols and smart contracts are also interoperable. For example, t3rn, a smart contract custody platform, allows smart contracts to operate on multiple blockchains. To do this, smart contracts are hosted on a smart contract platform and deployed and executed on various blockchain networks. Interoperable smart contracts make it easier for developers to build cross-chain applications and for users to execute cross-chain transfers.
Interoperable smart contracts will make it easier for users to access multiple decentralized applications as they will not need to switch networks. For example, suppose a user uses a dApp on Ethereum and wants to use a lending protocol on Polkadot. If a Polkadot-based dApp has an interoperable smart contract, they access it on Ethereum.
Oracles is another protocol that can benefit from interoperability. Oracles are entities that connect real-world data to the blockchain via smart contracts. Decentralized oracle platforms such as QED can connect oracles to multiple blockchain networks, making it possible to share real-world data between blockchains., Additionally, Oracle can take data from an API or sensor and send it to a smart contract to be activated once certain conditions are met.
For example, a supply chain consists of many organizations that use different blockchain networks. Once a supply chain component reaches its destination, Oracle can send data to a smart contract that confirms its delivery. Once the delivery is confirmed through the oracle, the smart contract issues the payment. Since Oracle is connected to multiple blockchains, each provider can use the network of their choice.
Interoperability is also important for the exchange of digital assets between blockchain networks. One of the most common ways to do this is to use a chain bridge., In simple words, cross-chain bridges allow users to transfer tokens from one blockchain to another.
Wrapped tokens, for example, allow users to spend bitcoin (BTC) in the same way as wrapped bitcoin (WBTC) on the Ethereum network. This is important in the DeFi space, as users can participate in DeFi without having to purchase the platform’s native token, which can be more volatile than stablecoins or top-tier coins such as BTC or Ether (ETH).
Being able to move assets easily between blockchain networks is one of the main advantages of interoperability. Anthony Georgiades, co-founder of Pestel Networks—a non-fungible token (NFT) and Web3 infrastructure and security project—told Cointelegraph:
“Interoperability is of paramount importance to the blockchain industry due to the diversity of data and assets found within the cryptocurrency ecosystem. Decentralized cross-chain bridges are essential to facilitate the transfer between different types of tokens or assets.”
The key to the success of blockchain technology will be the level of interaction and integration between multiple blockchain networks. thus, Interoperability between blockchains is important because it lowers the barrier of entry for users who want to participate in multi-network protocols.
Interoperability between blockchains will improve productivity across the cryptocurrency sector. Users can quickly move data and assets between blockchains, increasing flexibility for everyone involved, Instead of being tied to a single blockchain, smart contracts can operate on multiple networks and oracles will present real-world data across different platforms. When combined with the benefits of decentralized public blockchains, interoperability should provide the basis for widespread blockchain adoption and use.
Georgiades continued: “Therefore interoperability allows users to transmit cryptocurrencies from one blockchain to another and allows users to post tokens or NFTs as collateral for other assets. An interoperable world on Web3 is a vision we are working tirelessly on. A multi-chain ecosystem facilitated by seamless cross-bridges will get us there and make that vision a reality.”
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