Blockchain Interoperability

An exploration into the challenges of inter-blockchain communication

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@enter.artPUBLISHED 23RD FEBRUARY 2022

Following Bitcoin’s historic creation in 2009, countless blockchains have entered and found success in the crypto space. Those looking to buy NFTs have embraced Ethereum, while those looking for more sustainable proof-of-stake models turn to blockchains like Binance Smart Chain and Fantom. While variety and competition are healthy, the abundance of choices creates a dilemma. What happens when you need to transfer your digital assets between two independent systems? This is the fundamental problem that blockchain interoperability seeks to solve.


The intersection of blockchain ecosystems

While the fundamental technology is the same, different blockchains seek to meet different needs. One blockchain might focus on minimizing transfer fees while another seeks to maximize the security of transactions. The strengths and weaknesses of each blockchain system are relative to the current needs of a user. However, that doesn’t mean one is inherently better than the other.

To think of it in more traditional terms, a real estate developer needs to hire a wide variety of skilled workers for a project, from plumbers to electricians to architects and more. They wouldn’t hire a plumber to design the building and they wouldn’t hire an electrician to install pipes and water pumps. When all these workers can work and exchange ideas in harmony, they can construct a fully functioning building. The sum is greater than the parts.


Benefits of blockchain interoperability

Blockchain interoperability describes a state of harmony, transferability, and data exchange between different blockchains. Because the technology is so new, interoperability has posed a challenge to those designing blockchains. However, interoperability is absolutely essential to the future health of blockchains for several reasons.


A streamlined experience for users and industries

As crypto enthusiasts discuss the future of web3, a new blockchain-based iteration of the world wide web, the need to mix and match different protocols and regulations has become apparent. Smart contracts, which are blockchain programs that run when preset conditions are met, would benefit greatly from interoperability. These contracts could allow a variety of professionals in industries like healthcare and real estate to exchange essential business information in a safe and adaptive manner through varying blockchain systems. They could do this without all being centralized on one network that might be more beneficial to one party than the other. It would also allow day-to-day users more freedom in all kinds of transactions, including those which involve multiple types of tokens at once.


Further decentralization

Ask any blockchain enthusiast what the technology’s best assets are, and you’re sure to hear the word ‘decentralization’ thrown into the mix. Cryptocurrency’s lack of reliance on the centralized networks that fiat currencies depend on was a big part of what made it gain traction to begin with. However, when you’re working within one blockchain system exclusively, you haven’t maximized decentralization. Instead of having one network like Bitcoin processing all transactions from decentralized applications, interoperability would allow those applications to be processed by any interoperable blockchain.


Interoperability is easier said than done

It’s important to recognize the need for interoperability, but achieving it is a logistical and technological challenge. Chief among the issues surrounding the process are security concerns. In order for interoperability to be reliable, there must be a system in place that ensures data is not compromised during the exchange. If your data isn’t safe, the entire system collapses. In addition to security concerns, not every blockchain is outfitted with technology needed for interoperability to work. However, there are a few current tools working toward solutions, and each have their benefits and challenges.


Blockchain relays

In a blockchain relay, a user who wants to transfer an asset can destroy it on the source blockchain, usually by transferring it to an invalid user address. The transaction includes data about the asset and where it is actually intended to go. A third party monitors the blockchain for burn transactions and transfers them to the relay, which verifies and creates the asset on the new blockchain.

Relays are a practical solution in theory, but unfortunately, these transfers require third-party fees that can make them undesirable. One solution is to use an on-demand verification system which assumes validity unless a transaction is disputed. The third party then must put up a stake of their own currency which they lose if a transaction is deemed invalid. The solution has promise, but it’s a work in progress.


Cross-chain bridges and swaps

Another solution is to use an entirely separate blockchain as a bridge to allow for cross-communication. This “bridge” blockchain maintains a secured timestamped ledger of a transaction and acts as a go-between. The original asset is locked instead of destroyed on the source blockchain while the same asset is minted on the receiving blockchain. Chains are promising, but the security risks aren’t yet fully understood.

Atomic swaps represent an altered approach. Instead of using an intermediary blockchain, atomic swaps allow for a cryptocurrency exchange between different networks using what are called Hashed Timelock Contracts, a specific type of smart contract which uses a sort of virtual lockbox that can only be unlocked by two unique keys. The HashLock key only makes the exchange when both parties have signed off on a transaction. The TimeLock key returns assets to their original locations if a trade isn’t executed within a specified timeframe. Unfortunately, atomic swaps use a lot of energy and aren’t very user-friendly. They also aren’t compatible with all blockchains.


Oracles

Blockchain oracles also act as bridges, but instead of connecting two blockchains, they connect a blockchain with the outside world. These are third parties which provide smart contracts with external information. Many smart contracts are reliant on external data in order to determine which way to execute their functions, and there must be a trustworthy source to draw that data from. By using oracles, two different blockchains can ensure that their systems are referring to the same data source.

In theory, oracles are a great solution. However, they do present one huge problem: the reliability and trustworthiness of the chosen third party. Many oracles have proven themselves to be trustworthy for many transactions, but there is nothing inherent preventing them from feeding modified information to the separate blockchains. 

Oracles can also jeopardize the decentralized nature of blockchain technology by themselves being a centralized source. This is doubly true if an oracle is commonly relied upon by many transactions and starts to become overrepresented in the blockchain space. Users are forced to choose between prioritizing decentralization with a less established oracle or security with a commonly-trusted oracle.


The future of blockchain interoperability

Blockchains provide so many potential benefits that those operating the systems will continue to seek interoperability solutions until they find them. Like any emerging technology, there are challenges to meet before it can be widely implemented. If we ever want to see the technology applied across industries like healthcare and law, it’s an absolute necessity.

However, it should be acknowledged that those working on these systems have come an enormously long way in a short amount of time. With a variety of solutions on the table, we only need to find the one best-suited to lead us into the future.



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Explore more blockchain in these articles from enter.blog:

Centralized vs. Decentralized - Have a closer look at the pros and cons of the decentralized vs. centralized worlds. 

What is blockchain? - Bring it back to basics with this educational piece about blockchain as a whole. 

How to read BSC scan - The blockchain is highly transparent, knowing how to read it is essential when using it. 

How to swap safely - Stay safe while exploring the thrills of swapping. 

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