Blockchain interoperability refers to the ability of blockchain networks to interact with one another by exchanging assets, data, or both.
The practice of blockchain interoperability, however, isn’t as easy as it sounds due to the deterministic nature of a blockchain system. Determinism means that the current state of the ledger is determined by the transactions that came before.
In a trustless, open blockchain network, this leads to the principle that all data used to produce the ledger must be trustlessly verifiable by the network. Data or assets from outside the blockchain network cannot fulfill this basic criteria, so a blockchain network is designed to be closed off from outside sources, an issue known as the “oracle problem.”
The increasing importance of cross-chain technology
Historically, determinism means that blockchains like Bitcoin and Ethereum have been unable to communicate with one another, or with other systems and networks. This is true even when including blockchains created as hard forks, like Bitcoin Cash or Ethereum Classic. This lack of interoperability led to a heavy dependence on centralized exchanges to facilitate the movement of assets across chains.
While centralized exchanges play an important role in maintaining market liquidity, their role as an intermediary between blockchains created friction in the user experience, as well as high fees, leading to a push for decentralized alternatives.
As the blockchain ecosystem becomes more complex with more platforms, protocols, and applications, interoperability is an increasingly important tool to reduce fragmentation and friction.
Interoperability can also address issues such as scalability. Ethereum’s first-mover advantage led to significant network effects as developers flocked to the platform but limiting activity to one chain created congestion on the main chain. Layer 2 platforms were built to interoperate with Ethereum and support the scalability of the chain.
Another advantage is flexibility – an interoperable ecosystem means that developers can pick the attributes of a network that work best in a given use case. For example, developers can leverage one network for privacy and another for scalability to create their application.
Challenges of building connected blockchains
Along with the deterministic nature of blockchains, there are other challenges with building interoperability solutions. Not all blockchains use the same programming language or basic protocols. For example, some blockchains, such as Solana, aren’t compatible with the Ethereum Virtual Machine, so they rely on customized solutions for interoperability.
However, such solutions may not always be as secure as the main networks to which they connect. A popular cross-chain example is blockchain bridges, but several of them suffered several high-profile attacks early in their development due to issues such as small validator sets, creating vulnerabilities.
Blockchain interoperability solutions
Several different types of interoperability protocols exist, which serve various purposes in the blockchain ecosystem.
Token swaps
Atomic swaps emerged for users to trade assets across blockchains without needing to navigate a centralized exchange. They use a type of smart contract called Hashed Timelock Contracts, which is a time-bound smart contract where each party generates their own hash for the transaction on their respective blockchain.
Atomic swaps were the earliest form of interoperable token swaps, but cross-chain DEXs, which came later, enabled similar functionality. One example is Osmosis, which was built using the Cosmos Interblockchain Communication (IBC) protocol, enabling swaps across chains in the Cosmos ecosystem. SushiSwap also launched its own cross-chain solution for swaps.
Bridges
Bridges are protocols or applications that allow the transfer of assets and information between blockchains connected to the bridge. A bridge typically operates using a burn-and-mint or lock-and-mint mechanism that locks an asset on the original host chain while creating a mirrored version on the target chain. Once the asset returns through the bridge, the mirrored version is burned or locked.
Examples of bridges include the Portal Token Bridge (formerly Wormhole), which connects Ethereum, Solana, Polygon, Sui, and NEAR, among others, and the Celer cBridge, which connects over 40 blockchains and Layer 2s.
Cross-chain protocols
Several blockchain projects were conceived with the interoperability problem in mind and built to facilitate cross-chain communication and transfers within their own ecosystems. The most prominent examples are Cosmos and Polkadot. Both provide a set of protocols and developer tools that enable developers to build their own blockchains and connect to a central chain for functionality such as the ability to interact with the wider network, security, and consensus.
Chainlink is another example. As a provider of decentralized oracles, it has played a role in allowing blockchains to incorporate real-world data into smart contract transactions. The project developed its own Cross-Chain Interoperability Protocol (CCIP), which facilitates permissionless cross-chain token transfers and arbitrary smart contract messaging across different blockchain networks, including the ability for developers to trigger calls on smart contracts deployed on other blockchains.
Layer 2s and sidechains
Layer 2s and sidechains are designed to interoperate with a base layer or main chain. For instance, Arbitrum and Optimism are both Ethereum Layer 2s that send batched transactions to the main Ethereum chain. These protocols may not facilitate interoperability for users and developers in the same way as the other solutions above, but their ability to interoperate with another blockchain enables scalability as a benefit.
Blockchain interoperability essentials
- Blockchain interoperability is the capacity to send information and/or assets across blockchain networks.
- Interoperability plays an important role in improving user experience and liquidity flow, as well as enabling benefits such as scalability.
- Token swap and bridge protocols address the ability to send messages and tokens, while cross-chain protocols aim to provide a more comprehensive solution, enabling interactions across connected blockchains.