What Is Blockchain Interoperability?

For the last 10 years, we’ve been witnessing the “digital revolution” of the global economy, featuring blockchain as one of the core elements. More and more actors realize the advantages of blockchain over traditional databases: they store information more securely and transparently at the same time, they are immutable and raise trust. While finance, trade, and industry implement blockchain solutions, it becomes clear that one thing hinders the evolution of the decentralized digital economy — the lack of blockchain interoperability. 

This problem is relevant to the crypto domain, too. In 2015, we witnessed the birth of blockchain 2.0 — when self-executing trustless smart contracts emerged, and thousands of developers started building decentralized applications. Over time, many platforms allowing for such functionality have been created, and by the present day, a question arose — how can we ensure smooth interoperability between these blockchains? Together with security and scalability, this is a major issue for blockchain 3.0. When we manage to resolve it, we will wake up in a world with global, institutional, and enterprise adoption of blockchain and cryptocurrency.

What is blockchain interoperability? 

There are now hundreds of blockchains out there, but they can’t interact with each other. It’s yet impossible or hard to exchange data and value between them in a trustless, intermediary-free way. 

Blockchain interoperability aims to solve this problem. In cryptocurrency, it allows making cross-chain coin swaps and data exchange. In other domains of the economy, interoperability helps break silos and walled gardens of data and allows merging and analyzing data from different fields and organizations. New results in science, healthcare, finance, supply chain management, and more can be achieved. 

Cross-chain atomic swaps. Image source

What problems does blockchain interoperability solve? 

1. Crypto becomes more user-friendly, which drives its adoption. In a world with interoperable blockchains, users can make cross-chain coin swaps right from their wallets without thinking about what exchange service to use. In DeFi, yield farmers can increase their profits by easily moving liquidity from one protocol to another without being locked in one blockchain. 
2. Corporations find it more comfortable to adopt blockchain technology. Industry leaders like IBM argue that there is a lack of standards for building blockchains, which makes them too diverse and hard to interoperate. Generally accepted solutions would facilitate the adoption of blockchain by a wide variety of actors. 

In 2020, the World Bank Group released a report where it considered several cases for blockchain interoperability outside the crypto domain: 

1. Central banking and digital payments. The existing communication standards in payment networks slow money transfers down. During the pandemic-induced lockdown, it became clear that digital payments have to be facilitated. The experiments in blockchain interoperability for payments were carried out between the monetary authorities of Singapore and Canada, the European Central Bank and the Bank of Japan.
2. Digital identity. Users can leverage blockchain-based services to verify their identity, control and share data, and settle agreements with others. The identity verification shouldn't be locked in one platform — rather, it needs to be compatible with all systems where a user needs to prove their identity. 
3. Supply chains. There should be more connection between different data systems and actors when it comes to logistics. Fragmented supply chains make the use of blockchain limited, and interoperability should solve it. Also, it will help enable good communication between blockchains and legacy data processing systems. 
4. Healthcare. Medical institutions, regulators, and patients can benefit from seamless healthcare data exchange via blockchain. For people, it's better access to all treatment data in one place. For organizations, collecting statistics and conducting research can be facilitated. An American non-profit organization Healthcare Information and Management Systems Society (HIMSS) is one of the pioneers in the field of healthcare blockchains interoperability.

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4 ways to foster blockchain interoperability in the crypto space 

There are hundreds of active blockchains in crypto, but their abilities to interoperate are yet scarce. However, the topic has been gaining more traction lately, and there are a few solutions that enable blockchain interoperability today: 

• Atomic swaps are transactions that allow the direct exchange of coins between separate blockchains. 
• Polkadot and Cosmos make it simple to build custom interoperable blockchains. 
• Chainlink has just presented a protocol that allows smart contracts from different blockchains to interact with each other. 

Let’s take a closer look at each of these. 

Atomic swaps

Atomic swaps allow for direct cross-chain coin swaps that are trustless and free from intermediaries and trading fees. That is, you can exchange Ethereum for Bitcoin without having to use any exchanges or swap services. 

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The idea of atomic swaps was first discussed as early as in 2012-2013. The implementation that exists today involves the Hashed TimeLock Contract (HTLC) technology: when a transaction is initiated, 2 multisig vaults are created, and users have to send funds to each other and verify receiving them within a set amount of time. If any of the two parties fails to do everything in time, the transaction will abort: it can’t execute “partially”. 

Since atomic swaps are intermediary-free, coin’s devs or community members work on their implementation. And so far, this type of swap is quite a rare event. The first one was run in 2017 by Litecoin’s creator Charlie Lee when he swapped LTC to BTC:

Did a cross-chain atomic swap with LTC/BTC! 😁
10 LTC for 0.1137 BTC with @JStefanop1. ⛓️⚛️💱https://t.co/vXwTNirk0Jhttps://t.co/3NTplBOoW9 pic.twitter.com/DRKaHg4Wc7

— Charlie Lee [LTC⚡] (@SatoshiLite) September 22, 2017

In August 2021, the team of Monero managed to work out BTC-XMR swaps with no third parties. This was especially difficult due to the privacy features inherent to Monero, so making atomic swaps between these currencies is a great step for privacy in crypto.

Polkadot

Polkadot is a protocol that enables trustless communication between blockchains. It allows companies to create new customized interoperable blockchains and works on the compatibility of the existing established ones.

The core infrastructure level of Polkadot is the Relay chain — the main blockchain that ensures the coherent functioning of the Polkadot ecosystem. Second, there are parachains — smaller blockchains that developers and corporations can leverage for their needs. They are all built according to one standard, which makes them easily programmable and lowers the barrier to entry.

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Finally, there are bridges that will allow communication of Polkadot with separate established blockchains like Bitcoin, Ethereum, Litecoin, etc. Bridges will make it possible to exchange coins between these networks in a trustless way. The technology is currently under development. 

Cosmos

Close to what Polkadot is, Cosmos is a network of independent blockchains that run in parallel. The platform facilitates building new blockchains, and its ultimate goal is creating an internet of blockchains where the latter would communicate with each other in a decentralized way.

A common way to deploy your decentralized application today is using a smart contract on the Ethereum blockchain. However, these smart contracts have been made to suit a wide variety of needs and sometimes lack flexibility. With Cosmos SDK, you can easily build application-specific blockchains. 

Cosmos emphasizes blockchain sovereignty — all blockchains built on the platform have their own sets of validators which makes them independent from the main Cosmos network. And of course, these blockchains are interoperable which is achieved through a protocol called Inter-Blockchain Communication protocol (IBC). 

Chainlink

Chainlink is a decentralized oracle service, which means it brings data from the offline world on-chain. The platform retrieves data from the off-chain APIs and redirects it to smart contracts, acting as a bridge between blockchains and the rest of the world — another important component of interoperability for the blockchain 3.0 era. Chainlink partners with such giants as Oracle and Google and helps SWIFT make payments. 

In August 2021, Chainlink introduced the Cross-Chain Interoperability Protocol (CCIP) — a standard that allows smart contracts from different platforms to communicate with each other. CCIP enables decentralized inter-blockchain messaging, data, and token movements. Chainlink’s co-founder Sergey Nazarov says this unlocks the full potential of smart contracts and opens a whole new set of applications that were impossible before:

The Cross Chain Interoperability Protocol (CCIP) solves the security issues of existing bridges; through proper use of cryptographic primitives, larger signing committees via OCR 2.0 and the anti-fraud network's ability to stop fraudulent transactions. https://t.co/YMGh1Tn6Be pic.twitter.com/1GuY7ce9Fw

— Sergey Nazarov (@SergeyNazarov) August 10, 2021

Will all blockchains become interoperable in the future? 

Blockchain interoperability today is in its early days. The way Polkadot’s bridges are developed and adopted, the implementation of Chainlinks’ CCIP will hint us what the near future of interoperability will look like. 

Polkadot’s rise during the last year showed that the topic is quite hot among venture investors and crypto enthusiasts. But even if there are no concrete smoothly working interoperability solutions now, general logic suggests that everything in this world strives for unification and interconnection. Sooner or later, we will achieve blockchain interoperability — maybe via solutions that are not even known today.