Rather than trusting a single centralized entity, blockchains use decentralized consensus to agree upon changes made in the digital ledger across its distributed computer networks. This ledger stores users’ account balances and records the data that is shared between participants on the blockchain. As cross-chain interoperability is necessary for a multi-blockchain world, blockchain protocols are essential in order to efficiently exchange data and tokens across multiple chains.
By using blockchains, we have been able to create a trust-minimized paradigm of computing for multi-party record-keeping and automation. This new approach is more credible, secure, and transparent than other traditional computing environments.
Despite its advantages, however, it’s important to note that utilizing blockchain technology includes the lack of access to external APIs or communication capabilities with other blockchains – much like computers without an Internet connection.
The Oracle Problem, as it has been nicknamed, not only stands in the way of blockchains being able to communicate with traditional systems but also joining forces between different blockchains. This article is your educational guide to understanding blockchain interoperability and its importance. We’ll also discuss the various types of blockchain interoperability solutions, with a special focus on Chainlink’s Cross-Chain Interoperability Protocol (CCIP) – an advanced oracle technology that enables arbitrary data messaging between different blockchains. Now let’s dive in!
What is blockchain interoperability?
With blockchain interoperability, cross-chain messaging protocols are the key to allowing blockchains to communicate with other chains in a seamless manner. This facilitates a secure and reliable channel for blockchains to read from or write data onto each other’s ledgers without hindrance.
Interoperability has been instrumental in unlocking the full potential of distributed ledger technology and furthering its development across industries. Cross-chain messaging protocols allow developers to create cross-chain decentralized applications (dApps) that are not limited by individual blockchains.
These dApps can interact with multiple different smart contracts deployed on various distinct chains, which is a drastically different process than multi-chain dApps, where the same application must be distributed and executed independently across each blockchain without connection between them. Although cross-chain dApps that leverage messaging protocols are useful, they can be relatively limited in their function; token bridges serve only one purpose- facilitating the transfer of tokens from a source blockchain to a destination blockchain.
Nonetheless, arbitrary data messaging protocols offer a generalized inter-chain utility that can reinforce complex decentralized applications such as cross-chain DEXs, money markets, digital assets exchanges, NFTs (non-fungible tokens), DAOs (decentralized autonomous organizations), and a host of modular programs.
Why is blockchain interoperability important?
The current Web3 landscape is quickly transitioning to a multi-chain and multi-layered system. To date, there are more than 100 base-layer blockchains, and the number of layer-2 and eventually layer-3 networks built on top of them is rapidly increasing. Layer 2 and 3 networks rely at least in part on the security provided by their underlying base layers (e.g., rollups).
Driven by the potential of blockchain technology, a wide array of base layers and layer-2 networks have come into existence. To win developers and applications to their protocols, blockchains optimize themselves for certain feature sets—even if that means sacrificing other capabilities in the process.
For instance, while some blockchains prioritize decentralization and censorship resistance over throughput and composability at the base layer, others choose to incorporate native privacy features that come with new security assumptions in trusted hardware.
Blockchains are continuously experimenting with different consensus protocols, execution environments, and data storage solutions in order to optimize their performance. These experiments offer developers various considerations such as cost-effectiveness, liveness, speediness, security of the data stored, cryptoeconomics, and environmental impact.
Additionally, blockchains can stand out from the crowd by allowing certain programming languages, targeting distinct use cases and geographical regions, as well as establishing unique brands with values that attract audiences. When it comes to optimization decisions, much depends on a blockchain’s strategy for scaling its ecosystem:
- By having a single, powerful blockchain infrastructure that is suitable for applications across all industries and sectors, businesses can benefit from maximum efficiency.
- By utilizing a single, highly-distributed base layer blockchain that can sustain various modularized applications through scalability networks of layers two and three, we achieve an unprecedented level of performance.
- To ensure that each application and/or smart contract is optimized for its intended purpose, it’s important to have them run on their own base-layer blockchain or sovereign layer-2 network. This approach enables greater performance and reliability across the board.
Interoperability protocols are essential for legacy systems that need to communicate with a variety of blockchains from their current backends. These protocols form the foundation of abstracting blockchain layers, which enable traditional backends and decentralized applications (dApps) to interact with any on-chain environment through one blockchain middleware solution.
Without blockchain abstraction layer technology, Web2 systems and dApps would require a separate in-house development for each cross-chain communication that they want to utilize—a costly, lengthy, and complicated procedure.
Blockchain interoperability solutions
To understand blockchain interoperability solutions, it is wise to begin by examining the most prevalent cross-chain interactions.
Token swapping can be done through atomic swap protocols or cross-chain automated market makers (AMMs), which include two distinct liquidity pools on each blockchain to enable the token exchange. By leveraging these tools, you are able to quickly and securely trade a source chain’s tokens for those of a different destination chain!
Token bridges are an innovative technology allowing assets to move securely between two blockchains and enable cross-chain liquidity. This is achieved via a smart contract that locks or burns tokens on the source chain, while simultaneously unlocking or minting them on the destination chain. Token bridges thus provide users with higher token utility by providing access to more networks than ever before!
Token bridges are enabled by three distinct token-handling mechanisms, each with its own unique capabilities:
- Lock and mint token bridges allow users to lock their tokens into a smart contract on the source chain, whereupon wrapped versions of the same are then generated in the destination chain. It works similarly in reverse too; when burnt on the target network, it unlocks original coins from its point of origin. This system is often referred to as bridged assets.
- For a native burn and mint token bridge, tokens are burned on the source chain before being re-issued on the destination chain.
- Token bridges provide a secure way to move tokens from one blockchain network to another, while also incentivizing users with revenue-sharing programs. These bridges lock in tokens on the originating chain and unlock the same amount of liquidity via pools on the destination platform. As such, these token bridge protocols are often used as effective strategies for driving liquidity between both networks.
Native payments involve a source chain application initiating a payment in its native asset on another, destination chain. Cross-chain payments are also possible; they happen when the source chain makes an exchange of its native asset relying on data from yet another blockchain. Generally speaking, such transactions often symbolize some form of compensation and can be either based on information found in blockchains or even external events occurring outside them.
Contract calls involve a source chain smart contract calling a function deployed on the destination chain, possibly triggered by data from the source. By combining several of these calls together, you can create cross-chain applications that could include token swaps and bridge services. With this functionality, your business operations become more streamlined and efficient!
By combining token bridging and arbitrary messaging, programmable token bridges enable users to execute a contract call once tokens are transferred from the source chain to their destination. This entire process is completed in just one transaction- making it possible for more complex cross-chain activities like staking, swapping, or depositing tokens into a smart contract on the other side of the bridge. What’s more, this single step eliminates any tedious back-and-forth between different networks!
There are four primary interoperability solutions to facilitate cross-chain interactions by validating the state of a source blockchain and relaying the subsequent transaction to the destination blockchain. State verification and relays are integral components to completing most cross-chain interactions.
Blockchain interoperability is the next major step in this rapidly evolving Web3 world. As we move forward, it will become an essential component of digital infrastructure and open up new possibilities for collaboration across networks.
Interoperability protocols like CCIP can be a powerful tool for unlocking complex applications that function across multiple blockchains, providing enterprises, institutions, and governments secure access to any on-chain environment from one user interface.
Integrating these new functions will be a vital part of creating the next generation of dApps that can be accessed through more conventional user interfaces, thereby hastening the adoption rate for Web3.