The Path towards Interoperability in Blockchain Technology

If you have been online in recent years, you certainly heard about Blockchain: the backbone technology that will propel the expansion of Web 3. Blockchain Networks constitute a decentralized ecosystem built using distributed ledger technology. ?To simplify the concept let’s say a blockchain is a secured digital database, available 24/7 where transactions are recorded and shared among all computers participating in the Network (the nodes) rather than stored in one central location. Trust is guaranteed since the whole network ensures at all times that no outsider can tamper with the database.

A multitude of siloed Blockchains coexist

In reality, there is no One Chain but a multitude of siloed Chains that do not natively communicate with each other which means that what is created on a blockchain does not directly exist on another one and thus requires extra effort to be used outside of its native chain. ?

Each blockchain project represents a standalone ecosystem built for a different use case with different strengths and weaknesses. No protocol has it all: some are faster offering more transaction power but are in fact less decentralized while others are more secured but deemed ‘slower’.

Disclaimer: BlockChain Project Ecosystem from Josh Nussbaum is from Oct 2017, some projects may have disappeared and new ones joined the ecosystem.

At its most basic level, tokenization refers to the process of representing a real-world asset, such as a piece of art or real estate, as a digital token on a blockchain.

Well, how can Blockchains communicate with each other in other words how do we solve the interoperability issue among different protocols?

The answer is “Cross-Chain Technology between blockchain networks. It is a sort of bridging mechanism that lets data and tokens move across an interconnected network of blockchains in a secure and seamless manner.

These bridges are decentralized applications that enable smart contracts to read and write data to and from other blockchains. They play a vital role in ensuring digital assets’ and cryptocurrency’s cross-chain liquidity.

Source: https://chinadefi.com/

Cross-Chain bridges involve smart contracts

Practically speaking the technique usually involves smart contracts: one smart contract locks or burns token on the source blockchain while another one unlocks or mints token on the destination blockchain. ?

I will spare you the technicalities but there are several types of Cross-Chain Bridges and security remains at the center of the debate since bridges account for a significant portion of the hacks in Web 3.

Below illustration shows the different bridges on top blockchain platforms:

Source: https://twitter.com/DoTOracle/status/1452248525740199937/photo/1

Cross-Chain bridges’ use cases

Let us pick a simple example: imagine you are an NFT creator, currently, NFTs are often difficult to sell or trade due to the limited number of buyers and sellers within a single blockchain ecosystem. By allowing NFTs to be traded across multiple blockchain networks, cross-chain tokenization allows for a much larger pool of potential buyers and sellers, which increases the liquidity of your NFTs and makes it easier for them to be sold or traded.

Another industry that will benefit from cross-chain tokenization is the gaming industry. NFT Games Market was valued at USD 788.05 Million in 2021 with a potential for 20.41% growth year on year and many gaming companies are beginning to use NFTs to represent in-game items, such as weapons, skins, or armors that can be traded and sold by players. By using cross-chain tokenization, the gaming giants are able to allow players to trade and use their NFTs on multiple gaming platforms, increasing the value and utility of these assets.

In the world of crypto-payments, cross-chain bridges allow businesses to transact with clients who use different blockchains contributing to an enhanced and seamless customer experience. However, in the case of cryptocurrencies, cross-chain liquidity comes (for the providers) at the cost of a larger operating capital to maintain asset pools on several networks (account or wallet that collects pools of assets to fulfil lending or token swapping activities). This is where cross-chain liquidity aggregators come in to fulfill swap requests but we won’t dig into this concept today.

Conclusion

The Future is definitely “MultiChain” and building universal, open-standard links between blockchains will support this disruptive technology unlock its full potential and help ecosystems benefit from other blockchain’s individual qualities.

In the race to build a seamless, secure, scalable, and cost-efficient solution for blockchains interoperability we might have a winner in ChainLink. The Ethereum built blockchain is?currently developing an open-source cross-chain communication protocol known as CCIP (Cross-Chain Interoperability Protocol).

#crypto #blockchain #crosschain #interoperability

The views, thoughts and opinions expressed here are the authors’ alone and do not reflect or represent the views and opinions of its employer or any party he might related to.?