What Is Blockchain Interoperability – Beginner Guide 2023

Interoperability in the context of blockchains is the capacity for exchange of information between them. Data exchange between blockchain networks is referred to as interoperability.

Blockchains are decentralized computer networks that maintain a digital ledger of user data and account balances. Blockchains use decentralized consensus to reach a consensus on proposed updates to the ledger before it is accepted, as opposed to relying on a centralized authority.

A new trust-minimized computing paradigm for multi-party record keeping and process automation is created as a result, and it is more transparent, tamper-proof, and credibly neutral than conventional computing environments.

What is Blockchain Interoperability?

The ability of blockchains to communicate with one another is referred to as interoperability. Cross-chain messaging protocols, which allow blockchains to read data from and/or write data to other blockchains, are the cornerstone of blockchain interoperability.

Read More: How to Create a Blockchain Cryptocurrency – Your Ultimate Guide

Cross-chain messaging protocols enable the development of cross-chain decentralized applications (dApps), in which a single unified dApp can operate across numerous distinct smart contracts deployed across numerous distinct blockchains. Cross-chain dApps differ from multi-chain dApps in that a multi-chain dApp frequently deploys the same application on multiple blockchains, but each instance is an isolated set of smart contracts with no connection to other blockchains.

Token bridges, for instance, only allow tokens on a source blockchain to be transferred to a destination blockchain; as a result, cross-chain dApps that use cross-chain messaging protocols can have a limited application. In contrast, arbitrary data messaging protocols offer more generalized cross-chain functionality, which can support more sophisticated dApps like cross-chain decentralized exchanges (DEXs), cross-chain decentralized money markets, cross-chain NFTs, cross-chain decentralized autonomous organizations (DAOs), and various kinds of modularized applications.

How Does the Lisk Interoperability Solution Work?

Lisk also deploys sidechain technology. This is divided between the interoperability of sidechains in the Lisk ecosystem in conjunction with other mainnets. Using a system of certificates to communicate transactions and timestamps to confirm data, sidechains can communicate with each other. We won’t go into too much detail here because the capability to communicate with other mainchains is still under development.

With sidechains on Lisk, all blockchain applications work independently of one another, and work off of a Proof-of-Authority and a central BFT consensus mechanism. The major difference between Lisk blockchain applications and traditional dApps is that blockchain applications are more autonomous and allow for greater independence in development. DApps are built onto a chain and therefore are reliant on the main chain’s infrastructure, blockchain applications are built as sidechains to the main chain.

Therefore, all other components of each application are interchangeable thanks to the SDK’s modular design. Within the Lisk ecosystem, all of these programs created with the Lisk SDK can communicate with one another.

In the case of the Lisk interoperability solution, sidechains work with certificates to communicate across chains. CCMs from various blocks must be combined into a CCU (Cross-Chain Update) and posted to the receiving chain before an action can be taken. This cross-chain update contains the cross-chain messages, a certificate, and information about the current validator set of the sending chain.

The receiving chain can validate these To verify that messages were actually sent, CCUs are run against the most recent message. This allows for communication between chains and the transfer of assets and data through these messages.

The Importance of Blockchain Interoperability

The current Web3 environment is becoming more multi-chained and multi-layered. Already, there are over 100 layer-1 blockchains (i.e. base-layers) and an increasing number of layer-2 and eventually layer-3 networks that exist on top of base-layer blockchains. Essentially separate blockchains, layer-2 and layer-3 networks tie a portion of their security to a base layer (such as the Internet of Things). rollups).

An expressive design space for blockchain technology and blockchain ecosystems has led to a proliferation of base layers and layer-2 networks. By enhancing their protocols to support specific feature sets—often by making trade-offs with other features—blockchains compete for developers and applications. For instance, some blockchains prioritize decentralization and censorship resistance over throughput and composability at the base layer, while others choose to integrate native privacy functionality instead of introducing new security presumptions in trusted hardware.

Blockchains experiment with various consensus protocols, execution environments, and data storage options to maximize performance. These options provide developers with different presumptions regarding cost, liveness, performance, data availability, security, cryptoeconomics, and environmental impact. Blockchains can also set themselves apart from competitors by supporting a limited number of programming languages, concentrating on a limited number of use cases and regions, and creating distinctive brands and values that appeal to audiences.

One of the key distinctions in optimization decisions centers on the scalability thesis of a specific blockchain’s ecosystem. Examples of scaling theses include:

• having one base-layer blockchain with high performance that can support all applications across all industry verticals.
• a single, highly decentralized base-layer blockchain that supports a variety of modularized applications through layer-2 and layer-3 scalability networks.
• utilizing a separate base-layer blockchain or independent layer-2 network for each application and/or smart contract sector or use case.

Visit the blog Blockchain Scalability: Execution, Storage, and Consensus for more information on blockchain scalability solutions.

It’s essential that all these various on-chain environments can communicate with one another given the wide range of blockchain ecosystems. Developers wishing to create cross-chain/modularized applications that uphold a solitary global state and unified liquidity across various on-chain environments should pay special attention to this. For application developers who want to take advantage of the distinctive assets and features of every blockchain, this is also crucial.

For conventional systems that must communicate with a variety of blockchains from their current backends, blockchain interoperability protocols are equally crucial. Building blockchain abstraction layers, which enable traditional backends and dApps to interact with any on-chain environment through a single blockchain middleware solution, requires interoperability protocols as their fundamental building block. Web2 systems and dApps would need to develop separate, in-house implementations for each cross-chain interaction they want to use in the absence of a blockchain abstraction layer, which would be a laborious, expensive, and complicated process.

Types of Blockchain Interoperability Solutions

When trying to categorize blockchain interoperability solutions, looking at the most common cross-chain interactions is the best place to start.

Token swaps involve trading a token on a source chain and receiving a different token on a destination chain. Atomic swap protocols and/or cross-chain automated market makers (AMMs), which have distinct liquidity pools on each blockchain to facilitate the swap, are typically what make cross-chain token swaps possible.

Token bridges involve locking or burning tokens via a smart contract on a source chain and unlocking or minting tokens via a separate smart contract on the destination chain. By making cross-chain liquidity possible, token bridges enable the transfer of assets between blockchains, increasing the utility of the token. There are three types of token handling mechanisms that enable token bridges:

• bridges that lock and mint tokens (i.e. IOU) lock tokens in a smart contract on the source chain, then wrapped versions of the tokens are minted on the destination chain, often referred to as bridged assets. The wrapped tokens on the destination chain are burned in the opposite direction to reveal the original coins on the source chain.
• Token bridges that are burned and mint (i.e. native) burn tokens on the source chain, then re-issue the same tokens by minting them on the destination chain.
• Lock and unlock token bridges lock tokens on the source chain, then unlock the same tokens from a liquidity pool on the destination chain. By using incentive programs like revenue sharing, these kinds of token bridges typically draw liquidity from both sides of the bridge.

Native payments involve an application on a source chain triggering a payment on a destination chain in its native asset. In addition, cross-chain payments based on information from a different blockchain can be made on the source chain in its native asset. The majority of these payments typically function as some sort of settlement and may be based on blockchain information or even outside occurrences.

Contract calls involve a smart contract on a source chain calling a smart contract function deployed on a destination chain, potentially based on data originating on the source chain. Token swaps and bridging may be used in a more intricate cross-chain application that is created by combining several contract calls.

Programmable token bridges involve a combination of token bridging and arbitrary messaging, wherein a contract call can be executed as soon as tokens are delivered to the destination chain from the source chain. This is accomplished in a single transaction, enabling richer cross-chain functionality, such as staking, swapping, or depositing tokens into a smart contract on the destination chain as part of carrying out the bridge function.

There are four general interoperability solutions for validating the state of a source blockchain and relaying the subsequent transaction to the destination blockchain in order to support these cross-chain interactions. State verification and relays are two essential components for carrying out the majority of cross-chain interactions.

Web2 Validation

When someone executes a cross-chain transaction using a Web2 service, that is known as web2 validation. Users using centralized exchanges to swap or bridge their own tokens is the most prevalent example seen in practice. The user merely places their assets into a source chain address under the exchange’s control before withdrawing the same tokens or different tokens (through a swap on the exchange) to a destination chain address under the user’s control.

In terms of convenience and technical know-how, Web2 validation can be quite useful for private transactions. However, it doesn’t support cross-chain applications as well and necessitates faith in a centralized custodian. In addition, it mainly consists of exchanging and connecting tokens between blockchains supported by the exchange.

External Validation

When a specific set of conditions are met, the external validation process activates the subsequent transaction on the destination chain using a set of validator nodes that are independent of either of the two blockchains involved in the cross-chain interaction. While there are numerous ways to reach a consensus through a committee, i.e., multi-party computation, decentralized oracle networks, threshold multi-signature contracts—they all involve validator nodes doing trust-minimized off-chain computation that’s authenticated on-chain (i.e. hybrid smart contracts).

A majority of the external validator nodes must act honorably in order to maintain the integrity of the cross-chain interaction, which is typically required for external validation. However, additional strategies, like optimistic bridge validation, anti-fraud networks, and cryptoeconomic staking, can be used to boost trust minimization. External validation is currently the only practical way to carry out cross-chain contract calls between specific kinds of blockchains while still supplying trust-minimized guarantees, despite the additional trust assumption. Additionally, it is a highly generalized and extensible cross-chain computation method that can support more sophisticated cross-chain applications.

Local Validation

In a cross-chain interaction, local validation occurs when the counterparties confirm one another’s states. Peer-to-peer cross-chain transactions result from the execution of the cross-chain transaction if both parties accept the validity of the other party. A common name for cross-chain swaps that use local validation is “atomic swaps.”

Given reasonable blockchain assumptions, local validation via atomic swaps has a high level of trust minimization because the swap either occurs or both transactions fail. The tradeoffs include the inadvertent call option problem, which arises when the second party in an atomic swap has the option to act or not act on the swap, giving them an inadvertent call option for a specific amount of time. This method is not very generalizable to a variety of cross-chain contract calls. Therefore, cross-chain liquidity protocols involving liquidity pools that exist independently on each chain are the ones that typically use local validation.

Native Validation

Native validation occurs when, in a cross-chain interaction, the destination blockchain confirms a transaction by checking the state of the source blockchain before executing a subsequent transaction on its own chain. Usually, to accomplish this, a light client of the source chain is run in the virtual machine of the destination chain, or the two clients are run simultaneously.

In order for native validation to work, at least one honest relayer must be present within a committee (i.e. honest minority), or the user must relay their own transaction if the committee fails (i.e. synchronous assumption). Native validation is the most trust-minimizing method of inter-blockchain communication, but it is more expensive, provides less development flexibility, and works best with blockchains that have similar state machines,

Blockchain Interoperability Protocols/Projects – 5 Examples

As mentioned above there are a multitude of protocols that have already taken steps towards interoperability. Generally speaking, for the time being, all efforts have been focused on giving applications the ability to cooperate with one another within the same protocol.

We are going to look at five protocols that are pioneering interoperability: Polkadot, Cosmos, Plasma Bridge, Cardano, and Lisk.

Polkadot

Polkadot utilizes parachain technology. Parachains can be thought of as individual Layer-1 blockchains that have the ability to function in parallel within the Polkadot ecosystem. Each parachain relies on a central shard within the ecosystem for cross-chain communication and security. As long as this aspect of the chain is secure, parachains will also operate safely within the Polkadot network.

“Pooled security” is the name of this technique.’ Parachains are capable of exchanging data when validators from the central shard can confirm that it is correct against a state transition function. The relevant parachain receives the information if it can verify it all.

Cosmos

Cosmos works in a very different way to Polkadot. Chains can communicate with the creation of certificates by using the Inter-blockchain communication (IBC) protocol. If either chain cannot create certificates as part of their mechanics, interoperability through IBC is not possible.

Cross-chain certificates are a scalable and efficient way of interoperability, but come with their own sets of requirements and limitations. Applications would need to exchange information as lightclients and validate any certificates that were generated. There can be no communication if this can’t be upheld between the various parties.

Cardano

Another of the most popular chains that is close to interoperability is Cardano. Cardano from the start has championed the development and functionality of smart contracts, therefore the concept of bridges to other chains was inevitable. Cardano also adopts a cross-chain certificate standard for its solution, however, it is largely focused on chains with proof-of-stake.

Using sidechain technology, Cardano is beginning to demonstrate the potential for communication with chains like Algorand and the Nervos system. Although this is only applicable to PoS chains with very specific requirements, it demonstrates the potential for future development.

Plasma Bridge

Instead of layer 1, let’s talk about mechanisms. Plasma focuses on scaling the Ethereum network by using child chains and moving transactions from one chain to another. By using shared Plasma child chains, the Plasma bridge enables the transfer of assets between layer 1s. On the Ethereum network, this Proof-of-Concept is presently being tested as a layer 2 solution.

Lisk

The Lisk interoperability solution uses sidechain technology to allow for communication between chains. This solution’s foundation is the collection of a number of CCMs (Cross-Chain Messages) before a transaction is deployed to another application. When these messages are received, they can be verified and added to the block after being added to the block.

Cross-chain messages collected at different times can verify the state transition to ensure that information is valid over a period of time. This allows for the simple validation of the state of the chain and acceptance into a separate network.

The Future of Blockchain Interoperability

Blockchain technology’s future and its applications in terms of cryptocurrencies depend on how effective, efficient, and usable blockchain interoperability solutions are. To support interoperability among blockchain platforms, numerous projects are active right now.

Commercial systems like Cosmos and Polkadot need more stability for widespread use. It won’t be clear how these initiatives can work together, even if a few of them succeed and are adopted in the future. As a result, there is a greater need for standards, APIs, and related technologies that enable extensive blockchain platform interoperability.

The legality of the cryptocurrency ecosystem is also not acknowledged by many countries. Thus, for future applications of interchain interoperability, support from the regulatory framework is required. For transactions primarily targeted at the financial and related industries, adequate legal and regulatory frameworks for cryptocurrencies and interoperability techniques are also required.

such as layer-2 networks based on Ethereum and the EVM or only Cosmos SDK-based blockchains.

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