Is Interoperability the Future of Blockchain?
Why Cross-chain Infrastructure is Necessary for a Multi-chain World.
This year has seen the rise of a number of smart contract blockchains such as Polygon (formerly Matic), Solana and Avalanche. If Ethereum still remains the king, it seems increasingly clear that it isn’t going to give up its crown anytime soon, however some of its competitors are also here to stay. The future of blockchain is shaping up to be a multi-chain future. But if there isn’t going to be ‘one blockchain to rule them all’, then how will these different systems work together?
Blockchains as Disconnected Nations
Blockchains are, almost by definition, closed and self-contained systems. Data stored on one chain is not directly available to another, and value cannot pass easily between chains. You could think of each blockchain as being an individual island nation, each with its own language and laws that are unintelligible to the others. One solution is a centralised exchange that swaps between tokens from different blockchains; this would be like all trade taking place on a third island that acts as a middleman. Given that one of the main motivators driving the crypto movement is the desire to create a financial system that bypasses centralised middlemen, it is not surprising that this solution isn’t attractive to many in the crypto world. So what are the alternatives?
Bridges & Wrapping
Today, if you want to move assets from one chain to another, you will probably use a token bridge. In reality, assets do not ‘cross over’ from one chain to another, but instead are locked up in the bridge with new assets created on the other side. So, what you get is a ‘wrapped’ version of the original token, as with wrapped Bitcoin (wBTC), the erc-20 representation of BTC. Although cross-chain bridges are common, they can be expensive and sometimes have long wait-times for delivery. More importantly, the complexity of bridging between heterogeneous chains raises major security issues that can lead to serious financial loss, as was the case with the $600 million Poly Network exploit in August.
Purpose-built Interoperability Networks
There are now a number of projects that are being designed and built with interoperability in mind. One way to achieve this is with a ‘hub and spoke’ system such as those employed by Polkadot, Kusama and Cosmos. These feature a central ‘relay chain’ that connects a number of compatible chains, which not only obtain their security from the underlying relay chain but are also able to transfer data and assets between each other. In this kind of scenario, all the different islands can speak the same language, have compatible systems and also have infrastructure allowing them to communicate and trade with each other.
With the future set to see real nations issuing their own digital money in the form of CBDCs (central bank digital currencies), the problem of interoperability is not confined to the cryptocurrencies of today, but will include an ever greater number of blockchain systems that need to interact with each other. The race to build the infrastructure for a connected and interoperable blockchain future has already begun.
