The concept of interoperability is highly valued in the current landscape of cryptocurrency blockchain. This is due to the emergence of numerous new blockchains, intensifying competition, and sometimes the necessity for collaboration.
By embracing interoperability features, a blockchain can collaborate with others, directly competing and attracting more users compared to those that remain isolated. This article elucidates the frequently discussed concept of interoperability to aid investors in discerning which coins have a blockchain foundation with such a concept.
Interoperability Concept
Interoperability in the blockchain world refers to the communication between two or more blockchains. In the crypto realm, as previously mentioned, there exist multiple blockchains due to numerous developers striving for innovation.
Unfortunately, this condition fosters intense competition, making it challenging for blockchains to acquire new users. Consequently, these blockchains cooperate to create a connected crypto ecosystem, allowing users of one blockchain to utilise others as well.
Source: Chainlink
A straightforward example of interoperability is the ease with which blockchain users can send a token from one blockchain to another. For instance, utilising interoperability features, an investor can transfer ETH from the Ethereum Blockchain to the Solana Blockchain.
While this might seem simple from an investor’s perspective, it poses significant challenges for developers. This is because, when using both blockchains as mentioned in the example, there are differing standards for the types of tokens circulating within each.
A blockchain can only accept cryptocurrencies compliant with its standards. For example, Ethereum only accommodates cryptocurrencies adhering to the ERC standard, whereas Solana only supports those following the SPL standard. To facilitate crypto transfers, developers employ various methods to achieve interoperability.
Approaches to Achieve Interoperability
The first method is through wrapping mechanisms, the initial approach devised to achieve interoperability. Wrapping involves converting a cryptocurrency to comply with the standards of the target blockchain.
For instance, to move ETH from the Ethereum Blockchain to the Binance Smart Chain, it must be converted to WETH due to differing blockchain standards.
This mechanism alters the token’s form so that what’s transmitted isn’t actual ETH but rather a wrapped version. Functionally equivalent to genuine ETH, the supply and price remain the same, but the token’s name changes to Wrapped Ethereum or WETH.
This method is relatively complex, requiring considerable time and involving longer transaction processes. To address these issues, crypto developers created bridges, connecting links between blockchains.
Bridges operate in the form of protocols or applications, facilitating crypto transfers between different blockchains. Unfortunately, these features sometimes necessitate users to convert their cryptocurrency into wrapped versions.
Additionally, there are high transaction costs and lengthy transaction processes associated with them. Moreover, bridges have encountered security breaches, leading to user distrust.
Consequently, other innovations have emerged to facilitate data transfers between blockchains, not limited to tokens but also encompassing any type of data.
Currently, two protocols aim to enhance bridge mechanisms without associated issues. These are Chainlink through its product CCIP (Cross Chain Interoperability Protocol) and LayerZero.
Both projects are similar yet differ in terms of security and speed. They aim to move cryptocurrencies from one blockchain to another securely, akin to bridges, but employing more innovative mechanisms to provide users with a more pleasant experience compared to typical bridges.
Besides these protocols, many blockchains have integrated interoperability mechanisms directly into their smart contracts, eliminating the need for additional applications or protocols.
One example is the Internet Computer (ICP) through its implementation of HTTPS Outcalls, already deployed and under development.
This mechanism facilitates direct data transmission via smart contracts between blockchains without requiring third parties, making all features more decentralised and enabling direct peer-to-peer interactions.
Lastly, there’s the emergence of a new ecosystem called multichain, as seen with Polkadot through Parachain and Cosmos through Cosmos Hub.
The objective of multichain is to enable developers to build blockchains easily within a unified multi chain ecosystem. Consequently, when these blockchains seek to communicate or transmit data, including cryptocurrencies, such communication becomes seamless.
With the multi chain ecosystem, data transfers no longer rely on third parties, as all blockchain standards are uniform, rendering users more comfortable.
These are several methods to achieve interoperability. This feature not only enhances the reputation of a blockchain, directly impacting the value of its coins but also facilitates the creation of interconnected crypto ecosystems.
Therefore, investors should familiarise themselves with these mechanisms, especially if they frequently engage with blockchain technology.
