Blockchain, the underlying technology behind cryptocurrencies and non-fungible tokens (NFTs), is undoubtedly one of the most transformative technologies of our century. Thanks to the vast utility of the decentralized ledger, it stands to revolutionize how we handle data in some of our most important industries — from healthcare, to finance and public administration.
But with Bitcoin having launched over 13 years ago, there are already over 13,400 individual cryptocurrencies, each with its own blockchain network. The only problem? None of these blockchains can communicate with one another, since each network is an isolated data environment.
In such a fractured blockchain space, blockchains and their users have no means to communicate, share value with one another, or allow the free flow of capital across different networks. This is partly why the future adoption of blockchain technology largely depends on building cross-chain interoperability.
The Importance of Building Cross-Chain Interoperability
Cross-chain interoperability is indeed among the top priorities of blockchain developers trying to advance decentralized applications (dApps) and the world of decentralized finance (DeFI). So let’s first understand why this interoperability is so important.
You see, each blockchain is built differently, with all of them trying to address the blockchain trilemma using a different approach. Hence, each blockchain network comes with its own culture, set of values, and tradeoffs. While the Bitcoin network is the most decentralized, it doesn’t have any of the smart contract functionalities of Ethereum or the energy efficiency and scalability of Cardano.
And since blockchain networks can’t inherently communicate with one another, it means that sovereign chains can’t share their strengths to compensate for their limitations — severely reducing the value and utility of blockchain technology. Not to mention how difficult it is for crypto beginners to transact in this fractured ecosystem, where user experience has started to impede mainstream adoption.
Now that we’ve started to grasp its importance, let’s take a look at the three main ways of building cross-chain interoperability:
Blockchain bridges, also known as cross-chain bridges, enable crypto holders to transfer and swap assets from one blockchain network to another. The way standard centralized bridges work is that a third-party locks your Bitcoin on the Bitcoin network, minting and issuing the equivalent of an ERC-20 Wrapped Bitcoin (WBTC) on the Ethereum network. And because users have to trust the custody of their tokens on a central party, standard custodial bridges have been a vulnerability for DeFi.
Thanks to industry advancements, decentralized, non-custodial bridges like Magpie have started reinventing cross-chain asset swaps, offering more security, efficiency, and ease of use to crypto investors.
Sidechains like Polkadot and Cosmos are layer-2 solutions that build secondary blockchain networks compatible with a primary chain like Ethereum. Sidechains are usually built to offload some of the transactions congesting the main network or to assist the main chain with other such processes.
Much like a regular blockchain, sidechains have their own security parameters, native tokens, consensus mechanisms, and groups of validators. Some of these projects envision a future where each blockchain will have dozens of sidechains to help them process the growing demand from metaverse and non-fungible token (NFT) users.
Oracles like Chainlink and Decentralized Information Asset (DIA) are third-party software that creates an information bridge between different blockchain networks as well as on-chain and off-chain environments. But unlike cross-chain bridges, blockchain oracles can only transfer information.
Since blockchain consensus can’t differentiate between “true” and “false” data, oracles are responsible for creating a common source of truth for smart contract-based applications. Oracles can be used to relay any type of information, from weather to real estate prices and live price feeds.
While achieving complete interoperability among existing blockchains is still far-fetched, these are the three main types of technology fostering cross-chain interoperability. Blockchain experts believe that achieving true interoperability will create new use cases for blockchain and make DeFi a mainstream alternative to the legacy financial system.
In the current fractured ecosystem, users who wish to transact with one another either have to be on the same blockchains or use interoperability solutions like sidechains and bridges, which are difficult to navigate for your average internet user.
Yet, more interoperability will make the user experience more seamless and intuitive, as it will enable the creation of a PayPal-like frontend app, which will allow users to easily trade with anyone in the blockchain space.
Experts are also hoping to see multi-token wallets being developed, which would make the crypto space more user-friendly and less intimidating — since users will only need a single digital wallet, while current Web3 wallets only support chain-native assets. Meaning, that users need a Metamask wallet for Ethereum-native assets or a Phantom wallet for Solana-native tokens.
The Importance of Cross-Chain Security for Mainstream Adoption
In a 2022 Reddit post, Ethereum founder Vitalik Buterin wrote that he is “optimistic about a multi-chain blockchain ecosystem” but “pessimistic about cross-chain applications” due to the security vulnerabilities of existing cross-chain infrastructure.
While centralized cross-chain applications like Poly Network and the Ronin Network have suffered serious exploits in the past, Buterin’s post doesn’t necessarily mean that cross-chain solutions are doomed, but rather that building safe, decentralized, and censorship-resistant cross-chain infrastructure is the key to a multi-chain future.
Decentralized, non-custodial bridges like Magpie are already improving upon the shortcomings of previous solutions, by removing third-party custodians that represent a single point of failure for cross-chain bridges.
Cross-chain applications building the future’s multi-chain interoperability will have to follow suit and prioritize the security of digital asset holders and decentralization — to unlock the true value of blockchain technology.