Ever since blockchain technology started attracting investments and proved to be an instrument for increasing capital, various types of research and development initiatives were launched to experiment with it. The result was the spawning of a large number of different blockchains with their own consensus algorithms, operating protocols, and applications.

Variety is a boon, and users were thrilled to have a wide choice of applications and networks. However, such diversity led to the fragmentation of network space, essentially turning every blockchain into an island nation. This meant that blockchains could not interact or share digital assets, since their protocols were not compatible and did not understand each other, nor were they capable of executing each other’s smart contracts. The answer was the need for interoperability – the ability for blockchain-based assets to freely move in the form of transmitted data between networks and retain their prescribed characteristics within each of them.

Cross-chain compatibility, as the phenomenon is called, was first implemented in the form of atomic swaps – a primitive method that required the destruction of an asset on its original blockchain with its subsequent recreation on the destination blockchain. This approach not only proved extremely taxing in terms of resources, but also required the presence of an intermediary or counterparty that would be willing to exchange the assets in question on either network. Later on, this function was taken over by exchanges.

This material will explore the way blockchain interoperability can be achieved and the many hurdles that arise in the process.

Cross-Chain Technology

Most blockchains operate with data that is produced locally. This means that the blockchain does not receive any information from external sources and all the blocks are generated by the system itself. The ability of a blockchain protocol to accept, interpret and utilize any data packet from an external source is called interoperability, which is facilitated by cross-chain technology.

Cross-chain technology is vital for ensuring blockchain flexibility and asset transfer. An example of cross-chain technology are oracles, which share information between networks and are a stark contrast to atomic swaps. Another example are cross-chain smart contracts, which are executed once a transaction is issued on the destination network, thus leading to an alteration of the state of its hash.

How Blockchain Interoperability Works

In modern blockchains, interoperability can be achieved in many different ways. The following are the most popular among them:

The Sidechain

As the name implies, a sidechain is a proven and effective method of data transfer, which involves two blockchains operating in parallel and interacting. The mainchain and sidechain interact via a protocol that prescribes their communication and data storage via cross-chain methods.

The Notary Scheme

Though contrary to the core principles of decentralization, the notary scheme is a rather reliable method that foresees the need for a third party acting as a notary. The latter is a trusted exchange medium, which acts as a trust keeper and links the two blockchains party to a communication. A vivid example of a notary scheme is any centralized exchange, which, essentially, acts as an intermediary between parties to a trade. The integrity and reliability, or solvency, of a notary party is the sole factor determining whether the exchange will take place or not.

The Oracles

Oracles as external sources of information that feed context to a blockchain from off-chain environments. These sources act as trusted keepers of the integrity of the provided data, thus allowing smart contracts to be executed on that basis. An example of an oracle service is Chainlink, which acts as a decentralized oracle and data provider.

The Blockchain Router

A blockchain router is a specialized decentralized service that acts as a central hub linking other blockchains to it in the form of sub-chains. Acting as a hub and spoke system, the router is an intermediary between different networks, receiving, processing, and then routing information between the source and the destination. Routers effectively operate as a trusted bridge and allow blockchains to communicate without losing the information they store.

Market-Scale Solutions

There are special protocols that allow cross-chain interoperability to take place. Cosmos and Polkadot are examples of such solutions. For instance, Polkadot leverages a number of dedicated sidechains that interact with other blockchains. Cosmos, on the other hand, allows entire blockchains to be created in an environment of zones and hubs that later communicate via a special protocol.

The Hashed TimeLocks

Hashed TimeLock Contract (HTLC) is a specialized solution used for the creation and subsequent modification of smart contracts tailored for financial operations. These are basically timed operations that prescribe a certain window during which the receiving party must provide a unique key to access the funds. The funds in question are locked on a smart contract until that happens. An example of a system that uses HTLC is the Lightning Network of the Bitcoin blockchain

Challenges to Implementing Cross-Chain Interoperability

There are many benefits to having cross-chain interoperability and compatibility. Apart from the ability to exchange data and assets between blockchains, interoperability allows for complete accessibility of Web3 applications from any source, thus vastly streamlining use of the internet of the future and decentralized means of payments.

Though the advantages of having interoperability between blockchains are numerous, there are substantial challenges to achieving it, both on the technical and the mental levels.

  • Blockchain data that has already been hashed is immutable and it is therefore necessary to verify it before transferring any information.
  • There is no guarantee of security or integrity during the process of data transfer, since interception and hacking means are advancing.
  • The interoperability procedure itself is highly constrained, since a limited amount of data can be transferred at any given point. The limitation is based on the technical capacity of the smart contracts acting as data carriers.
  • Various trust models applied on different blockchains mean that additional modules that interpret their protocols and make them interoperable are necessary, adding another layer of complexity.
  • Interoperability can expose large networks to manipulation on the part of smaller ones, which can exploit loopholes.

Outlook on Future of Interoperability

The way interoperability will be achieved and the way it will be made more effective and efficient will largely determine the vector of blockchain development in the coming decade. Luckily, many solutions are currently at both the development and testing stages, with a great many of them targeting Web3 applications.

Presently available commercial solutions for ensuring interoperability, like Polkadot and Cosmos, are imperfect and lack stability. Whether they will be implemented on a market-wide scale is still a big question. An even bigger question is how they can interact. This raises an even more pressing issue of standardization that would negate the need for additional solutions capable of making interoperability systems interoperate between each other, further increasing the complexity and load of blockchain operation.

The lack of a unified legal framework for cryptocurrencies is also adding to the challenges, since many states do not even recognize blockchain markets, much less the assets generated on them or the systems supporting such networks. Only time will tell how interoperability will be achieved on a massive scale, since there is great inconsistency and fragmentation in this domain at present.