Interoperability of Blockchains

Why interoperability of blockchains is a crucial step to mass adoption of cryptocurrencies


Hey DEFI TIMES community,

We talked about interoperability a lot in this newsletter. Interoperability is one of the most underestimated and unexplored chapters of the crypto universe.

Today, the crypto world is mainly based on Ethereum and Bitcoin. Even though other chains are developing their own network effect (Polkadot, Cosmos, Binance Smart Chain, etc.), Ethereum is still the dominant player when it comes to DeFi.

However, this is likely to change soon - Ethereum's dominance won't last long. Other chains are exploding in usage right now.

You see rapid development anywhere: Whether we are talking about sidechains (Polygon, xDai), layer-two solutions (Optimism, Arbitrum), or even other base chains (BSC, Solana).

The main problem is that most base chains are not able to communicate with each other. 

We don't have this problem with different layers on Ethereum: Polygon can easily communicate with Ethereum; Rollups are also interoperable with the base chain.

This is not the case when we talk about sovereign blockchains - Solana, Cardano, etc. 

How can we achieve complete interoperability of the crypto network?

Let's start with the idea of interoperability itself. What does it even mean for blockchains to be interoperable?


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What is the "interoperability" of Blockchains?

Today, we are still in the era of "siloed blockchains." While blockchains are inherently open, different base layers are not able to communicate with each other efficiently. We have many blockchain projects - all claiming to be the best of their kind - and all of them have different characteristics and particularities. They differ in:

  • number of transactions

  • hashing algorithms

  • consensus models

All those different blockchains are still competing. If this were to continue, we would be left with various siloed blockchains fighting to be the best and not leveraging each other's network effect.

However, this is the wrong path: the crypto space is not a zero-sum game. What one blockchain gains is not necessarily the loss of another one.

One company to first notice this fact is a16z. In 2018, they published a blog post called "4 Eras of Blockchain Computing: Degrees of Composability."

In this blog post, they explained the four different phases of the blockchain space. They compare these phases with the four different phases of the early computer:

  1. Calculator Era (Bitcoin)

  2. Mainframe Era (Ethereum started)

  3. Server Era (some composability and shared network effects)

  4. Cloud Era (complete interoperability)

With the Cloud Era, they describe a multi-chain future. As you might have guessed, we are currently in the Server Era and building the Cloud Era.

The "cloud era" is meant to invoke a scalable, generalized substrate for trustless computation. This is the promised land, where composition is only bounded by creativity, not scale or communication complexity, and where innovation can compound without hitting diminishing returns.

The Cloud era is the promised land, where scalability and interoperability are not an issue anymore. That's what we are building today.

Now, let's explore why interoperability is important in the first place!

Why do we need interoperability?

Okay, interoperability means that different blockchains can exchange information with one another. But why do we need interoperability in the first place?

What if we only have one blockchain where every single application runs on? Wouldn't that be enough?

Well, probably not! The main advantage of a multi-chain future is that we can customize base chains for different needs. For example, Ethereum is well suited for high-value and secure transactions. Ethereum's consensus mechanism is exceptionally secure and will therefore be used for high importance and value transactions.

On the other hand, Ethereum is costly; that means we need other chains for lower value transactions even if it comes with the trade-off of less decentralization.

We need different blockchains for different purposes, and interoperability allows us to connect all of them!

We merge all kinds of blockchains - but not in a homogenous way. They will merge in a heterogeneous way. Each blockchain keeps its initial parameters but becomes a part of the internet of blockchains.

Blockchains of all kinds will contribute to a multi-chain future!

Connecting the dots 

But what kinds of blockchains are interoperable with each other? 

There are plenty of different ledgers in the crypto ecosystem. In the Ethereum ecosystem, we already have three: Ethereum, sidechains, and second-layer solutions.

Second layer solutions process all the computation on a second layer but store the result on Ethereum. So, they bring inherent scalability without sacrificing decentralization. 

Sidechains, on the other hand, are sovereign blockchains that are closely connected with Ethereum. They work closely together with Ethereum and capture some of its network effects - with the end goal to make the Ethereum ecosystem more scalable.

Thirdly, we have other base chains that brand themselves as entirely different blockchains. They have different consensus mechanisms, block times, and possible transactions per second.

In the end, we merge second-layer solutions, sidechains, base chains. Everything will be connected, and every single chain will exchange information with the others.

Some thoughts on the future

While this future seems far away, it's really not. The only things that stand in the way are software problems.

To understand why a scalable and interoperable network of blockchains is actually pretty close, we should take a look at a similar revolution in the past: the internet.

The internet started to gain its first traction in the 1990s. However, during this time, mass adoption was far away.

There was one main reason for this: Lack of hardware solutions. Even though there was significant demand during the Dot Com Era, it wasn't necessarily easy for ordinary people to use the internet. Because it was so hard for people to use internet devices, it took 20 years for most people to adopt it.

In crypto, we don't face hardware problems. The only issues we face are software-related.

These problems might be tough to solve, but we don't need to change the underlying infrastructure. Everything is in place!

While we have no clue how fast this revolution will emerge, we can be pretty sure that it won't take as long as the internet took to hit the mainstream.

The internet of blockchains is just thousands of lines of code away!

Conclusion

The future of blockchain is interoperable - a16z calls it the "Cloud Era," referring to the computer revolution.

While many maximalists claim that only their blockchain will win in the long run, it's safe to say that several blockchains will prevail.

Which blockchains will win is yet to see; however, the internet of blockchain is around the corner.

And it will come soon… at least sooner than most people think!


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DISCLAIMER: All information presented above is meant for informational purposes only and should not be treated as financial, legal, or tax advice. This article's content solely reflects the opinion of the writer, who is not a financial advisor.

Do your own research before you purchase cryptocurrencies. Any cryptocurrency can go down in value. Holding cryptocurrencies is risky.