What is Blockchain Interoperability & Why is It Important?
The importance of blockchain interoperability
Hardly anything has served humanity more in recent decades than the internet. The power of the open internet has been particularly demonstrated by the recent pandemic. When governments around the world mandated lockdowns and home-office work, many industries could remain fully functional thanks to the internet.
While the internet is open and public on the surface, many of today’s online services are fundamentally built on proprietary software. This has led to the rise of walled gardens that prevent data from freely flowing in cyberspace. The internet’s many applications are not interoperable, which is shown by the fact that users need a multitude of accounts and passwords to navigate the internet. Tech giants like Alphabet or Meta offer solutions as they provide an easy way to log in to applications without having to go through a cumbersome onboarding process. Such solutions come in handy but give more power to centralized actors.
A vision is gaining traction
Public blockchains have set out to solve this problem. A public blockchain is made from one single piece, which is why every application built on this blockchain is perfectly interoperable with every other application within the ecosystem. Data within a blockchain network can smoothly flow. But this isn’t the case when it comes to different blockchains, of which there are many today.
Over the last few years, many different public blockchains have emerged. Some of them have grown big with a high market capitalization and a big user base. But still, by the end of 2021, blockchains’ overall vision of bringing interoperability to the online world has not yet materialized. Because different public blockchains are based on different protocols and design choices, blockchain data cannot freely flow between them. As a result, the public blockchain space currently suffers from the same incompatibility between different systems as the internet itself. Most public blockchains are still siloed, forcing developers and users to use them as isolated platforms.
This will change in due course. With many different public blockchains in existence, advances in blockchain interoperability have been touted as a real need. are tackling the problem and are readily deploying their solutions one by one. But what exactly are they solving?
What is interoperability?
In the case of blockchains, interoperability refers to a blockchain’s ability to freely exchange information with other blockchains. Every asset that is held and every transaction that is made are recorded on a specific blockchain. Through a proper interoperability solution, whatever economic activity is happening on one blockchain can be represented on a different blockchain. This means that the economic activity from one chain can be transmitted to another chain and unfold its potential there.
In more technical terms, this means that the goal of a blockchain’s interoperability solution is to verify and deliver messages of data across chains. These messages of data contain information about a blockchain’s state that is then reproduced in a secure and uncompromising way on a different blockchain. For instance, this also means that an asset transferred from one blockchain to another will not be double-spent in the process but remain locked on the originating blockchain as long as it is used on the receiving blockchain.
Crypto Interview: Interoperability and Micropayments are the Internet’s Future
In the true spirit of public blockchains, it is essential that interoperability solutions are fundamentally built on the premise of decentralization, allowing for a connection of blockchains to access information from one another without compromising on decentralization.
Having connected rather than siloed blockchain ecosystems seems to be a desirable outcome. But what sort of benefits exactly will blockchain interoperability bring? To answer that, we first need to understand what public blockchains are.
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Blockchains as independent institutions
At the end of 2021 public blockchains and their merits seem to have been intellectually vindicated. While many blockchain projects are global in nature and have amassed significant communities all around the world, the general public still struggles to make sense of what exactly these public blockchains are.
As some economists have been saying for years: Public blockchains are in the process of establishing themselves as new institutional technologies. As such, they make up new kinds of digital institutions that are equipped with their own, independent non-sovereign property systems, enabling natively digital property rights. These property rights are the breeding ground for blockchain-based culture, governance, monetary policy, economic participants, products, or services.
Because these new economic institutions scale modularly with various projects being built around and on top of their settlement layers (which is the actual blockchain itself), they are ever more growing into digital nations that exist alongside nation-states. Just like their counterparts in the physical world have done for centuries, these new digital nations have primarily their own survival and proliferation in mind. Consequently, as every public blockchain has set out to create network effects for itself, cross-chain interoperability has not really been a priority.
Why strive for blockchain interoperability?
Realizing cross-chain interoperability will unlock the true power behind public blockchains. The interconnectedness of blockchains will have similar benefits as an interconnected world of real economies. As our planet has globalized and nation-states have cut back on protectionism, the free movement of goods, information, capital, and human beings has benefited humankind (and led to some issues, too).
Today, most of the 195 nations around the world are interconnected in more than one way. The ability to freely trade with other nations has given rise to unprecedented levels of prosperity. Different nations specialize in different areas and through frictionless communication and cross-border trade facilitated by connected supply chains, an ever-increasing amount of goods and services is interchanged. Ultimately, it has been the case in the real world, that free trade and cross-border communication has vastly enhanced the real-world economies’ potential.
The same will be true for today’s over 100 active public blockchains once interoperability has come to full fruition. Ongoing progress in the field of blockchain interoperability will massively enhance asset portability among different public blockchains. Because assets will be portable from one blockchain to another, their usability will greatly increase. Use cases such as cross-chain token transfers, cross-chain arbitrage, and cross-chain smart contract calls can be thought of.
Progress in the area of interoperability will also drive specialization within the blockchain industry. Because public blockchains will be able to communicate and their assets will be interchangeable, a specific blockchain does not need to be able to provide every service but can focus on a unique value proposition and specialize in whatever it does best.
So, while blockchain interoperability will make it possible to realize real-life use cases such as the swapping of health data that is distributed over many different organizations such as hospitals, clinics, specialists, and pharmacies in the health care sector, its biggest impact will most likely be with the new digitally emerging realm of the metaverse. After all, in order to make sure the metaverse will be a public space open to anyone, seamlessly connecting the different metaverse subworlds within it will be crucial.