Benefits and Potential Applications

Scalability

Interoperability can serve as a scaling solution for blockchain networks. Rather than relying on a single public blockchain to handle all network transactions, resource-intensive operations (like a complex smart contract) could be offloaded to a separate blockchain (a “side-chain”) with a more efficient consensus process and thus expedite the computation. The final result would then be recorded on the main public chain, resulting in a faster and cheaper experience for the end user.

Blockchain Agnostic Decentralized Exchanges

A blockchain agnostic decentralized exchange (dubbed for this article as an aDEX) allows for a seamless transfer of value between any digital asset on any blockchain. This is currently being implemented through the use of atomic swaps while other implementations are still being researched. Essentially this solution resolves the hypocrisy that many crypto enthusiasts are guilty of: utilizing centralized exchanges to trade digital assets. Today, investors and traders entirely rely on centralized exchanges such as Binance or Coinbase to trade assets cross-chain (i.e., Bitcoin for Ethereum). There is currently no easy way for users to directly trade their Bitcoin for Ethereum or Monero to EOS without relying on a centralized intermediary to execute the trades off-chain. In an industry with the goal of decentralization and uprooting large centralized intermediaries, interoperability enables that vision.

Future decentralized applications could potentially integrate an aDEX protocol into the back-end of their application for users to seamlessly transfer one digital asset for another. It wouldn’t matter if you wanted to use Bitcoin, Ether, or any altcoin (given sufficient open atomic swap contracts for both assets) to pay for an in-app service or a good at a local merchant, even if they only accept Bitcoin. An application utilizing an underlying aDEX would be able to seamlessly transfer the sender’s asset into the receiver’s desired asset and completely abstract the process for the end users. This idea would unlock immense value for users as it creates a frictionless ecosystem for the thousands of new digital assets and currencies minted every day. Well with the one caveat is that, regardless of the technical ease, these tokens need to have sufficient demand which is a huge issue as of now, particularly in this down market.

Transfer of Logic

While there have been a number of solutions tested and implemented for transfer and exchange of value between blockchains, transfer of arbitrary data and logic present unique problems. With the proliferation of smart contracts gaining popularity through platforms such as Ethereum, many protocols have attempted to provide alternative coding languages to reach developers who are unfamiliar with Solidity. While this is a step in the right direction, the industry at large still suffers from the problem of siloed logic. Simply put, Ethereum smart contracts are transferable to protocols with Ethereum Virtual Machine compatibility. Furthermore, interoperability provides the opportunity for blockchains to communicate smart contract logic between each other, regardless of the underlying Virtual Machine. In other words, a user can input data on one blockchain and cause a change on another blockchain.



Generally, transfer of logic is the notion of: if x happens on blockchain A then execute y function on blockchain B.

Example 1: An insurance provider could reference a policy recorded on one network, verify the medical records held on a private chain, and confirm a payment made in bitcoin or, a stablecoin such as DAI.

Example 2: An individual can submit digital identity information (like reputation, credit scores, and income) from one blockchain to a bank’s loan approval smart contract on its permissioned blockchain to disburse a loan to the borrower in Ether.

Verified Standard Data

When sourcing data externally from something like a website through an oracle on any network, it’s difficult to verify the validity of this data without trusting the source of information. To reduce the ambiguity of data quality, there may be data verified through a non-native reputation-based protocol connected to the “main network.” This allows an intermediate process of data validation between direct-web input and complete network consensus surrounding incoming information.

Zero Vendor Lock-In

Additionally, utilizing an interoperability standard could give developers the confidence that they aren’t building on the AskJeeves of the internet era. By providing the ability for data and smart contracts to migrate across various blockchains, a company can move their application or other blockchain resources to one or more blockchains at will if any serious issues with their underlying blockchain solution come to light.

Issues & Risks Associated with Interoperability

While there is significant potential in a widely adopted interoperability standard, blockchains are already facing enough problems as independent ecosystems. It’s important to recognize that at this time, interoperability may complicate aspects of governance, 51% attacks or contentious hard forks.

For example, had the DAO occurred with a network of connected permissionless systems, the lost funds could have been immediately transferred to another smart contract platform amplifying the governance issue over a hard fork to two blockchains. Worse, the perpetrator of the DAO could’ve split the funds to 50 different blockchains, and the entire blockchain ecosystem would be under an immensely complicated governance issue over the recognition of those funds.

With that being said, the road for interoperability is long, and it is possible for developers to take precautions to mitigate the amplitude of these attacks. Nonetheless, a common interoperability standard would undoubtedly increase the number of attack vectors within the space as a whole.

Projects Tackling Interoperability

As of now, a multitude of different approaches are being taken to solve interoperability with each of these projects sharing the same goal of global industry adoption. We’ve described some of the projects that are currently at the forefront of interoperability innovation below: