For the last several years, blockchain interoperability has been a key area of focus for the digital assets industry as it seeks to revolutionize the financial landscape. The idea is that once the growing number of blockchains can communicate with each other, DeFi will flourish due to the seamless connectivity of once-isolated islands of liquidity.
By removing these liquidity barriers, the blockchain industry can offer a vastly improved user experience, enabling developers to inject more innovation into Web3 by making collaborations more convenient. Despite being viewed as a top priority, the industry needs a more collaborative approach to ensure widespread interoperability capable of creating real ecosystem value materializes.
Cross-chain challenges
Dedicated blockchains like Cosmos or Polkadot, cross-chain bridges, and other tools have attempted to tackle the interoperability challenge, providing minor relief to the ecosystem but ultimately falling short of facilitating an intertwined financial landscape.
Despite helping boost DeFi activity and enable assets to flow between certain networks, bridges introduce security risks through smart contracts, which have unwittingly helped hackers steal billions of dollars. Bridges and cross-chain protocols use centralized components such as validators which can also be compromised and require liquidity pools on both ends, fragmenting the overall liquidity, and leading to capital inefficiencies. On top of these flaws, bridges lack standardization, a major barrier to broad interoperability, and their complex interfaces create a poor user experience.
Cosmos, which brands itself as the “Internet of Blockchains,” has enjoyed success as a Layer-1 with its Inter-Blockchain Communication (IBC) standard enabling easy data and asset sharing across multiple chains. Its software development kits (SDKs) and modular structure make it easy for developers to deploy apps within a flexible and scalable environment.
However, chain independence within the IBC leads to fragmented liquidity—a core problem that interoperability is supposed to address. Since IBC isn’t universally applicable to all blockchains without customization, chains outside Cosmos’s ecosystem or with different consensus mechanisms require additional bridging solutions to achieve interoperability with IBC-connected networks.
The growing number of blockchains fragments things further, diminishing the limited interoperability cross-chain bridges and protocols provide. Despite steady progress, interoperability is becoming increasingly difficult as scalability, diverse consensus mechanisms and protocols, security, and different governance structures present obstacles to defragmenting the ecosystem.
With the lack of universal interoperability posing a major barrier to adoption, how can the Web3 community work toward overcoming this obstacle?
Strategically collaborating
From bridges to interoperability protocols, no single solution comes close to offering broad interoperability at scale and with the highest degree of security. The current landscape of patchwork fixes does little to address the root problems, meaning the best way to advance interoperability initiatives is through collaborations.
Due to the decentralized nature of the blockchain and digital asset industry, collaborating is a fundamental element that has helped drive growth and progress. That, however, doesn’t mean that the industry isn’t hyper-competitive.
By shunning strategic collaborations aimed at expanding integrations or addressing interoperability, the industry risks its long-term viability. Imagine, if competing tech service providers like Yahoo, AOL, and Hotmail had never standardized communication protocols in the early days of the internet, how different sending emails would be. In this scenario our email communications would be fragmented and therefore limited, one provider would dominate the entire space, or a better, more flexible alternative would emerge.
The only way to make true interoperability a reality is through widescale collaborations that establish a set of shared standards. By focusing on multilateral partnerships, particularly consortiums and think tanks, with clearly defined objectives, the industry can foster blockchain compatibility and solutions for smooth integrations.
The Blockchain Interoperability Alliance was established in 2017 by three different projects focused on developing a common set of standards to facilitate the shared vision of connecting blockchains. While this initiative seemingly didn’t produce any breakthroughs, the idea was in the right direction, it just lacked broad participation within the industry to effectively collaborate on research.
Collaborative efforts can pool resources and facilitate knowledge sharing to help build robust technical solutions. The aim of these collaborations should center around clearly defined priorities such as bolstering security, expanding adoption through user-friendly interfaces, and careful implementation of cutting-edge technologies to drive innovation through meticulous research and development.
The path to interoperability can’t solely focus on bridging isolated blockchains; it needs to create a foundation for seamless and secure exchanges of data and communication across any ecosystem. That includes traditional finance. The industry must go beyond temporary fixes and embrace strategic partnerships and innovative standards capable of unlocking blockchain’s full potential.
As elements of traditional finance, from global investment firms and Main Street banks to credit providers and digital-first neobanks, continue to enter the digital asset ecosystem, bringing fiat systems into any interoperability developments would only enhance UX and onboard new users. Part of this should also prioritize a secure mechanism to connect public and private—or permissioned—blockchains. This is crucial since public chains hold the vast majority of liquidity and private networks are primarily used by institutions and enterprises.
As challenging as creating a cohesive infrastructure to power a new financial landscape is, the hardest part is building meaningful partnerships that transcend competitive spirits. Throughout human history, advances have resulted from collaborations and compromises which paved the way for prosperity. Just like we can now email our parents at their Yahoo address from our Gmail account, one day we will be able to seamlessly send an Ethereum-based token to Avalanche or any other blockchain.
