12 min read

Blockchain Interoperability: Challenges and Opportunities for Cross-Chain Communication

Communication, it's important!

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Published on

13 June, 2023

Introduction

The crypto Twitter space is filled with multiple colours, logos and tag lines — almost akin to a football fan’s feed. The presence of numerous chains, each claiming its supremacy, is quite encouraging as it creates a sense of competition which in turn fosters mutual growth. But an alternative way to look at the blockchain space is its fractured nature. However interesting it may seem — this is not club football. In spite of having a shared goal of a decentralised future — the technology in its current state limits blockchains from working together for the vision that they have. Hence we will need to create mechanisms to achieve interoperability between chains and create a common turf to play on — apologies for the footie pun. In this article, we shall look at the various challenges we face while implementing interoperability and the opportunities we have to create an interconnected net of chains. We will also expound upon various approaches that facilitate inter-chain communication such as sidechains, atomic swaps, cross-chain bridges and interoperability protocols.

Interoperability — an analogy

Imagine a scenario where Emma in California uses her mobile phone connected to a home network via a wireless router. She sends an email to Max in the UK, who receives it on a different email platform and on his desktop machine. Emma and Max have different devices and rely on separate network routers. Now, let’s consider a scenario without interoperability. Emma, still in California, uses her mobile device connected to a network through a wireless router. However, she can only send emails to Max if they both have the same device and use a router built by the same company.

Interoperability allows different hardware and software to freely exchange information without any restrictions. Without it, communication would be confined to a specific system. Likewise, in the world of decentralised applications, interoperability enables different networks to exchange digital assets without constraints.

Blockchain interoperability aims to enable different blockchains to communicate, share data and interact with one another in a secure and standardized fashion. Interoperability enables chains to leverage each other’s strengths and overcome any limitations. This creates a healthy and secure ecosystem which offers the best of all worlds to the users and enables collaboration, scalability and innovation in the larger blockchain world.

Challenges to be Faced

Interoperability is not something that is built into the blockchain architecture. In its purest form, a blockchain has no external communications possible with other blockchain networks — much like a tribe on an island. But with increased adoption and the existence of multiple chains, it is exceedingly necessary while also being tough to configure. So challenges are aplenty.

Right from the get-go we can see that blockchains have Proof of work or Proof of Stake consensus models. Hence, we have already hit a hurdle in trying to achieve consensus across multiple chains. Similarly, all chains have their own smart contract languages, data structures and working. This fosters a need to agree on common standards and protocols for interoperability to function while ensuring data consistency and transaction validity.

A major feature of blockchain is its trust-free nature. Its decentralisation and freedom from central authority are what make blockchain so secure. However, in many applications, a blockchain might need information from a third party — like price data to draw up a smart contract. In these cases, we use what is called a blockchain oracle. Like a fortune teller — this oracle pulls information from the unknowns of the outside world and provides it to the secure (yet unwitting) blockchain. But in doing so, it breaks the basic tenet of blockchain being a trustless system. The reliance on a third party in the form of a blockchain oracle creates a vulnerability — any issues with this third party can create the entire chain to collapse. This is the Blockchain Oracle Problem — an issue closely related to interoperability.

The interoperability issue can also be visualised in the form of a trilemma.

  • Trustless — Ensure the same level of security as the original chain
  • Extensible — Ability to extend the solution to any ecosystem
  • Generalisable — Any arbitrary data can be passed on via the bridge

Achieving all three has been very tough as some level of compromise always remains. Using an external verification can work — but it removes the trustlessness. A local verification with verification on the recipient’s end works — but since it is asset specific the generalisability is lost. Similarly, native verification, where the verification is carried out on the original chain also provides a solution — but it does not extend to all chains hence losing extensibility.

So it is very evident that incorporating interoperability is no easy task. There are issues with this approach due to the design of the blockchain approach. But much like every technology, there are iterations of improvements and that is true for blockchain as well. Fortunately, the community is already at work, reinforcing this weak point.

Exploring Solutions

Multiple methods are being explored towards practical interoperability. Let’s classify them in order to understand them better. The classification is not exhaustive and some solutions may span multiple types. We shall take a look at some specific implementations which have been working out well.

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Cross-chain Communication Protocols: These are sets of rules, standards and mechanisms which try to establish a framework for chains to — as evident from the name — cross-communicate. Cross-chain protocols can be thought of as defined grammar rules and vocabulary which different chains can utilize to communicate.

A notable example in recent times has been the Cosmos ecosystem — which is intended to be an internet of blockchains. Cosmos combines a cross-chain protocol (IBC) with a pegged blockchain architecture (Cosmos Hub) to achieve its vision of an interconnected network of blockchains.

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Sidechains and Pegged Blockchains: Sidechains enable interoperability by establishing a connection between a main blockchain and an independent sidechain. In case the main change is experiencing issues, the assets can be moved to a sidechain and vice versa. This creates interoperability between the two chains. Pegged Blockchains enable locking tokens on a main chain and minting a corresponding number of tokens on a side chain — for use in that chain’s ecosystem. Both of these methods work by creating fixed relationships between two isolated chains and hence facilitate asset transfer and address scalability issues.

Sidechain examples include Liquid, which is designed to address the need for faster and more confidential Bitcoin transactions. As for pegged blockchains, we have wrapped Bitcoin (wBTC) and Cosmos — which utilizes pegged blockchain in its cross-chain protocol.

Bridge Protocols: Bridge protocols specify how various chains can be linked, communicated with, and their exchange of data or transactions verified. They typically involve consensus mechanisms, cryptographic proofs, and communication protocols to establish trust and maintain security to enable interoperability. While cross-chain protocols are the grammar, these are the actual implementations or semantics.

An example of a bridge protocol is the Polkadot Relay Chain and its associated Cross-Chain Message Passing (XCMP) protocol. The XCMP protocol allows parachains connected to the Polkadot Relay Chain to communicate and transfer assets and data between each other. See the grammar-semantic coming full circle? Nice. Learn more about how Polkadot manages interoperability without compromising on speed and security here.

Middleware Layers: A middleware layer is a software infrastructure that sits between different blockchains, providing a standardized interface for developers to build cross-chain applications, simplifying interactions, and abstracting complexities of various blockchain protocols.

An example of a middleware layer is Chainlink, an oracle network that acts as a middleware layer between smart contracts and real-world data. It enables smart contracts to securely and reliably interact with external data sources, APIs, and off-chain systems.

While similar, a bridge and middleware work in different ways. A bridge is like a link or a pathway that connects two blockchains and enables them to transfer information. Whereas on the other hand, middleware is like a translator or facilitator that sits between different blockchains.

Interoperability Standards: As blockchain continues to come to the forefront and issues like interoperability are discovered, this draws the attention of organisations which aim to standardise the ecosystem. This approach aims at forming well-established rules which can prevent regulatory issues when the technology goes heavily mainstream.

Common examples include the Interledger Protocol (ILP) by the Interledger Foundation which is based strongly on the original Internet Protocol(IP). We also have the Token Taxonomy Framework (TTF) defined by the InterWork Alliance, which places its bets on the power of tokens and claim that tokens will disrupt commerce as we know it today, and hence standardisation would be in our best interests.

Token Swaps: In the most basic terms, token swaps are swapping one cryptocurrency and exchanging it for another cryptocurrency’s token. We can either achieve it using a third-party exchange which can exchange our coins. This process involving Decentralized Exchanges (DEXs) or Centralized Exchanges (CEXs) is called a regular swap. Binance is a well-known CEX whereas Uniswap is a popular DEX.

The other type of token swap is the cross-chain or atomic swap which enables one digital token to be exchanged for another between two chains, directly, without involving a third-party swapping service. It utilises a smart contract called hashed timelock contract (HTLC) which ensures consent from both ends, by locking assets for a period of time.

Opportunities Ahead

It goes without saying that the introduction of blockchain technology has ushered in a new age of digital revolution. However, as it was with the proliferation of the internet, blockchain interoperability is the best bet for the survivability and mass adoption of this technology. The development of interoperability mechanisms is essential to accommodate the diverse use cases arising from the rapid growth of the blockchain ecosystem. To that end, we highlight multiple opportunities that active development and adoption of blockchain interoperability grants to individual enthusiasts and enterprises.

Much to the dismay of many centralized authorities around the world, blockchain technology has flourished. In response, stakeholders such as companies and governments have embraced this technology to provide digital services efficiently. For instance, the rise of central bank digital currencies (CBDCs), has prompted the need for standardization. With each central bank potentially opting for different blockchain technology to implement their CBDCs, achieving interoperability becomes essential. It enables seamless and globalized finance, ensuring secure, convenient, timely, and cost-effective transactions.

Interoperability allows for seamless interaction between smart contracts on different blockchain networks. This means that a smart contract on one blockchain can trigger actions or initiate payments on another blockchain, facilitating complex and interconnected workflows. One notable project addressing this use case is Quant, which has garnered a vibrant and active community. Recently, the Quant network introduced support for its users to issue, manage, and interact with assets on the Avalanche network.

Another use case which could leverage blockchain interoperability is the operation of global supply chains. Managing a supply chain is a multifaceted process and undoubtedly a complex one. These intricacies arise due to the inexorable involvement of external stakeholders (e.g., enterprises, and regulators). The dynamic nature of these markets often necessitates the reliance on paper trails and documents to track the state of the supply chain, rather than fostering trust among the stakeholders. Blockchain technology holds the potential to leverage its properties of immutability to prevent any tampering with these documents. Interoperability among such networks will provision suppliers, manufacturers, and retailers with the ability to participate in multiple supply chains using a single endpoint in a trustless manner, hence eliminating the need for complex interaction processes and fostering more efficient supply chain management.

Conclusion

Interoperability is all around us. We know it works because we don’t even notice this. Perhaps advancements in the web3 space will inspire other technology goliaths to find common ground and overcome their differences, just as interoperability allows us to communicate across different messaging platforms without concerning ourselves with the colour of our text bubbles.

While Cosmos defines protocols and enables seamless data transfer using a pegged architecture, Chainlink provides a decentralized oracle, a middleware to enhance interoperability for smart contracts. Polkadot is taking the forefront in defining a protocol which can ensure a truly multi-chain environment and support the transfer of any arbitrary assets. Similarly, multiple other technologies like Hybrix, Loom, Wanchain and Harmony — all have their foot in the game. Together, these platforms empower developers and users to leverage the benefits of multiple blockchains, fostering innovation and expanding the possibilities of decentralized applications and services. As blockchain technology continues to evolve, interoperability will remain a key focus, enabling a more connected and efficient decentralized ecosystem.

About Luganodes

Luganodes is a world-class, Swiss-operated, non-custodial blockchain infrastructure provider that has rapidly gained recognition in the industry for offering institutional-grade services. It was born out of the Lugano Plan B Program, an initiative driven by Tether and the City of Lugano. Luganodes maintains an exceptional 99.9% uptime with round-the-clock monitoring by SRE experts. With support for 36+ PoS networks, it ranks among the top validators on Polygon, Polkadot, Sui, and Tron. Luganodes prioritizes security and compliance, holding the distinction of being one of the first staking providers to adhere to all SOC 2 Type II, GDPR, and ISO 27001 standards as well as offering Chainproof insurance to institutional clients.

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