Exploring Blockchain Interoperability: Solutions and Key Challenges

Thanks to the growing popularity and adoption of blockchain technologies, we now live in a multi-blockchain world. Thousands of blockchain-based applications and ecosystems have been created over the past few years. The current Web3 landscape is becoming increasingly multi-chain and multi-layered, with over 100 layer-1 blockchains and a rapidly growing number of layer-2 networks.

Unfortunately, most of these blockchain systems exist in isolated pockets. Our multi-blockchain world is fragmented because most blockchain systems have no communication capabilities that will allow them to connect with other blockchains or external APIs – limiting their potential benefits and applications.

In this article, we will explore the concept of interoperability in blockchain software development. We will examine why this concept is so important and the various approaches to interoperability. 

• Blockchain interoperability is the ability of distinct blockchain systems to interact seamlessly with each other, facilitating the seamless transfer of data and assets between them. 
• Blockchain interoperability can be achieved through the implementation of solutions that help facilitate efficient communication and asset transfer such as cross-chain bridges, oracles, atomic swaps, and interoperability solutions. 
• Resolving the challenges associated with blockchain interoperability such as security, protocol standardization, and regulatory issues can help fast-track blockchain interoperability adoption. 
• Without interoperability, it is almost impossible to adopt blockchain technology, because each individual project would be too siloed to enable cross-chain data exchange, asset transfers, or scalable, multi-chain solutions.

What Is Blockchain Interoperability?

Blockchain interoperability refers to the ability of distinct blockchain systems to interact seamlessly with each other. The interaction, integration, and communication between individual blockchain systems will facilitate seamless asset transfers between them for various utilitarian purposes.

Most blockchain systems and apps today function independently within an isolated system. Each of these ecosystems has a unique approach to scalability, transaction speed, and security. For a multi-chain system that will leverage all the individual benefits of the different blockchains available to emerge, there’s a need for different blockchains to be able to co-exist, communicate, and interoperate. These are known as heterogeneous blockchains—blockchains with varying protocols and architectures—which present unique challenges for cross-chain communication and interoperability.

Interoperability aims to integrate various blockchain ecosystems so that they will one day be able to transfer data and conduct transactions with each other. This will make it easier to switch from one platform to another and leverage the distinct abilities of each of these platforms. Each blockchain is built with different standards and code bases, making most blockchains naturally incompatible and highlighting the challenge for interoperability.

How Blockchain Interoperability Works

The internet as we know it today once operated as a set of isolated LANs (Local Area Networks) in its early days. These networks, each with their own protocols and standards, were unable to communicate with one another. It was only through the development of standardized protocols such as TCP/IP that the isolated networks began to form the vast, interconnected network that has now transformed society forever. Blockchain interoperability protocols play a similar role in enabling communication and collaboration between different blockchain networks, allowing them to exchange data and assets seamlessly.

Blockchain interoperability can be achieved through the implementation of solutions that help facilitate efficient communication and asset transfer between different blockchain networks. Examples of such solutions include blockchain bridges that connect different blockchain protocols, layer-0 protocols that serve as a shared underlying infrastructure for multiple blockchains, side chains, and dedicated interoperability protocols.

These tools facilitate interoperability by either creating a bridge to connect one blockchain network to the other or establishing a standard cross-chain interoperability protocol. This will serve as a framework that enables communication and data exchange between interconnected networks. Standardizing data formats is crucial for enabling interoperability, as it ensures that different blockchains can understand and process information consistently. Data transfers between heterogeneous blockchains are facilitated by these protocols, supporting secure and flexible cross-chain communication. Technological incompatibility makes direct native communication between blockchains impossible without intermediary ‘translation’ layers.

Why is Blockchain Interoperability Important?

The lack of interoperability between individual blockchains is one of the biggest obstacles to the widespread adoption and innovation of blockchain technology. Since the advent of this technology in 2008, blockchain systems have existed in siloes.

By nature, no single blockchain has it all. In fact, most blockchains emerge by optimizing their protocols to support certain features while trading off other features. While Bitcoin has established itself as a decentralized and censorship-free store of value, Hyperledger Fabric prioritizes privacy and scalability over decentralization.

Interoperability in blockchain technology will not just allow seamless communication between isolated blockchains, it will create an interconnected network of blockchains that leverage the individual strengths of each system, enhancing the overall potential and impact of the technology in solving real-world problems. Interoperability enables different networks to share data, allowing for cost-effective, timely, and secure transfers of data and funds between different financial ecosystems. It also allows organizations to build applications across different chains, opening up new business models and revenue opportunities. The following are some of the benefits of blockchain interoperability.

• Solves the trilemma problem: The blockchain trilemma problem refers to the challenge of achieving all three critical goals of blockchain technology (decentralization, security, and scalability) all at once. While it’ll be difficult for a single blockchain system to solve this problem, an interconnected blockchain landscape will allow users to leverage different blockchains for what they’re good for, switching between them seamlessly as required.
• The emergence of new use cases: Interoperability is creating opportunities for new use cases of blockchain technology to emerge. For instance, the new wave of genuine asset ownership and in-game item transfer in the blockchain gaming industry depends on the concept of interoperability.
• Greater blockchain adoption: For blockchain technology to achieve widespread adoption, it has to be easy to use for consumers. Interoperability and the connected blockchain ecosystem will lead to better user experiences. For instance, the convenience of using multiple blockchain platforms without managing multiple wallets or going through complex (and costly) conversion processes will favor blockchain adoption across a larger customer base.

Approaches to Blockchain Interoperability

There are different approaches and technologies to facilitate interoperability between blockchains. This can be achieved by either making direct changes to blockchains that allow transactions to follow the same set of business rules or conditions across several ecosystems or through third-party blockchain protocols that act as bridges facilitating the exchange of data, assets, and messages between different blockchain networks. Interoperability enables secure linkage and communication across multiple blockchain networks and other systems, allowing diverse blockchain frameworks to transfer data and assets seamlessly. Some of these blockchain interoperability features are explained in detail below.

Interoperability protocols are foundational to building blockchain abstraction layers, which allow traditional backends and dApps to interact with any on-chain environment.

Cross-authentication

Cross-authentication in blockchain interoperability refers to the process of verifying the authenticity and validity of transactions and data across diverse blockchain networks using a separate blockchain as a bridge. This is typically facilitated by a third-party blockchain solution known as a notary or other methods such as token bridges or side chains.

In the notary method of cross-authentication, the notary verifies transactions on one chain and relays the information to another chain. Cryptographic proofs are used to ensure the integrity and authenticity of cross-chain transactions, providing cryptographic guarantees that the data being transferred is valid and secure. The two main types of notaries that can be used for cross-authentication include single-signature and multi-signature notaries. While single-signature notaries collect event data from the source chain and validate it without relying on other nodes, multi-signature notaries require cross-chain transactions to be verified by the majority of nodes before they are transmitted.

Oracles 

Data oracles facilitate seamless interoperability by connecting disparate blockchain networks to external systems. Oracles can act as a bridge between two blockchains or transmit data from an off-chain legacy system to a blockchain ecosystem. Oracles enable blockchains to access external data and respond to external events, which are crucial for complex cross-chain interactions.

For instance, John and Don bet on the outcome of a football match. John is betting on team A to win and Don is betting on team B, with their total wager held in escrow by a smart contract until the outcome of the match is decided. How does the smart contract know who to release the funds to when the match ends?

For this, it’ll need to interact with data from an off-chain system. Oracles serve as agents that allow blockchain networks to communicate this way, fetching accurate data from external systems and delivering them to the destination chain securely and reliably. Decentralized oracle networks provide secure, trust-minimized validation for cross-chain data, ensuring that off-chain computation and data authentication are reliable for complex interoperability scenarios.

Kaleido has enabled secure data sharing and interoperability between healthcare providers’ blockchain networks, enhancing patient privacy.

API gateways

API gateways function as intermediaries, streamlining inter-blockchain communication between blockchain networks and external applications. They are designed to act as bridges between various distributed ledgers.

To communicate with blockchain protocol, an external application would send a request to the API gateway. These requests can be anything from querying data to initiating a transaction or triggering a smart contract. The API gateway receives the request, identifies the target blockchain based on the request parameters, and transforms the request data into a format compatible with the target blockchain. Standardizing data formats is essential in this process to ensure compatibility and seamless interoperability between different blockchain systems.

Cross-chain Interoperability Solutions

Cross-chain interoperability solutions are networks that act as an interoperability layer to facilitate cross-chain communications for blockchain applications. They allow the transfer of assets, messages, and contract calls to and from any blockchain supported by the network. Cross chain applications leverage these solutions to enable seamless data and asset exchange across multiple chains, supporting a wide range of use cases in decentralized finance and beyond.

Mechanisms such as cross chain swaps, token swaps, and token transfers are essential for exchanging assets across different blockchains, often utilizing protocols like atomic swaps and cross-chain AMMs. Beyond simple asset transfers, arbitrary data and general message passing protocols enable complex cross-chain logic and communication, supporting advanced applications like decentralized exchanges and cross-chain DAOs. The main chain in a multi-chain ecosystem often provides security and validation for cross-chain transactions, anchoring trust and consensus.

The emergence of bridge aggregators is improving user experience by exposing multiple existing bridges through a single interface. Additionally, there is a trend toward the consolidation of generalized messaging protocols (GMPs), similar to what has occurred with layer 1 networks. Infrastructure providers play a crucial role in advancing blockchain interoperability by delivering technical solutions and fostering industry collaboration.

Polkadot uses a central Relay Chain that provides shared security and consensus for its connected parachains. Interoperability protocols like Polkadot’s XCM and Cosmos’s IBC are designed to allow independent parachains or zones to share security and messages natively. The Cross-Chain Interoperability Protocol (CCIP) aims to establish a universal connection between blockchain networks via a single interface.

Over the past few years, several cross-chain messaging protocols have emerged to address the challenge of achieving blockchain interoperability, each with its own set of unique features and capabilities. Examples include Polkadot, Cosmos, Chainlink, Wanchain, and Alon among others.

Enterprise-grade Interoperability Solutions

The emergence of platforms that offer interoperability solutions as a service is making it easier for enterprises and big businesses to adopt interoperability solutions for their blockchain systems. This model is lowering the barrier to interoperability, providing access to big and small companies looking to leverage blockchain technology.

Unlike public blockchains such as Bitcoin and Ethereum, an enterprise blockchain platform is private and typically permissioned, with limited interaction with external ecosystems. Still, many enterprise blockchains could benefit from interoperability with external systems, including centralized systems and traditional systems. Interoperability is crucial for connecting blockchain networks with legacy infrastructure, enabling seamless integration between decentralized and conventional technology architectures. At the very least, such an interaction will allow organizations to leverage existing infrastructure and blockchain networks without setting everything up from scratch.

Enterprise-grade interoperability also fosters collaboration among enterprises. This is particularly important for organizations in industries like healthcare and finance where sensitive data needs to be shared securely between stakeholders. Multi party record keeping is a key benefit, as decentralized consensus mechanisms enable secure, transparent, and tamper-proof ledgers shared among multiple parties, supporting trust-minimized and collaborative data management. Implementing enterprise-grade interoperability solutions will ensure data integrity and privacy controls while still facilitating seamless collaboration.

Kaleido’s interoperability solutions have improved transparency and traceability in supply chain management by connecting disparate blockchain networks. Kaleido’s Trusted Bridge establishes secure connections between participating blockchain networks, employing cryptographic techniques to verify the integrity and authenticity of data exchanged between chains.

Types of Blockchain Interoperability Solutions

The validation mechanisms that facilitate cross-chain transactions and data transfer across different blockchain types can also give rise to different interoperability methods. Based on this, some of the blockchain interoperability solutions include:

Web2 validation

This refers to a cross-chain transaction executed with a Web2 service. A good example of this is when someone uses a centralized exchange to bridge or swap their tokens, depositing their assets on one chain and withdrawing them on a destination chain. While this method is a fairly simple transaction that’s easy to execute even for someone with limited technical expertise, it often involves higher transaction costs due to exchange fees and additional overheads. However, its utility is limited to token swapping and bridging use cases.

External Validation

As the name suggests, an external validation mechanism requires the participation of validator nodes that are different from those of the blockchain systems involved in the cross-chain transaction. These external validators confirm the state of the source blockchain based on a specific set of criteria and trigger the subsequent transaction on the destination chain. Decentralized oracle networks can serve as external validators, providing secure and trust-minimized validation for cross-chain transactions.

This method of cross-chain validation is more extensive and has complex applications compared to the Web2 method. It provides trust-minimized guarantees through techniques like honest majority assumption, optimistic bridge validation, and cryptoeconomic staking.

Local Validation

In this type of blockchain interoperability system, the parties involved in the transaction are responsible for verifying each other’s state and executing the transaction. Cross-chain systems that use this method of validation are also called atomic swaps.

While this system offers a high level of trust minimization, it cannot be used for some cross-chain contract calls and has a few limitations such as call option problems – where one of the parties in the atomic swap may choose to act or not act on the swap for a certain period. The main use case for this validation method is in cross-chain liquidity protocols that involve independent liquidity pools. In these protocols, capital efficiency is a key consideration, as optimizing asset use and minimizing capital lock-up directly impact transaction speed, cost, and overall resource utilization. 

Native Validation

In this type of cross-chain interaction, the destination blockchain is responsible for verifying the state of the source blockchain and confirming the transaction before executing it. This is achieved by running a light client of the source chain either on a virtual machine or side by side with the destination chain. The main chain often serves as the authoritative backbone, anchoring security and validation for these transactions to ensure trustworthiness across different networks. Zero-Knowledge (ZK) light clients can also be used to verify transactions cryptographically without relying on trusted third parties. This is the most trust-minimized method of cross-chain communication, but it is also the most expensive. It also works best for blockchains running on similar state machines like Ethereum and EVM-based layer-2 networks.

Challenges of Blockchain Interoperability

Despite its potential benefits, achieving cross-chain interoperability still comes with numerous challenges, many of which have not been resolved by the interoperability technology that is currently available. Resolving these challenges is the key to the widespread adoption and success of blockchain interoperability. Some of the challenges are highlighted below: 

• Security is the biggest challenge in any interconnected blockchain ecosystem. The bridge presents a potential point of vulnerability that can be exploited by hacks and manipulations. Vulnerabilities in one blockchain ecosystem can have a significant impact on the other. 
• Since blockchains operate with different consensus mechanisms, interoperability creates new governance challenges that may be too complex to manage. 
• Given the differences in the consensus algorithms, security systems, and programming languages of individual blockchains, achieving interoperability is a technically complex endeavor. 
• The regulatory framework for the entire blockchain space is still evolving. Interoperability introduces a new layer of complexity to blockchain legislation.
• Implementing interoperability solutions can be costly, especially for smaller blockchain projects.

Use Cases of Blockchain Interoperability

The idea that you can seamlessly exchange data and assets across disparate blockchain ecosystems has several potential use cases. Some of the possible industries or sectors where interoperability can be useful include: 

Decentralized Finance 

DeFi platforms use blockchain infrastructure to provide financial services such as trading, borrowing, asset management, and so on. These services often involve moving assets across different blockchain platforms. Such cross-chain transactions are facilitated by interoperability solutions such as atomic swaps and wrapped tokens. Cross chain swaps and token swaps further enable seamless asset exchange between different blockchains in DeFi, allowing users to trade tokens across networks using protocols like atomic swaps and cross-chain AMMs. DeFi platforms also need to manage tokens across multiple blockchains, overseeing token minting, burning, and transaction processes to ensure smooth cross-chain operations.

Supply Chain and Logistics

Manufacturers, suppliers, retailers, and other stakeholders in a supply chain need to be able to share information in a timely and efficient manner. Multi-party record keeping enables secure, transparent, and tamper-proof ledgers, allowing all participants to collaboratively manage and verify data across the supply chain. Coordinating supply chain networks on an interoperable blockchain will make it easier to share and track data about the movement of goods across the supply chain in real time. Kaleido’s interoperability solutions have improved transparency and traceability in supply chain management by connecting disparate blockchain networks.

Healthcare and Data Sharing

Blockchain interoperability could revolutionize data sharing and patient care in the healthcare industry. It allows the seamless exchange of patient medical records across different enterprise blockchains used by stakeholders such as healthcare providers, insurance companies, and other institutions involved in patient care. 

Interoperable Digital Identity Solutions

The secure nature of blockchain makes it a potentially valuable tool for managing digital identities. However, the real value of such a digital ID management system can only be realized when a single user identity can be used across multiple blockchain platforms.

Think of how having a Google account gives you access to a wide range of other digital services. A consistent and interoperable digital identity will make it easier for users to access services across various blockchains using a single identity so they don’t have to manage multiple wallets or create a new profile on each one. 

Software Development

By leveraging cross-chain technology, developers will be able to create cross-chain dApps that combine some of the best attributes of multiple blockchains. The use of arbitrary data and smart contracts enables the development of advanced cross chain applications, allowing seamless interaction, data exchange, and programmable asset transfers across multiple blockchain networks. This may also lead to the creation of decentralized apps that can easily use off-chain data where needed.

The Future of Blockchain Interoperability

The increase in the number of blockchain ecosystems over the past few years is based on the recognition that no single blockchain solution can solve the trilemma of problems that blockchain technology aims to solve. 

Yet, if there’s anything we have learned from blockchain analytics so far, it’s that interoperability will be necessary to solve the problems of decentralization, security, and scalability all at once. The different blockchain systems created to solve these problems have to interact with each other one way or another through interoperable blockchain database systems.

As more organizations come to this realization, blockchain interoperability is expected to evolve and become a priority and may even supersede the need to create a new blockchain system. This will be marked by an increase in the number of projects focused on making blockchain platforms interoperable. Over time, we may even see the consolidation of some protocols and standards that will allow smoother cross-chain communication. 

To achieve this, stakeholders have to invest in the standardization of blockchain protocols and initiatives aimed at creating frameworks for cross-chain interactions with a focus on both small businesses and enterprise use cases. 

Projects like Chainlink, Polkadot, and Cosmos are already leading the way in this area, but the biggest achievements will be the creation of global standards and protocols for cross-chain communication that will guide innovation across the entire industry. Resolving some of the challenges associated with interoperability such as security and governance will also play a major role in the adoption of cross-chain solutions as the industry continues to evolve. 

Blockchain Interoperability Solutions from CrustLab

Anyone looking to create a successful and profitable blockchain product has to look into blockchain interoperability and all the benefits it offers. At CrustLab, we understand the complexities involved in implementing interoperable blockchain solutions and we are here to guide you through it especially as it affects your blockchain development project. Contact us to learn how we can improve your product with blockchain technology.