Blockchain technology is witnessing immense growth and development as more business shift to decentralizing their databases. However, blockchains are not cumulative ecosystems. Blockchains are isolated and each network is considered to be its own island. This means that blockchains cannot interact with each other smoothly without intermediaries. Why is exchanging data between blockchains important? Well, it limits users from experiencing the full benefits of blockchain technology. But, this is where cross-chain interoperability comes into play.
Cross-chain technology is an innovation that emerged to cater to these ever-growing interoperability challenges that distributed ledgers are facing.
The Need for Blockchain Interoperability
Let’s understand the importance of why blockchains need to communicate with each other in the first place. Blockchains are on the rise, and each day brings with it breakthroughs in distributed ledger technology. Whether by introducing new consensus protocols or security measures, blockchain technology is growing. However, this also means that its scalability issues are proportionally increasing.
The isolation of each blockchain makes it difficult for each chain to benefit from the other. Interoperability in this case allows two or more blockchains to trade off their protocols, decentralization, features, and security.
In addition, the lack of cross-chain interoperability limits the blockchain’s chances of mass adoption. For example, if User A wants to send cryptocurrency to User B, they both have to be using the same blockchain. In traditional financial systems, users can send monetary assets regardless of whether they use the same bank or not. This is, obviously, not the case with blockchains.
However, the inefficiency of data transfer between two or more blockchains is not a problem in chains that integrate cross-chain technology.
What Is Cross-chain Technology?
Cross-chain technology is an emerging technology that refers to a set of protocols, tools, and methods that allow different blockchain networks to communicate with each other. Its primary goal is seamless asset transfer from one blockchain to another.
Think about how email works. It would be a hassle if you can’t send an email to an Outlook account from your Gmail one. That means that you have to create an account on each email platform in order to communicate with everyone. This is exactly what happens when someone wants to transfer crypto from let’s say Ethereum to the Bitcoin blockchain.
Cross-chain protocols allow the interoperability of blockchains and enable the exchange of data between several networks.
How Does It Work?
There are many approaches to how cross-chain technology works. Each network has its own approach to blockchain interoperability to facilitate the exchange of data between chains. But here are some of the common cross-chain interoperability approaches:
Atomic swaps allow peer-to-peer exchange of data between different assets without the need for intermediaries. The word atomic refers to the indivisibility of the exchange, this means that the exchange either happens or it doesn’t. This makes sure that both parties in the swap are protected from the risk of one party not fulfilling their end of the bargain. Smart contracts enforce the atomicity of the exchange by locking the funds until the swap is complete.
Cross-chain relays facilitate interoperability by acting as an intermediary bridge between two blockchains. Relays’ primary goal is to verify the events that take place on another blockchain via a smart contract. In the relay method, a relay blockchain is deployed between the two blockchains that wish to cross-chain communicate.
A series of relay nodes are deployed in each blockchain to monitor and verify the transaction data of the relay chain. Therefore, the consensus nodes of the relay chain verify the validity of the cross-chain transactions and execute the exchange accordingly. However, relay chains are hard to implement because of their complexity, and thus, have high expenditure rates.
This cross-chain interoperability model relies on trusted third parties, such as a notary, to verify the validity of the cross-chain transactions. There are two types of notaries, single signatures notaries, and multi-signature notaries.
Single-signature notaries are simple because they only utilize one node. They are also known as centralized notaries. These notaries collect transaction data from the source chain and validate it and execute it on the target chain. However, because they are centralized they are more prone to failure.
Multi-signature notaries on the other hand require the verification of transaction data by the majority of notaries. To avoid the Byzantine fault, the cross-chain transactions are processed through consensus.
The Advantages of Cross-chain Interoperability
Cross-chain technologies bring many benefits to blockchains’ interoperability efficiency. Here are some of the benefits that cross-chain protocols offer:
- Enhanced Blockchain: Ecosystem: Probably the most obvious benefit, cross-chain technology allows interoperability between different blockchains. It enables effective communication and strong connection as well as efficient data transfer between chains. Thus, encouraging a more open and interconnected blockchain environment.
- Better Scalability: Many blockchains suffer from scalability issues due to their lack of interoperability. With cross-chain communication, blockchain can leverage the speed concerning multiple blockchains, and thus, enhances the scalability.
- Blockchain Adoption: Blockchain might look more appealing to people who would like to use more than one network to conduct their business. Thus, interoperability enables them the smooth transfer of their assets without the hassle.
- Risk Control: Diversification of data across multiple chains can limit the risks that come with one single blockchain.
Although cross-chain technology enables interoperability between blockchains, it faces a lot of challenges. For starters, each blockchain has its own protocols and consensus mechanisms that they follow. The lack of protocol standardization poses major challenges to cross-chain communication where interoperability wouldn’t be as smooth as it has to be.
In addition, users can find cross-chain transactions very complex and tedious in comparison to on-chain transactions. Also, regulatory challenges might arise due to varying rules and compliance requirements across different protocols.
Making the Blockchain More Efficient
Although some challenges might face cross-chain communication, blockchain interoperability is a must. It improves the overall efficiency of blockchain technology by overcoming the limitations of isolated networks and bringing significant advantages in terms of flexibility, efficiency, and user experience. The more blockchain networks adopt cross-chain technologies, the more they get close to mass adoption.