Blockchain interoperability is considered by many analysts to be the most important requirement for the further development of the cryptocurrency industry.
Interoperability means the ability to conduct transactions on different blockchains. As a rule, each cryptocurrency works only on its blockchain, which limits the use of cryptocurrencies and makes them non-competitive compared to fiat currencies. Developers understand this and strive to overcome limitations. Perhaps this year will bring significant changes.
JPMorgan analysts predict that greater interoperability of various blockchains could be this year’s hallmark. Due to this, “cryptocurrency markets will be increasingly relevant to financial services”. First of all, this is about the transition to Ethereum 2.0 and new Layer-2 projects. Bitcoin continues to hold the position of digital gold or a digital value. But it is platforms for smart contracts that allow developers to create new crypto and traditional applications.
The demand for cross-chain transactions has grown tremendously. Ethereum’s dominance as the leading smart contract platform is declining as the network is overloaded, with high fees and low transaction throughput. Investments are redirected to other blockchains, which are ways to provide a transaction throughput comparable to traditional finance.
Put very simply, interoperability is the ability for computer systems to exchange and make use of information and entailing the ability to transfer an asset between two or more systems while keeping state and uniqueness consistent.
Blockchain-to-blockchain interoperability comes in two types:
1) Digital asset exchange (the ability to transfer and exchange assets originating from different blockchains without trusted intermediaries such as centralized exchanges);
2) Exchanging arbitrary data (the ability to do something on one blockchain that affects another blockchain).
But how do evaluate the impact of such decisions on the overall cryptocurrency market? It is hard to talk about the size of the interoperability market and its functional distribution. In fact, it is about total value locked (TVL).
The market size of varied interoperability solutions: infrastructure
Cross-chain solutions can be divided into two different groups:
1) By their purpose (asset-specific, chain-specific, application-specific, and generalized Internet of blockchains bridges and their method of validation (externally verified, natively verified, and locally verified);
2) Based on TVL data for bridges.
Chain-specific bridges have historically occupied the main share, up to 95% of cryptocurrencies since April 2021. Application-specific bridges have started to gain popularity among users, bridging 27% of TVL in Ethereum in October 2021. However, this segment has skyrocketed four times in one month.
More comprehensive blockchain solutions like Cosmos (ATOM), Polkadot (DOT), and Avalanche (AVAX), solve the problem of interoperability at a lower infrastructure level and introduce scalability while simple bridges cannot.
Asset-Specific bridges make it possible to transfer specific cryptocurrencies as wrapped coins. The most popular is BTC on the Ethereum blockchain.
Chain-Specific bridges connect a limited number of blockchains and support a limited number of operations like locking and unlocking tokens on the source chain and minting new assets on the destination chain.
Polygon is a protocol of such kind, for building and connecting Ethereum-compatible blockchain networks.
Application-Specific bridges are focused on specific applications like DEX.
And the most functional are Generalized bridges, a large-scale completed solution to facilitate general data transfer across multiple blockchains, including tokens and smart contracts. Cosmos IBC and Polkadot are the bridges of that kind.
Until now chain-specific bridges are dominating the market. Despite the general crisis in the cryptocurrency market since February 2022, the losses of TVL on the largest Ethereum bridges are not devastating. They reflect the redistribution of the market shares, according to DeFi Llama.
Oracles for interoperability of smart contracts
Blockchain oracles are third-party services that provide a smart contract with external information, serving as bridges between blockchains and the world of fiat finance. Oracles can be a tool that can provide interoperability between different blockchains. As for Blockgeeks, there are three promising blockchain oracle projects: ChainLink (LINK); Augur (REP); RIF Gateways (RIF).
ChainLink is a decentralized oracle network built on Ethereum to be a secure middleware that connects different smart contracts across blockchains. Currently, it is focused on creating a decentralized network of oracles compatible with Bitcoin, Ethereum, and Hyperledger.
Augur is a trustless, decentralized oracle, and prediction market platform.
RIF Gateways provides a network of oracles to enable secure and tamper-proof interactions with the external world. It proposes an interface layer that unifies access to oracle services and cross-chain integrations.
Oracles suffer losses just like other cryptocurrencies. On average, over the year, their capitalization has decreased by 2–3 times, if we take the three leading platforms ChainLink (LINK), Augur (REP), RIF Gateways (RIF). LINK remains the leader with a capitalization of $3.270 billion.
Blockchain interoperability of wallets
Ledger, a global hardware wallet manufacturer with 4 million customers, offers its version of interoperability. For a long time, Ledger has been producing the so-called multi ledger, which supports BTC and Ethereum. A new step to the general interoperability of blockchains is the cooperation with the Cosmos (ATOM) platform. Cosmos was founded back in 2014, now it is a network with a complete set of tools that enables blockchains to communicate data with each other and create an internet of blockchains. Now Ledger hardware wallets allow users to store ATOM and even stake ATOM.
Cosmos platform serves as a common Hub for the tokens from one chain to be passed on to the other.
Layer-2 Interoperability with Celer Network
Besides the Layer-1 solutions, there are some Layer-2 projects providing different blockchains interoperability along with scalability. Layer-2 platforms are built on top of the layer-1 blockchains like Ethereum and Bitcoin.
They do not require changes to the base-level protocol. Celer (CELR) is a good example of such a solution that introduces the general smart contract flexibility on Layer-2. It provides an optimal state routing algorithm with more than 20X performance gain and has multi-blockchain support, not only for payments but also for off-chain smart contracts.
To prove the great flexibility of Celer protocol the team even added supporting two architecturally very different blockchains, Ethereum and DFINITY. Now the team claims that Celer (CELR) is the world’s first blockchain agonistic layer-2 scaling platform that supports 110+ tokens across 30+ blockchains and layer-2 rollups.
These blockchains are Ethereum, Astar, BNB Chain, Avalanche, Polygon, Arbitrum, Fantom, Metis Mainnet, Oasis Emerald, Celo, Aurora, Harmony — and others. New blockchains are added from time to time, pushing up the price of the native CELR token. Since June 24, Celer has been supporting the LUSD connection between the Ethereum and Optimism blockchains. LUSD is the native token of the Liquidity Protocol, an interest-free borrowing platform on the Ethereum network. CELR is up about 8% after that, although it’s down 75% YtD.
The weakness of the cross-chain bridges
Increasingly, the cross-chain bridges are becoming a target for hacker attacks. On June 23 Harmony (ONE) announced that the Horizon bridge to Ethereum and Binance Chain was hacked for roughly $100M in assets, including Wrapped BTC (wBTC), Wrapped ETH (wETH), Aave (AAVE), SushiSwap (SUSHI), Binance USD (BUSD) and others.
Harmony is a Proof of Stake Layer-1 blockchain with low fees. It is also known for its P2E games and meme coins. In January 2022, ONE’s market cap reached a high of over $4.1B, but today it’s just $232M.
Earlier the Wormhole and Ronin bridges suffered from hacker attacks. Hackers have stolen $322 M and over $600 M respectively. The Wormhole Bridge hacked is between Ethereum (ETH) and Solana (SOL). Ronin is Axie Infinity’s Ethereum sidechain.
Developers are now forced to pay much more attention to security issues so that the cross-chain bridges do not threaten the development of the industry.
Interoperability of tokens with Tozex Bridge
Tozex Bridge is a truly revolutionary solution for the interoperability of tokens. It has been under development since mid-2019. Generally, Tozex Smart Contract Platform has been designed to facilitate the tokenization and management of assets within one ecosystem for all the stakeholders in a secure way as a non-custody platform.
As for Tozex Bridge it is integrating the multi-signature scheme into the bridge between blockchains. The concept of multi-signature requires two or more private keys to sign and send a transaction. Such an approach adds security for cryptocurrency transactions because hackers often hack blockchains via bridges. A detailed explanation of how Tozex Bridge solves the problem of interoperability in a secured way is here.
At Tozex platform the decentralized Tokenpad module allows users to issue, manage, and distribute tokens with no help and trust from a third party. It is a blockchain agnostic solution; users are able to choose the most suitable blockchain network depending on their use cases.
Conclusion: The perspective of interoperability market
The digitalization of finance is inevitable since the traditional financial system today has more intermediaries than it probably needs. Decentralized finance is finance without intermediaries, so capital will flow into them. To counter this, traditional Financial Services are embracing the crypto ecosystem to make traditional financial offerings better.
Now there is a race to the forefront: either fiat finance will start using blockchain technologies, or cryptocurrencies will offer users the services that they are used to in the fiat market. Interoperability is essential for blockchain digital finance to win this race. According to market experts, it is interoperability that will lead to the final implementation of the very idea of Web3.