Blockchain Interoperability – Cross-Chain Compatibility Among Dissimilar Blockchains

It seems inevitable that there will be many different tokens running on dissimilar systems. Unfortunately, these tokens will have their own blockchains. The good news is that they all run over the same IP based network. This allows a protocol layer to provide interoperability services to bridge various blockchains. This means a direct exchange of value from one cryptocurrency to another. As a result, atomic swaps will become possible across borders and payments can be instantaneous among tokens.

There are many different types of blockchains today and they are very much silos of their own ecosystem. There is no universal way to interoperate other than thru digital exchanges. The currency is often paired with a stablecoin to try and peg the value as close to fiat or with major cryptocurrency like BTC. The problem is that some pairings just don’t exist. The inconvenience here is the user will have to exchange their token to a supported pairing on their exchange first in order to make it useful. For example suppose there is no direct conversion between MyCoin and ANewCoin. Most of you know the drill. You have to buy into an exchange with fiat a supported cryptocurrency, and in most cases it will be BTC or ETH. It is only after you have bought that can you convert to MyCoin to get ANewCoin. Imagine all that happening with just a few finger swipes on screen or mouse clicks and all behind the scenes.

There are projects like Wanchain and Cosmos that focus on blockchain interoperability. They have an Application Layer (DApps, website, smart contract, etc.) that can interact with their software at the Interoperability Layer. This provides an API into the Blockchain Layer itself ubiquitously without the users doing anything else. It is simplified for a more pleasant user experience. Making it more user friendly leads to greater adoption of technology due to ease of use.

A good way to envision this is let’s say you are an ETH holder. You are interested in buying a luxury watch directly from a seller that is valued in BTC. Instead of exchanging ETH for BTC at a digital exchange and then pay for the item, interoperability will allow you to pay directly using an app with ETH at BTC valuation. The conversion process takes place automatically thru the interoperability layer, quickly transferring value from the ETH blockchain to the BTC blockchain. The seller gets paid and the item is delivered to the buyer. Certain programming interfaces can also create smart contracts for these type of transactions to release the item for delivery upon receipt of payment.

All that is required is software that can understand the different protocols. While it would appear to be a centralized settlement layer, it is actually not. It remains decentralized because the processing is done by not one organization, but different trustless nodes that run the software. These nodes are computers that belong to people who don’t know each other. All they have in common is that they are running the same software over the same network. Transactions are then processed by these nodes and incentivized for it.

Critics might quickly say that these systems are not scalable because blockchains are slow and cumbersome databases. You can argue that, but it still provides cryptographic security which is very important in value based transactions. There are new ways to settle payments that provide both on-chain and off-chain solutions to address scaling issues. An example of this are Bitcoin’s Lighting Network and Ethereum’s Raiden Network. By moving micro transactions like instant payments off-chain, the idea is to scale to larger volumes since the payments can be handled without going through a tedious consensus process like Proof-of-Work. Interoperability will have support for these types of systems as well.

Interoperability among the major public blockchains, will allow seamless, reliable and more efficient transactions for users. It is similar to how we communicate today. English provides a bridge among many countries because it is widely spoken and understood. The English language would be like the protocol for communications used on blockchains for interoperability. This is the ideal vision of a digital economy where transfer of value is frictionless and not complicated, regardless of cryptocurrency.

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