Since the emergence of the practical use of blockchain technology, interoperability remains one of the significant issues. If solved, crypto experts think, it could facilitate a seamless transition from Web2 to Web3 and have added benefits. They suggest a TCP/IP-like standardized communication system between blockchains, as it can address interoperability.
Blockchain and Interoperability Issues
Ryan Lovell, Director of Capital Markets at Chainlink Labs, stated that blockchain would require the same level of interoperability as computers use the internet to transfer data across vast networks. Modern computers use TCP/IP protocol for communication, and blockchain would require a similar system to achieve complete interoperability.
If developers can develop such a system, blockchains can connect like computers on the internet. This facility could revolutionize the industry, as the crypto industry generated hefty profits during the last bull run. But these profits would have multiplied if the isolated blockchains were connected via a system.
Lovell stressed the need for interoperability and its pivotal need in the financial institutions working on tokenizing real-world assets. Only with this facility can they ensure that a closed ecosystem does not constrain liquidity.
Each blockchain is a unique and secure ecosystem, providing lucrative benefits to others. Imagine a system where users can benefit from each without stressing the need for interoperability. A TCP/IP equivalent robust communication system could solve this problem.
Cosmos has an Inter-blockchain Communication Protocol (IBC), which backs a lending platform, Umee. It’s founder and Chief Executive Officer, Brent Xu, told a crypto media outlet that a proper risk management system must be in place to ease interoperability. This has to be done before real-world assets are brought on-chain, as bridging them would only serve the desired purpose if interoperability is functional.
Xu further explained that financial institutions should start working on strict KYC credentials to ensure the authenticity of real-world assets before they can be tokenized. This would also be beneficial during the on-chain proof-of-reserve audit, which is required to be released.
Every Aspect Needs to be Considered
Citing the financial crisis of 2008, he said the significant amount lost after the incident could have been saved from being lost given the inefficient legacy system. If any blockchain technology-like system had been employed, the contagion which made the billions of dollars go into vain could have been saved.
Cross-chain bridges, oracles, and independent layer-2 sidechains are commonly used interoperability tools. But multiple hacks have been on the cross-chain bridges making them a weak point in the ecosystem. In March 2022, the Ronin Bridge hack caused around $600 million in losses.
Xu noted that most bridges involve multi-signature security setups or rely on proof-of-authority consensus mechanisms. These centralized systems are more prone to attacks. He also said that initial interoperability procedures targeted speed and ignored security; this approach backfired.
Xu thinks the key would be incorporating the interoperability protocols into the platform working on a blockchain rather than a third party. This could significantly enhance security as they could eliminate the vulnerability of bridges since they are a known attack point of hackers.
Popular interoperability protocols in the industry are Chainliknk’s Cross-Chain Interoperability Protocol (CCIP); Cosmos’ Inter-blockchain Communication Protocol (IBC).
Disclaimer
The views and opinions stated by the author, or any people named in this article, are for informational purposes only and do not establish financial, investment, or other advice. Investing in or trading crypto assets comes with a risk of financial loss.
Steve Anderson is an Australian crypto enthusiast. He is a specialist in management and trading for over 5 years. Steve has worked as a crypto trader, he loves learning about decentralisation, understanding the true potential of the blockchain.
Source: https://www.thecoinrepublic.com/2023/04/17/interoperability-solutions-in-blockchain-industry-need-to-evolve/