The concept of interoperability in cryptocurrency refers to the ability of blockchains to be compatible with each other, in order to facilitate the seeing and sharing of information across multiple chains.
The Long Explanation
One of the longest standing problems in the blockchain space has been the standalone nature of blockchains. This means that most blockchains – as well as the decentralized applications built on top of them – can only work within the limits of their data and capability.
The concept of interoperability in blockchain refers to the ability of different blockchain networks to exchange data between one another, leverage this data for its operations, and move assets from one chain to another.
An interoperable system allows ordinarily disparate networks and assets to plug into themselves and enjoy the combined power of their abilities. This interoperability allows for the creation of powerful new products and services that simultaneously takes advantage of the strengths of multiple blockchains.
An example of the advantages of interoperability can be seen in the popular Wrapped Bitcoin (WBTC). Known also as proxy tokens, these ERC-20 tokens are the product of a Bitcoin-Ethereum bridge that allows you send and use Bitcoin on the Ethereum network.
While this is certainly one of the more harnessed forms of interoperability today, though, blockchain enthusiasts long for a time when interoperability becomes commonplace.
Complete interconnectivity of blockchains is seen as critical to the total decentralization of the blockchain. It would allow more persons create application-specific chains that communicate with other chains like Ethereum and Bitcoin without any hassles.
With many chains already enhanced for efficiency in one specific area (such as smart contract execution, governance/decentralized consensus, etc.), interoperability will allow these chains work more closely to bring all of the advantages together for a cause.
There are increasingly more and more attempts at interoperability today, such as the WBTC example above. Most attempts at interoperability, though, fall into one of the following categories:
- Sidechains: A type of blockchain built on top of another chain, but with its own consensus mechanism, tokens, and security parameters. Also known as layer-2 networks, these sidechains look to improve on a feature of their parent chain. E.g.: Polygon (MATIC)
- Bridges and Swaps: A cross-chain network designed to facilitate the swapping of one asset from one chain to another. This process is mostly done by “burning” the token from one chain, and minting an identical token on the receiving chain. E.g.: Wrapped Bitcoin (WBTC)
- Oracles: An information bridge between on-chain and off-chain environments. An oracle serves as a decentralized source of information from which multiple blockchains and their smart contracts can draw/send information. E.g.: Chainlink