Unlike centralized systems, blockchains use a communal agreement method to validate updates to the ledger, offering a more neutral, secure, and transparent multi-party record-keeping system.
Yet, blockchains lack native ways to communicate with other networks or external data sources. This hampers their ability to interface with traditional systems and other blockchains.
As multiple blockchain networks become commonplace, protocols for inter-blockchain communication, or cross-chain applications, are essential. This article serves as a guide, introducing key benefits of blockchain interoperability, various solutions, and how Kaleido enables advanced interoperability for the enterprise.
Table of Contents
Why are cross-chain capabilities important?
The web3 landscape is becoming more complex with over 100 base-layer blockchains and multiple layer-2 and layer-3 networks. These layers are a result of blockchains customizing their features to better fit specific use cases, often by making trade-offs like prioritizing throughput over decentralization. They also differ in aspects like consensus protocols, performance, and support for programming languages. Blockchains are also adopting different strategies for scalability, such as having a single high-performance base layer, or using additional layers for modular applications.
Interoperability in blockchain technology enables seamless exchange of data and assets across different blockchain networks. Currently, transactions are straightforward only if both parties are on the same blockchain. Interoperability aims to simplify cross-chain transactions, making it easier and more efficient for parties to interact.
This is particularly crucial in the financial services industry, where different financial ecosystems operate on various blockchains. Interoperability allows for cost-effective, timely, and secure transfers of data and funds between these ecosystems.
What are the benefits of blockchain interoperability for businesses?
Most layer-1 blockchains don’t inherently support cross-chain interoperability. However, various techniques are being developed to increase the level of interoperability between different blockchain networks. Cross-blockchain compatibility offers several key advantages, including:
Interoperability helps to solve the blockchain trilemma by using different chains for what they are good for. For example, you might use a public chain for security and a zero-gas sidechain for cost savings and to facilitate lots of transactions. When we connect these two, we get the best of both worlds.
New use cases
The ability to build applications across different chains opens up new business models and revenue opportunities for businesses. Some industry specific examples include:
Decentralized Finance (DeFi): Cross-chain decentralized applications (DApps) enable users to tap into a variety of financial services on multiple blockchains, without sacrificing liquidity or security inherent to blockchain technology. This advancement is poised to drive innovation in the DeFi sector and expand the reach of new financial tools to a global user base.
Asset Tokenization: In recent years, the tokenization of assets like real estate, commodities, and financial instruments has gained momentum. Various blockchain platforms are specializing in specific use cases. Interoperability is important because one bank may prefer one blockchain for tokenizing assets while a real estate platform may opt for another. Where this could lead to fragmentation due to different underlying technologies, cross-chain interoperability can address these issues by improving liquidity, broadening user access, and enhancing the overall user experience. Also, assets settled on one blockchain can be seamlessly transferred to another.
Digital Currencies: Expanding on the earlier use case, digital currencies such as stablecoins and Central Bank Digital Currencies (CBDCs) are groundbreaking developments in digital finance. CBDCs are authorized digital versions of a country’s national currency, issued by the central bank, while stablecoins are digital tokens usually anchored to a stable asset like fiat currency. The cross-chain operability of these digital assets is crucial for their utility and broad acceptance. Interconnectivity among various blockchain networks allows for smooth and effective transactions, empowering CBDCs and stablecoins to operate across multiple financial ecosystems. This interoperability enhances international trade, facilitates remittances, and promotes financial inclusion by enabling these digital currencies to engage with a wider array of financial platforms and services.
Gaming Industry: Cross-chain DApps have the potential to transform the gaming sector by facilitating cross-platform trading of in-game items, elevating the gaming experience, and ensuring genuine asset ownership. These features allow players to effortlessly switch between games and platforms while maintaining control of their virtual assets, thereby ushering in increased player engagement and asset value retention.
Supply Chain Management: For supply chains, cross-chain DApps have the potential to enhance both transparency and traceability. Imagine we used Kaleido to build a track and trace app, then, by leveraging multiple blockchains, we connected our application to other endpoints. We could track authenticity, minimize fraud risks, tie into logistics platforms. Such elevated transparency could be transformative for industries where accountability and origin verification are critical.
Larger user base
The benefits of blockchain interoperability are clear in a number of use cases. The business value is also clear, as we increase capabilities and scale. But the more important benefit may be to the end user.
For web3 applications to reach mass adoption they need to be easy to use for end consumers. Interoperability, more chain support, connected DApps, all this leads to simpler user experiences and a larger customer base. By making experiences where one account can connect to many, versus a world where a consumer needs a login for every blockchain app, we can bring more people into the fold.
How does Kaleido enable enterprise-grade interoperability?
Choosing the right development platform, managing transaction fees, synchronizing on-chain and off-chain activities, and providing user wallets are just a few of the issues that you need to consider. Kaleido serves as a comprehensive resource for addressing all your web3 interoperability challenges, offering solutions for each aspect of blockchain development.
Our Trusted Bridge then lets you connect multiple blockchain networks
By using a bridge, we can help enterprises securely link its permissioned blockchain to a public blockchain, enabling access to the benefits of both networks. Bridging can also facilitate the exchange of assets between different blockchains. For example, a user on one blockchain may want to send a digital asset you’re managing to a user on another blockchain. A bridge can facilitate this transfer by allowing the asset to be “wrapped” in a form that can be recognized and transferred between the two networks.
We offer an open-source orchestration engine: Hyperledger FireFly
At the heart of FireFly is the concept of a FireFly Supernode. This Supernode can interface with any public or private blockchain. Once connected, it can execute specific smart contracts, manage tokens, and monitor transaction activity. Think of FireFly as a brain or data orchestration layer. A single FireFly Supernode is able to connect to multiple chains and create a cross-chain network by facilitating transactions, data, and messaging.
The system operates on an event-driven model, ensuring reliable data transfer between your DApp and connected blockchains, complete with correct sequencing, retry mechanisms, and idempotency for both on-chain and off-chain data.
For instance, Hyperledger FireFly can function as a secure intermediary between multiple chains. You configure FireFly with the relevant RPC URLs and chain IDs for the blockchains you wish to connect. FireFly’s inherent messaging and event-monitoring capabilities then handle token minting and burning on the connected chains.
Hyperledger FireFly comes with other robust features like a comprehensive web3 development stack, modular security options, token APIs, and smart contract management. An open-source version is available for those looking to get their feet wet. For more advanced needs, Kaleido offers a managed FireFly service, complete with additional APIs and enterprise-specific security features.
Kaleido in action: Enabling interoperability in global finance
Kaleido helped Swift complete a CBDC Sandbox. Leveraging Hyperledger FireFly, the sandbox demonstrated that CBDC-initiated cross-border payments can plug into Swift’s enhanced platform exactly as real-time gross settlement (RTGS) payments do. This was facilitated using Swift’s newly designed CBDC connector gateway.
The sandbox started with 18 central and commercial banks and simulated nearly 5,000 transactions. The testing received positive feedback and showed promise for additional use cases, and Swift announced a second phase of testing with an expanded list of 30 participants.
Put Kaleido to work for you
Blockchain interoperability brings numerous benefits and opportunities, including seamless data and asset exchange between disparate blockchain networks. This enables cross-chain applications, opens up new possibilities for industries like healthcare and finance, and streamlines the user experience by potentially allowing easier transactions across different applications.
Kaleido is a platform that simplifies the creation and operation of multi-chain networks. It offers tools for managing cross-chain transactions, smart contracts, and asset movement, making it easier for enterprises to adopt blockchain technology while navigating its complexities. This can speed up the deployment of interoperable blockchain solutions, reducing the time and resources required to build and maintain such networks.
If you want to dive deeper into blockchain interoperability or discuss your use case with one of our solutions architects, you can schedule time here.
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