With so many blockchains being developed with seemingly similar value propositions, many people are starting to wonder which one will emerge victorious and leave the others in its wake.
However, that may not be the right way to look at the landscape. In fact, it has become common in the industry to say that there is going to be more than one winner. After all, blockchains have important differences such as the amount of time it takes to process a transaction and how much it costs to use. One network could be ideal for an NFT purchase, while another is the best way to send money to your aunt around the world. However, unless you plan on setting up specific wallets for every blockchain, which could quickly become unwieldy, there must be a way for all these networks to talk to each other. Blockchains cannot be data silos. This is where interoperability comes in.
Blockchain interoperability is the idea of enabling distinct blockchain networks to interact and integrate, communicating seamlessly to allow for the sharing of data between chains. Are the fees too high on Ethereum ETH ? Switch over to a Layer 2 protocol like Polygon MATIC or a competing network such as Algorand ALGO ; if that’s running slow, hop over to Solana SOL . The dream is to be able to move freely between blockchains as easily as we switch between internet tabs today.
There have already been early successes in blockchain interoperability. Take, for example, wrapped bitcoin (wBTC). As DeFi started to grow many bitcoin hodlers were looking for a way to generate yield on their holdings. Just like everyone else, they wanted to make their money work for them. They got the solution in January 2019 with the launch of wBTC, a token running on top of Ethereum that is pegged 1:1 with Bitcoin BTC . Today, wBTC can be found throughout Ethereum’s DeFi ecosystem deployed in decentralized lending pools, earning yield farming revenue (which can vary depending on the protocol) or posted up as loan collateral. Its market capitalization is $3.4 billion, amounting to about a little less than 1% of the total bitcoin market cap.
wBTC is an example of a bridge, where a user locks up an asset in either a smart contract or with a centralized custodian/issuer and receives a token on a new blockchain that represents the original asset. wBTC is not the only example of a Bitcoin/Ethereum bridge. RenBTC is another that is completely smart-contract based. wBTC is issued on a 1:1 basis by a consortium that includes BitGo.
But that is just the beginning.
Some blockchains share a common set of DNA so that they are compatible with each other. For instance, many networks have integrated the Ethereum Virtual Machine (EVM), which is essentially the open source recipe that sets the rules for changing a blockchain from state to state (i.e. adding a new block). It comprises the rules run by every node on Ethereum so that they know how to process transactions.
However, any blockchain can integrate the EVM into its operations. This makes it simple for prominent applications such as decentralized exchanges to move from one blockchain to another. Some platforms that offer EVM compatibility are Binance Smart Chain, Tron and Polygon (formerly MATIC). As an example, prominent Uniswap-clone SushiSwap has integrated with both Polygon and Binance Smart Chain. This way, their clients can use the same application on the platform of their choosing.
Finally, there are blockchains being formed with interoperability in their DNA. For example, Polkadot DOT is an open source platform building cross-chain bridges to enable transfers of data, assets and even smart contracts across blockchains. Another leading interoperability project, Cosmos ATOM , is focused on building an ecosystem of interconnected apps and services communicating through its inter-blockchain communication protocol.
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