Jul 05, 2021

Blockchain Interoperability: What Is it and Why Does it Matter?

By: Algorand

Bitcoin started with the goal to become a decentralized, peer-to-peer money system but ended up bolstering a paradigm shift in the way digital assets and web applications are created and operated. It all has to do with blockchain, the technology underpinning cryptocurrency.

Distributed ledger technology (DLT) diverted from its initial use case a long time ago, especially with the introduction of smart contracts – self-executing programs in which the terms of an agreement between two or more parties are written in the code.

There are many blockchains that support smart contracts and thus can host various assets and decentralized applications (dApps), i.e., applications that run on decentralized computing systems. 

Today, businesses and individuals can employ thousands of dApps, covering all kinds of use cases, from finance and healthcare to gaming and social media. 

However, there is one attribute that is still missing from the bigger picture and potentially hindering the mass adoption of blockchain: blockchain interoperability.

What Is Blockchain Interoperability?

Part of the reason why blockchain adoption is capped today has to do with the fragmentation of the market. While we have many blockchain infrastructures to build on, the problem is that most of these distributed networks are isolated and cannot really interact with each other. This limits the resources of most dApps, which are strictly confined to the blockchains that host them.

Blockchain interoperability is the ability of independent distributed ledger networks to communicate with each other. 

In other words, interoperability is:

  • the ability of blockchains to exchange and make use of data;
  • the ability to move a digital asset between two or more blockchains while maintaining the state and uniqueness of the asset consistent throughout the process.

Making blockchains interchangeable would unleash the potential of dApps and digital assets, and would power many innovations to be widely adopted across platforms. 

Why Is Interoperability Important?

Intuition tells us that blockchain interoperability is imperative for enterprises. In a world where businesses rely on greater levels of collaboration and inclusion, blockchain interoperability is indispensable. It would enable a user-friendly experience, frictionless data sharing, easier execution of smart contracts, and better opportunities to secure partnerships.

In traditional software systems, software doesn’t work to its fullest potential if it cannot communicate with other software or ecosystems.

In a similar fashion, blockchain use cases in finance, supply chain, healthcare, or digital identity cannot be fully deployed without interoperability. Breaking the silos of data and applications should be the next top priority of third-generation blockchains.

The internet itself has been focused on interoperability since its early stages, which is why it has succeeded so fast. Imagine what would happen if you couldn’t send an email from a Google account to a Yahoo account. The same is true about blockchains – achieving this major objective would accelerate the fourth industrial revolution and transform business processes.

In April 2020, the World Economic Forum (WEF) released a whitepaper on blockchain interoperability, concluding:

Organizations do not want to find themselves on a blockchain platform that may limit their options for external collaboration in the future. They want to build scalable solutions that can grow with both the enterprise and the extended ecosystem if needed. Many organizations also want to remain flexible in changing or connecting to different solutions.”

How Does Algorand Advocate Interoperability?

Algorand is a public blockchain that enables the creation of digital assets and smart contracts on its Layer-1 network, meaning that all minted assets benefit from the security, speed, and decentralization of the mainnet.

The blockchain network relies on Pure Proof of Stake (PPoS), a consensus mechanism invented by MIT Professor Silvio Micali. It is currently the only consensus approach that solves the Blockchain Trilemma by achieving all three key elements of an ideal blockchain: scalability, decentralization, and security.

Algorand has focused on interoperability since its inception. To begin with, Layer-1 represents an ecosystem that enables the creation of fungible and non-fungible tokens that can communicate with each other. In this way, Algorand aims to contribute to the defragmentation of the market.

Businesses and individuals can issue a wide range of assets on Algorand through Algorand Standard Asset (ASA) framework, which features universal interoperability across all tokens developed on Layer-1.

Besides building a multi-functional ecosystem with interoperability in mind, Algorand also promotes cross-chain interoperability through its partnerships:

  • Stacks – in 2020, Algorand worked with core Stacks developers to build a multi-chain smart contract programming language. Stacks is a decentralized platform whose goal is to let users have control of their data and identity. The new language, known as Clarity, enables the two networks to communicate with each other directly. The project’s ultimate goal is to allow developers to create smart contracts that execute across Algorand and Stacks, as well as other chains that might decide to join the initiative.
  • pNetwork – in April 2021, Algorand partnered with pNetwork, a blockchain project that promotes universal blockchain composability - a broader term for interoperability. pNetwork has been working to connect blockchains through special bridges powered by pTokens, which act as intermediary tokens with a 1:1 peg connecting any two chains.
    Thanks to the partnership, pNetwork will create cross-chain bridges for the Algorand ecosystem. It has received a grant from the Algorand Foundation for developing a cross-chain channel for Layer-1 to be connected with external assets and ecosystems.
  • Circle – last year, the Algorand Foundation partnered with Circle to add support for its USDC stablecoin on the Algorand blockchain. USDC has been the fastest-growing dollar stablecoin in 2021 and is now relying on a multi-chain infrastructure.
  • Yieldly -  This month, a DeFi platform built atop the Algorand blockchain unveiled a mechanism tying the Algorand ecosystem and major chains, including Ethereum, Polkadot, and Binance. The move brings Yieldly Bridges to an estimated 600,000 Ethereum users….

Algorand is poised to become one of the leading blockchain platforms for CeFi (Centralized Finance) and DeFi (Decentralized Finance) applications thanks to its ongoing effort to integrate interoperability both internally and externally. Learn more about FutureFi on Algorand here.

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