Looking for the ‘interoperability’ in blockchain interoperability with cross-chain connections

Blockchain interoperability market

Blockchain interoperability market size was valued at $275.5 million in 2022 and can reach a CAGR of 26.8% between 2023 and 2032, as per insights from Global Market Insights, a market research firm. Reportedly, this can take place due to the increased need for cross-chain asset transfer in businesses. Industry experts believe more innovations will make the cross-chain transfer of sensitive assets safer. For example, Chainlink’s cross-chain interoperability protocol (CCIP) is used to provide price feeds on decentralised finance (DeFi) platforms across multiple smart contract blockchains, with over $20 billion in total value locked (TVL) secured by Chainlink’s oracle network.  

Another example could be the Layer Zero interoperability protocol which utilises blockchain interoperability, to immediately validate the cross-chain transactions that are taking place, overcoming the challenge of liquidity fragmentation. It is believed blockchain interoperability finds application in creating cross-chain decentralised applications (dApps), allowing a unified dApp to operate across various smart contracts on different blockchains. For example, know-your-customer (KYC) based solutions, identity management, title records for loan verification, and cross-border payments, among others, can be some of the use cases of blockchain technology in fintech. “ In the fintech sector, blockchain interoperability can enhance safety by enabling secure and efficient communication between distinct blockchain networks. It can also facilitate seamless data and digital asset interaction, among others, across different blockchains,”  Hariom Seth, Founder, Tagglabs, an AI advertising company, explained.

The road ahead

From what it is understood, each blockchain has its own unique rules, token standards, protocols, and smart contracts, among others. It eventually led to segregated liquidity of assets which can require cross-chain solutions for interoperability. It is believed that cross-chain technologies have the potential to develop facilities that enable the exchange of information between different blockchains. Cross-chain bridges can be a milestone in the quest for blockchain interoperability. “Crypto bridges can build artificial derivatives to mimic native assets on other chains. These synthetic versions are known as wrapped tokens. However, more recent developments around interoperability protocols such as Layer Zero and Chainlink’s cross-chain interoperability protocol, among others, can improve,” Parth Chaturvedi, investments lead, CoinSwitch Ventures, a blockchain investment firm, highlighted. 

Industry experts believe some of the popular blockchain fintech use cases can be found in trade finance and supply chain, among others. Interoperability is important due to the difference in protocols along with the value chain. It is believed that while transferring money, many siloed systems are responsible for making sure the transaction is completed. Without interoperability, the systems will not be able to communicate with each other. This limitation can hamper blockchain adoption in the finance sector as the bank has to set up the whole value chain in one single protocol. “ However, with interoperability, it opens opportunities for other companies to play a role in the value chain. In addition to this, there are other benefits such as using smart contracts powered by the blockchain, which can make the process of trade finance smooth,” Siddharth Ugrankar, CEO and founder, Qila.io, a Blockchain-As-A-Service (BAAS) platform, said.

 Critics argue that this technology can be too complicated, and might raise safety issues. Primary challenges in blockchain interoperability can involve cross-chain asset transfers and function calls. Many blockchain infrastructures are expected to operate in isolation, restricting the resources of dApps confined to their hosting blockchains. Most often, each blockchain has its distinct governance model, security protocols and privacy features. “Blockchains are decentralised networks that operate without intermediaries, creating a standardised protocol that is monitored by a centralised agency is not possible. This makes each blockchain vulnerable to the weaknesses of any other blockchain it integrates with,” Shilpa Mankar Ahluwalia, partner and head, fintech, Shardul Amarchand Mangaldas and Co, a legal firm, concluded.

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