Cryptocurrency and blockchain enthusiasts pride themselves on belonging to a community working on the future of financial systems. However, the community is inherently fragmented as many blockchains operate independently of each other. The dream of the mass introduction of blockchain and decentralized finance faces a major obstacle: lack of interoperability.
In the meantime, decentralized applications (DApps) – the result of decentralization – are being consolidated. DApp developers are having difficulty transacting between different blockchain networks and the reason for this is that they are stuck in the Ethereum ecosystem. Despite the best infrastructure, Ethereum is losing ground.
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Ethereum is pursuing the dominance of the single network blockchain
According to the DApp market report, around 59% of all DApps run on the Ethereum blockchain. Despite the development of decentralized funding on Ethereum, many developers and users are not happy with the network.
The ever-increasing transaction fees are a complete limitation for both developers and users. Likewise, the Ethereum network is prone to congestion. Even six years after its inception, Ethereum’s transaction speed dropped by around 15 transactions per second (TPS). The combination of the above has distracted developers’ efforts by overestimating the feasibility of their projects.
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The highly anticipated Ethereum 2.0 upgrade doesn’t fix any scalability problems either. Eth2 could still take more than a year to fully implement. When you factor in related efforts like proof-of-stake migrations and security upgrades, measures to address the scalability issue don’t seem to be on the priority list.
Part of Eth2’s vision is to “make applications faster and cheaper”. However, as reality drifts away from that vision, the crypto financial community is looking for alternatives.
These alternatives are based on cooperation rather than competition. The potential driver of decentralized financial growth is improved interoperability.
Interoperability and search for interoperability solutions
Advertised as a solution for applying decentralized finance outside of the Ethereum blockchain, interoperability promotes the idea of decentralization. By facilitating seamless communication between different blockchain networks, the future lies in interoperability.
With interoperability, the traditional mentality “I use blockchain B because it is better than blockchain A” is experiencing a paradigm shift. We are moving towards a culture where blockchains A and B work together and are used together for a specific purpose.
For a better context, consider the following: Without interoperability, most DeFi protocols would be missing the largest blockchain network and the largest cryptocurrency Bitcoin (BTC). With the help of blockchain bridges, however, it is now possible to transfer one’s BTC holdings to the Ethereum network in the form of wrapped tokens such as Wrapped Bitcoin (WBTC), which cryptographically have around 1% Bitcoin supply on Ethereum. These ERC-20 compatible packaged tokens provide faster Bitcoin transactions and allow users to use Bitcoin on DeFi protocols like Aave to lend and borrow assets – or perform operations on Other DeFi.
It is also because of the interoperability of the blockchain that users have the freedom to trade ERC-20 tokens on the Binance Smart Chain in order to avoid Ethereum’s skyrocketing gas fees and conduct transactions almost instantly. The advent of compatible solutions will serve as a window to many DeFi products and applications.
Many developers, especially in high volume sectors like gaming, are currently looking for two solutions to solve their problems. However, many of these solutions are slow to deploy as designers ponder options such as plasma state channel technology. Aggregation is an exciting new solution that bundles transactions for higher throughput.
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However, the fact that many of the Ethereum Layer-2 protocols limit DApps in the Ethereum ecosystem. Without the ability to interact, developers and users cannot leverage the value of other platforms.
So how can we achieve seamless interoperability while mastering the challenges that the existing Layer 2 infrastructure is facing?
Trustless Bridges: The Holy Grail for Blockchain Interoperability?
As the name suggests, blockchain bridges are built to expand blockchains and facilitate communication. This technology solves the problem of the interaction between two different protocols. With a Trustless Bridge, users can take advantage of both blockchains.
In general, these bridges are regulated using the “Burn and Cast” method. Accordingly, the tokens do not leave their respective blockchains during the transaction. The token is burned or blocked on its blockchain, while its equivalent is minted or generated on another blockchain. This method ensures a constant supply of tokens and reduces volatility.
There are two types of blockchain bridges: federated and trusted. The project was previously a more private and focused project where certain criteria had to be met before the bridge could go into operation. Trustless Bridges, on the other hand, work in a decentralized environment: Similar to Bitcoin and Ether (ETH) miners, Trustless Bridge Validators receive incentives to maintain bridges. Here, trustworthy bridges operate on mathematical truths and are free from human error or corruption.
Along with innate transparency, there are many benefits associated with trustworthy bridges. They enable tokens to be interoperable between different networks. Ethereum can use this ability to outsource its transactions to another blockchain. In addition, trusted bridges help reduce congestion in high-volume blockchains and provide users – and especially DApp developers – a seamless transaction experience.
Reliable bridge and open financing
Using Trustless Bridges is an effective way for blockchains to grow together. It also serves as a great incentive for developers to create DeFi applications that promote the prospect of an open financial system. The Trusted Bridge heralds a new era of interoperability that will ultimately create new value for the benefit of all market participants.
Trustworthy bridges create the potential for cooperation between DeFi platforms and central banks. A peer-to-peer banking system that leverages the convenience of traditional banking setups is a hope built by trustworthy bridges.
Stephen Tse is the founder and CEO of Harmony.one. Previously, he was a researcher at Microsoft Research, a senior infrastructure engineer at Google and a lead engineer for search rankings at Apple.