Cross-chain technology allows two or more blockchain networks to communicate with each other by using “oracles.” An oracle is an entity that provides data from another source — like the real world — to feed into the network and trigger transactions.
Among others, Interoperability is one of the most exciting developments in the evolution of cryptocurrency. It makes it easier to move funds between different blockchains and cryptocurrencies.
While there are different blockchains in the world, and they all have their own unique characteristics — some of them are better than others, every blockchain has certain advantages and disadvantages.
For example, Bitcoin (BTC) was the first cryptocurrency to be created and is still one of the most valuable ones. However, it has some problems that other blockchains don’t have. For example, if you want to make a payment using Bitcoin Cash (BCH), you’ll need to convert your funds into BTC first and then back into BCH. This process can take up to 24 hours or more, which makes it inconvenient to make payments online or in person.
On the other hand, Ethereum (ETH) is much faster than Bitcoin but it also has its drawbacks — for example, it doesn’t have smart contracts like EOS. So what’s needed is a way to combine all these different blockchains so that they can communicate with each other regardless of what language they are written in or what platform they run on.
That’s where cross-chain technology comes into play. This technology can help address some of the most pressing issues in the digital asset ecosystem today, such as scalability, interoperability and privacy.
What Is Blockchain Interoperability?
Interoperability refers to a connection between two or more systems that allows them to exchange information or send commands back and forth.
In the case of blockchain technology, interoperability means that different blockchains can communicate with each other — they can send data to each other without having to go through an intermediary party like an exchange or wallet provider. This also means that tokens from one chain can be transferred onto another chain without having to go through an exchange first.
There are two main types of cross-chain technologies: Atomic swaps and sidechains. Both have their pros and cons but they both achieve the same goal: allowing cryptocurrencies to move freely between different blockchains.
Atomic swap allows cryptocurrency to be traded peer-to-peer (P2P) without using a third party. It is an automated, self-enforcing digital asset swapping contract.
With sidechains, tokens and other digital assets can be securely used in another blockchain and then moved back to the original blockchain if necessary.
Why Is Blockchain Interoperability Needed?
The crypto ecosystem is characterized by a wide variety of data and assets, making interoperability vital. To facilitate the transfer of tokens and assets across chains, decentralized cross-chain bridges are necessary.
Blockchain interoperability enables more useful information to be shared in a timely manner. To illustrate: Data from a blood test the patient took last week at his doctor’s office can be used during an emergency visit today, eliminating the need for additional (or unnecessary) tests.
Use Cases of Interoperability
The primary use cases of interoperability at the moment are:
First and foremost, It facilitates the transmission of a given cryptocurrency’s liquidity from one blockchain to another. In addition, It enables users to trade one asset on one chain for another asset on another chain. Furthermore, users will be able to borrow assets on one chain by posting tokens or NFTs as collateral on another.
What Are the Benefits of Interoperability?
Interoperability is a very important aspect of blockchain technology. Below are some of the benefits of cross-chain technology:
- It provides users with more options for exchanging value
- It makes it easier for users to make payments and other transactions
- It gives investors more options for buying cryptocurrencies
- This technology allows for interoperability between different blockchains and cryptocurrencies.
- Increased interoperability, greater privacy, and more efficient scaling
- The ability for different cryptocurrencies to communicate with each other also opens up new opportunities for developers who want to create decentralized applications (dApps). For instance, if Ethereum (ETH) could interact with Bitcoin (BTC), then dApps could potentially use both chains for different purposes without having to build them separately from scratch. This would greatly reduce development costs and speed up innovation within the industry.
Interoperability is an important part of any financial ecosystem because it allows assets to flow freely within it, ensuring that users can easily access their money from any point in time. This can be particularly beneficial for individuals who want to make payments across borders or convert one type of cryptocurrency into another without having to go through an intermediary.