Cross-Chain Compatibility: The Future of Interoperability in Crypto

With every emerging blockchain network, crypto traders and investors are introduced to new technologies and consensus mechanisms that are driving innovation in the crypto arena. However, the lack of compatibility between these networks has presented obstacles to advancing blockchain development.

This challenge is being met with cross chain compatibility, also referred to as cross-chain interoperability, which is a means of creating an interconnected crypto ecosystem. It enables direct communication between blockchains, allowing for the smooth transfer of assets between networks.

Cross-chain Interoperability Basics

So, what is crypto cross-chain interoperability exactly? A simple definition of cross-chain interoperability is the capacity for blockchains to connect – communicating, sharing data, and enabling the transfer of digital assets between networks. As a result of this compatibility, users can execute smart contracts, sending cryptocurrencies between multiple chains in a decentralized fashion, with no middlemen.

Cross-chain Interoperability Benefits

There are plenty of advantages to enabling decentralized applications (dApps) to gain access to resources across multiple blockchain networks. Among the primary benefits are:

Increased Cohesion

One of the primary benefits of cross chain interoperability is a less fragmented decentralized economy. Increased compatibility means a more unified, smoother and faster-functioning crypto ecosystem. 

Higher Liquidity 

Cross-chain compatibility makes trading easier, since by allowing for the seamless transfer of digital assets across blockchains, crypto ecosystem liquidity is increased.

Greater Collaboration

As digital resources can be shared rapidly and simply across chains, this encourages collaboration between networks and drives crypto innovation. Cross-chain interoperability means solutions can be developed that harness the collective power and unique characteristics of a diverse array of blockchain networks.

Enhanced Adoption

Cross-chain compatibility promotes greater crypto and blockchain adoption by facilitating instant access to all kinds of dApps, across a wide variety of blockchains. This creates a better, richer user experience as it enables users to benefit from multiple, unique decentralized services.

Cross-chain Interoperability Challenges

While there are undeniable benefits to interoperability, developers face a number of challenges in effectively implementing these cross-chain solutions. Some of the main difficulties include:

Limited Compatibility

Differing consensus mechanisms and system architecture across blockchain networks can present a major obstacle to cross-chain interoperability.  A lack of compatibility between underlying technologies makes the development of a unified crypto ecosystem incredibly challenging.

Compromised Security 

One of the most significant risks of cross-chain compatibility, arising when data and assets are transferred between blockchains, is security breaches. This is because vulnerabilities occur as a result of the fact that each network has its own security protocols and a high level of coordination and trust are required between chains for these risks to be mitigated.

Diminished Scalability

Scalability issues are inevitably starting to arise, as more cross-chain transactions are executed each day. An ever-more powerful solution is required to handle the growing volume of data being transferred and the increasing number of assets being transacted.

Fractured Standards

A lack of commonality is a major challenge impeding the advancement of cross-chain compatibility. When multiple blockchain networks interact, each with their own unique governance, standards and protocols, standardization is required to ensure the smooth future functioning of an interoperable crypto ecosystem.

Blockchain Bridges

As their name reflects, blockchain bridges, also known as cross-chain bridges, link separate blockchain networks to one another, to boost utility and liquidity. The blockchain bridge functions by locking or burning tokens on chain A via smart contract, and then unlocking the tokens or minting new ones via a different smart contract on chain B.

Two leading blockchain bridges used to enable interactions across chains are the Ren network and the ERC-20 token Wrapped Bitcoin (WBTC), which represents Bitcoin on the Ethereum blockchain and acts as a bridge between the Bitcoin and Ethereum blockchains. 

Both REN and WBTC provide mechanisms for tokenizing assets from a source  blockchain  to a destination blockchain  to enable cross-chain interactions.

Additional Popular Cross-chain Projects

There are a wide variety of additional cross-chain compatibility projects that have emerged in the last few years that have been established with the aim of overcoming the challenges faced in creating an interoperable crypto ecosystem. Leading cross-chain initiatives include:

Polkadot 

Polkadot is a sharded, highly scalable, multi-chain platform that spreads transactions across numerous blockchains. It enables cross chain compatibility allowing assets and datasets to be transferred between networks using the Polkadot relay chain, (its central chain), and its parachains. 

Cosmos Network

Similar to Polkadot, the Cosmos network facilitates the transfer of assets and data between blockchains. Connected utilizing the Inter-Blockchain Communication (IBC) protocol, Cosmos is a web of interoperable decentralized blockchains.

Wanchain

Another popular decentralized cross-chain blockchain network is Wanchain, the Wide Area Network chain. The interoperable platform’s cross-chain capabilities enable Bitcoin, Ethereum and other digital assets to be seamlessly transferred between chains.

The future of the blockchain is going to be shaped in large part by developments in cross-chain compatibility. Facilitating improved communication and smoother asset transfers will create a more decentralized, cohesive, and interconnected crypto ecosystem. This will lead to enhanced adoption, liquidity, utility and an overall enhanced user experience. 

For all these reasons, here at AlgosOne, our advanced AI-based crypto trading algorithm trades a wide variety of the native currencies for cross-chain projects. To mitigate risk and expand market opportunities, AlgosOne also trades a wealth of other crypto coins and traditional assets ranging from forex and commodities to stocks, indices and bonds on account holders’ behalf.To learn more about the AlgosOne, the blockchain, different types of crypto projects and currencies, as well as the world of AI-based trading, check out the rest of the AlgosOne blog!