June 23, 2024

Unlocking the Potential of Blockchain and The Hurdles of Interoperability Across Networks

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Blockchain technology has revolutionized industries by offering decentralized and transparent systems. However, for its full potential to be realized, achieving interoperability between different blockchain networks is crucial. Being involved in this space for close to a decade certain realities have surfaced with no solutions until now. So I am going to go over the concept of interoperability, the challenges it poses, and the solutions being developed. I also want to touch on the costly mistakes made in the past that resulted in massive losses and highlight the need for improved security practices.

Understanding Interoperability in Blockchain

Interoperability refers to the ability of different blockchain networks to communicate and exchange data seamlessly. It enables the transfer of assets and information between distinct blockchains, fostering collaboration and enhancing the overall efficiency of the decentralized ecosystem. This capability is especially vital in the realm of decentralized finance (DeFi), where smooth asset transfers and data sharing are essential. Sounds simple enough but it is not that simple and I’ll go over this as we move along.

Approaches to Achieving Interoperability

Various methods have been employed to achieve interoperability in blockchain networks. One common approach is the utilization of bridges, this acts as software applications facilitating asset transfers between different blockchains. Just think of you traveling from Brooklyn to Manhattan, without a bridge to cross it would be pretty difficult to get there. Bridges create digital representations of assets on one blockchain and utilize smart contracts to enable their transfer to another blockchain.

Another method is the implementation of sidechains. Sidechains are separate blockchains connected to a main blockchain, enhancing scalability, performance, and experimentation with new technologies without impacting the main blockchain. Now although both of these processes are used today, there are better methodologies that have not been explored which are more secure and simpler to implement. These processes are not for mass adoption as of yet as they are proprietary however in the very near future there will be systems available that will allow various layer-1 blockchain networks to interact with each other in a very secure way. Now who wouldn’t want a complicated task to be made very simple to use, it’s coming just be patient. Let’s move on to touch on some of the current challenges and why I am writing this article in the first place.

Challenges in Achieving Interoperability

Several challenges need to be addressed to achieve seamless interoperability between blockchain networks. One challenge arises from the diverse consensus mechanisms employed by different blockchains. These mechanisms, responsible for verifying transactions and maintaining security, can differ significantly in terms of performance and security characteristics. Harmonizing consensus mechanisms is crucial to enable smooth communication between blockchains.

Another obstacle stems from the use of different programming languages across blockchains. This variation makes it challenging to develop smart contracts that can facilitate asset transfers between diverse blockchain networks. Moreover, differing governance structures among blockchains pose coordination challenges when developing interoperability solutions.

These have been the challenges and bridges and sidechains that have been created to date do have security flaws that could result in massive issues. Interoperability isn’t simple, it have been tried on many different levels however the beta testing has resulted in users losing their digital assets. What needs to be understood is that blockchain technology is more than a coin, it has so many different use cases across many different industries. The implementation of layer-2 systems benefit from the security of the blockchain itself and that is where most layer-2 systems promoting interoperability stop and the danger begins.

Learning from Past Mistakes

The blockchain ecosystem has witnessed significant mistakes leading to substantial losses. One notable example is the DAO hack in 2016, where a vulnerability was exploited to steal $50 million worth of Ether. This incident exposed security vulnerabilities and underscored the need for enhanced security practices within the DeFi space.

Another major incident was the Mt. Gox hack in 2014, where $460 million worth of Bitcoin was stolen from the popular Bitcoin exchange. This incident severely impacted confidence in cryptocurrencies and highlighted the importance of robust security measures. Now bare in mind the two examples are not a reflection on the blockchain itself and they are actually layer-2 systems either, it is a reflection on the lack of security involved in these platforms. Even higher end security protocols if not integrated seamlessly can be subject to security breaches. These same incidents that can take places with digital assets such as Bitcoin and Ethereum can happen with sensitive documents if a platform is utilizing subpar security integration.

Solutions for Interoperability Challenges

To address the challenges of interoperability, various solutions need to be developed and in the case of MegaHoot Technologies are being developed but it is a process. It is important that the establishment of interoperability standards is a crucial first step but it is only a first step. Standardization ensures that different blockchain networks can effectively communicate and exchange data without fear of a security breach.

Decentralized protocols offer another solution. These protocols, not controlled by any single entity, help to avoid censorship and manipulation while ensuring open and transparent interoperability solutions. This is a good step but what it actually does not solve the security breach part of it unless a system is truly decentralized and supported maintenance wise.

Government involvement can also play a significant role, just imagine if governments provided funding for research and development of interoperability solutions, that would be great if they embraced innovation. Most fear that government involvement would defy what decentralization is supposed to signify and creating interoperability for private blockchains probably wouldn’t get much government funding. If they did fund for R&D in this area it would more than likely lead to enacting blockchain regulations and governments may force the adoption and implementation of interoperability standards. This opens up a can of worms, this is why the private sector needs to steer this ship.

Interoperability stands as a critical component for the future of blockchain technology, there is zero question about that, the question is how and who will bring it to the table. Enabling seamless communication and data exchange between different blockchain networks will be a gamechanger in this space and such interoperability paves the way for the growth of DeFi and broader blockchain adoption.

The security aspect is what becomes the most critical component of it all, overcoming these challenges by having standardized paths in place integrating that with decentralized protocols would be good second steps. The blockchain industry as a whole is evolving every day, blockchain is more than Bitcoin, it is a much bigger picture than that. I will leave you with this, there is little doubt that in the very near future you will be using systems that you use today but they will be blockchain enabled, protecting your data, securing your transactions and making the world an even smaller place where transfers of all types of digital assets can happen in micro seconds across the globe.

Welcome to the future but it is only bright if it’s secure.

Louis Velazquez
Managing Partner – FGA Partners

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