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Opinion: Interoperability is Key to the Success of Cryptocurrency

In the beginning, blockchains had a very difficult time communicating with one another. There was the bitcoin blockchain, the litecoin blockchain, and the dogecoin blockchain. Each cryptocurrency had its own independent, and dedicated blockchain on which the transactions took place. This all changed when Ethereum was invented. Ethereum is essentially a token platform, with the ability to host many cryptocurrencies on a single platform. What was desired, was the ability to have tokens interact with one another. Up until Ethereum, it was very difficult to get the Litecoin network to respond to events that took place on the Bitcoin network. The communication between blockchain networks is called interoperability. In this article, we’re going to find out why interoperability is the key to the future of cryptocurrency.

chainlink fence above the world

Ethereum is Already Interoperable

One of the reasons why Ethereum is so significant to the cryptocurrency space is because of its rich token ecosystem. Ethereum is home to hundreds of projects, all interacting, and responding to events taking place both on and off of the blockchain. Ethereum has achieved interoperability with itself, but not so much the outside world or other networks. It is possible to create tokens and coins that interact directly with other coins on the Ethereum blockchain. That being said, it is still quite a challenge to create a token or smart contract that responds to events on the bitcoin blockchain. The reason why people would want to have this take place is not immediately clear. So lets explore this further.

Becoming Interoperable with the World

Blockchains are closed systems by default. They don’t know about the outside world at all. They only know about the events that take place within the blockchain itself. That’s the blocks, the transactions, and the accounts. Ethereum doesn’t know what block the bitcoin network is on. It’s not listening to see what transactions take place on the bitcoin network. Ethereum doesn’t know about the weather, and therefore cannot respond to it. Ethereum doesn’t know about the price of gold on the NASDAQ, and therefore cannot respond to it.

The Oracle Problem

Telling Ethereum what the price of gold is on the NASDAQ is actually not that tough to do. We simply send an Ethereum transaction on the blockchain containing the price of gold. That transaction gets included on the blockchain, and now people can look up the price of gold at a particular point and time on Ethereum. The problem is who is the sender of that transaction, and how do we know that we can trust the price they just submitted? This is the Oracle problem. How do we develop systems that can be inherently trusted by everyone? Creating properly decentralized informers/oracles for Ethereum is a really tough problem to solve. Solving the Oracle problem is one of the main barriers to getting blockchains to properly talk to and trust sources external to the blockchain.

Chainlink

There is one project in particular that has set their sights on trying to solve this problem. Chainlink is a network of decentralized oracles that feed data into the Ethereum blockchain. The project has risen to the top of the charts for a couple of reasons. One of those reasons is that most people embedded within the blockchain industry know how big of an issue the Oracle problem is. A single incorrect input to a smart contract can have catastrophic consequences. Hackers are smart people. They are constantly looking for errors and mistakes within smart contracts and data in order to take advantage of them. That’s why Chainlink exists. Chainlink must maintain a perfect record of verified data for the secure functioning of smart contracts.

Wrapped Tokens

In just 6 short years, Ethereum has developed some pretty strange features. One of the strange aspects of Ethereum is the ability to “wrap” tokens. Many people wanted the ability to use bitcoin within the Ethereum blockchain. But this is an extremely difficult, if not impossible task to accomplish. So Ethereum developers built a workaround. They built a smart contract that allows people to lock up their bitcoin, and receive an equal amount of wBTC, or wrapped Bitcoin. The wrapped bitcoins exist only in the Ethereum network, and are redeemable at a 1:1 basis for real bitcoin. When someone redeems their wrapped bitcoin for real bitcoin, a corresponding amount of wBTC is destroyed. This allows for all sorts of new functionality. Now people are able to deposit and use bitcoin within the Ethereum ecosystem. There are a host of wrapped tokens including wETH, wGOLD, and wZEC.

Having the ability to trade tokens on the Ethereum blockchain, that are not native to Ethereum, is instrumental in becoming interoperable with the world. In theory, any token on any blockchain is wrappable. This opens up the discussion for being able to wrap commodities or stocks being traded on the stock market.

We Must Solve the Interoperability Problem

In order to fully integrate the world of cryptocurrencies and blockchains into the fabric of society, we must solve the interoperability problem. It is unrealistic to have dozens, if not hundreds of independent blockchains not talking with one another. Cryptocurrencies don’t need to compete for attention from the community at large. For example, Bitcoin and Etheruem have completely different use cases. There is enough room in the world for both of them to get along, and even fuel one anothers growth. At the end of the day, all cryptocurrencies belong to the same family. The cryptocurrency family.