Blockchains need an interoperable standard to scale, say crypto executives

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Blockchain technology needs a reference communication standard that can be easily integrated by every network in order for a complete transition from Web2 to Web3 to occur, according to industry commentators.

Many expect there to be multiple blockchains and such an ecosystem requires communication protocols similar to the Transmission Control Protocol/Internet Protocol (TCP/IP) used on the Internet.

Ryan Lovell, director of capital markets at oracle crypto solutions company Chainlink Labs, told Cointelegraph that blockchains will need interoperability similar to how computers need the internet to transfer data and value on the networks:

To achieve a fully interoperable blockchain ecosystem at scale, there must be an open communication standard analogous to TCP/IP, which currently serves as the de facto connection protocol to the Internet.

Lovell believed that a similar standard for blockchain networks would pave the way for a seamless internet-like experience for the platform and its apps.

This is especially important given that the last bull market saw a slew of new layer 1 blockchains make their mark. However, almost all of them operate in isolation from each other.

Lovell emphasized that blockchain interoperability is crucial for financial institutions looking to tokenize real-world assets, as it would ensure that liquidity is not stifled by only existing in a siled ecosystem.

Brent Xu, founder and CEO of Umee, a lending platform backed by Cosmos Inter-blockchain Communication Protocol (IBC), told Cointelegraph that before real-world assets were put on-chain, systems appropriate risk management systems must be in place to facilitate this interoperability.

Xu explained that financial institutions should tick Know Your Client (KYC) credentials to ensure the authenticity of real-world assets before they are tokenized on-chain, and then ensure that they can be identified by a chain proof of -verification of reservations.

In order to avoid a chain disaster, he pointed out that the risk of taking shortcuts simply isn’t worth it:

Think of the mortgage crisis of 08. Huge financial value was lost due to a faulty legacy system. Imagine if this value were transferred into the blockchain ecosystem, we would see a huge loss in value due to contagion.

Cross-chain bridges, independent layer 2 side chains, and oracles are three of the most commonly used blockchain interoperability solutions today. The first two work on-chain only, while the second feeds off-chain data to on-chain.

Related: Why interoperability is key to mass adoption of blockchain technologies

However, some of these solutions have had problems, including cross-chain bridges.

A report from October pointed out that half of all exploits in decentralized finance (DeFi) have taken place on a cross-chain bridge, with the most notable example being the $600 million Ronin Bridge hack in March. 2022.

Xu noted that many of these hacks come from multi-signature security setups or proof-of-authority consensus mechanisms, which are considered centralized and much more vulnerable to attack.

He added that many of these interoperability solutions favored development speed over security from the start, which backfired.

The key, Xu said, is to embed interoperability within the platform, as this will result in a more secure end-to-end transaction than using third-party bridges:

Bridges are particularly sensitive because they provide two ends at which hackers can potentially infiltrate any vulnerabilities.

Among the most commonly used blockchain interoperability protocols are the Chainlinks Cross-Chain Interoperability Protocol (CCIP); the IBC, which is based on the Cosmos ecosystem; Quant Networks Overledger and Polkadot.

Update (April 17, 08:25 UTC): This article has been updated to more accurately reflect an analogy from Ryan Lovell.

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