Blockchain technology needs to evolve a interoperable reference communications standard that all networks can easily integrate for a full transition from Web2 to Web3, say industry commentators.
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Many envision that there will 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 cryptocurrency price oracle solutions firm Chainlink Labs, told Cointelegraph that blockchains will need interoperability similar to how computers need the Internet to transfer data and value across networks. :
“To realize a fully interoperable blockchain ecosystem at scale, there needs to be an open communication standard analogous to TCP/IP, which currently serves as the de facto connection protocol for the internet.”
Lovell believes that a similar standard for blockchain networks would “pave the way for a seamless, Internet-like experience” for the platform and its applications.
This is especially important given that the last bull market saw a large number of new layer 1 blockchains make their mark. However, almost all of them work in isolation from each other.
Lovell stressed that blockchain interoperability is “crucial” for financial institutions looking to tokenize real-world assets, because that would ensure that liquidity is not “stifled” by existing solely in an “isolated ecosystem.”
Brent Xu, founder and CEO of Umee – a lending platform backed by the Cosmos Inter-blockchain Communication (IBC) Protocol – before real-world assets are brought on-chain, there needs to be establish appropriate risk management systems to facilitate this interoperability.
Xu explained that financial institutions would need to mark Know Your Customer (KYC) credentials to ensure the authenticity of real-world assets before they are tokenized on-chain and then ensure they can be identified by proof-of-audit. of-reserve on-chain.
To avoid an on-chain catastrophe, taking shortcuts is not worth the risk:
“Think about the 2008 foreclosure crisis. Huge financial value was lost because of a faulty legacy system. Imagine if this value was moved to the blockchain ecosystem, and we would see a tremendous loss of value due to contagion.”
Cross-chain bridging, independent Layer 2 sidechains, and oracles are three of the most widely used blockchain interoperability solutions to date. The first two operate solely on-chain, while the latter feeds data from off-chain on-chain.
However, there have been problems with some of these solutions, most notably with cross-chain bridges.
Xu noted that many of these hacks have 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 interop solutions from the start favored “speed of development” over security, which backfired.
The key, according to Xu, is to build interoperability within the platform, as that will lead to a more secure end-to-end transaction than using third-party bridges:
“Bridges are especially susceptible because they provide two ends that hackers can potentially infiltrate for any vulnerability.”
Among the most widely used blockchain interoperability protocols are Chainlink’s Cross-Chain Interoperability Protocol (CCIP); the IBC, which takes advantage of the Cosmos ecosystem; the Quant Network Overledger and Polkadot.