The rapid rise of decentralized finance has changed the economic world forever.
Popular decentralized exchanges like Uniswap and Sushiswap, and lending platforms like Compound, facilitated a Total Volume Locked growth from $675 million to $16.2 billion across 2020 for the DeFi world.
DeFi’s popularity has also made blockchain interoperability through cross-chain interaction a stronger reality than ever before.
Many hope the decentralized financial ecosystem will be the industry that’s able to properly distribute value and functions while maintaining blockchain interaction.
The World Of Blockchain Needs New Innovation To Keep Growing
Currently, the vast majority of blockchain networks only operate within isolated ecosystems that make it all but impossible for crypto users to leverage the full benefits of distributed ledger technology.
A few tout atomic swaps as a way to convert their cryptocurrencies utilizing somewhat of a cross-chain value exchange. However, atomic swaps only work if both blockchain networks have the same hashing algorithm (which many don’t).
Others point towards Wrapped Bitcoin (WBTC), which allows interoperability between Bitcoin and Ethereum. Still, the WBTC contract relies on outside custodians. It’s also limited to just Bitcoin-Ethereum interaction.
Overall, many believe the rise of cross-blockchain compatibility will lay foundations for the mass adoption and use of blockchain technology in ways past technologies could not.
In a simple form, cross-chain functionality allows various blockchains to communicate with each other even if they’re independent. This means information on an EOS blockchain could be sent to an Ethereum blockchain even though the two are completely different networks.
Interoperability due to cross-chain protocols means blockchains can communicate without the need for a middleman potentially adding in extra time or transaction fees.
Cross-Chain’s Influence Grows As Top Projects Focus On The Technology
Many current cross-chain implementations are seen in projects related to asset exchange.
Projects working on cross-chain technology include Cosmos, aiming to enhance interoperability via communication protocols, and Polkadot, enabling common validator sets to secure multiple blockchains.
Wanchain is another notable project working on blockchain interoperability via cross-chain protocols. The project relies on cryptographic theories to build a distributed ledger and network that records cross-chain and intra-chain transactions. Any blockchain network can integrate with Wanchain to connect with different ledgers to carry out low-cost inter-ledger asset transfers.
Wanchain also supports token exchange privacy protection. Institutions or individuals can set up a virtual ‘teller window’ and offer services like loan origination, asset exchanges, and credit payments.
Wanchain’s framework leads to the proliferation of a blockchain-based financial market alongside technical infrastructure that fosters permissionless, decentralized cross-chain transactions. The Wanchain team believes interoperability is a main driver towards the goal of an ‘Internet of Blockchains.’
Cross-Chain’s Potential To Propel DeFi Forward
Why is cross-chain technology so important? Because it’s viewed as one of the main tools to help continue the growth and expansion of decentralized finance (DeFi).
If elements of the DeFi industry are not able to work with each other in a smooth manner, decentralized finance will be hindered in its attempts to challenge, or at the very least, bring traditional finance to the crypto world.
Blockchain interoperability also allows people to make payments across multiple blockchains, fueling an energetic digital economy where many believe multi-token wallet systems should emerge.
Hopes are crypto users who can just rely on a single wallet to transact and transfer coins across different blockchains will continue to help speed up mainstream crypto adoption.
Interconnection Is Needed As Blockchains Keep Expanding
As the crypto world continues to develop, it has become abundantly clear blockchains which remain in a singular ‘silo’ and function only within their own ecosystem will hinder the potential of distributed ledger technology and DeFi.
As different types of chains come into existence, cross-chain technology remains the best solution to foster interoperability and give crypto users the ability to harness the collective power of multiple blockchains.