Blockchain Interoperability Challenges Explained

The reality of Web3 is multi-chain, where hundreds to eventually thousands of different blockchains co-exist, each with different asset issuers, user bases, applications, and technological strengths and weaknesses. The multi-chain approach has overtaken the single unified ledger idea because it’s more scalable, flexible, and practical given the wide range of technologies, stakeholders, and interests involved.

However, for a multi-chain economy to work, blockchains must be able to seamlessly communicate and transfer assets cross-chain in a secure and reliable manner. Unfortunately, blockchain interoperability is a challenging problem to solve, with over $2.8B in user funds already hacked due to insecure cross-chain token bridges and infrastructure.

The following blog will explore blockchain interoperability, its main challenges, and how the Chainlink Cross-Chain Interoperability Protocol (CCIP) sets a new industry standard in security and moves the industry closer to realizing the ultimate goal of onchain becoming a single Internet of Contracts.

What Is Blockchain Interoperability?

Blockchain interoperability is the ability of different blockchain networks to communicate with one another by sending and receiving messages and tokens. Just like the Internet enables communication between computers, blockchain interoperability enables the cross-chain transfer of data and value.

Without blockchain interoperability, blockchains are akin to digital islands where their users, assets, and information are disconnected from the wider Web3 ecosystem. Thus, establishing a blockchain interoperability standard is critical to unlocking the full potential of blockchain technology because it enables an interconnected onchain economy that maximizes liquidity, provides universal access to users, and realizes greater efficiencies and cross-chain collaboration. To learn more, check out the blog: What is Blockchain Interoperability?

Key Challenges to Blockchain Interoperability

Technology

Due to the way they generate consensus, blockchains are not designed to directly validate the state of all other onchain networks or offchain systems that exist in the world without introducing significant compromises to the chain’s security, stability, or scalability. This connectivity limitation is the basis of both the oracle problem and the blockchain interoperability problem.

Therefore, a blockchain interoperability solution must be able to read and write data in different formats and interpret different consensus mechanisms to determine important information, such as whether a transaction is considered finalized on a specific blockchain (i.e., transaction finality). It must also have its own way of receiving, validating, and executing cross-chain transactions.

Functionality

There are a variety of functionalities that a blockchain interoperability solution may be asked to fulfill, most notably the ability to relay messages to/from different blockchains and transfer tokens cross-chain using a variety of token handling mechanisms. Beyond that, there are other important functionalities that a blockchain interoperability solution should ideally support, such as programmable token transfers—the ability to transfer tokens cross-chain and then use those tokens in a supplementary action on the destination blockchain, all within a single transaction. For example, transfer an asset cross-chain and deposit it in a staking contract as part of the cross-chain transaction.

A blockchain interoperability solution should also support data oracles as a way to trigger automated cross-chain transactions based on real-world or other blockchain events. Furthermore, institutional clients may want additional functionalities, such as the ability to program various organizational and compliance policies into their cross-chain workflows or the ability to conduct privacy-preserving cross-chain transactions.

Security

Validation of data and transactions is crucial to preventing a cross-chain protocol from being exploited. One of the main security challenges stems from blockchains having different notions of transaction finality—the point at which past blockchain transactions are deemed extremely difficult or impossible to revert. As such, a blockchain interoperability solution needs to understand the differences in blockchain design to ensure adequate time has elapsed for finality on the source blockchain before taking action on the destination chain.

Another key notion of security is how the blockchain interoperability solution validates transactions or data on the source blockchain and relays the data to the destination chain. These methods include centralized validation (e.g., a cryptocurrency exchange), local validation (e.g., atomic swap), native validation (e.g., zero-knowledge proof), or external validation (e.g., decentralized consensus). Different security approaches come with different trade-offs. For example, highly decentralized protocols may offer strong censorship resistance at the expense of developer flexibility and disaster recovery, while more centralized protocols may offer the reverse.

Finally, it’s important from a security perspective to evaluate the onchain and offchain code of the protocol and how battle-tested it is in terms of undergoing security audits and running securely in production. Furthermore, their private key security is of utmost importance—as compromised private keys are an attack vector often exploited within cross-chain solutions.

Standardization

Similar to how TCP/IP creates a single standard for the World Wide Web, blockchains need a single standard to enable communication between them. By having a single standard compared to a mix of different interoperability solutions with varying levels of security guarantees, liquidity can become unified across chains while security standards and workflows become standardized across use cases.

Chainlink’s Role in Blockchain Interoperability

CCIP (Cross-Chain Interoperability Protocol) is a blockchain interoperability solution powered by Chainlink. It is specifically designed to address the many challenges of blockchain interoperability.

CCIP is an arbitrary messaging cross-chain protocol that can read and write data from any public or private blockchain, as well as perform a variety of other functionalities for cross-chain transactions, such as enabling token transfers via a variety of token handling mechanisms (e.g., lock and mint, burn and mint, lock and unlock) and allowing users to execute programmable token transfers. Furthermore, CCIP is part of a wider Chainlink platform that enables users and institutions to get additional services needed to facilitate cross-chain transactions, such as Net Asset Value (NAV) data, proof of reserves, pricing information, blockchain abstraction solutions, and more.

Chainlink CCIP is the only blockchain interoperability solution to reach level-5 cross-chain security, and is powered by the same decentralized consensus that has helped the Chainlink protocol enable over $12T in onchain transaction value. It’s also the only blockchain interoperability protocol to feature an independent Risk Management Network—a separate decentralized network that serves as a secondary validation and anomaly detection layer. You can learn more about the five levels of cross-chain security in the video below.

CCIP is already being used across leading DeFi protocols, such as Aave’s stablecoin GHO, and some of the world’s leading financial institutions, such as DTCC, ANZ, and Swift. The ability to securely support both DeFi and TradFi is critical to establishing a standard that supports the next era of digital finance based on tokenized assets and programmable money and finance services. There are also token bridges built on CCIP that provide user interfaces for users to transfer tokens and messages across blockchains via CCIP. Two CCIP-powered interfaces include Transporter and XSwap.

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