Addressing Blockchain Interoperability: All About Omnichain, Multichain, and Cross-Chain

Interoperability stands as a fundamental aspect within the cryptocurrency industry to achieve the vision of a truly decentralized financial system. This is where users can have complete freedom over how they utilize their digital assets. Additionally, blockchain interoperability solutions facilitate these tasks by enabling seamless transfers between networks and ecosystems.

In this guide, we will unravel the critical concepts surrounding blockchain interoperability, including omnichain, multichain, and cross-chain technologies. Understanding these terms is crucial for grasping how different blockchains and decentralized applications (dApps) can communicate with each other.

Understanding Interoperability

Interoperability refers to the ability of different blockchains and decentralized applications (dApps) to communicate and interact with one another. Most blockchains are designed as silos, lacking the capability to interact with each other, which poses a series of issues such as:

• Inefficiency. Users have to go through centralized exchanges or complex manual processes to move funds between chains. This process is slow, costly, and requires trust in third parties.
• Lack of innovation. Being isolated, blockchains cannot benefit from the innovation and technical progress of other networks. This hampers the development of new products and adoption.
• Centralization. A dominant blockchain in the market, such as Ethereum (ETH), becomes a single point of failure, contradicting the decentralized ethos.
• Limitation for end-users. Finally, there’s the issue of limitations imposed on end-users who don’t have complete freedom on how and where to use their digital assets due to a lack of communication between chains.

Satoshi Nakamoto‘s vision of a decentralized financial system still faces challenges in fully materializing. Despite the promises of blockchain technology, obstacles persist, such as the need for a global and open financial system that overcomes border barriers and promotes financial inclusion worldwide.

Moreover, permissionless innovation is required to enable interoperability between platforms and protocols, facilitating the development of new financial products and services, as well as unrestricted flow of economic activity within DeFi ecosystems, where users must have full control over their assets, including custody and management of their financial information.

To address these challenges, it is crucial to develop and promote open and global financial systems that facilitate inclusion and interoperability, thus fostering innovation and free movement of economic activity.

Blockchain Trilemma

When talking about interoperability, it is also important to mention the concept of blockchain trilemma. The blockchain trilemma refers to the challenge of balancing three critical aspects of public blockchains: decentralization, security, and scalability. Improving one of these elements often involves sacrificing another, limiting developers from achieving high levels of all three simultaneously.

This problem arises because, in public and permissionless blockchain networks, there is no central authority overseeing and protecting the system. Instead, all participants validate transactions. The more decentralized nodes there are, the more secure the network becomes, but scalability decreases as consensus among many actors needs to be reached.

What Is Omnichain?

Omnichain refers to the connection of all existing blockchains, regardless of their underlying smart contract technology. This universality is its distinctive feature.

Omnichain operates by creating a base layer (Layer 0) serving as an interoperability infrastructure between chains. All other blockchain networks and dApps can seamlessly integrate into this base layer. Consequently, users and digital assets can move seamlessly across blockchain boundaries.

A prime example is LayerZero, a protocol implementing omnichain functionality. LayerZero deploys special smart contracts called “LayerZero Endpoints” on each supported blockchain network. These endpoints establish a bridge connecting that specific chain with all other LayerZero blockchains.

For instance, by integrating LayerZero with Ethereum, Binance Smart Chain, and Polygon, a user could effortlessly send their ERC-20 tokens across these three ecosystems. On the receiver’s end, it’s as simple as interacting with their chosen blockchain. All complex cross-chain routing is encapsulated within LayerZero.

Therefore, this technology addresses several interoperability challenges by facilitating the transfer of any token or NFT between chains, without relying on specific bridges, streamlining the user experience, and enabling them to interact with the blockchain network that suits them best, without the need for third-party intervention.

What Is Multichain?

Multichain refers to a blockchain project that exists on multiple blockchains simultaneously. This enables users to interact across these different chains using that project.

The way multichain technology functions is through a modular blockchain architecture. Instead of having a single monolithic chain that does everything, functions are divided into specialized layers such as:

• Consensus base layer. This is the security layer that protects all chains in the multichain network. It handles elements like transaction validation and consensus algorithm.
• Application layer. This is where different blockchains reside with their own tokens and logic. This layer is programmable, allowing each chain to have its own set of features and rules.
• Modules facilitating communication between chains. These modules act as bridges, allowing blockchains in the application layer to communicate and transfer data.

The multichain structure offers notable benefits, such as improved scalability by distributing tasks among multiple specialized chains, cost reduction by initiating security from the consensus base, flexibility to add new blockchains as per specific needs, and seamless communication between diverse blockchain ecosystems.

As examples of prominent multichain projects, we can mention Polkadot (DOT) which allows the connection of new chains to its Relay Chain for security and communication, Cosmos (ATOM) which facilitates interoperability between sovereign chains through the Inter-Blockchain Communication (IBC) protocol, and Celestia (TIA) which enables the straightforward launch of scalable applications through its modular toolkit.

What Is Cross-Chain?

Cross-chain technology facilitates communication and exchange of information and digital assets between two independent blockchains, essentially acting as a bridge for interoperability between isolated ecosystems. It operates by implementing protocols with smart contracts that lock the original assets in a pool and issue synthetic tokens of equivalent value on the other chain, thus enabling seamless transfers and interactions.

For example, if someone owns 1 Bitcoin (BTC) and wants to use it within a DeFi application on the Ethereum network, they can transfer their Bitcoin to a cross-chain bridge. This process locks the BTC and issues 1 wBTC in return. Notably, wBTC is an ERC-20 token representing BTC ownership in the bridge, native to Ethereum and usable normally within the network.

Key features and benefits of cross-chain bridges include improvements in capital flows between blockchains, increased liquidity for DeFi and other products by combining funds from multiple chains, expanded access for users wishing to interact with other chains without changing their underlying assets, and strengthening decentralization by avoiding dependence on centralized exchanges for mobility between chains.

Prominent examples of projects utilizing these types of bridges are Chainlink (LINK), RenVM, Connext (NEXT), and Axelar (AXL), each employing slightly different approaches but all enabling some level of seamless integration between individual blockchains through token wrapping and burning.

Final Thoughts

Interoperability remains an active area of research and development in the blockchain space. As we have explored, omnichains, multichains, and cross-chain bridges present varying strategies to overcome the walled gardens between independent ledgers and dApps.

Each framework carries unique tradeoffs and implementation challenges regarding decentralization, security, and scalability. However, the overarching goal remains enhancing inclusion and transparency by cultivating open and permissionless platforms that can freely interact with one another without compromising their sovereignty.

As these technologies continue maturing, we inch ever closer to manifesting Satoshi Nakamoto’s vision of an open financial system unencumbered by borders and gatekeepers.