Interoperability

What is Interoperability?

Interoperability refers to the ability of different blockchain networks to communicate, share data, and interact with each other seamlessly. This capability allows assets, information, and functionalities to move between separate blockchain ecosystems without the need for intermediaries.

Bootstrapping Problems for New Blockchains

New blockchain networks face many challenges when they are first starting out, particularly in gaining adoption, achieving network effects, and building a robust ecosystem. Some common bootstrapping issues include:

Lack of Liquidity

Liquidity is essential for any blockchain, especially if it involves tokens or other financial instruments. Without liquidity, users and developers may be hesitant to engage with the platform.

By enabling cross-chain asset transfers, interoperability can inject liquidity from established blockchains into a new network. For instance, a new Avalanche Layer 1 blockchain can integrate with decentralized finance (DeFi) protocols on other chains, bringing in liquidity and users.

Limited Integration Support

Attracting developers to build on a new blockchain is challenging, especially when there are more established platforms with robust tooling and large communities.

Interoperability can provide developers with the ability to create cross-chain applications. This allows developers to leverage tools and communities from other blockchains, reducing the friction involved in developing on a new Layer 1 blockchain.

For example, a developer may need to access data from a blockchain oracle service (such as Chainlink Price Feeds) that is not yet available on the new blockchain. By using interoperability, the developer can access the oracle data from another blockchain and integrate it directly into their application.

Another example could be integration with existing stablecoin providers, such as USDC or DAI.

Typically, these types of integrations would be a lengthy and expensive process. The developer would need to convince the provider to integrate onto their blockchain, or build custom bridges and oracles to connect the new blockchain with the external service. Interoperability simplifies this process by providing standardized mechanisms for cross-chain communication and asset transfers that allows developers to leverage existing implementations on other blockchains.

Lack of On-Ramps

A new blockchain may lack direct on-ramp services (like exchanges or fiat gateways) due to its early-stage development. Users would need to buy a cryptocurrency supported by the new blockchain, but if few exchanges support it, this can be a significant barrier.

Interoperability allows users to transfer assets from more established blockchains (like Ethereum) to the new blockchain. For instance, a user could buy Ethereum (ETH) on an exchange, and then use a cross-chain bridge to move those assets onto the new blockchain, where they can be swapped for the native token.