As DeFi grows continuously, the need for interoperability for different platforms is becoming increasingly important. This article discusses interoperability in the age of decentralized Finance (DeFi).
Despite recent market volatility, the decentralized finance (DeFi) landscape has shown remarkable resilience, and as the industry matures, a new generation of DeFi platforms and applications is emerging.
These systems expand upon the benefits of DeFi 1.0 while also attempting to solve some of the problems that plagued that version. The dynamic financial sector is releasing a steady stream of new products and services.
Every type of financial product or service has gone through numerous revisions, from credit cards and Internet banking to contactless payment and, more recently, peer-to-peer lending.
The DeFi market has also matured and expanded, with early offerings confined to developing decentralized analogs to conventional financial products like loans and insurance.
However, testing, reinforcement, and development of Decentralized Finance protocols have significantly improved the user experience, and more use cases have been established.
The current rate of innovation bodes well for the future of DeFi applications, which are already more intuitive and feature-rich than those of traditional banks or previous iterations of Decentralized Finance.
What is Interoperability?
Interoperability refers to the capacity of two or more fundamentally distinct systems to communicate with each other and exchange value. The majority of payment technology in the traditional banking system is interoperable.
You can use your debit or credit card to pay for goods and services regardless of the currency accepted by the shop.
When you travel abroad with a bank-issued card, you know it is accepted everywhere, regardless of the local currency — that is interoperability.
Interoperability in the blockchain domain refers to the ability of two or more blockchain systems to communicate with one another and exchange assets.
Returning to the coffee shop, you should be able to pay with Ethereum even if the store takes Bitcoin, and this is in a decentralized setting. Unfortunately, that is not the case.
As with the Internet, a web service provides an API to communicate with that specific web service. This API is a communication layer between the web service and all other external web services.
Unfortunately, no such cross-chain communication protocols have been devised for blockchain; therefore, they operate and exist in silos.
Interoperability and Decentralized Finance (DeFi)
When talking about blockchains, interoperability means that two or more blockchains can easily share data.
For example, on a blockchain, every asset that is owned and every activity that takes place are recorded. Anything in the economy on one blockchain can be shown on another if the proper connectivity solution exists.
This means that the economic action that can happen on one blockchain can spread to another blockchain. This is one of the main features of blockchain interoperability solutions.
Regarding DeFi, cross-chain interoperability means that various decentralized apps (dApps) and protocols can work on multiple blockchains. This lets users get to more assets and services.
The Decentralized Finance ecosystem is worth over $40 billion, with Ethereum making up more than 58% of that value. Cross-chain communication is essential for this reason.
Users of non-Ethereum blockchains like Polygon and Avalanche can only participate in the value creation in the biggest DeFi ecosystem if blockchain interoperability exists.
Decentralized Finance methods could only help the crypto community if the blockchain they were made for before cross-chain interoperability came along.
Decentralized Finance could not be used by people who did not use Ethereum on the most famous blockchain ecosystem.
So, they took on all the problems in their neighborhood network. This caused Ethereum transactions to take longer and gas fees to go up.
For some, it needed more cash on hand and a smaller customer base. Cross-chain technology changed the rules for decentralized banking because of this.
Cross-chain communication can also help DeFi become more popular. Users can connect with Decentralized Finance better if they can easily use DeFi protocols across blockchain networks.
More people may want to use Web3 and DeFi because they are more accessible for everyone to use. More money coming into the Decentralized Finance community makes it possible for lending, staking, and yield farming to be bigger.
Cross-chain interoperability also lets users get around the limitations of specific blockchains. For example, they are no longer limited by Ethereum’s high gas fees or other networks’ low value and few users.
Developers can also make basic building blocks that let digital goods move between chains.
Importance of Interoperability in DeFi
Interoperability between different blockchains is crucial to the growth and success of the DeFi ecosystem in the years to come. Here are some importance of interoperability to the DeFi space;
- Risk mitigation
- Enhanced liquidity
- Asset diversification
- Expanded user base
Risk Mitigation
Cross-chain interoperability lowers the risk of concentration depending on just one blockchain.
If one blockchain has problems like high fees, many users, or technical issues, DeFi platforms connecting to multiple chains can easily switch to other networks. This keeps operations running smoothly and reduces the chance of problems.
Enhanced Liquidity
Cross-chain interoperability increases liquidity aggregation by enabling frictionless asset transfers across different blockchains.
This gives users access to a broader selection of assets and liquidity pools, which improves trading possibilities and reduces slippage. Increased liquidity helps to make the DeFi ecosystem more efficient and dynamic.
Asset Diversification
Cross-chain interoperability makes it easier for assets to move between blockchains. This lets users diversify their holdings and find new investment possibilities.
This lets users spread their investments across more than one network and asset, making them less dependent on the success and risk of a single blockchain.
Expanded User Base
Interoperability lets people from different blockchain networks use Decentralized Finance standards and talk to each other.
This makes it possible for more people to use DeFi platforms, which promotes inclusion and encourages acceptance across many groups.
Cross-chain interoperability also makes it easier for groups to collaborate and form partnerships, leading to synergies and benefits for everyone.
Platforms that provide Interoperability in DeFi
The world of DeFi is rapidly evolving, and various initiatives have sprung up to create cross-chain communication platforms that address custodial and interoperability issues.
These platforms will transform the DeFi landscape and expedite development and adoption, paving the door for a new financial system powered by blockchain networks. Some of these platforms are;
- Fusion
- Anyswap
- Wanchain
Fusion
Fusion is, without a doubt, the most promising cross-chain interoperability technology designed to enable worldwide decentralized financial services for the masses. They have created a collection of products that provide real interoperability.
Fusion has also created a set of finance-related APIs, allowing developers to develop financial apps that can interface with any supported blockchain protocols. This will pave the way for the next wave of financial innovation.
Fusion has expanded the definition of the “Internet of Values,” previously limited to exchanging “value” over the Internet.
The fusion platform thinks that the Internet of value may be realized by focusing on usability, scalability, and interoperability rather than just value exchange.
AnySwap
AnySwap is based on Fusion’s DCRM protocol. Technically, Anyswap, like Uniswap, is an Automated Market Maker (AMM).
Users can deposit their digital assets on Anyswap and seamlessly exchange them for another asset in a decentralized ecosystem.
Uniswap provides swap pairs limited to Ethereum and ERC-20 tokens, but Anyswap takes a step further by allowing cross-chain token exchanges, which provides additional liquidity.
The Anyswap platform currently supports Fusion (FSN), Tether (USDT), and Ethereum (ETH), and they want to add Bitcoin, Ripple, and Litecoin as swap pairs shortly.
Anyswap’s sole minor constraint is that it can only swap 95% of all coin or token kinds without further modification, as well as those that use ECDSA or EdDSA as a signature scheme.
Wanchain
Wanchain has a different design and focuses more on digital asset exchange services across many blockchain networks via its unified infrastructure.
It is a “currency-agnostic platform” that allows several blockchains to communicate with one another.
One of the best features of Wanchain that sets it apart from the competition is its “cross-chain assets transfer” functionality, which allows it to connect to all major blockchain platforms (such as Bitcoin, Ethereum, and others).
It also provides asset conversion without the need for any changes to the original properties or the use of a bridging chain.
All consortium blockchains, including enterprise, public, and private blockchains, can connect to the Wanchain protocol directly and transfer assets to the Wanchain platform.
Transferring the assets to the original blockchain networks can also reverse this process.
The Future of Interoperability in DeFi
Cross-chain interoperability in DeFi is becoming more popular, but there is still much work to be done before it is the rule in cryptocurrency.
Many popular decentralized apps don’t let you do deals across multiple blockchains and the ones that do have many problems.
Cross-chain interoperability needs to improve its base, the cross-chain bridge mechanism, if it wants to be a vital part of the future of crypto.
In the cross-chain DeFi environment, bridges are an important part of the infrastructure. They make it possible for assets to be moved between chains.
For the most part, bridges lock assets on one network and create new ones on a different network.
They can be one-way (only letting transactions go in one direction) or two-way (letting transactions go back and forth between two networks). Cross-chain links make DeFi interoperability possible, so hackers have been going after them hard lately.
Solutions that use more than one blockchain make DeFi more scalable and worsen privacy and openness problems. Some known bridges even require KYC verification for potential users.
Cryptocurrency freedom will continue to grow over the next few years. Interoperability between blockchains is critical to making the DeFi playing field fair for users and systems. Other blockchain networks may also have extra cash on hand because of Ethereum.
Conclusion
The DeFi field is quickly growing, and one of the most significant barriers to expansion has been the need for cross-chain interoperability platforms.
Many attempts have been made, but they all have significant limits. They did, however, lay the groundwork and provide the essential knowledge basis for subsequent platforms.