Interoperability needs its ERC-20 moment

Undoubtedly, one of the prerequisites for the mass adoption of blockchain technology is secure and seamless cross-chain interoperability. Many potential applications, particularly in complex and regulated sectors, simply can not be deployed without common guidelines and interface definitions.

Without these, as is currently the case, applications that aim to go cross-chain must rely on custom off-chain components and automatically inherit the accompanying risks and trust assumptions. The only alternative is to remain constrained to a single, isolated network.

Today’s interoperability solutions – or “bridges” – have matured to the point where just about any two blockchain networks can be connected. The problem is that each bridge is an ad hoc construction, which limits scalability and usability.

This issue is amplified when dealing with networks that have drastically different infrastructures, as is the case with non-EVM blockchains. Limitations aside, bridges are clearly needed and remain in high demand. Even following declines during the bear market, the Total Value Locked (TVL) in major cross-chain bridges on Ethereum alone hit $23.5 billion in January 2024.

Despite these gaudy totals,there are still many hurdles to overcome before blockchain technology is ready for mass adoption. There remain three major challenges impeding the progress of blockchain interoperability: Security, UX and Compatibility.

Security

The most obvious obstacle to blockchain interoperability is the ever-present security concerns. Indifferent to market performance and hype cycles, the repeated failures of poorly-designed cross-chain bridges has left a black mark on the industry and dissuades people from engaging with solutions. Individuals who have suffered losses due to a bridge hack naturally develop a distrust for all cross-chain bridges. Fool me twice, and all that.

And it’s hard to blame them. An estimated $2.9 billion was stolen in the top 10 cross-chain bridge hacks between 2021 – 2023. It didn’t take long for 2024 to kick off on the same, with Orbit Bridge being hacked for $80m over the new year period. With the mainstream adoption of blockchain technology relying on secure interoperability, these trends cannot go on. Any remaining security issues simply need to be solved.

UX

A seamless user experience is paramount in driving user adoption and engagement, which contributes directly to the sustainability of digital products and services. This fact is as fundamental in Web2 as it is in Web3. Cross-chain bridges are no exception.

Today’s bridges are anything but seamless. While mature solutions have abstracted the user’s direct involvement to a single transaction, the user journey is still too complex. Users would rather not transact using multiple assets while manually switching between multiple wallets and RPC servers.

This is largely caused by current limitations of blockchain technology but is exacerbated by immature interfaces. Many may be shocked to learn that there isn’t even a unified system for cross-chain solutions to identify a unique blockchain network!

Without seamless interoperability, UX can only be improved incrementally unless certain unpalatable concessions relating to security and decentralisation are made. Collaborative efforts are needed, or blockchain interoperability solutions will remain fractured and mainstream adoption will remain stymied – resigned to value storage and niche financial applications.

Compatibility

Compatibility, or rather, the incompatibility between different blockchain interoperability protocols is one of the great ironies of our industry. As it stands, the vast majority of blockchain interoperability projects are focused on building proprietary products with custom relayers, message definitions and verification mechanisms. Too many are focused solely on growing their own products.

With so many competing approaches with shockingly little overlap, it becomes impractical, if not impossible, to properly vet the security of each. The fight to become the one-and-only solution is ultimately detrimental and poses a risk to the industry’s long-term outlook. Common infrastructure and shared interfaces are needed as these can be properly vetted and tested. Blockchain interoperability must be core infrastructure first, product second.

The Solution

Underpinning security, UX and compatibility challenges is the lack of an open, unified interoperability standard. Such a standard is essential because it would provide a universally accepted framework for communication between blockchains and blockchain-like systems. This would ensure secure interoperability and seamless global connectivity, in turn preventing fragmentation across different projects.

Imagine a world without ERC-20, the de facto standard for issuing fungible tokens on the Ethereum blockchain. Every project that issues a token on Ethereum would follow its standard and one project’s token would be incompatible with another’s. Applications like decentralized exchanges could still theoretically be built, but their growth would be hamstrung by the need to follow standard-agnostic design principles.

Each token would represent an ad hoc integration and users could only use applications that explicitly support their token. Without a standard defining a set of rules and functions, the development of Ethereum’s ecosystem would have been greatly hampered.This is the current state of blockchain interoperability.

However, because the ERC-20 standard has been vetted and adopted, all applications can interact with, manage, and trust unknown fungible tokens. Even tokens deployed after the creation of a specific application can be used without any additional engineering work required, and tokens can be compatible with multiple applications. This is the power of an open, unified standard. This is what blockchain interoperability so desperately needs.

The benefits of an open, unified standard for blockchain interoperability may be even more profound.

A common plug-and-play architecture that follows a vetted, standardized framework could span three layers – messaging, function calls and applications. This would enable secure and seamless communication between EVM and non-EVM blockchains alike. Prioritizing interchangeable components will also accelerate the development of true blockchain interoperability powered by multiple providers.

Establishing such a standard has the additional benefit of assisting enterprises and regulators in comprehending the technical intricacies to develop a fair, informed regulatory framework. Developed alongside technical advancements, a fair balance between innovation and regulation could then be achieved.

Blockchain technology has the potential to change the world for the better. Secure and seamless blockchain interoperability between blockchains and blockchain-like systems are a prerequisite for mass adoption. Without an open, unified interoperability standard, true mass adoption will remain out of reach.