It has become evident that two factors do not help blockchains reach this technology's potential. This has been a predominant theme ever since blockchain broke out into the mainstream. These are:
The lack of blockchain interoperability amongst themselves (which isolates each one of them), and
The lack of interoperability across blockchains and other systems, including but not limiting to traditional IT systems, web solutions, and mobile networks.
Without being able to exchange data with other platforms, it is entirely impossible to implement blockchain technology in most areas. This is because of what's known as the oracle problem.
Blockchain oracles 101
This simple example illustrates the importance of oracles:
Let's say you want to create a DeFi protocol in which users can use something (e.g. their laptops) as collateral to apply for a loan. For this to happen, you'd also have to create a decentralized price feed. Without it, you wouldn't be able to calculate the price of every individual model of computer.
This creates two problems:
Since all the information comes from one feed, attackers have a centralized, single target.
Even if you aren't attacked, others can figure ways to game and manipulate the feed, a problem of centralization. This can be done through arbitrage, human manipulation, illegal means, etc.
Because of the above, the best way to create a sufficiently decentralized, practical and secure feed is to compile information from several sources, including centralized ones, and weighing it. This way, decentralization is achieved securely, and you reduce the impact of any probable attack.
Now, oracles are not the only interoperability solution. In fact, they might be wrong solution for multiple use cases. Interoperable solutions can happen either in a just-in-time manner, or be ongoing ones. They can also be third-party (like oracles) or hosted internally.
Other interoperability solutions are:
Blockchain notaries: these use one or more trusted nodes. These nodes then connect to both chains to trigger transactions on them as a response to triggers. When something happens within the node, the notary makes updates to both chains. The more decentralized a notary, the more trustworthy it is. Notaries can also be thought of as having an accountant represent expenses and earnings in different columns of a spreadsheet.
Hashed Timelock Contracts (HTLCs): These are agreements resulting in conditional transactions. A transaction only occurs and gets settled when it meets a condition, often expressed as a deadline. Users need to provide cryptographic proof directly to the contract instead of going through intermediaries. If they fail to do this, the contract never makes it to the main chain. HTLCs are vital for atomic swaps, which are at the core of permissionless inter-chain transactions.
Sidechains and relay chains: These are ways to connect to a central chain that supports smart contracts. The relayer at the center of all the connections then interacts with and exchanges information with the chains, keeping tabs itself. Polkadot is a great example for this, and it works mainly by locking tokens and issuing synthetic assets.
Abstraction Layer Adaptors: This is almost the exact opposite of the relay chain model. Common Application Programming Interfaces (APIs) are used to represent blockchains and communicate with them. Because of this, a blockchain-agnostic language can be used for newcomers to seamlessly plug into this layer.
It's important to remember that, because of how blockchains have originated and grown organically, the industry has no interoperability standards. Every subsequent development therefore increases the difficulty of interoperability, constantly fragmenting the industry.
So, what is interoperability good for?
Digital payments
The first use case for blockchains was monetary systems. With 2020 and 2021 following the common theme of social isolation and the boom of e-commerce, digital payments' limitations have been exposed and at times been exploited. Keep in mind that these limitations are often not found at a consumer level, but rather in the back-end of solutions, in a time of international commerce and digital products.
The difference between payment standards and communication protocols creates interoperability delays. There is an increasing demand for faster, cheaper, more efficient payments worldwide, which Central Banks aim to solve with their native digital currencies. Interoperability, therefore, would allow multiple sectors of our economies that are currently unable to interact with each other efficiently (or at all) to unlock the value in these chains and systems.
Other interesting use cases for interoperability are:
Digital identity: To work, this needs both interoperability between blockchains and outside of them.
Supply chain management and tracking: For this to happen, there is a need for interoperable solutions useful in all systems. Companies often use proprietary solutions, therefore the future of interoperability lies on the incentives and coordination of multiple actors.
Healthcare: The interoperability of digital identities, medical records and general data coming from different vendors, providers, regulators and patients would greatly benefit this industry.