November 19, 2020 6 min read
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Blockchain technology captured the attention of the world as the technology that would revolutionize how we do business and finance. The fascination of the blockchain moved entrepreneurs, developers, and blockchain enthusiasts to discover just how far you can stretch the power of the blockchain.
As more blockchains came into existence, the world started seeing that blockchains could have different consensus protocols, algorithms, and create and use different tokens.
But there was one problem.
With all these blockchain technologies, there wasn’t a way they could interact with each other. Thus, a transaction that took place on one blockchain or a smart contract that was initiated on that blockchain could not be transferred to a completely different blockchain in the network.
This was bad news especially for decentralized finance (DeFi). According to Binance, Decentralized finance refers to “an ecosystem of financial applications that are built on top of blockchain networks”. In order words, DeFi is not controlled by a central authority like the central bank.
Its nature creates a more transparent financial ecosystem where users are in control of their financial assets. Financial assets in DeFi are easier to access compared to the financial system that we’re used to. It does not need intermediaries like banks and neither does it need courts to settle disputes. This is because the blockchain, upon which the decentralized finance is based, records all transactions that take place on the blockchain and secures them from being tampered with by third-parties. Thus, reducing the possibility of disputes because all parties including the blockchain itself are intimated with the details of the transaction, thus making the whole process transparent.
As impressive as decentralized finance is, adoption to the ecosystem is quite slow.
The lack of an interoperable solution affects the mass adoption of decentralized finance. This means that the inability of blockchains to connect with another blockchain on the network made this innovation unattractive. There was no way to transfer assets from blockchain to blockchain.
To illustrate the problem, let’s look at our centralized financial system. Financial transactions in a centralized system are hardly restricted to one financial institution. Someone with a bank account can easily transfer money to another person who has an account with a different bank. Imagine how difficult it would be if financial transactions were only limited to the bank you have an account with.
Thus, something had to be done to bridge the gap between blockchains. Many people tried to embark on the audacious quest to connect all blockchains, but very few were able to make this happen. It seemed like the voyage to interoperability wasn’t going to be easy.
Role of interoperability in the mass adoption of decentralized finance
So, what is interoperability?
It simply means the ability of various blockchain systems to communicate with each other. The ease of communication would allow users to share, view, and access information across the blockchains in the network. This free-flow of information would help expand one’s reach and influence irrespective of which blockchain system you use. It would create a sense of freedom to choose a blockchain on the ground of merit and prevents the need to be part of several blockchains just to get transactions done.
Interoperability in the blockchain helps to create an ecosystem that will forever remove the need to have intermediaries not just within the blockchain but also in the networks of blockchains. Without Interoperability, users would be forced to make use of intermediaries to carry out transactions totally defeating the purpose of blockchains to decentralize control.
The world depends on collaboration to ensure sustainability and expansion, thus making interoperability critical. Without it blockchains, and by extension decentralized finance, won’t experience the full potential of what they were initially created for.
Ease, smooth information sharing, and execution of transactions would just be a mirage and the so-called “decentralized system” would just be another copy of what we experience in our familiar centralized space.
Related: 3 Lessons From the Summer DeFi Boom
Nobody would ever be moved to use decentralized finance if they’re only going to experience a virtual version of the challenges they face with centralized finance. Under such conditions, nothing that would attract them to adopt DeFi.
The light at the end of the tunnel
Several blockchain solutions were developed to solve the interoperability problem. However, those solutions had their flaws. Although these solutions addressed the problem of interoperability, it came at a cost. Due to the complicated nature of these solutions, it led to slow operation speed and increased transaction costs.
Libonomy was among such companies that attempted to create a solution to connect blockchains. This platform interconnects different protocols under one ecosystem. Made of a team of three Swedish co-founders — Richard Haverinen (CEO), Fredrik Johansson and Therese Johansson — they did extensive study of the mistakes of solutions before them. With their knowledge in decentralized technology and hands-on experience in running startups, they realized that they had to adopt a different means through the consensus protocol could function in a decentralized network. They discovered that the missing link was Artificial Intelligence (AI).
Libonomy creates a self-learning system powered by AI which regulates network parameters. This is what helps interconnect blockchains and allow for the easy exchange of transactions from one blockchain in the network to another.
All the drawbacks experienced by previous interoperability solutions like slow speed and high cost of transactions were made history. This means that Libonomy made interconnection between blockchains a lot faster, safer, more power-efficient, and scalable.
The new journey for the adoption of decentralized finance
The world is growing increasingly interconnected and it was only a matter of time before our diverse blockchains needed a solution that would match our need for collaboration.
The road to interoperability certainly wasn’t straight. Many had to venture on the same path so that those who came after them would learn from their mistakes and devise better solutions that will achieve interoperability.
Now that interoperability is no longer a problem, we have to embark on a new journey — the journey to mass adoption of decentralized finance.