A variety of blockchain networks host cryptocurrencies and decentralised finance (DeFi) applications. However these networks are discrete entities, and communication between them is not a simple process.

The following articles provide a background to the issue of interoperability and the ways in which the problem is being dealt with. Have a read before testing yourself with our quiz below.

1. What is Blockchain?

Blockchain technology offers a way to maintain a distributed and secure database perfect for financial applications. No single actor has the power to influence the system alone, new blocks are added only when verified by the majority of nodes on the network.

What is Blockchain?
Blockchain is a technology that has sprung into popularity in the last decade alongside the rise of cryptocurrencies and other digital assets. Well-known examples include the Bitcoin Network and Ethereum. A blockchain, as the name suggests, is a continuous list of blocks of information that live on…

2. What is Interoperability?

Many different blockchain networks exist, but smooth communication between them is a difficult problem to solve in a decentralised manner. In order to create a financial system capable of massive adoption, this process must be made smoother without having to trust a centralised entity.

What is Interoperability?
Interoperability is an umbrella term which refers to a category of technologies and projects that aim to allow distinct blockchain networks to function together. The goal is to build a continuous financial experience across various networks (such as between Bitcoin and Ethereum), which potentially r…

3. What are Token Standards?

In order to maximise composability between projects, their smart contracts and the tokens they use, the Ethereum network has introduced token standards. Among these are ERC-20, which is perfect for cryptocurrency, and ERC-721, perfect for NFTs.

What are Token Standards?
The Ethereum blockchain was designed to support the development of decentralised applications by many different parties at the same time. To keep this ecosystem of services in harmony with itself, it is important to have certain standards of development. Hence, Ethereum contains specifications for c…

4. What are Wrapped Tokens?

In order to send tokens from one network to another, smart contracts are able to lock or ‘wrap’ tokens on one network inside a smart contract, and create an equivalent token on another network.

What are Wrapped Tokens?
Wrapped Tokens are a type of cryptocurrency, whose value is pegged at a 1:1 ratio to another cryptocurrency. Wrapped tokens are most useful when we need to move a currency created on one blockchain network onto a different blockchain network, and transact with it there. This is of great

5. How do Bridges work?

Bridges are the route via which tokens are sent between blockchains. Using a lock-mint, burn-release system, tokens from one blockchain are able to be used on another, maintaining their value. This allows users to transact with, for example, BTC on the Ethereum network.

How do Bridges work?
Individual blockchain networks are self-contained and are unable to communicate directly with each other. In addition, they may use different consensus mechanisms, programming languages, etc., resulting in isolated ecosystems which operate independently from one another. Improved interoperability be…

6. What is Layer 2?

As well as other, entirely independent blockchains (L1s), another option to alleviate traffic on the congested Ethereum network is the application of Layer 2 (L2) solutions, such as Rollups and Sidechains. These are linked to Ethereum mainnet and offer a way to increase throughput whilst still relying on the underlying network’s security and decentralisation.

What is Layer 2?
Layer 2 is the generic name given to a variety of projects dedicated to scaling the use of the Ethereum network. As we know, Ethereum is a decentralised, peer-to-peer blockchain network. However, the very properties which make Ethereum open and trustless, also lead to a limit on the speed at

Summary

Blockchain technology allows for the development of the secure, decentralised networks which underpin DeFi. However, these very same qualities also limit scalability. As users are increasingly drawn to alternative networks where transactions are fast and affordable, the need for frictionless solutions to move between these discrete ecosystems grows.

Quiz

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