Blockchain Interoperability: The Key to Unlocking Institutional Adoption

In recent years, we have witnessed a significant shift in traditional finance (TradFi), as legacy institutions have begun to adopt decentralized technologies

TradFi institutions have begun to adopt decentralized technologies and explore strategies that include the distinct advantages of blockchain technology. As a result, institutions not actively engaging with decentralized technologies are at risk of being left behind in today's rapidly changing digital environment.

While the number of institutions dipping their toes into the world of decentralized technologies continues to grow, subpar interoperability is an obstacle impeding the widespread adoption of blockchain. Owing to their trustless nature, blockchains are incapable of communicating with other blockchains without external intervention.

That leaves enterprises with two options: They can remain confined to a single blockchain or rely on blockchain interoperability solutions to leverage the power of multiple blockchains. Following more than a decade of case studies and experiments, it has been proven fairly definitively that the scale and scope of global operations are too large and complex to be serviced efficiently by a single blockchain.

Instead, the business logic of global institutions must routinely span multiple blockchains and seamlessly move between private and public networks. As such, there is only one choice. Institutions must rely on blockchain interoperability solutions to achieve their ambitions.

Today, only a handful of reputable blockchain interoperability protocols exists. Using advanced cryptographic techniques such as multiparty computation and zero-knowledge proofs to move data seamlessly and securely between different blockchain networks, blockchain interoperability protocols can actively address the technical challenges inherent to blockchain technologies.

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Blockchain interoperability solutions enable institutions to develop crosschain smart contracts that interact across multiple blockchains, granting them access to greater liquidity. Institutional players can deploy their business logic across multiple networks while meeting their stringent security and compliance requirements.

For example, blockchain interoperability enables traditional banks to actively monitor and navigate market movements, transaction history and compliance protocols. When a bank's customer wants to make a crosschain transaction, interoperability protocols can be set in place to ensure the verification of such transactions across chains and to meet regulatory requirements in a simple and timely manner.

From 2021 to 2024, several healthcare organizations worldwide, including the UnitedHealth Group-owned health tech company, Change Healthcare, have been the victims of cyberattacks due to a lack of secure data management systems. Integrating interoperability protocols into IT systems of enterprises across industries where data sharing is crucial, such as healthcare, finance and supply chain, is therefore necessary.

With their ability to seamlessly connect different public and private blockchain networks, blockchain interoperability protocols can drive institutional adoption and success. While there are many contributing factors as to why widespread adoption of crosschain interoperability has lagged till now, it is impossible to ignore the negative effect that the lack of a transparent regulatory environment has had.

Although several recent regulations and initiatives by government bodies such as the Global Financial Innovation Network and the US Executive Order on Digital Assets aim to improve the current interoperability infrastructure, the journey to build secure, compliant solutions has just begun.

The blockchain industry itself is not without blame. While blockchain interoperability protocols are very functional today, the state of blockchain interoperability itself remains one of fractured incompatibility. Competing projects continue to build ad hoc solutions that make it impractical for regulators to vet the viability and security of each.

Collaboration between regulatory authorities, industry leaders and developers is key to accelerating the institutional adoption of blockchain interoperability. While challenges remain and interoperability protocols continue to evolve, institutions need to act and position themselves as leaders in a world where decentralized platforms define the endless possibilities for long-term scalability, security and operational efficiency.

By providing accessible solutions that make transferring data and assets as simple, secure and efficient as possible, blockchain technology has advanced sufficiently that we are on the precipice of widespread adoption.