Why Interoperability is Critical to DeFi’s Future

Interoperability has long been considered the white whale of Web3, the key to maximizing the potential of DeFi’s parallel financial ecosystem.

Despite the industry’s impressive growth, many believe that without the ability to smoothly exchange data, assets, and value across networks and protocols, DeFi will only ever constitute a drop in the ocean that is the wider financial world.

In fairness, developers have spent the last few years attempting to solve the interoperability quandary, whether through cross-chain bridges, sidechains (separate blockchains anchored to a primary network) or interoperability communication protocols like the IBC, which facilitates cross-chain interactions for over 110 networks.

The question is, what more needs to be done?

DeFi Interoperability: But Why?

Some may wonder why bridging gaps between disparate blockchain networks is so essential. After all, at its peak the Total Value Locked (TVL) in DeFi’s various protocols soared past $200 billion. Lack of interoperability didn’t prove much of a hindrance to reach that sum, so is it really a prerequisite for further growth?

If DeFi is to reach critical mass, the answer is yes. Enhancing interoperability across the board confers many important advantages, not least deeper liquidity, improved capital efficiency, and a more interconnected ecosystem.

By connecting to multiple liquidity sources spread across chains, DeFi protocols can access a larger pool of assets and deliver a superior UX, whether to traders, NFT collectors, play-to-earn gamers, lenders, borrowers or farmers.

Interoperability also enables users to access a broader range of DeFi services, regardless of the network they interact with. Anyone who has spent time in crypto knows that blockchains have their own unique culture (here’s looking at you, edgelords) and developer communities. For example, it’s no secret that most bitcoiners tend to skew right politically, while Ethereum maximalists skew right.

The beauty of interoperability is that all of these communities can exist under a broad church, breaking free of silos (technological and ideological) and transacting freely with one another. In short, blockchain interoperability turns DeFi into Silk Road (not the darknet marketplace, I hasten to add).

Cosmos’ Unique Advantage

As an ecosystem of interoperable and sovereign blockchain apps and services, Cosmos has done more than most to push the interoperability wagon forward. Established in 2016, the platform’s SDK – which powers all blockchains in the ecosystem – furnishes hundreds of businesses with customizable modules that allow them to create high-performance decentralized applications (dApps).

The SDK is just one part of what Cosmos calls its Interchain Stack, with other pillars being the aforementioned Inter-Blockchain Communication protocol, its consensus algorithm CometBFT, and CosmWasm, its dedicated smart contract platform.

The appeal of building on Cosmos is that developers can create their own customized blockchains (known as Appchains), which anchor to the Cosmos Hub while being able to tap into liquidity sources across the cryptosphere without fragmenting assets. These application-specific chains also benefit from Inter-Chain Security (ICS) and high throughput, with the ability to process up to 1,000 transactions per second (tps).

Nolus: An Appchain in Action

Cross-chain lease protocol Nolus serves as an example of how projects can benefit from the interoperability granted by Cosmos’ appchain infrastructure. Inspired by traditional lease products, the non-custodial money market is conceived as an alternative to conventional DeFi lending platforms, many of which are notorious for their high over-collateralization requirements.

Because it’s an appchain, Nolus can connect to multiple liquidity sources across chains, the better to furnish users with a wide range of services: fixed-interest loans/leases with up to 150% financing, swaps, and staking. It also utilizes the IBC and Interchain Accounts (ICA), the latter being the Cosmos SDK implementation of the ICS-27 protocol for cross-chain account management.

“The system can swiftly swap assets on any integrated DEX, streamlining lending by negating the need for multiple pools and ensuring liquidity providers handle only stable assets,” Nolus Co-founder Kamen Trendafilov told HackerNoon earlier this year.

Cosmos, of course, is just one major player that puts interoperability at the heart of its operations. Projects like Polkadot, Avalanche and Sovereign Chains are also doing their part to unlock DeFi’s full potential by making it more user-friendly and friction-free.

As the Web3 world sets about winning hearts and minds with its promise of trustless protocols and automated transactions, the need for cross-chain interoperability – and with it, improved utility and efficiency – isn’t going away. And nor should it.

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