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Imagine a world where emailing was only possible within isolated platforms
Gmail to Gmail, Yahoo to Yahoo and so on. Consequently, a Gmail account holder won’t be able to email someone who uses Yahoo and vice versa.Though hypothetical, this situation underscores the severe limitations originating from the lack of interoperability or the capacity for cross-platform interactions. These concerns aren’t exclusive to communication-oriented platforms but permeate almost every other domain, including finance. As with emails, being unable to transfer funds from accounts in one bank to those in another would be devastating.
Over the years, legacy financial systems have achieved considerable degrees of interoperability and integration. Fintech’s evolution has been a significant catalyst in this regard. Nevertheless, the centralized nature of traditional finance is so fundamentally flawed that interoperability alone cannot bring the much-needed structural change.
Reimagining finance holistically is the need of the hour, which the emergent blockchain-cryptocurrency sector is addressing in many ways.
Having secured a market capitalization of $2.76 trillion despite its nascency, this industry is presently the forerunner in making global finance more transparent, secure and borderless. In its bid to become viable alternatives to legacy systems and processes, blockchain-based protocols have strived for seamless and broad interoperability since their early days.
In 2016, for example, Vitalik Buterin authored a report on blockchain interoperability, describing it as the next level of development. Before this phase in the technology’s evolution, blockchains were necessarily and predominantly siloed, unable to facilitate the exchange of data and value across ecosystems. The situation has improved significantly since then, surfing the tide of innovations like sidechains and bridges.
Today, blockchains not only interact more but also scale better. Furthermore, recent developments in the realm of blockchain-based decentralized finance (DeFi) have strengthened the quest for interoperability. But some glaring concerns remain to be overcome, especially concerning lending and borrowing protocols in DeFi.
Underutilized assets
he trouble with DeFi lendingDeFi protocols have significantly contributed to the outstanding growth of blockchain cryptocurrency markets, with over $112 billion in total locked value at the time of writing. Despite their phenomenal success in general, DeFi lending protocols still face considerable obstacles due to siloed ecosystems with limited interoperability.
In most cases, liquidity remains locked off in individual protocols, isolated and inaccessible to other networks. Due to this condition, crypto assets often lay idle in users’ wallets as there is limited scope for their use
say, within a single platform and in secondary marketplaces. Mechanisms like yield farming…
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