| 13-07-2020 | Carlo de Meijer | treasuryXL
Blockchain‘s potential for improving business processes, providing transactional transparency and security in the value chain, and reducing operational costs is obvious for many. Notwithstanding this the expected mass adoption failed to happen up till now. What has been holding blockchain back?
In fact, there have been several concerns in recent years preventing this mass adoption. But by far the most widely recognized problematic issue is that of interoperability. Or, more accurately, the lack of it. In this blog, I will not go into the details of the various tools that can be used to enable interoperability. There are many reports that give in-depth description. I will look at recent developments in the interoperability area, the various offerings and real word interoperability use cases that should give an idea of what we may expect.
Siloed blockchain ecosystems
While blockchain was conceived as a decentralized technology, individual blockchain networks are not inherently open and are not able to communicate properly to each other. There are a large number of blockchain projects, all of which have different characteristics – such as the type of transactions, hashing algorithms, or consensus models – and which focused on a particular area. The problem is further deepened by different networks and financial institutions running completely different governance rules, blockchain technology versions and regulatory controls. This has resulted in a series of unconnected blockchain ecosystems operating alongside, but siloed from each other, preventing the industry from reaching its full potential.
“We would be left with a scattered collection of siloed blockchains, each supported by a weak network of nodes and susceptible to attack, manipulation, and centralisation.” ConsenSys research paper
What is interoperability?
The term blockchain interoperability is increasingly being talked for some time now. It not only means the possibility that disparate blockchain systems can communicate with each other. Above all it is the ability to share, see, and access information across different blockchain networks without the need for an intermediary – like a centralised exchange. So, blockchain projects that want to implement interoperability into their platform aim to create an ecosystem that will enable different blockchains to easily communicate with each other. The vision of interoperable enterprise blockchains thereby rests on a number of functionalities and abilities including: integration with existing systems, initiate transactions on other networks, conduct transactions with other chains, transact between deployments on the same chain by integrating apps and making it easy to switch one underlying platform for another.
Why is interoperability critical?
It is easy to see why interoperability for blockchain is not only desirable, but above all critical, in a world where enterprises depend on ever-greater levels of collaboration and interaction. In fact, interoperability is crucial in any software system – it simply won’t work to its full potential if it can’t work with other software. It is the only way to realise the full promise of enterprise blockchain and get the most out of their blockchain investments. Interoperability would enable smooth information sharing, easier execution of smart contracts, a more user-friendly experience, the opportunity to develop partnerships, and the sharing of solutions.
Where is interoperability needed?
Especially in areas where the value chain is important, such as supply chain, trade finance, healthcare, aviation, etc., one blockchain network will simply be unable to provide all the needs for any given transaction. This asks for multiple networks, each providing specific value, and proper communication so that data from private networks can be routed to other relevant networks for transactions “without having to establish a one-to-one integration”. “Everyone is dependent on physical goods’ ability to move across all participants in the global supply chain with minimal friction. We need the same ability to move a digital asset from one blockchain to another without creating redundant data or a new market for intermediaries. This is why blockchain interoperability is critical.” Rasmus Winther Mølbjerg, Director, Deloitte, Denmark.
Blockchain’s characteristics allow disconnected supply chain management systems to interoperate securely without too high investment costs. Because of the pressing need for supply chain transformation, leveraging these characteristics ensures that blockchain can be useful and effective in the real world.
Interoperability Studies: WEF Report
In the meantime a number of interesting papers covering the interoperability issue have been. The most ground-breaking one is that of the World Economic Forum (WEF). The WEF described blockchain technology as being “balkanised in silos.” In collaboration with Deloitte, the WEF this year released a report on “Inclusive Deployment of Blockchain for Supply Chains – A Framework for Blockchain Interoperability”. The report covers several models, concepts, approaches and best practices for blockchain interoperability. It should help organizations understand the importance of interoperable blockchains and outlines a decision framework to support their development and execution. “Interoperability and compatibility issues are key to address in a world after the coronavirus pandemic.” “The challenge of interoperability is not only a technology problem, but even more so a problem in terms of governance, data ownerships and commercial business models.” Nadia Hewett, Blockchain and Digital Currency Project Lead at the World Economic Forum
Blockchain interoperability approaches
Broadly one could distinct two main blockchain interoperability approaches: APIs and network-of networks model.
Blockchain networks and solutions could be brought together for an organization via a so called “mashup” application. They only have to interact with one consistent application programming interface (API) and not an API for every network. This mashup application can include a variety of capabilities defined in data models and smart contracts, but fundamentally, it will serve as “the glue that joins various networks together”. However, APIs do not presuppose a governance structure, which makes them flexible and expedient but also a poor choice for organizing interoperability in the long run.
Network of networks model
The most efficient and scalable way to build interoperability is through the joint effort of establishing industry standards as well as identifying a network of networks structure that industry networks can converge around. An organizations blockchain network actually represents a ”web” of interconnected networks. This architecture would allow an organization to connect and transact with multiple solutions, not restrained to a single network, and open up a market of interoperability across solutions. By unlocking the power of the peer, organizations can use their peer to connect into multiple blockchain networks via channels. This significantly reduces the complexity and optimizes an organizations interaction with different blockchain networks. This network of networks model for interoperability continues to gain momentum, especially as we see natural blockchain hubs emerge.
Blockchain interoperability solutions
The majority of interoperability solutions up till recently were mainly focused on chain interoperability across public blockchains, thereby using crypto-directed tools like sidechains (or relay chain), notary schemes and timed hash-locks. The focus however has increasingly shifted towards solutions for interoperability between private networks and/or between private networks and public blockchains. One way to solve interoperability is to use a separate blockchain as a bridge to facilitate cross-communication. Essentially, this is a third blockchain that sits in the middle of the two blockchains and maintains a cryptographically secured timestamped ledger of the transactional and messaging activity between the two. Interoperability tools that are used range from hub and spoke, decentralised finance (DeFi) and general purpose bridges. Another way to facilitate interoperability between systems is with off-chain or middleware systems. This so-called non-blockchain interoperability approach uses tools including atomic swaps, oracles and state channels.
Blockchain Interoperability projects
A growing number of interoperability projects have entered the scene to try to bridge the gap between the various blockchains. Their aim is to facilitate interaction between networks and ensure the concept of decentralisation is fully realised. Depended on the interoperability solutions these can be used for activities like decentralised asset exchange and decentralised message exchange. Interesting projects are Chainlink, Cosmos, Hybrix, Polkadot and Wanchain. Other examples include Aion, Ark, ICON, Transledger, and Overledger.
Chainlink is a decentralised oracle network, an interoperability solution to facilitate secure and trustless communication between all disparate blockchain systems. The resources mostly revolve around off-chain data to trigger smart contracts and settlement outputs like established payment systems and cloud backend. This standalone function is important for many blockchains that don’t have to interact with other blockchain protocols but do need access to externals inputs and outputs. Chainlink nodes are able to format messaging and data from public APIs into a readable format for smart contracts. These nodes can connect to any API, whether it is a blockchain, enterprise system, Web API, or IoT device. Chainlink is sometimes working in combination with other interoperability protocols. Chainlink has already announced partnerships with Polkadot and Ethereum to provide off-chain data to their networks. Wanchain is integrating with Chainlink to provide off-chain data to their on-chain smart contracts.
One of the most prominent interoperability solutions is Cosmos, very much focused on its Cosmos SDK platform. Cosmos aims to act as an ecosystem of blockchains that can scale and interoperate with each other. Cosmos is a smart contract platform that has prioritized interoperability as a critical component of their blockchain design. Their architecture is based on the so-called ‘hub-and-spoke’ system whereby a series of ‘spoke’ chains connect to a ‘central’ hub by means of inter-blockchain communication. Cosmos is heavily reliant on validators to provide interoperability. It makes use of the so—called Byzantine fault tolerant (BFT) consensus algorithm and uses both member chains and Peg-Zones for existing chains to improve the overall ecosystem. Their end goal is to create an ‘internet of blockchains’ – a network of blockchains that can communicate with one another in a decentralised way. The implementation of the IBC (Inter Blockchain Communication) protocol is scheduled for this year 2020. Cosmos will use the IBC protocol to allow communication between a central hub and the chains linked to the network, also called Zones. It will first only concern the interoperability of chains built on top of Cosmos SDK platform.
Hybrix is an open-source cross-chain solution aimed to make it easier to make cross-chain transactions, and also increase the level of ease for developers who want to offer multi-chain platforms. For that purpose Hybrix is developing an “HY” token. Each token represents an identical block of a chain and can be used to reconcile data across the entire crypto complex. Tokens form as bridges that allow transactions to be conducted on either a single chain or multi-ledger systems. Since Hybrix utilizes existing languages to build its protocol and interface, there’s no need to acquire new coding languages to use its system. Hybrix has amplified its capacity to adapt 27 major blockchains and more than 400 tokens.
Another project is Polkadot, which facilitates transactions and data exchange, aiming to promote interoperability between blockchains. It uses the DPoS algorithm and employs required validators which can lead to a certain degree of centralization. The concept at Polkadot is quite similar to that of Cosmos. It allows communication between the relay chain and the parachains of Polkadot’s network. By using Parachains and Bridgechains, this approach enables to transfer both value and data. Additionally, scalability will be taken to a whole new level by running multiple parallel chains. This is a bit different from other projects which are looking to bridge the gap between blockchains as well. The launch of their mainnet is planned for this year (2020). As for interoperability, there are no precise timelines regarding their protocols for chains implementation.
The Wanchain network allows interoperability between very heterogeneous blockchains like Bitcoin, Ethereum and EOS. Wanchain aims to link and facilitate communication between the different blockchains as much as possible. Wanchain is already functional and allows communication and exchange of value and data between public and private blockchains through storeman nodes and the T-Bridge framework. The storeman node system combines two cryptographic concepts that ensure security and confidentiality of network transactions: secure multi-party computation and “Shamir’s secret sharing”. The Wanchain project recently announced the integration of EOS blockchain and the implementation of the T-bridge framework. Wanchain’ s next challenge is to fully decentralise its network. This is planned to be finalised in 2022.
Other interoperability offerings
And there are many more interoperability projects including Aion, which is working towards integrating artificial intelligence in its consensus model. Or Ark which uses Smartbridge to link existing chains, and will also allow for the transfer of both data and value. And the Loom Network, which uses its DPoS blockchain Basechain to connect and transfer value among several blockchains, including Bitcoin, Ethereum, and Binance. A rather unknown but interesting player is Block Collider. Its proof-of-distance (PoD) consensus algorithm ensures that ledgers can operate with one another. It is also the only project that, in its current form, requires any validators.
Real world interoperability use cases
During 2020 we have seen a number of interesting real world interoperability use cases.
AVA Network (Defi Apps)
The AVA network is an open-source platform for building and deploying decentralized finance (DeFi) apps and enterprise-grade blockchain solutions that can be run in one interoperable, highly scalable ecosystem. AVA has officially released the codebase of its AVA blockchain platform to the global community. Interoperability between different DLT networks has thereby been built into the AVA protocol, using the Avalanch consensus protocol. The AVA platform has coupled this protocol with a network model that enables the system to span permissioned and permissionless networks, making AVA a self-serve platform for new blockchains and digital assets. Instead of one network with thousands of tokens, the AVA ecosystem is one platform with thousands of subnetworks and tokens on each subnetwork . AVA’s infrastructure allows anyone to build their own private, public, permissioned or permissionless blockchain networks or subnetwork, so-called “subnets.”
Kava Labs and IRISnet (decentralised finance)
Another real world example is Kava Labs that has teamed up with IRISnet in order to provide a technology foundation for facilitating the development of distributed business applications. Kava is a Cosmos SDK (software development kit) blockchain. The collaboration will involve the whole interchain ecosystem that has been developed by blockchain interoperability solution provider Cosmos. Aim is to further support and promote decentralized finance (DeFi) application development on each other’s respective blockchain or distributed ledger technology (DLT) networks. Kava’s Interblockchain Communication Protocol (ICP) will be used by both development teams to expand the nascent DeFi ecosystem. IRISnet aims to offer iService and Coinswap applications to Kava in order to improve liquidity. “Cosmos’ value proposition is that “if you make a blockchain and it has a similar consensus mechanism to another blockchain …[then by using] … the inter-blockchain communication protocol (IBC), you should be able to connect those two blockchains and transfer data [or assets] between them.” Brian Kerr, CEO at Kava Labs
Quant Overledger and Oracle Cloud (banking lifecycle)
Quant Network, a technology provider, delivering blockchain enterprise-grade interoperability for the secure exchange of information and digital assets across any network, platform or protocol, at scale, has partnered with Oracle. Quant will use Oracle Cloud to run mission critical business applications on interoperable DLTs that will be powered by Overledger, which connects global networks to blockchain-based platforms. Banking institutions may deploy an extensive set of APIs that aim to cover all areas across the banking lifecycle. “Quant helps Oracle’s customer banks by providing a single API to all supported blockchains to power interoperability across platforms. Giving clients choice and flexibility to freely use any blockchain technology and go cross-platform with only three lines of code.” “Clients gain benefits of market access, new products and revenue streams without the challenges of managing complex underlying blockchain technology stacks.” Gilbert Verdian, CEO at Quant Network
SIA and Quant Overledger (financial services)
Banking users of SIA’s private blockchain infrastructure, SIAchain, will be able to link up with other distributed ledgers following successful testing of interoperability via Quant Network’s Overledger technology. Quant’s Overledger complements and connects existing systems and DLTs, to drive innovative and efficient growth for companies, public entities, and regulatory bodies alike. This integration provides the ability to bridge permissioned blockchain instances between SIAchain’s 580 European network nodes and other external networks in order to have crossplatform applications and services covering the likes of notarisation, payments and KYC. SIA, that provides its services in 50 countries, is European leader in the design, creation and management of technology infrastructures and services for Financial Institutions, Central Banks, Corporates and the Public Sector, in the areas of Card & Merchant Solutions, Digital Payment Solutions and Capital Market & Network Solutions. “The achievement of a fully interoperable blockchain network, through our collaboration with Quant Network, is another key-element in our path of bringing innovation and state-of-the-art technologies for supporting banks, financial institutions, corporates and public administration bodies to extend their capabilities in integrating different DLT business applications.” Daniele Savarè, innovation & business solutions director SIA.
Telos and Transledger (crypto currency transfers)
Transledger, a blockchain interoperability platform that aims to facilitate cryptocurrency transfer between separate or independent DLT networks, has chosen the Telos blockchain network to perform cross-chain digital asset transactions with its utility token in a fast and secure manner. Transledger Inter-blockchain Communication (IBC), allows different blockchains to interact with each other and perform tasks together. Use cases for blockchain interoperability solutions include peer-to-peer (P2P) networks such as decentralized or non-custodial cryptocurrency exchanges (DEXes). These types of trading platforms allow digital asset users to trade their tokens without requiring centralized, third-party exchange platforms. DEXes may use Transledger IBC to run P2P networks across several different blockchain platforms. This allows trading on DEXes to take place at speeds that are comparable to centralized exchanges, however, these non-custodial platforms allow users retain control of their funds. They also allow investors to manage their cryptocurrency portfolios with “faster and more powerful” smart contract functionality and features.
Skuchain and Corda (trade finance)
Skuchain network, a blockchain platform for supply chain, recently launched the DLPC CorDapp, a Skuchain application that promotes interoperability in trade finance blockchain applications. This application is the first example of The Bankers Association for Trade and Finance’s Distributed Ledger Payment Commitment (DLPC) operating in a real network. A DLPC is a fundamental piece of trade transaction. Everyone needs to commit to a payment. Skuchain’s DLPC CorDapp allows transactions to take place between its enterprises on Hyperledger Fabric and their bank partners on the Corda Network. The ultimate goal of brokering interoperability between Skuchain EC3 and Corda is to allow Skuchain’s enterprise customers to receive trade finance from banks on a Corda implementation without any party having to onboard onto another platform. Enterprises can now easily access trade finance as native part of their own supply chain platform.
The arrival of interoperability solutions may fundamentally change present attitudes towards blockchain and will be an important step in persuading networks that the seamless exchange of data is crucial to the success of the entire market. As more progress towards interoperability between blockchain protocols is expected in the coming years, and we already may see successful cross-blockchain projects this year, interoperability is likely to become an important game changer for the blockchain industry. We may say that Blockchain seems to be at the threshold of widespread acceptance and adoption.
Carlo de Meijer
Economist and researcher