Within the past year alone, hundreds of new blockchain protocols have emerged. Many are claiming to be an all-encompassing solution for future blockchain applications. These protocols promise to solve a lot of the same issues. Many of these issues plague the blockchain industry, such as scaling, accessibility, and decentralization but the reason these limitations are so pervasive may also indicate their complexity. The industry is at an inflection point where the idea of “one protocol to rule them all” may no longer be valid. It is likely that many of these protocols will ultimately fail, leaving behind only a handful of projects that successful target a few or one of these issues.
With this idea in mind here are some possible companies and projects that can fill these necessary roles. Bitcoin has a non-zero chance of setting the standard for storage of value, Ethereum for developing smart contracts, VeChain for launching supply chain solutions, or Monero for private transactions. However, these existing protocols must adapt to the rapidly evolving landscape and needs of more complex integrations. Otherwise, they will be replaced by a future blockchain and distributed ledger technology that has started with collaboration and cross-platform communications in mind from the start.
As a result, there is an increasing need for a standard communication protocol for any present or future blockchain network to seamlessly interact with one another. The key to unlocking a sustainable ecosystem with strong adoption lies in interoperability.
In its early years, the internet was comprised of multiple intranets used for a permissioned set of computers to communicate within a small network. Over time, generic protocols such as TCP/IP were developed to provide these intranets a common communication layer between each other, revealing the potential of the internet we know it today. The evolution of blockchain technology may be no different. We are already beginning to see this develop through the structural framework of Web 3.0 and the semantic web protocol introduced through systems such as the InterPlanetary File System (IPFS).
What is Interoperability?
On a surface level, interoperability allows for the information of blockchain A and blockchain B to interact with each other through systems that are complimentary on either blockchain. Typically this is in the form of compatible smart contracts with partial keys on either chain or via oracles.
This means a digital asset or information native to blockchain A can be represented on blockchain B and vice versa. In the instance of a full-scale interoperable ecosystem, information can seamlessly be sent and received between any blockchain network. However, we quickly run into issues such as network permissions and data validation across chains.
Suspending these suspicions, from a high level this all sounds great, but what does this mean for actual applications?
Benefits and Potential Applications
Interoperability can serve as a scaling solution for blockchain networks. Rather than relying on a single public blockchain to handle all network transactions, resource-intensive operations (like a complex smart contract) could be offloaded to a separate blockchain (a “side-chain”) with a more efficient consensus process and thus expedite the computation. The final result would then be recorded on the main public chain, resulting in a faster and cheaper experience for the end user.
Blockchain Agnostic Decentralized Exchanges
A blockchain agnostic decentralized exchange (dubbed for this article as an aDEX) allows for a seamless transfer of value between any digital asset on any blockchain. This is currently being implemented through the use of atomic swaps while other implementations are still being researched. Essentially this solution resolves the hypocrisy that many crypto enthusiasts are guilty of: utilizing centralized exchanges to trade digital assets. Today, investors and traders entirely rely on centralized exchanges such as Binance or Coinbase to trade assets cross-chain (i.e., Bitcoin for Ethereum). There is currently no easy way for users to directly trade their Bitcoin for Ethereum or Monero to EOS without relying on a centralized intermediary to execute the trades off-chain. In an industry with the goal of decentralization and uprooting large centralized intermediaries, interoperability enables that vision.
Future decentralized applications could potentially integrate an aDEX protocol into the back-end of their application for users to seamlessly transfer one digital asset for another. It wouldn’t matter if you wanted to use Bitcoin, Ether, or any altcoin (given sufficient open atomic swap contracts for both assets) to pay for an in-app service or a good at a local merchant, even if they only accept Bitcoin. An application utilizing an underlying aDEX would be able to seamlessly transfer the sender’s asset into the receiver’s desired asset and completely abstract the process for the end users. This idea would unlock immense value for users as it creates a frictionless ecosystem for the thousands of new digital assets and currencies minted every day. Well with the one caveat is that, regardless of the technical ease, these tokens need to have sufficient demand which is a huge issue as of now, particularly in this down market.
Transfer of Logic
While there have been a number of solutions tested and implemented for transfer and exchange of value between blockchains, transfer of arbitrary data and logic present unique problems. With the proliferation of smart contracts gaining popularity through platforms such as Ethereum, many protocols have attempted to provide alternative coding languages to reach developers who are unfamiliar with Solidity. While this is a step in the right direction, the industry at large still suffers from the problem of siloed logic. Simply put, Ethereum smart contracts are transferable to protocols with Ethereum Virtual Machine compatibility. Furthermore, interoperability provides the opportunity for blockchains to communicate smart contract logic between each other, regardless of the underlying Virtual Machine. In other words, a user can input data on one blockchain and cause a change on another blockchain.
Generally, transfer of logic is the notion of: if x happens on blockchain A then execute y function on blockchain B.
Example 1: An insurance provider could reference a policy recorded on one network, verify the medical records held on a private chain, and confirm a payment made in bitcoin or, a stablecoin such as DAI.
Example 2: An individual can submit digital identity information (like reputation, credit scores, and income) from one blockchain to a bank’s loan approval smart contract on its permissioned blockchain to disburse a loan to the borrower in Ether.
Verified Standard Data
When sourcing data externally from something like a website through an oracle on any network, it’s difficult to verify the validity of this data without trusting the source of information. To reduce the ambiguity of data quality, there may be data verified through a non-native reputation-based protocol connected to the “main network.” This allows an intermediate process of data validation between direct-web input and complete network consensus surrounding incoming information.
Zero Vendor Lock-In
Additionally, utilizing an interoperability standard could give developers the confidence that they aren’t building on the AskJeeves of the internet era. By providing the ability for data and smart contracts to migrate across various blockchains, a company can move their application or other blockchain resources to one or more blockchains at will if any serious issues with their underlying blockchain solution come to light.
Issues & Risks Associated with Interoperability
While there is significant potential in a widely adopted interoperability standard, blockchains are already facing enough problems as independent ecosystems. It’s important to recognize that at this time, interoperability may complicate aspects of governance, 51% attacks or contentious hard forks.
For example, had the DAO occurred with a network of connected permissionless systems, the lost funds could have been immediately transferred to another smart contract platform amplifying the governance issue over a hard fork to two blockchains. Worse, the perpetrator of the DAO could’ve split the funds to 50 different blockchains, and the entire blockchain ecosystem would be under an immensely complicated governance issue over the recognition of those funds.
With that being said, the road for interoperability is long, and it is possible for developers to take precautions to mitigate the amplitude of these attacks. Nonetheless, a common interoperability standard would undoubtedly increase the number of attack vectors within the space as a whole.
Projects Tackling Interoperability
As of now, a multitude of different approaches are being taken to solve interoperability with each of these projects sharing the same goal of global industry adoption. We’ve described some of the projects that are currently at the forefront of interoperability innovation below:
- Wanchain: Aims to become a “distributed” bank as a platform enabling decentralized transfer of assets between blockchains.Live Cross-chain representation of Ethereum, Bitcoin, and Maker’s Dai. Recent addition of the Gemini Dollar (GUSD) to Wanchain’s integrations
- Aion: Multi-tiered blockchain system supporting custom blockchain architectures and trustless mechanisms for cross-chain interoperability.Trustless mechanism for swapping AION (ERC20) tokens to native AION (Token Bridge). Recently released protocol for arbitrary message transfer (TransWarp Conduit)
- Icon: Consortium blockchain network connecting independent blockchains without additional intermediaries.An increasing amount of consortium blockchains connecting to Icon. Decentralized exchange and identification service to be released in the first half of 2019.
- Polkadot: Multi-chain network aiming to connect private/consortium chains, public/permissionless networks, and oracles into the web3 ecosystem.Reached third proof-of-concept live on testnet with new consensus algorithm, GRANDPA. Mainnet anticipated in Q3 2019.
- Quant Network: Developed Overledger, a blockchain agnostic operating system to connect blockchains to one another along with other existing networks.
Overledger is live, empowering developers to connect blockchains and build multi-chain applications with only a few lines of code. Connected with multiple public and private blockchains with the mission to integrate with Corda in early 2019.
- Cosmos: Tendermint-based blockchain ecosystem to help scale Ethereum dApps.Game of Stakes released to test the correctness and stability of the candidate software that the Cosmos Hub will be run on. (Tendermint Core, Cosmos-SDK, and/or Gaia). Mainnet still unconfirmed.
Overall, interoperability has vast potential for simplifying many complexities of blockchain and cryptocurrencies for mainstream users. A universal interoperability standard could very well act as a de facto scaling solution although there are still widely unanswered questions regarding the security issues created with governance and network attacks. If done correctly, assuming developers design applications with the necessary precautions, interoperability will allow for a more freely accessible decentralized ecosystem to emerge and proliferate. With this being said, we are still a long way from finding a widely-adopted interoperable standard as most of these projects are still in their infancy requiring a significant amount of time to be researched, iterated, and implemented.
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Fitzner Blockchain Consulting is a leading management consulting firm that specializes in blockchain-based systems and their design