Blockchain Interoperability

interoperability

12 min

interoperability

12 min

Welcome back!  (we’ll never get tired of saying that) I would liken this WBS to a space adventure, a prelude to a space saga if you will - we’ll be exploring how the universe of all the different blockchain networks is destined to one day be interconnected, and where we are today in the story.

We are 100% confident that you know what a blockchain is, but just in case you aren’t familiar with the word “interoperable,” here’s a definition. Now, let’s also make sure you can pronounce “Interoperability” when the pressure is on, and you don’t want to look like a noob (took me a while).  Just break it up into two words:  “Inter” and “Operability,” now say it a bit faster, and voilà.

In a network sense, communication means sharing and being able to use data or information.  Think about everything you know about blockchain, and what type of data is potentially important to share if two networks are to be connected:  participant identifiers, wallet keys, transactions, token ownership balances, and all other block/ledger stored information. The blockchain community has used terms like “internet of blockchains,” “blockchain of blockchains,” and “inter-blockchain communication” to describe the same basic idea:  Blockchain Interoperability.

WARNING: We are moving towards deep space (9) very fast - better put your spacesuits on! (too cheesy?)

We’ve mentioned blockchain interoperability in the past, but let’s define the term before we blast off (still cheesy, we know).  In a perfect world, blockchain interoperability is the ability of two or more blockchain networks to communicate and affect each other without the need for an intermediary and without additional risk or loss of efficiency.  However, we don’t (yet) live in a perfect world...

The closest you can get to interoperability today is for two blockchains to be able to pass value and data cross-chain with different levels of additional complication, time, or cost depending on the particular solution (more on that later). In a highly efficient solution, two networks built on the same interoperability supporting protocol (clones), and using compatible and mutually agreed upon governance models may be able to pass information and process transactions seamlessly from the perspective of the user.  So, defining what is and isn’t a network intermediary within the context of vetting today’s interoperability solutions can get fuzzy since there is always some sort of additional system or process involved (like smart contracts, DApp’s, and even other blockchains!).  Additionally, while risk can be managed, efficiency will always be affected even if by a small degree.  It’s easier understood when you consider an example:

Perfect blockchain interoperability would be if participant wallets on chain A (BTC, for example) could send tokens or currency to wallets on chain B (ETH, for example), the same way they would within their own chains - without any added time, security risk or cost.  Keep in mind that means that the transaction would also be written to both chains, with blocks reflecting the full details.  In real-world interoperability, there would need to be a conversion from one chain’s token to another, and that involves another process and adds complexity.  And writing two separate blocks may add fees.  The key is that current interoperability solutions strive to make the process seamless from the perspective of the users and are therefore still a massive improvement from having to open a crypto account, transfer your tokens into a different wallet, place a trade on the exchange, wait to settle, transfer back, then send, and add in all the little steps and possible fees in between.  

Sending tokens frictionlessly across blockchain networks is just one example of how (and why) blockchain interoperability is important for continuing blockchain adoption and innovation, and ultimately the future of blockchain.  Consider a medical network or a hospital group that is using a blockchain to store records.  If a patient from another group needs care, how would they obtain the patient’s medical records if they are stored on a non-compatible computer system or blockchain?  (hint: intermediary - in this case probably a phone call followed by an email with the information...how early 2000’s)  Supply chains are another logical implementation of interoperability.  Logistically, to get a commodity (food, wood, steel, oil) from the production facility to the wholesale distribution facility takes multiple parties and potentially crosses multiple borders.  As of right now, some companies are using blockchain to solve a process previously full of manual procedures (remember Shipchain?), but that might be for only one leg of the journey.  And even if other blockchains (Block Array, CargoX, GrainChain) are used on other legs - data cannot be seamlessly passed from one leg to another, unless the chains involved are compatible or interoperable.

This is a good a time as any for full disclosure...this whole post was inspired by this white paper (and hats off to BK for spotting it first - not Burger King btw). We strongly recommend reading this paper, though a word of caution, it’s long and technical.  But, it is extremely important for a blockchain investor to understand the application of interoperability; and why it can improve on current business models - especially supply chain, and this paper explains just that.  It also has a ton of examples and use cases that will make you really “get it” even if you skip the technical parts.  And for the overachievers out there, this paper is excellent as well.

Ok, that was pretty high-level, now let’s get loooow (better??)

There are actually different ways that blockchain networks may need to connect, the two distinct ones are value transfers and non-value data sharing.

Value transfers are exactly what was described in the example of sending tokens between chains, but MUST be done efficiently and as securely as if it was the same chain.  Non-value sharing is like the medical group example, and it’s the more important and more difficult of the two as a result of additional requirements like how to transfer AND access the data, who can see what data, protecting data security, establishing the validity of the data on both chains and as it’s interacted with, and trust in the respective governance models.  A great example of the difficulty associated with this type of interoperability can be found in regulated industries like securities, and explains the current need for a centralized and permissioned model like Prometheum (bonus points for the tie in!).  If blockchain securities were to be traded between blockchains, regulators would want to protect investors.  That may include monitoring the trading, access to a consolidated historical trading ledger, and most importantly, they (and maybe the participants themselves) would want to make sure that participants on one chain had passed AML/KYC checks as equally rigorous as on the other chain.  To put it mildly, we are a long way off from “regulated” interoperability, but that is the future.

Much like with consensus and scalability, there are many different interoperability solutions and functions--and unsurprisingly--developers have some cool names for them.  We’ll define some of them (very) briefly here:

Notary schemes - Two or more chains recognize a third party as having the ability to confirm transactions between chains, in a sense acting as a blockchain notary.  Usually involves a separate consensus model and a separate ledger, which sends a multisig to the chains that allow the transaction to execute.  This is the most centralized solution and also the least efficient.

Sidechains/Relays - This allows networks to communicate without the need for third parties, even with different consensus rules.  Usually, smart contracts exist within one chain that can interpret and interact with another chain - the sidechain runs a contract pegged to the other chain.  This solution requires some level of similarity between the protocol rules of the underlying networks.

Hash-time locked contracts - Triggers built into smart contracts, usually in the form of matching “secret” hashed information, execute when the preset parameter is met.  Atomic swaps are based on this model.

You should start with this oldie but goodie from Mr. Buterin if you want to learn more about these different solutions.

Blockchain interoperability is a self-fulfilling process...as more companies extend blockchain efficiencies beyond their own networks with protocols and BaaS (enterprise) solutions that allow for interoperability, competitors will be forced to use those blockchain models as well or be left “out of network” (boom) and possibly less competitive.  And that brings us full circle to a previous post we did about interoperable enterprise blockchain networks like Polkadot and Cosmos.  I love it when that happens.  Oh, and check out Chainlink, Ark, Aion, and Wanchain to see the different ways they approach interoperability. (pop quiz: who uses notary schemes, who uses sidechains, and who uses parachains?? And it may be a trick question...)

And...we’re out of spacetime.  This topic is one of those interoperable rabbit holes, feel free to go deeper, hop around, and explore whatever tangent topics pop up (rabbits do that, so it’s a decent ending).  Have a great week, everyone!