Blockchain Interoperability—What are the Key Drivers?

Blockchain Interoperability, the ability for independently developed blockchains to connect to other blockchains and work together within the same ecosystem, is an increasingly desirable function amongst developers . But is it necessary to have interoperable blockchains? What problems do they solve and what are the various challenges involved in interconnecting blockchains?

Blockchain today is often likened to the Internet of the 90’s. As with the Internet, Blockchain has also seen its share of people who predicted its doom within a few years of its launch. But, like the Internet, Blockchain has weathered the storm and has moved into a phase of mainstream adoption. Blockchain is no longer seen as just a toy in the hands of a few crypto-geeks, but has gained the interest of big business.

Enterprise blockchains today could be compared to the state of business applications in the late nineties, when firms ran tailor-made applications for Finance, Supply Chain, and Customer Management in their data centers. These applications hardly interacted with each other. Then, the phase of ERP systems started, where all the business needs were packed into a single monolithic application. Later we moved back to having distinct applications for specific requirements, but this time, they were built to work together seamlessly with each other as if it were a single application.

As Blockchain interoperability has clear benefits, should companies start working on them right away? In this author's opinion, the answer is "No". Businesses should first understand what they are getting into, assess how their needs can be met by this new technology, and specifically what are the risks involved. Blockchains can be integrated in many ways - transferring digital assets from one network to another or transferring assets in one network while paying for it in another. Integrating multiple blockchains can be technologically challenging and the companies exploring the possible integrated blockchains, should not ignore the business and the legal difficulties.

What are the business considerations for an interoperable blockchain?

Clarity on the Use Case

Most often, companies indulge in new technology because of the fear of missing out. Instead, they need to determine the use cases where the integrating blockchain networks can add value. For instance, businesses using Enterprise Blockchains for managing their supply chain processes may choose to explore Corda for trade finance. 

Incentives

What are the companies getting in return for sharing their valuable data with parties outside their network? Why should they be honest with the data they share? Monetary incentives will drive the companies, to be honest. Incentives also increase the cross-chain adoption. For instance, in a gig economy, if company A uses the background checks done by company B to fast track their employee onboarding, paying Company B for its service would encourage company B to share their data.

Governance

Preparing a governance model for different blockchain networks to work together is not an easy task. These networks might not have the same blockchain platform. For instance, digital assets transferred on a Hyperledger network, might be paid on the Bitcoin network. Public blockchains commonly have less stringent governance than the private ones. And private networks tend to have a closed governance ecosystem. Bridging the gap in the governance models of these networks is vital to building trust.

Legal and Regulatory compliance

Managing compliance across networks is a hard task. The laws and regulations that these blockchains have to adhere to increases with their geographies. Careful consideration of the applicable laws - Anti-money laundering, KYC, Antitrust, IP rights, and data privacy - across jurisdictions is essential. A bank on one blockchain platform might rely on the KYC checks done by another bank on another interconnected blockchain platform for a firm before granting them loans. Hence, adhering to compliance is crucial for interoperable blockchains as one network might rely on the compliance checks done by the other.

What are the Technology challenges to be addressed for interoperable enterprise blockchains?

Data Standards

Does "apples" in application A means "apples" in application B as well? This is always a concern when integrating different applications. Blockchain is no different. "Users" in blockchain A might mean "accounts" in blockchain B and "nodes" in blockchain C. Hence, it is necessary to have a common data dictionary for the interconnected ecosystem. Standardized data shared between the blockchain platforms leaves little room for error and increases its credibility. Besides, this reduces the technical challenges involved in integrating disparate blockchain systems.

Data Privacy and Security

Every blockchain network will have different data privacy and security standards. If a private blockchain has to interact with a public blockchain, is it possible to have agreeable data privacy standards? If a blockchain with three nodes has to interact with a blockchain with 100 nodes, is it possible to have the same security standards? How will one network trust another to maintain the same privacy and security standards? It is always beneficial to have a higher degree of security implemented in the system. Meeting the required data privacy needs is vital for the success of this newfound synergy between blockchains.

Interoperability

The next concern to be addressed is how to share data between these disparate networks. The whitepaper from World Economic Forum provides options for blockchain interoperability varying from using cross-authentication mechanisms to APIs depending on the type of blockchains being integrated. 

Smart Contracts and Shared Consensus

Every blockchain platform uses different languages to write smart contracts. Some blockchain applications such as bitcoin do not have smart contracts. How do we ensure all the blockchain networks are agreeing to the same terms and conditions? How do we ensure the order of transactions in each blockchain network is the same? It is vital for all blockchains to have the same terms and conditions coded into their smart contracts. At the same time, using an independent ordering service will ensure all the blockchains have the same order of transactions.

What is the work currently going on?

Many big players, in the Blockchain ecosystem, are realizing the necessity as well as the complexity of blockchain interoperability. The World Economic Forum has included an interoperability module into its recently released toolkit, which guides the development of new Blockchain solutions.

In conclusion, interoperable business blockchains will unlock new potential use cases. But, the difference in business requirements, technology preferences, ideas of incentivization, and compliance requirements makes it difficult for using a single type of blockchain for every use case. There is no one-size-fits-all with Blockchain. A balance between trust, security, governance, and standards will enable the seamless flow of information between diverse blockchain networks.