Turning Isolated Nation States into the European Single Market: The Value Behind Interoperability of Blockchains
Adrian Brink from Tendermint Team (Cosmos Network) gave today a talk at Decentralize Singapore, specifically about the IBC protocol and the Cosmos Hub. The purpose of the talk was the same as this article: to provide a mental model and make the community understand the value behind the so-hyped-now property of interoperability. Interoperability of blockchains has been widely associated as a potential solution to the limited transaction throughput. However, no developer has told you the real value behind it.
The Story of Hans: A Gold and Silver Merchant from West Germany in early 20th Century
This is the story of Hans Wolfgang Wagenknecht, a boy who was born in west Germany and worked as a gold and silver merchant. As the prodigal son of the Wagenknech family, the future of the inherited business in precious materials was entirely on his shoulders.
The European continent looked very different back then. It was comprised of 28 nation states that lived largely in their own silos.
He didn’t pick his community by choice, but was rather born into it, as he inherited the business from his parents. He had plenty suppliers of gold and silver in the western part of Germany, but at the same time very few customers, since it was a region known for mining but not craftsmanship. He knew that the main demand for gold during this time came from France, another distinct community and a direct neighbour which was only 50 km to the West of his warehouse.
However, it was almost impossible for him, as a simple merchant, to sell his goods in France, since it was an expensive, time-consuming and sometimes dangerous process to move goods from one nation state to another, or put differently, from one community to another.
Where are we getting at? The nation states of the 20th century are the blockchains in our current ecosystem. Today’s Bitcoin is yesterday’s Germany and today’s Ethereum is yesterday’s France. Today’s decentralised application developers are yesterday’s merchants. And when you think about tokens as digital goods, it becomes clear that we currently live in the 20th century Europe in the blockchain space.
For a decentralised application, it is extremely expensive, time-consuming risky and mostly an impossible task to access tokens, NFAs or other complex objects from two different communities. This is due to the fact that it involves switching the backing infrastructure of the application. In fact, it is currently impossible to use Ethereum on Bitcoin or vice versa.
The Story of Modern Hans: A Decentralised Application Developer
This is the story of Hans Wolfgang Wagenknecht, or especially known by the username _waggie42_ on GitHub and Reddit. Hans was born and raised in the countryside of west Germany, even though he claims that he is a citizen of the world and that he is one of the so-lately-popular digital nomads. In any case, _waggie42_ is a software developer who got fascinated by the decentralise-everything movement. Just like every decent human being, he adores doges (shiba inu or shibes) because they’re so undeniably cute and good bois, and keeps (secretly) a framed picture of Vitalik Buterin next to his work station.
_waggie42_ wants to build a Decentralised Exchange because he acknowledge how expensive, insecure, untransparent, and tricky Centralized Exchanges were. He also wanted to become rich, but that’s a minor detail.
Instead of selling precious metals directly, he is building a decentralised exchange that allows anyone to directly exchange digital goods without a trusted third party. He would like to reach as many users with his DEX as possible. Can you guess which platform he chose to build on? I bet you would’ve never, ever thought of it, but he is building a DEX on Ethereum, as it’s where most of the user generated tokens are.
However one of his biggest users is a Bitcoin maximalist, who would like to use his BTC to buy and sell digital goods. For her it is an extremely expensive, time-consuming and risky process to participate in Hans’ DEX. She first has to send her BTC to a centralised exchange, wait for 6 confirmations, swap it into ETH, then withdraw it to Ethereum, wait for another 6 confirmations and only now is he able to use in the DEX. All the while he had to tolerate the risk of the exchange getting hacked or running away with her tokens.
Do you remember the problems of old Hans, the fact that moving goods used to be extremely expensive, time-consuming and dangerous. It is very similar in today’s blockchain ecosystem.
“But what if we could turn siloed blockchains into a single free market?”
The InterBlockChain Protocol (IBC Protocol)
Blockchain communities can be thought of as nation states. When Hans moves an ounce of sterling silver from Germany to France it does not change ownership. Instead the protocol that governs it changes from Germany to France or vice versa. The amazing thing with blockchains is that our protocols are completely open-source and transparent to anyone before using them.
IBC works exactly the same way. When Hans moves one ETH from Ethereum to the Cosmos hub, he moves it from one protocol to another, from Ethereum to Cosmos, or from Bitcoin to Ethereum. However he always maintains his ownership and is able to trade that ownership.
Moving tokens, NFAs or complex objects over IBC requires that you trust the involved protocols, but it does not require you to trust a central exchange or any other third party.
The best mental model for IBC is that it allows the consensus of some protocol to have ownership over some asset on another protocol. Currently, we mostly talk about users maintaining ownership over some asset, but with IBC we allow consensus mechanism to maintain ownership as well.
“IBC allows the consensus of some protocol to have ownership over some asset on another protocol” — Adrian Brink
The European Single Market (The Cosmos Hub)
The Cosmos hub is the equivalent of European Single Market. Any application developer that would like to build decentralised application for the single market connects to the Cosmos hub over IBC. Now his application can access all tokens, NFAs and complex objects that live within the market.
Modern Hans does not have to choose and be constrained to a single community anymore, but can rather leverage all communities that have joined this single market. Instead of just building on top of Ethereum or Bitcoin, the decentralised application can leverage the sum of the top 50 or top 100 communities.
“In the end it is up to every individual application developer whether they want their application or protocol to be part of a world of free-trade or a world of protectionism and trade restriction.” — Adrian Brink
So what is your choice?
Become an isolatated nation state, or be part of a larger single market?