A Primer on Blockchain Interoperability

Aleks Larsen
Dec 20, 2018 · 11 min read
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Why Does Interoperability Matter?

Distributed systems have to make trade-offs to function effectively in an asynchronous environment like the internet — one without a global clock to define the ordering of events. Blockchain-based networks, designed to carry immense value, must also guard against malicious, or byzantine, actors. At the consensus level, these trade-offs can include limiting the number of participating nodes to provide consistent ordering of events between them (as in DPOS, PBFT algos), or adopting a probabilistic view of the ordering to ensure the continued functioning of the network (Nakamoto consensus). At the application level, trade-offs exist around the expressiveness of a blockchain network’s programming capabilities, as the size of its design space is correlated with the size of its attack surface. The list goes on…

So How Do We Get Interoperability?

First, to describe how we get interoperability, we need to be a little more specific about what it means. In this context, interoperability can be split into two categories:

  1. Exchange of arbitrary datasuch as making payments to a supplier on Ethereum based on the GPS location of an asset tracked on Stellar
  1. Relays (exchange of arbitrary data)
  2. Hashed timelocks (exchange of digital assets only)

Notary Schemes

Notary schemes employ a trusted federation to attest to events on another chain. This federation will verify to chain A that an event on chain B took place or that some statement about chain B is true. The notaries will come to agreement through some consensus algorithm and will then issue a signature that can be used to finalize payments on chain A conditional on this consensus. This type of scheme can be used to implement what’s known as a federated pegged sidechain, where the federation will be in control of a multisig address on chain A, such that assets locked up in the multisig can be issued synthetically on the sidechain (chain B) — making them usable on a different state machine. This has been implemented in Liquid, a BTC-backed sidechain created by Blockstream, that makes it possible to spend synthetic bitcoin on a ledger that has the functionality to issue new digital assets.

Relays

Instead of having a federation that verifies events on another chain, relays allow the chains to do this themselves. A relay is a contract on chain A that functions as a light client of chain B, using chain B’s standard verification procedure to verify block headers fed into the contract. This gives chain A the ability to understand event changes on chain B — an ability that can be used to create lots of interesting cross-chain applications. For example, BTCRelay is a smart contract on Ethereum that can read the Bitcoin chain. It has been used to create applications such as EthereumLottery, where the lottery used Bitcoin block headers as a source of randomness. However, with BTCRelay, interoperability is one-way; Bitcoin can’t read the Ethereum chain as there is no Ethereum relay contract on Bitcoin.

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Source: author.

Hashed Timelocks

The most practical technical approach to interoperability is, as one might expect, also the most limiting in terms of functionality. A hashed timelock contract (HTLC) is a class of blockchain-based payments that uses hashlocks and timelocks to require the receiver of a payment to either acknowledge receipt prior to a deadline or forfeit the ability to claim the payment, returning it to the payer. HTLCs allow for cross-chain atomic swaps and fully funded bi-directional payment channels between assets on certain types of blockchains.

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Source: author.

Conclusion

In this post I covered why interoperability is growing in importance, broke down the main types of interoperability and gave a brief high-level introduction to some of the key projects that are working to make blockchains communicate as effectively as possible. Each approach that I went through carries a different set of capabilities and limitations.

Blockchain Capital Blog

Research and insights from the Blockchain Capital network…

Aleks Larsen

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Investments & research at Blockchain Capital

Blockchain Capital Blog

Research and insights from the Blockchain Capital network on the latest in the crypto ecosystem and blockchain technology sector

Aleks Larsen

Written by

Investments & research at Blockchain Capital

Blockchain Capital Blog

Research and insights from the Blockchain Capital network on the latest in the crypto ecosystem and blockchain technology sector

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