What is the solution to Blockchain interoperability?

First things first! I would like to acknowledge the source of the graphic that made my presentation on blockchain interoperability totally ‘adorable’. It comes from Stephan Tual’s blog on Medium, but the major kudos goes to Leonardo, age 5. Since Leonardo’s drawing was so highly appreciated by my audience, I have decided to use it in this blog post as well.

A necessary digression

I need to make a brief digression here — I would like to mention that Stephan Tual is the right person to follow if you are interested in new and exciting crypto/blockchain projects. Besides, he has got a new venture called ‘Atlas Neue’, and is currently working on the incredibly interesting ‘Deodands’ project. I will not say more about it at this point, but it is a sort of project I wish I thought of! I hope to get the opportunity to talk to him about it soon.

Back to the topic

That was actually not too out of the way since it has to do with blockchain and smart contracts! OK. Now, why I would like to address the topic of blockchain again is because I find the current developments to be both significant and necessary. We have seen huge investments been made in blockchain up to now not just by VCs, but also leading technology players and other large incumbents. As far as the financial services sector is concerned, it is already moving from PoCs to pilots. And, although everyone agrees that blockchain is still a very immature tech, it’s clear that its strategic value justifies all the investments. Please check “Blockchain beyond the hype”, a brilliant analysis of the subject that McKinsey released in June this year.

Three valuable insights

There are three core insights in the study regarding blockchain — which will, in hindsight, be obvious to you even if you do not follow the field closely. Here they are:

• Blockchain does not need to be a disintermediator to generate value
• In the short term, blockchain’s strategic value is mainly in cost reduction
• Feasibility at scale is likely to be three to five years away

The use cases analysed revealed that existing institutions can benefit from cost reduction, simplified transactions, more transparency and better fraud controls by deploying permissioned/private blockchains. Thus, initially, blockchain will improve their operational efficiency and lower the costs. However, it will also enable entirely new revenue streams and, eventually, new business models.

The study also evaluated the key constraints to widespread adoption of blockchain, namely standards and regulations, technology, assets, and ecosystems. In other words, standards need to be established; regulatory barriers addressed; technology needs to rapidly advance in relation to speed, security and storage; infrastructure and tools need to be built; ecosystems developed and assets digitised. Do you think that three to five years is a fair estimate? (Feel free to leave your comments below.)

Blockchain interoperability is crucial

It will be of crucial importance that those permissioned/private blockchains are able to interconnect and communicate with both internal and external systems such as data stores, messaging systems, interfaces and different touch points, as well as public blockchains. Hence, there are currently a number of startups creating different solutions for blockchain interoperability. While researching the topic I have managed to number twelve of them. The solutions range from atomic swaps, through ‘blockchain OS’, to ‘blockchain of blockchains’. If you would like to explore them, I can recommend Ibrahim Ludwick’s article “The Race For Cross-Chain Communication”.

Polkadot — third generation blockchain

While it is still too early to say which solution is going to be the optimal one (As a side note, I am keen to hear what you think!), I have decided to draw your attention to Polkadot because it focuses on both value and data transfer between chains.

Simply put, Polkadot will facilitate not just the transfer of value back and forth across chains — there are already over 1,500 cryptocurrencies in existence today — but it will also allow for cross-blockchain interactions between disparate smart contracts. That means that Polkadot will be able to interconnect wildly different blockchains such as public chains like Etherium or Zcash, and private/permissioned chains like Quorum or Corda. The start of this future interconnected multi-blockchain world is approximately a year away — Polkadot will be released in the third quarter of 2019.

There are other benefits interoperability will bring. One of them is wider adoption and the network effect — since blockchains will no longer be isolated, more value will get created. Interoperability will also drive further innovation. Additionally, Polkadot aims to resolve other equally important issues of blockchain technology, namely scalability and governance. To find out more about the technical aspects of Polkadot protocol, I am suggesting the “Polkadot Network” video [16:24] in which Robert Habermeier, Polkadot’s co-founder, explains how Polkadot actually works and who powers the network. You will learn about the relay chain, parachains and bridges, validators, nominators, collators and fishermen that have all been represented so artfully in Leonardo’s drawing above.

Web 3.0

Gavin Wood, who is the author of the Polkadot Paper, probably does not need any introduction. I will therefore just mention that he is also the President and Founder of Web3 Foundation. The foundation’s mission is to steward technologies and applications in the fields of decentralized web software protocols, and Polkadot is their keystone.

As far as the term Web 3.0 is concerned, in essence it is the concept of the fully decentralised web where users are in control of their own identity and data. If you would like to check “Why the Web 3.0 Matters” and what its advantages are, please follow the link to Matteo Gianpietro Zago’s excellent post on Medium.

Hope that you will enjoy exploring all the resources I quoted above. I am looking forward to your comments and the decentralised multi-chain world we are heading to.