Interoperability of blockchains in simple terms
When I started working at etonec in July last year I had almost no idea of what blockchain was. As with every learning experience, I needed time and patience, and most of all I needed and received support from my colleagues.
I’m not saying I am now an expert in blockchain and secure identification but I learned how to navigate and simplify concepts. I believe that this could benefit a lot of “normal” people that are curious about knowing more about this industry and don’t want to feel like they’re missing out on something just because they aren’t that familiar with the topics.
A brief history of blockchain
The first time a broader audience became aware of blockchain was in 2009 when it was used for backing up the well-known cryptocurrency called Bitcoin from Satoshi Nakamoto, which is probably a fictional name for a group of experts or a company.
Since then, it has experienced a great boom and hype as companies all around the globe started recognizing blockchain’s huge benefits. In just 12 years the technology has developed so much through multiple use cases that it has begun to be very difficult to keep up on its changes if you were not onboarded in the very early stages.
What is blockchain?
In simple words, Blockchain can be defined as a data structure that holds transactional records that aren’t controlled by a single authority. A blockchain is a distributed ledger — and taking this directly from Investopedia.com:
A distributed ledger is a database that is consensually shared and synchronized across multiple sites, institutions, or geographies, accessible by multiple people. It allows transactions to have public “witnesses”.
In short: everyone has a copy of the data and any changes in one place are sent to all copies in a secure way. In the case of Bitcoin blockchain, the ledger is completely open to any and everyone on the network. But because each transaction on the blockchain is secured with a digital signature proving authenticity, it is extremely difficult to change or alter any information on it without authorization.
Multiple blockchains are running in the world and for them to be able to interact you need interoperability. To give you an impression of the market development there are 5728 projects listed on icobench.com, and 7332 blockchain-based tokens are classified at the International Token Standardisation Association (ITSA). Most of the projects started just in the last 3 years.
Cryptocurrencies
If you’re reading this article, you’ve at least once heard of cryptocurrencies. And also for making this easier, I’m referring back again to Investopedia.com:
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology.
More than 7000 cryptocurrencies were created since 2009 to develop a new kind of money exchange that would not suffer from inflation and would make participation fairer and more inclusive thus reducing the differences of money issuance across countries. Cryptocurrencies can completely eliminate the need for intermediaries like banks to control the validity of transactions. This is done by the blockchain itself, so by all participating computers that have access to the blockchain and give consensus to authorize the transaction in a collaborative approach supervising each other.
Interoperability of blockchains
Because of the large availability of cryptocurrencies and blockchains, a new need has arisen in the blockchain and crypto world: Interoperability.
I started my research on interoperability by reading the outlook for 2021 of Bitcoin Suisse that was published at the beginning of this year. There you can find a more detailed description of interoperability written by Fatemeh Shirazi, CTO & Research Team Lead at Web3 Foundation.
In the problem statement, Fatemeh begins by saying that:
a blockchain’s consensus decides the canonical history of which transactions happened and ensures that these transactions are valid.
And this is what a network of individuals or entities does with a blockchain: They give consensus and exchange copies of that blockchain on which information is stored.
However this transaction history is only directly visible to its own ecosystem. Interoperability between two blockchains refers to one or both chains being able to understand the history of the other chain.
Until information is stored on one single blockchain, that information is only visible to those who have access to it. But with interoperability, two different chains can understand each other and communicate in order to exchange information.
A more practical example is the exchange of tokens, or digital units of value, between two blockchains, that could happen if a system of interoperability was in place. This is already happening in the physical world where we exchange fiat currencies (US Dollars, Euros, Pesos, etc.) and the correctness of the foreign currency is physically checked.
But what happens in the blockchain world where transactions happen in minutes or a maximum of one hour? Who has the power to check the validity of the exchange without the trust of some third party? These questions are two of the main issues blockchain companies are trying to solve in 2021.
What is happening today is that if users are willing to benefit from different platforms they have to hold all the tokens that are recorded on the blockchain in order to swap them. This results in having to go through centralized (e.g. fiat) and decentralized (e.g. crypto) exchanges that are extremely time-consuming, unreliable, and inconvenient. Furthermore, this process could slow down the usability of the blockchain accordingly.
Following Fatemeh’s words:
True interoperability between chains would make this (the process) obsolete and work in the background and thereby reduce friction. Interoperability will make connected blockchains effectively one eco-system, reducing the costs of lock-in when deciding which chain to use. True interoperability would allow assets on one chain to derive value from being used on another and applications on different chains to interact.
In addition, interoperability is necessary to support some business ideas that require communication between multiple protocols. What is crucial here is that the interaction between two blockchains can be traced back to authorized parties. The link between the parties' identity on one blockchain and the other blockchain needs to be bullet-proof.
Another technology comes to help and that’s Self-Sovereign Identity. That topic is a story to be told in detail in another blog, but we at etonec have developed an SSI-based module that makes it possible for businesses to use SSI technology to map multiple identities in so-called verifiable credentials. These credentials can be used to ensure authenticity and authorization of blockchain transactions and enable interoperability in a secure way.
Summary
I hope my first article on blockchain and crypto made these topics more comprehensible and helped you understand more about them.
On the topic Self-Sovereign Identity I recommend you read my colleague Emilio’s great introduction to Self-Sovereign Identity and our whitepaper describing the etonec SSI Management Module.
Please reach out if you’d like to further expand your knowledge on the topic of interoperability. I would love to hear your opinion about this complex subject and how it can be made easier and more engaging for a broader audience.
