Interoperability

Interoperability is a characteristic of a product or system, whose interfaces are completely understood, to work with other products or systems, at present or in the future, in either implementation or access, without any restrictions

COVID-19 has highlighted the need for supply chain infrastructures to communicate with one another. Given this fact, interoperability will be essential to blockchains going forward.

While blockchain was conceived as a decentralized technology, individual blockchain networks are not inherently open.

In the supply chain context, there has thus far been little incentive to change due to concerns about security and consensus and lack of customer urgency. However, blockchain’s characteristics allow disconnected supply chain management systems to interoperate securely with a reasonable financial investment.

Because of the pressing need for supply chain transformation, leveraging these characteristics ensures that blockchain can be useful and effective in the real world.

Key truths and realities

Recently, the blockchain industry has arrived at the following truths:

• Unlike other battles between technology standards, there will not be consolidation around dominant blockchain protocols that have the primary burden to become interoperable. It is true that Hyperledger Fabric and Corda are the most widely adopted protocols in the enterprise blockchain space. The public blockchain space for digital currency is far more fragmented, but Bitcoin and Ethereum are considered the reference cryptocurrencies. Due to the dynamic nature of open source projects for decentralized systems and fast iteration in early stage technology, these protocols all have strong peers and proprietary competitors. More importantly, convergence around a protocol is absolutely no guarantee that the blockchain networks that use that protocol can readily communicate with one another.
  

• As a business matter, the market will consolidate around industry consortia, whose blockchain network will crowd out all other networks in that space. A blockchain network is far more than the infrastructure that supports it. It is also a governance structure, commercial model, application functionality and middleware to communicate between what the end user sees and operation of the blockchain. Especially in enterprise blockchain, where private networks controlled by large, powerful players dominate, network functionality is highly specific to business needs. As a result, industry consortia determined to be full-service blockchains for their members have stalled, and those that are open to interoperability with other networks, including their members’ individual networks, are gaining traction.

In supply chains, it has become clear that there are three areas around which networks and standards form:

● Industry: Enterprises in Steel, Electronics, Commodities, and the like.

● Finance: Banks and Financial Institutions

● Compliance: Governments and Global Regulatory Bodies

One blockchain network will simply be unable to provide all the needs for any given trade transaction. There will need to be multiple networks, each providing specific value. Data from private networks can be routed to other relevant networks for transactions without having to establish a one-to-one integration.

“Everyone is dependent on physical goods’ ability to move across all participants in the global supply chain with minimal friction. We need the same ability to move a digital asset from one blockchain to another without creating redundant data or a new market for intermediaries. This is why blockchain interoperability is critical.” Rasmus Winther Mølbjerg, Director, Deloitte, Denmark.

Interoperability at the data layer: A web of APIs

Interoperability between blockchains is most directly accomplished by facilitating the transfer of data payloads. This is brokered through application programming interfaces (APIs) that are designed specifically to allow systems to communicate with one another. APIs are a well-established tool and generally do not require specialized blockchain programming skills to implement.

However, APIs do not presuppose a governance structure, which makes them flexible and expedient but also a poor choice for organizing interoperability in the long run. They require one-to-one integration between blockchain platforms, which, in addition to being inefficient, introduces the element of a business negotiation between the platforms that adds friction to collaboration

At the same time, APIs send data payloads between platforms, but do not require a cross-platform check of consensus mechanisms. In other words, it is possible that the data transferred from one platform was not first authenticated by a valid blockchain mechanism.

Given these drawbacks, the best way to foster interoperability for those industries where blockchains remain largely fragmented is to work on a data standard as soon as possible. There needs to be a common organizing principle by which interoperability is accomplished at scale, and if it’s not found within the major components of the technology stack, then it has to come from the data payload itself.

Interoperability best practices

As platforms approach interoperability in blockchains, the right implementation will be key.

“Interoperability and compatibility issues are key to address in a world after the coronavirus pandemic,” Nadia Hewett, Blockchain and Digital Currency Project Lead at the World Economic Forum explains. “The challenge of interoperability is not only a technology problem, but even more so a problem in terms of governance, data ownerships and commercial business models.”

In a separate report, the World Economic Forum covers both functional and non-functional drivers of success for well-thought-out blockchain deployments. While the blockchain toolkit provides tools and resources to address interoperability specifically, it also includes a series of inter-connected topics. Those identified as the most important considerations in supply chain blockchain solutions help organizations with a holistic approach to blockchain development.

The network of networks model for interoperability continues to gain momentum, especially as we see natural blockchain hubs emerge.

As commercial discussions between blockchains seeking to connect become more complicated and frequent, it will become clear that nominating a blockchain fit for purpose as a facilitator of interoperability is the most cost and operation-efficient strategy.