The explosion of Initial Coin Offerings (“ICOs”) in 2017 and 2018 has introduced a huge range of blockchain applications and protocols to the market. Most of these are tailored to specific use cases, or industry sectors, and this trend of verticalisation (or specialisation) of blockchains is accelerating.
More powerful and commercially attractive use cases can be derived by utilising more than one specialised blockchain. For example, one blockchain providing banking or payments services may require identity verification from a second blockchain which specialises in providing distributed identity. Therefore, to fully realise the benefits of blockchain technology it is likely that a greater degree of connectivity and interoperability will be required.
Interoperability is in its infancy and achieving it will be a process, rather than a ‘point in time’ state.
There are many different views surrounding the definition of interoperability of blockchains and this was no different within our Global Leaders Exchange. In its simplest form, interoperability can be defined as different blockchain protocols and applications communicating and exchanging information and value, the objective of which is to make information useable in a frictionless way.
It is also clear is that the challenge is complex and highly technical in nature. Interoperability is in its infancy and achieving it will be a process, rather than a ‘point in time’ state. In other words, the extent of interoperability will vary over time and will require continuous attention and improvement.
There are arguably greater challenges to solve than interoperability when it comes to moving blockchain forwards. The technology is still evolving to suit specific industry use cases and we believe organisations should continue to focus on solving these problems and demonstrating true business value. This will have a greater impact on the adoption of blockchain technology in the short term.
That being said, several working groups have been set up which aim to promote interconnectivity between isolated blockchain networks, such as The Dutchess Project by Hyperledger and we offer several suggestions to support this goal here.
The trend towards open source development is increasing. In order to facilitate interoperability, this trend needs to be embraced. Some traditionalists are struggling to accept code transparency and the absence of code ownership has also been reported to have impacted available funding for full adoption. It is seen as a high risk to many organisations’ Boards with so many decentralised variables out of their control. We believe the opposite could also be true: open source code helps protect investment because failed ventures can be taken forwards by new enterprises. There is less code wasted. More importantly, knowledge of different protocols and applications needs to be shared to build connectivity.
A slightly different take on interoperability could see a number of trusted blockchains with specific use cases providing responses to key questions rather than exchanging information between blockchains. For example, a trusted identity blockchain could be asked to verify the identity of an individual as opposed to providing a second blockchain with the full identity information.
How that trusted status is established could take a number of forms but the starting point would be establishing appropriate governance and controls over the blockchain. It may even be necessary for some sort of auditor or regulator participation in the blockchain to validate transactions and controls in order to provide that trust. In these scenarios the interoperability challenge is somewhat simplified as the chains need to be less intertwined.
A recent survey conducted by PwC in Asia found that 51% of respondents cited a lack of common industry standards as one of the most significant factors impeding the development of blockchain within the enterprise. 2 The majority of blockchain development to date has been completed on disparate and evolving platforms, with no commonly recognised foundation or standards to align to.
We believe that agreeing common standards will make the task of interoperability more straightforward. Some organisations are attempting to create standards, for example the ERC20 token standard from Ethereum. At a global level, the International Standards Organisation (ISO) have launched an initiative to create a ‘blockchain and distributed ledger technologies’ standard. There are also national initiatives starting in countries like China who have committed to developing blockchain standards by 2019. These are good starting points but convergence of these standards initiatives will be important to ensure consistency and the ability to collaborate across borders. Again, it is necessary to recognise that the creation of standards will take time. In the absence of this, organisations interested in early adoption of blockchain can benefit from aligning themselves to industry consortia where market leaders, technology vendors and advisory companies are working together to create best practice within a particular industry vertical. Our recent survey highlighted that only 13% of organisations investing in blockchain have taken this approach.*
Arguably a more important enabler for the proliferation of blockchain technology will be the extent that organisations collaborate on development and scaling of projects. The true benefits of blockchain are only likely to be realised when this happens.
Collaboration has thus far primarily taken the form of industry driven consortia, such as the R3 Consortium. Blockchain consortia have proven to be a great benefit in the development of the technology by reducing the risk to one specific enterprise and establishing a forum to share knowledge and collectively solve industry challenges. However, the formation and governance of blockchain consortia has a number of challenges that must be overcome, in particular:
The process by which blockchain partners are identified and onboarded has proved challenging. Competing organisations will usually have different blockchain goals, strategic priorities and appetites for risk.
When considering a blockchain implementation, ten or twenty organisations may be involved from the outset. Consensus must be achieved consistently throughout via a specific mechanism. Centralised approvals are difficult to manage, if not impossible. This can lead to disputes and if not resolved, organisations may withdraw investment and resources leading to wasted development.
Thus far, implementers have sought to use open source development methods to get around these challenges or have been happy to succeed power to consortia to make decisions, knowing that they were unlikely to move beyond a proof of concept stage and truly impact their business. To progress beyond this, organisations must establish a collaborative structure from the outset, which outlines, confronts and answers the difficult questions that the project will almost certainly face. Questions such as:
Partner, Digital Trust Leader, PwC Middle East
Tel: +971 (0) 56 113 4205
Partner, Digital Trust, PwC Middle East
Tel: +971 (0) 56 480 2447