Interoperability Is the Key to Unlocking the Network of Networks

2019-6-20 10:00

The power of blockchain to reduce friction and enhance trust between two parties on either side of a business transaction is already having a major commercial impact. Digital assets lesson the need for expensive counterparties in these transactions; instead, they can trust a digital asset to move money before it reaches its destination. The faster transactions and greater transparency powered have generated huge cost savings and boosted productivity across a range of industries, most notably financial payments, trade finance and supply chain logistics.

Yet creating a faster, cheaper payments network or a smarter supply chain barely scratches the surface when it comes to blockchain’s potential. The truly transformative impact will happen when individual networks come together to form a network of networks that will change how interconnected industries transact with each other.

For example, a container ship arriving at port will automatically kickstart a chain of events that results in the supplier receiving an instant payment and an insurance company ending its coverage. These automated interactions will allow companies to pursue opportunities faster, while creating completely new business models to explore.

Two things need to happen for this network of networks to become a reality. Individual networks need enough volume in order to offer value to other blockchains, which is already occurring in the key areas mentioned above. Then each of these blockchains must be able to operate with one another easily. As we’ll see, we still have a lot of work to do if this second requirement of interoperability is to happen.

How multiple blockchains can work together
Some forms of interoperability are straightforward. It’s relatively easy for one blockchain to provide simple instructions to another using an API, like that logistics network telling the payments networks to pay the supplier from the example above.

But what if the contents of that container ship were sold to someone else during the voyage and the assets need to be moved from one trade finance blockchain to another on a different stack? It’s highly unlikely that a single technology will dominate the blockchain space, which means interoperability will be key to completing complex technical operations like transferring an asset.

Work is already underway to resolve the problem. Interledger Protocol (ILP) is an open protocol suite designed to allow value to be transferred across networks. It works by abstracting the differences between these networks much like how Internet Protocol (IP) makes technologies like Ethernet and WiFi compatible. With interoperability, we will not be limited by the specific technology of any individual blockchain but can create interconnected experiences that solve more problems and open up new opportunities.

We also need to think about the on-ramps connecting blockchain networks with today’s non-distributed ledgers. No matter how fast the space grows over the coming decade, many of our legacy systems are not going away anytime soon. Creating the ability for these two worlds to cooperate is an important part of developing the future network of networks.

A connected world of new opportunities
As blockchain applications start to use protocols like ILP to connect with other networks over the next few years, the potential for new ideas and business models will become apparent.

Banks and other financial institutions currently struggle to service small and medium businesses because their high-cost systems are geared toward big customers. Interoperable trade finance and payments solutions powered by blockchain technology could enable them to offer lower cost alternative services to smaller firms. The ability to tap into these new markets will drive higher volumes and more profits for the banks—thanks to blockchain’s increased efficiency—while also allowing small businesses and startups to compete with larger rivals.

Major financial services also typically ignore low-income individuals or those people who don’t have a credit history, like migrant workers. The network of networks will allow banks to easily connect with other services that could act as a substitute for a traditional credit score, like knowing that someone has never missed a cell phone bill payment. The ability to bring on board these kind of customers will generate new revenues, especially on cross-border remittances, while boosting financial inclusion.

Other transformative impacts could be a deep integration of insurance networks with supply chain logistics to create customized policies that are updated in real-time. Or a supermarket shopper may be able to dig into the origin of their favourite fresh produce and tip the farmer directly using a payments network.

How to win in a truly interconnected world
The possibilities of a network of networks are endless but can only get started once we’ve resolved the issue of interoperability. While it’s natural for each individual network to focus on developing its own business case and driving user adoption, ensuring enough attention is given to connecting with others will be the key to not being left behind.

Any service provider, technology company or group of banks or businesses that is already thinking about interoperability and taking steps to build a network of networks will be the winners of our truly interconnected world.

About the Author

James Wallis is Founder of 7e4 LLC, which provides business advice, analysis, strategic vision and operational plans for businesses that wish to leverage blockchain technology for economic and social good.

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