How interoperability establishes blockchain’s utility and effectiveness for trade finance

blockchain ny

(Pascal Bernardon, Unsplash)

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Rebecca Liao, Co-Founder and Executive Vice-President, SKUChain


  • The coronavirus crisis has shown the need for blockchains to share and access information across networks.
  • Making interoperability a first-class citizen of blockchains going forward will be key to maximizing efficiencies.

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.

Blockchain

What is the World Economic Forum doing about blockchain interoperability in global supply chains?

The World Economic Forum has produced a report on “Inclusive Deployment of Blockchain for Supply Chains – A Framework for Blockchain Interoperability”. This report, in collaboration with Deloitte, helps organizations understand the importance of interoperable blockchains and outlines a decision framework to support their development and execution. The report is the seventh in a series, offering analysis that helps organizations responsibly deploy blockchain and distributed ledger technology in supply chains, to maximize the benefits and minimize the risks of the technology.

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 (Figure 1, below).

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.

To give an example, Skuchain’s deployments in mining and minerals use its proprietary Popcodes technology for traceability. When connecting with its customer’s supply chain ecosystem partners, a common data standard is used for data sent to a partner blockchain, and data sent back is converted to the same format before it is ingested by a Skuchain network.

WEF white paper, “Inclusive Deployment of Blockchain for Supply Chains: Part 6 – A Framework for Blockchain Interoperability”.
WEF white paper, “Inclusive Deployment of Blockchain for Supply Chains: Part 6 – A Framework for Blockchain Interoperability”
Image: World Economic Forum

Network of networks

The most efficient and scalable way to build interoperability is through the joint effort of establishing industry standards as well as identifying a network of networks structure that industry networks can converge around. These are the principles that underlie the DLPC CorDapp, a recently launched Skuchain application that promotes interoperability in trade finance blockchain applications.

This application is the first example of The Bankers Association for Trade and Finance’s Distributed Ledger Payment Commitment (DLPC) operating in a real network. BAFT recognized that interoperability would require a neutral working group to establish some standards around trade finance on the blockchain. The framework for a DLPC was the result. In April 2019, it published the business and technical best practices for the DLPC. Updated best practices will be released in May 2020 to reflect industry feedback and implementation experience.

A DLPC is a fundamental piece of trade transaction. Everyone needs to commit to a payment. The objective of this framework is to allow banks and enterprises to create a legally binding promise to pay and represent monetary value based on a negotiable instrument. It can be assigned and distributed to third parties and is sufficient to trigger payment. Skuchain’s DLPC CorDapp takes this standard a step further and allows transactions to take place between its enterprises on Hyperledger Fabric and their bank partners on the Corda Network (Figure 2).

Image: Skuchain

Significantly, this model for interoperability allows for cross-chain validation of a transaction. First, transactions originating in a Fabric network have signed directives to carve out DLPCs. Second, a smart contract is triggered. This produces the DLPC payload and submits to the Skuchain EC3-Corda gateway. Third, this gateway talks to an EC3 agent node on the Corda Network. Fourth, the Corda node validates the DLPC and submits the transaction.

The ultimate goal of brokering interoperability between Skuchain EC3 and Corda is to allow Skuchain’s enterprise customers to receive trade finance from banks on a Corda implementation without any party having to onboard onto another platform. Rather than thinking of trade finance as the product of a separate bank network, enterprises can now easily access trade finance as native part of their own supply chain platform.

“It will become clear that nominating a blockchain fit for purpose as a facilitator of interoperability will be the most cost and operation-efficient strategy.”

—Rebecca Liao, SKUchain

Interoperability best practices

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

The World Economic Forum, in collaboration with Deloitte, recently released a white paper, “Inclusive Deployment of Blockchain for Supply Chains: Part 6 – A Framework for Blockchain Interoperability,” the final white paper in its series on blockchain and supply chains. It covers several models and best practices for blockchain interoperability. The report takes a holistic approach to elaborate on blockchain interoperability at the governance, business, technical and process levels. The report aims to articulate, in simple terms, important concepts, approaches and success factors as they relate to blockchain interoperability considerations.

“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, Redesigning Trust: Blockchain Deployment Toolkit, 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.

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