Building the Internet of Blockchains

May 2018

By Lawrence Lundy-Bryan, Head of Research

With Contributions from Joel John and Shaquille Noor

Building the Internet of Blockchains Outlier Ventures

I have said it before so I will say it again, the new data value ecosystem sees data captured by the Internet of Things, managed by blockchains, automated by artificial intelligence, and all incentivised using crypto-tokens. For a summary of the thesis take a look at the introductory blog.

Clickbait headline aside, if we aren’t careful we are going to end up replicating data silos we hoped blockchains and decentralised technologies would remove. This is why the transport layer of our investment thesis: the Convergence Ecosystem, is so important. For us the transport layer includes but not limited to four components: data interoperability like say Haja Networks; value interoperability like Polkadot, AION, Cosmos and atomic swaps; transport and messaging protocols like telehash and whisper, and state communication protocols like Lightning Network for Bitcoin, Raiden Network for Ethereum and IOTA’s Flash Channels.  

The technologies of this layer are less mature than the layers below but will become ever more critical as blockchains and DLTs proliferate if we are to avoid the same data silos that exist today in the Web 2.0 era. It is at this layer where interoperability protocols are developing for messaging, value, data and state – and we are beginning to see the contours of a so-called ‘Internet of blockchains’. In the full paper, we explore each of the interoperability protocols, this blog is an extract of value and data interoperability.

Value Interoperability

Value interoperability across multiple blockchains refers to the ability of digital assets in one blockchain to interact with assets in another. The most straightforward example for an interoperable transaction would be one in which an individual transfers a cryptocurrency on one blockchain in exchange for cryptocurrency on another, for example, Bitcoin exchanged for Litecoin or XRP.

Through limiting the flow of value in a blockchain to a single ledger, one risks creating new “decentralised” DLT-based siloes that cannot interact with each other at scale. By enabling ledgers to interact with one another with a communication protocol layer, improvements in security, speed, cost of transactions can be attained.

There are multiple approaches to obtaining interoperability, each with a focus on a specific function. One of the simplest forms is through a relayer. These utilities check for transactions in one chain and “relay” that information to another. BTC Relay, for instance, allows Ethereum smart contracts to verify a Bitcoin transaction without any intermediary. This enables Ethereum DApps and smart contracts to accept Bitcoin payments. A new generation of cross-chain transaction enablers allows exchanges to occur without a centralised party. Atomic cross chain swaps use hash time locked contracts to enable two parties to interact with tokens from different ledgers with each other without the need for an intermediary.  

Cosmos, Polkadot, and Komodo are a handful of projects with an explicit focus on the space. Interoperability protocols also often enhance privacy through zero-knowledge proofs. They enable verifying the accuracy of a computation without knowing the variables involved. Through sending a transaction across multiple ledgers, tracking the source and recipient of a transaction can be made drastically more difficult. One could also consider decentralised exchanges such as EtherDelta as an interoperability enabler. Although restricted to ERC20 tokens, they allow individuals to trade their tokens for another one without relying on a central authority. One could trade their Storj tokens received as payments for leasing their computer’s storage space out and buy INS tokens to receive discounts at a retail outlet without having to move coins from their wallet with the help of the likes of 0x and Kyber. While decentralised exchanges come with new challenges – especially liquidity – they offer the promise of delivering significant security improvements over centralised exchanges.

Value interoperability will allow value that is stored in siloed blockchains to break free. This applies equally to value stored in both public and private blockchains. NEO is already enabling cross-chain asset agreements with NeoX. Users do not need to set up wallets for every blockchain they want to use and rely on third parties every time they have to interact with a different chain. Interoperability protocols further add value to the Convergence Ecosystem by allowing multiple industry-oriented tokens to communicate with each other. For instance, one could make payments in MIOTAs for leasing IoT based sensors that pass on data using the Ocean Protocol OCN token. Similarly, protocols would be used in connecting and incentivising functions in mobility and robotics. A machine can pay for access to a resource in the native token of one ledger and receive the resource itself through another ledger. As projects and protocols start delivering real-world utility at scale, the need for exchange infrastructure will increase. One could compare these protocols to hubs that route value without an intermediary.

In a world of seamless value interoperability one can expect a complex interplay between users holding tokens for particular service utility and others for store-of-value; the wallet or ‘portfolio’ balance likely optimised by a personal AI. This AI will be personalised by risk appetite, values, and services; the weighting of which will lead to a new field of TPO (token portfolio optimisation) an extension of search engine optimisation (SEO) and social media optimisation (SMO).

Building the Internet of Blockchains Outlier Ventures

Data Interoperability (Off-chain)

Today, incredible amounts of data are stored on the private servers of a relatively small amount of organisations. The internet’s client-server architecture makes data-sharing inconvenient, while privacy and data protection laws limit the cases where it can be done legally. Even if this were not to be the case, there is no rational economic incentive for individuals to do anything other than giving away their data. While strides are being made towards increased data accessibility, such as open Application Programming Interfaces (APIs) and open-data regulations like PSD2, the benefits are one-sided. Indeed, users can now benefit from open data, but there is still no market, and data contributors remain largely unpaid. So, are blockchains the solution?

Blockchains are not databases; they are ledgers. It sounds almost flippant to say that, but the distinction is essential in understanding why data interoperability is just as important as value interoperability.

Blockchains must be lightweight with limited on-chain storage so that “anyone” can download a full history of the blockchain. If blockchains become too large, fewer people will be able to participate in the network, thus reducing the decentralisation of the network and overall security. When it is said: “blockchains will enable large datasets to be shared or stored” actually it is not blockchains where the data itself will be stored. We are talking about decentralised and distributed data storages like IPFS and Swarm. Each blockchain implementation uses different data storage for “off-chain” data, and the balance between “on-chain” and “off-chain” data depends on the use case requirements. Just like the design of the Internet and the internet protocol suites, we expect blockchains to remain as light as possible to ensure speed and reliability; it will be the “off-chain” storage that will hold the majority of the data.

But what we must avoid is a world in which value is interoperable, but the underlying data is not; leading to the same monopolistic market dynamic as we have today. Projects like Haja Networks are vital in enabling data sharing throughout the ecosystem. We need protocols that permit data to be shared seamlessly across both centralised and decentralised databases. Innovations in cryptography such as zero-knowledge proofs, differential privacy, Fully Homomorphic Encryption (FHE), and secure Multi-party Computation (MPC) will enable data to remain private and secure but still move through public networks. Without data interoperability, the Convergence Ecosystem does not work.

Only when both value and data can be shared securely, can marketplaces be built that will drive the Convergence Ecosystem. Tune in next week for more on the importance of data marketplaces to the future Web 3.0 vision.

Building the Internet of Blockchains Outlier Ventures