To realise their potential, business blockchains must learn to communicate
Business relationships change all the time – so Monash researchers are working on solutions to make blockchain work the same way.
Fuelled by anecdotal reports of Bitcoin’s runaway success, business adoption of blockchain has picked up dramatically in recent years.
Early financial-services adopters have been joined by peers in industries like technology, media, telecommunications, life sciences and healthcare, and government.
Indeed, the latest Deloitte Global Blockchain Survey found that 83 percent of respondents see a compelling use case for blockchain, up from 74 percent the year earlier. And fully 53 percent believe blockchain technology became a critical priority for their organisations in 2019.
This proliferation of interest has created new challenges, flooding the market with more than 2,000 cryptocurrencies, 5,000 industry-specific blockchains, and over 500 cryptocurrency exchanges managing just under 19,000 cryptocurrency trading pairs.
While the larger exchanges might be managing billions of dollars’ worth of exchange transactions per year, smaller exchanges may be handling just a few million dollars per year.
Since individual blockchains often choose a particular cryptocurrency structure based on its operational parameters – Ethereum’s smart contracts or Monero’s anonymity-by-design, for example – exchanging them for other currencies can be complex and difficult.
To make this work, you must currently convert your holdings twice – first into a fiat currency (often USD) as an intermediary step, and then into a second currency that may be managed by a completely different exchange.
This double-handling contradicts the very essence of blockchain, which was designed as a distributed ledger specifically to improve trust by preventing any single entity from becoming the gatekeeper of authority.
When exchanging information between blockchains, however, such a gatekeeper is currently unavoidable. This creates issues for the smooth operation of blockchain-based exchanges – including slower transactions, higher fees and the potential for security issues if an intermediary exchange has been compromised.
Complexity of exchange systems is, in turn, hindering the adoption of blockchain-based environments whose design currently prevents businesses from smoothly transacting with customers on other blockchains.
“Each cryptocurrency represents an ecosystem that is working for one particular application of blockchain,” explains Dr Jiangshan Yu, Associate Director of the Monash Blockchain Technology Centre (MBTC), whose research interests include a deep dive into the exchange ecosystem and ways of improving the operation of the blockchain economy.
“We are looking at how to allow them to communicate with each other, enabling distributed users to exchange their data between different blockchains without the need for a central go-between.”
Decentralising blockchain exchange, fairly
Among the many research projects currently underway within the MBTC, improving blockchain interoperability is close to Yu’s heart. As a Lecturer in the Department of Software Systems and Cybersecurity, Yu has worked extensively around ideas of blockchain consensus.
Consensus – the mechanism by which blockchain members agree on the validity of a particular transaction – is a fundamental element of establishing and maintaining trust within industry-specific blockchain ecosystems.
For blockchain to reach its full potential, however, it must be transferable between blockchains using interoperability standards that provide direct links between the buyer and seller – without needing a third-party exchange to facilitate the transaction.
One widely explored concept, called Atomic Swap, enables two parties to directly exchange cryptocurrencies. However, research by Yu and his team showed that the conventional mechanism for enabling Atomic Swap transactions, known as Hashed Time-Locked Contract (HTLC), could be biased to advantage one party if they delayed the completion of the exchange.
“Since there are two different blockchains and two different users, each step of the process takes a long time,” Yu explains.
“To complete the transaction, the party who initiates the connection will release a secret to the other party – but if the second party refuses to take the token until the exchange rate is good for them, or if the network is slow, the exchange rate can vary quickly.”
This made Atomic Swap’s variability comparable to that of the American Call Option, a financial trading technique that allows one party to improve their margin by around 0.3% by delaying completion of a transfer until exchange rates move in their favour.
“Within normal financial exchange, this delay is tolerable,” Yu said. But in a blockchain context, his research team found, the rapidly changing value of cryptocurrencies meant one party could manipulate the exchange to increase the penalty to 2 percent to 3 percent of the asset value.
To make blockchain Atomic Swap work more fairly, Yu’s research team developed an Ethereum Improvement Proposal (EIP) that provides a set ‘premium’ to ensure neither party in a cryptocurrency exchange unfairly benefits from exchange rate movements while the transfer is being processed.
Building the ‘Internet of blockchains’
Idiosyncrasies in existing blockchain processes are only becoming clear as businesses embrace the technology for increasingly mission-critical purposes. Resolution of such issues is key to evolving blockchains from their current state into a robust, timely global exchange platform and driver of new business opportunities.
That platform must, by design, be open and interoperable – and that requirement will, Gartner has predicted, rapidly expose deficiencies in current implementations that will see 90 percent of current blockchain implementations needing replacement by 2021 because they are not open and interoperable enough.
“Blockchain platforms are emerging platforms and, at this point, nearly indistinguishable in some cases from core blockchain technology,” Gartner Senior Research Director Adrian Lee said.
“Many CIOs overestimate the capabilities and short-term benefits of blockchain as a technology to help them achieve their business goals,” he added, “thus creating unrealistic expectations when assessing offerings from blockchain platform vendors and service providers.”
By identifying and addressing inequities in exchange mechanisms, Yu and his colleagues within the MBTC are partnering with various business and financial experts – across Monash and its partner universities and industry players – to help build the kind of decentralised blockchain exchange that enterprises truly need.
Smooth exchanges between ecosystems will, some experts believe, help create an ‘Internet of blockchains’ – a large-scale trading ecosystem that allows partners to communicate seamlessly thanks to flexible, scalable and interoperable data protocols.
Ultimately, the goal is to manage cryptocurrency and blockchain-based trading with the same level of scalability, performance and equity that businesses and traders now enjoy in the financial world.
“If we can provide a mechanism generic enough to allow the tokens of one blockchain to be used in other blockchains, we can enable a network of ecosystems,” Yu said. “For me, that would be the next technology that would shake the world.”