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Exploring Blockchain Interoperability

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Guillaume BONNOT


Blockchain Architect @ Caasiope, Co-founder @ Scaling Ventures

Dec 5, 2018

When Bitcoin was publicly unveiled by Satoshi Nakamoto almost a decade ago, it was the world’s first trustless and decentralized virtual currency. More importantly, however, it was also the first modern and practical implementation of blockchain technology. Since 2009, Bitcoin has continued to reign supreme in the cryptocurrency market and is still a shining example of the distributed ledger technology it pioneered. However, in the past few years, the blockchain industry has also matured significantly, to the point where developers are rapidly innovating away from Nakamoto’s original vision to solely build an “electronic cash system”.


While competing cryptocurrencies have been in development since Litecoin in 2011, it was arguably not until the launch of Ethereum in 2015 that alternative use-cases for blockchain technology began flourishing. Smart contracts, privacy-focused currencies and decentralized applications (dApps) are only some of the many features that these newer platforms brought to the table. It was starting to become evident that each blockchain project offers its own unique set of strengths, with varying degrees of overlap.


Today, there are over 2000 different cryptocurrencies on the market. As a result, the maximalist notion that there will be only “one blockchain to rule them all” has started to recede. As Vitalik Buterin, the co-founder of Ethereum, puts it, “Within the public blockchain space, different projects have been staking out different regions of the tradeoff space between security, privacy, efficiency, flexibility, platform complexity, developer ease of use and even what could only be described as political values.”



The Solution: Blockchain Interoperability

As stated above, the likelihood of one platform covering all possible use-cases of blockchain is almost non-existent. This will only be compounded with the introduction of second layer chains that extend the functionality of existing blockchains in the near future. That is why, the idea of communication between different blockchain protocols has started to gain ground. In technical terms, this feature is called ‘blockchain interoperability’.


Interoperable chains can allow digital assets to be transferred from one platform to another, and can even facilitate payments without a third-party, escrow or middleman involved. However, the concept has not yet been implemented by any major cryptocurrency or blockchain network so far. Furthermore, existing solutions are focused on developing entirely new chains with the interoperability logic pre-defined. The lack of legacy support for say, Bitcoin and Ethereum, means that these new projects are essentially offering users a closed ecosystem.


Vitalik Buterin has also brought up similar issues in his research paper titled ‘Chain Interoperability’. He wrote, “There has not yet been a single permissioned chain that has seen substantial use or adoption, and so it is not fully clear to what extent the consensus algorithms and other features of current experiments will translate.”


Centralized Exchanges: Inadequate, Fragmented and Insecure


The only widespread form of interoperability available now involves the use of centralized cryptocurrency exchanges. These entities allow users to deposit different types of tokens, which they can then ‘trade’ them for other digital assets or currencies. While, on the surface, this method allows users to quickly jump from one cryptocurrency to another, it also requires them to place their trust in a third-party. Since the trade does not take place at the base protocol level, the exchange must hold user funds, at least temporarily.


Needless to say, digital currency exchanges have not exactly proven to be the epitome of security in the past few years. Mt. Gox, the first major Bitcoin exchange to be exploited, lost approximately 850,000 BTC to a security breach. Bitfinex, one of the largest cryptocurrency exchanges worldwide, also fell victim to a major hack in August 2016. A security breach reportedly led to the theft of 120,000 BTC, approximately $72 million at the time.


These hacks are not all that rare either. Coincheck, Bithumb and Coinrail are only some of the several lesser-known exchanges that have lost millions of dollars since the start of 2017.


Ultimately, cryptocurrency exchanges act as a centralized validator and introduce a central point of failure. Interoperability support within blockchains can eliminate these risks and even remove user dependance on them entirely.


Cosmos and Polkadot: Mastering ‘Closed’ Interoperability


One of the most well known projects in the blockchain interoperability space is Cosmos, an independent network built on top of the Tendermint protocol. The two, Cosmos and Tendermint, offer sub-blockchains, or hubs, the ability to communicate with each other. Tokens can be transferred between these chains through the Cosmos Hub, which has a set of decentralized validators just like any other blockchain network.


Put simply, Cosmos achieves interoperability by creating a ‘blockchain of blockchains’. It uses the Inter Blockchain Communication protocol (IBC) to achieve communication between chains and a proof of stake consensus mechanism to achieve better transaction throughput. New blockchains can be built on top of the Tendermint consensus engine, which defines a set of rules for establishing communication and arriving at a consensus.


To demonstrate the project’s effectiveness, the Cosmos development team are working on Ethermint, the first chain to make use of the Tendermint engine and interact with the Cosmos Hub. Scheduled to launch sometime after the main network launches, it will bring all the capabilities of the Ethereum Virtual Machine (EVM) to the Cosmos platform. This means that decentralized applications can be set up and run in no time, as the underlying infrastructure is almost exactly a replica of Ethereum. Ethermint is also predicted to be 20 times faster than Ethereum, thanks to Tendermint’s unique proof of stake implementation.


Polkadot is another popular interoperability project that includes functionality for sending messages between blockchains in addition to simple token transfers. However, it does this by requiring new blockchains to be created with the Substrate native protocol. It also only promises limited connectivity with existing cryptocurrencies, like Cosmos. Furthermore, since Polkadot is essentially another ‘blockchain of blockchains’, it suffers from the same limitations discussed above.


On paper, Cosmos and Polkadot appear to be among of the best interoperability solutions currently available. Practically speaking though, their limited compatibility with existing blockchains such as Bitcoin and Ethereum make them useful to very few people. Ultimately, since new blockchains have to be tailor made to work with each ecosystem, the scope of interoperability is drastically reduced.


In an open blockchain market, with thousands of different protocols and some widely accepted ones like Bitcoin, Cosmos and Polkadot do not provide sufficient interoperability. This is because existing blockchains will likely never add full-fledged support for these intrusive solutions, especially as doing so could compromise the integrity and security of the base protocol.

Cross-chain Atomic Swaps


Atomic swaps allow for the exchange of value from one blockchain to another, without the requirement of external services or hubs. With the help of a smart contract, or more specifically, a hash time-locked contract, atomic swaps can almost completely eliminate the need for centralized exchanges. Token transfers can take place in a peer-to-peer and trustless manner. Furthermore, users can be assured that their cryptocurrency is safe since atomic swaps do not require them to relinquish control over their private key.


So far, cross-chain atomic swaps have been successfully demonstrated between the Bitcoin and Litecoin blockchains. While there is no doubt that the technology has tremendous potential, atomic swaps have proven to be rather impractical at this time.


However, an atomic swap still does not solve the problem of value transfer across blockchains. When a swap takes place between two users on different blockchains, only the ownership of tokens is transferred. While this sort of implementation is perfect for something like a decentralized cryptocurrency exchange, it does not allow value to be transferred off either blockchain.

The Caasiope Network: Striking a Balance


Many in the blockchain industry believe that true interoperability can only be achieved when the ecosystem agrees on some form of standardization, especially one that considers already established blockchains. Another important consideration is the overall user experience and ease-of-use. While many theoretical solutions have been devised, none are suitable enough for the masses yet.


Recognizing these fundamental requirements, the Caasiope development team has developed a network that achieves interoperability without sacrificing on security, user experience or speed. More importantly though, it is a non-intrusive solution that does not require blockchains to be created in one specific way. This is because, participating blockchains do not have to provide any form of interoperability by themselves. Caasiope is, therefore, more universally compatible and practical than competing solutions and atomic swaps.


As a result, Caasiope’s primary advantage is that it can achieve universal interoperability with existing blockchains and digital assets. To do this, the network uses a unique governance mechanism called ‘Business as Stake (BaS)’. Transactions on the platform are verified by The Caasiope Consortium, a group of businesses that have a vested interest in safeguarding the network.


Users can deposit and withdraw different types of tokens on the Caasiope Network through ‘gateways’. From the white paper, “A gateway can be thought of as an agent who

interacts with end users of the network to perform a deposit or withdrawal.” The tokens themselves are stored in multi-signature custodian wallets. This way, Caasiope can create gateways on virtually any cryptocurrency blockchain to provide liquidity.


At the most basic level, the Caasiope network can be used by an individual to swap between different types of tokens. In the future, however, it can also be used for trading through decentralized exchanges. While the exchange will be tasked with handling trade matching between two users, Caasiope’s infrastructure can facilitate the actual transfer of tokens.