7 minute read 11 Apr 2019
Creative business people high-fiving in meeting

Five learnings from a blockchain interoperability hackathon

By

David Williams

EY UK Financial Services IT Advisory Leader, Ernst & Young – United Kingdom Banking & Capital Markets Advisory Partner

Transformation leader. Passionate about innovation. Action-oriented realist. Driving business transformation through the intelligent use of the latest technology. Husband and father of two.

7 minute read 11 Apr 2019

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Discover what happens when we collaborate to crack the riddle of interoperability between Blockchains

As wholesale banking, capital markets and market infrastructure organizations continue to experiment with distributed ledgers, it is becoming increasingly apparent how critical it will be, in the short term, for the various blockchain technologies to interoperate with each other, and with legacy infrastructure. 

Organizations are continually weighing up the pros and cons of each blockchain technology. It is no surprise, therefore, that promising use cases are being developed on Ethereum variants (such as Quorum) and R3 Corda. The underlying technology alone will not necessarily determine which use cases prevail – other factors such as benefit cases and critical mass will be just as important.

In the long term, the true value of blockchain – particularly in industries broader than financial services – may only be realized with public blockchains unlocking the full network effect. 

In the medium term, within financial services, regulators and central banks are likely to be more comfortable with the concept of supervised entities using blockchains, private or public, that synchronize with a central, public blockchain. 

At this point in time, it is not plausible for all network participants to agree on just one standard. To do so would take considerable time and delay the critical innovation that is required. Creating open standards will allow all parties to contribute in a natural way, making the case for a single, public blockchain. Organizations can leverage interoperability to proceed with much more confidence and less risk of obsolescence – providing an immutable, auditable record of their activity. 

Disrupting post trade

When we looked at the pain points front to back, throughout the capital markets industry, we concluded post-trade operations are a strong contender for the application of blockchain technology. 

Each participant has its own infrastructure, maintained at significant cost, deployed to support processes that are often archaic. If you were to design an investment banking ecosystem from scratch, it would bear little resemblance to what exists today. 

The well-documented benefits of distributed ledger technology, including its potential to support instant settlement, have the potential to be game changing for an industry beset by structural costs, increasing capital requirements, and tightening profit margins.

Cracking the interoperability challenge

Interoperability – which is not a concept that is unique to blockchain – requires coordinated standards to allow the exchange of data in a secure and validated way.

But while interoperability is conceptually simple, and has been solved with relative ease in many cases with APIs, interoperating across blockchains is more involved. Take the example of communicating between an Ethereum and an R3 Corda blockchain. They have different hashing algorithms and different consensus protocols. This has implications when determining which version of a transaction is the most recent and correct.

In starting to think about blockchain in the context of post trade, the case for interoperability starts to mount. Many blockchain use cases are specific to a particular asset class, such as FX, or a line of business such as trade finance, or a process such as Delivery versus Payment. When you start to look at end-to-end transaction journeys, it is easy to see how interoperability becomes critical.

In the short term, this could mean passing value from a bank’s legacy system to another bank’s blockchain ledger. Alternatively, it could mean transacting between different types of blockchains such as from a private R3 Corda blockchain to a public Ethereum blockchain.

Clearmatics interoperability hackathon (HackIon)

In February 2019, EY teams were invited to observe a hackathon, held at Barclays’ Rise London innovation centre. Interoperability was put to the test over two intense days, with five teams, across a range of disciplines and four highly-experienced judges from the banking industry. 

London-based blockchain R&D company Clearmatics hosted its inaugural hackathon for the Ion blockchain interoperability protocol, which it developed and made available as open source. Hackathon participants were challenged to enable separate blockchain networks to interoperate with each other using the Ion protocol, sharing data and properties seamlessly across a process without loss of information. This gave the teams freedom to be innovative; while testing the usability, flexibility and integrity of the framework. 

Here are five things we learned:

1. Achieving interoperability is harder than it looks.

The fact that different blockchain technologies have different consensus and hashing algorithms made it harder for the participating teams to achieve their objectives. Teams did succeed, however, with interoperability achieved between Ethereum and Fabric, and between Ethereum and Corda. 

The Barclays team’s work highlighted this the most, having to create a bespoke algorithm in order to transfer the relevant data from a Corda smart contract to an Ethereum chain.

2. Standardization is key.

The Ion protocol has been open sourced as part of Clearmatics’ open source road map. This is important to promote engagement, innovation and collaboration around developing accepted standards. An interesting parallel is the telecoms industry when it developed GSM standards to describe the protocols for second-generation (2G) digital cellular networks used by mobile devices. The decision to develop a continental standard, in 1987, eventually resulted in a unified, open, standard-based protocol. The GSM standard now accounts for over 90% mobile market share globally. 

3. Importance of collaboration.

For Clearmatics, the hackathon was an opportunity to spread the word, validate the premise and get feedback on the technology and documentation underlying the protocol. The hackathon was also a great chance to stress and flex the framework and understand how others could apply the Ion platform. The importance of this collaboration and co-development cannot be underestimated if blockchain technology is to be truly industrialized and commercialised by industry. 

4. While UI isn’t the point here, it is still important.

Blockchain rarely demos well. The complexity of what goes on under the surface rarely manifests in a way that easily excites non-technical stakeholders. Showing the business benefits of interoperability in a way that business stakeholders can understand, as achieved by the Santander team, will be key. 

In addition, the provision of an intuitive user interface for developers working with frameworks such as Ion was also called out as a learning from the event. This is one that the Clearmatics team is taking on board.

Adhara was particularly successful at this, summarizing its approach into an easily digestible and accessible diagram. The simplicity of this approach allowed business stakeholders and developers to see the use case for the Ion interoperability framework, and subsequently the added benefit. 

5. The future is exciting.

It is not all about the technology. Among teams of bankers and highly experienced coders, a team of four students from Bedford School entered the competition with their computer science teacher. Up until two days before the event, the team had no prior experience of working with blockchain technology. Despite this, the lower and upper sixth students landed third place having connected chains of exam boards using the Ion framework and delivering a single, consistent approach for exam results to a student. 

The team also identified and opened two potential issues on GitHub, one of which was immediately resolved by the Clearmatics team. While the team didn’t have a working user interface, they used a Balsamiq tool to put together wireframes for the demo purposes. The judges were impressed by the initiative shown by the students, the coordination in their presentation and their technical knowledge. 

The students’ skill, agility and aptitude to develop was extremely impressive. The future of blockchain technology is likely to be in good hands!

The teams and their use cases

Adhara modelled a cross currency FX swap, transferring between Rinkeby and the Autonity testnet. The team tokenized a prefunded trade (DVP) on a Core Banking System (CBS) on the Clearmatics’ blockchain and, using the Ion framework, transferred this to the Rinkeby testnet.

Santander modeled an issuance workflow on Hyperledger Fabric with settlement on Ethereum. The team also developed a very useable UI and workflow.

Web3 Labs published floating reference rates on a Quorum chain by putting it on a public chain. The team could then successfully reference it on another Quorum chain. 

Bedford School built a smart contract for exchanging data between exam boards, schools and students.

Barclays developed a Corda application that created debt obligations between two parties and transmitted the data to an Ethereum chain.

Shaping the future

Blockchain is a complex technology that has wide ranging applications. Hackathons such as these are a great way to explore, test and validate these applications and generate interest in its use, and to serve as a catalyst for a broader group of industry stakeholders to co-create a set of standards.

Interoperability, while far from straightforward, will be critical in shaping the future and speed of adoption of blockchain for those entities that have chosen to operate multiple networks, giving organizations the option to integrate with others, whether it is in post trade, or in other parts of the banking value chains.

Summary

Interoperability will be critical in shaping the future of blockchain for those choosing to operate multiple networks. Hackathons can serve as a catalyst for a broader group of industry stakeholders to co-create a set of standards.

About this article

By

David Williams

EY UK Financial Services IT Advisory Leader, Ernst & Young – United Kingdom Banking & Capital Markets Advisory Partner

Transformation leader. Passionate about innovation. Action-oriented realist. Driving business transformation through the intelligent use of the latest technology. Husband and father of two.