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Establishing Blockchain's Utility and Effectiveness for Trade Finance

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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 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 blockchain can be useful and effective in the real world.

Key truths and realities

Recently, the blockchain industry has arrived at some important truths.

Unlike other battles between technology standards, there will not be consolidation around dominant blockchain protocols, which 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 environment. The public blockchain space for digital currency is far more fragmented, with Bitcoin and Ethereum 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 the blockchain networks using that protocol can readily communicate with one another.

“A blockchain network is far more than the infrastructure that supports it. It is also a governance structure, commercial model and middleware to communicate between what the end user sees and operation of the blockchain.”

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 serving as full-service blockchains for their members have stalled, and those open to interoperability with other networks, including their members’ individual networks, are gaining traction.

In supply chains, there are three areas around which networks and standards form:

  1. Industry: Enterprises in Steel, Electronics, Commodities and the like
  2. Finance: Banks and Financial Institutions
  3. 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 travel through other relevant networks for transactions without having to establish a one-to-one integration.

A web of APIs

Facilitating the transfer of data payloads most directly accomplishes interoperability between blockchains. This is brokered through application programming interfaces (APIs) 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.

At the same time, APIs send data payloads between platforms but don’t require a cross-platform check of consensus mechanisms. In other words, a valid blockchain mechanism might not authenticate a data transfer from another platform.

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. We need a common organizing principle for interoperability at scale, and if not found within the major components of the technology stack, then it must 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 customers’ supply chain ecosystem partners, we use a common data standard for information sent to a partner blockchain, and data sent back is converted to the same format before ingested by a Skuchain network.

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 promoting 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.

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.

“Rather than thinking of trade finance as the product of a separate bank network, enterprises can now easily access it as a native part of their own supply chain platform.”

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

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 entry 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.”

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

In a separate report, Redesigning Trust: Blockchain Deployment Toolkit, the World Economic Forum covers both functional and non-functional drivers of success for blockchain deployments.

While the blockchain toolkit provides tools and resources to address interoperability specifically, it also includes a series of interconnected 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.

Republished with permission, this article first appeared on World Economic Forum.

Header photo by Clint Adair/Unsplash

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