Blockchain 3.0 – The 2nd layer protocols, scaling and interoperability of blockchains

14. jun 2018
Blockchain 3.0 is the third wave is about scaling blockchains. 2nd layer protocols scaling performance of blockchains and several interoperability projects getting ready for beta and/or release. Blockchains will now become an ecosystem and not a winner takes it all platform race. Network effect is however still important in p2p technology. This wave will most likely output a standard for blockchains akin to HTML.
Alexander Hemdorff Koch
Business Consultant

This series of articles sees to explore the evolution of Blockchain technology. How are we seeing real world adoption for each progression and what can we speculate might come about? The articles are intended for people with some knowledge of blockchains. Thus, features and terms won’t necessarily be described. This article is my views. I have done light research but mostly it’s coloured by my experience in my crypto journey.

Satoshi Nakamoto the pseudonymous creator of Bitcoin laid the foundation for payment channels in bitcoin back in 20091. The idea is to have an open tab between two users that can later be settled. In the history of bitcoin 2017 will be remembered as the year bitcoin almost broke under its own weight, paralyzed to find a solution by a divided community and fear of centralization. Bitcoin forked with the core branch going the way of a 2nd layer protocol “The Lightning network” and the fork Bitcoin Cash going the way of bigger block size increasing the hard-disk space it requires to run a full node/wallet.

The lightning network is payment channels distributed. A 2nd layer protocol to bitcoin that allows users to keep tabs open between each other’s routing payments through IOUs. A balance can be cashed out of the lightning network at any time and control of the balances remain decentralized.

An important metric for Blockchain has been transactions per second. For Internet of Value type cryptocurrencies comparable performance to the Visa / Mastercard ecosystem has been the golden standard. The VISA network averages 1667 transactions per second but is capable of a theoretical 56,000 transactions per second. Bitcoin without lightning network supports 3-4 transactions per second. However, this number scales to theoretical millions of transactions per second with the Lightning network 2nd layer. Another benefit of using a 2nd layer protocol is instant transactions compared to bitcoins out of the box 10 minutes average processing time for well tipped transactions. Lightning network is also much cheaper in fees.

A mist of the discussion of 2nd layer vs increased block size Microsoft released a white paper and a press release expressing their view on needs for 2nd layer protocols. Most of the community took it by headline as a support for lightning network and it might have been so by timing. The whitepaper described a 2nd layer to smart contract platforms like Ethereum. The 2nd layer promises to scale a chain like Ethereum to near database performance allowing up to 1600 transactions per second a massive increase from native 20-30. It also adds functionality known from popular consortium type smart contract distributed ledger technologies like Hyperledger Fabric. Specifically creating consortiums on-top of public blockchains with permissioned access, anonymity to smart contracts and trusted players. The Coco Framework (Confidential consortiums) as it is called batches transactions into public blockchains, encrypted. It utilizes Intel and Windows ability to create trusted enclaves on their architecture where code can be executed untampered. Because of this, once connection and membership is initially established data can be shared on a secure channel established on an unsecure channel like a public blockchain. 

Year 2018 is posed to be big for decentralized exchanges. Many are popping up trying to get a piece of the big market the centralized exchanges are sitting so heavily on. Some decentralized exchanges are more decentralized than others. The thing is that you can’t make a truly decentralized exchange without also creating a service router between blockchains as you need it to coordinate off-chain data transactions that orchestrate trades.

I have been involved in the development of a 2nd layer protocol since 2014. The protocol is called XRouter and is the core enabling the Blocknet platform on which the first application is the Blocknet DEX. XRouter protocol makes blockchains interoperable. This enables blockchains to be service based rather than monolithic platforms. Blocknet platform aims to be a service router that connects blockchains both in data and value layer. Allowing a dApp (Decentralized application) to call in functions from several chains while not necessarily keep balance for each. Blockchains come in different sizes and with different attributes. Scaling blockchains will not be about creating super highways but rather redirect traffic to the optimal chain. Protocols like XRouter and its closest competitor Supernet will help create the internet of blockchains one big integrated ecosystem. These two projects are the first but not the last and hopefully the future will bring that the interoperability protocols are also interoperable between each other.

The reason XRouter is a big deal is not the current main attraction of an exchange that is leading on decentralization both technological but also organizational and development. The main attraction is the service router. It will allow blockchains to specialize, rather than trying to cater to all needs it will instead be kept small and specialized. The blockchains will compete on price of transaction vs features like security. 

Companies ERP systems will be interconnected on blockchains, but a large-scale ERP system has several ledgers, a general ledgers and sub-ledgers. It also has various registers for master-data, financial and product.

The ERP system talks with Product life-cycle, Product data management system and so on. An entire value stream from resource to consumption can benefit from having their ledgers being able to talk to each other.

Supply chain planning as we know it will be completely disrupted. We could even see the fabric of how we organize businesses be reconstructed in a new image because of blockchain. The only thing that was missing for this was either the perfect blockchain or the service router that can utilize the best fitting features of an ecosystem of imperfect blockchains.

Looking to the future I see a great need to expand the existing Enterprise Architecture frameworks to better encompass the changes that will be brought forward by blockchain tech. Especially a service based blockchain architecture and a disruption to how we know organizational forms now. I hope to later do a piece on the new organizational form DAO with real experience from Blocknet that as guiding strategic principle is trying to be as decentralized as possible. I will try to use existing EA modelling tools and touch how these can be used for DAO and what could be lacking. I will also try to touch consortium modelling.

There is being worked on standards for blockchains and interoperability. Hopefully this wave will end up in a HTML like standard giving us the internet of blockchains. Maybe Blockchain 4.0 will be the decentralized internet with projects like MaidSafe and IPFS working on this but truly powered by Blockchain 3.0 internet of blockchains.