Interoperability & Blockchain

I. Interoperability Before Blockchain

Interoperability is the ability of different systems, devices, applications or products to connect and communicate in a coordinated way, without effort from the end user. Over the last several decades, considerable effort has been placed by software developers, those responsible for managing supply chains and manufacturing, and throughout the business community more broadly to enhance interoperability and reduce the often difficult process of communicating between systems.  Blockchain technology has recently been put forward as a tool that can help accelerate these efforts while also enhancing the overall security and transparency of the system. Some initial projects have been developed towards this end, but broad adoption has yet to occur. This is due in large part both to being very early on in the development of the technology and to some broader challenges and concerns that will be discussed in what follows.

Before interoperability became a sought after goal of software developers and the business community more broadly, it was a defining feature of various epochs of human history. This broader context should help frame how we think about the future of interoperability as supported by blockchain. In many ways, interoperability has always been driven by either a common language or common currency that makes it possible to communicate and exchange across borders between disparate communities. For this to occur, those within a community must have faith in the system while those exchanging between communities must rely on mutual trust. They also often rely on a common language and currency, standardized accounting procedures and ways of doing business, means of settling transactions, methods of navigating the world, a common way of describing location in space and a common means of keeping track of time. In many ways, they require a standardized operating system that more recently has taken the form of various software supporting global commerce. If these conditions are met, it becomes possible to tie together disparate forces, ideas, locales, ideologies, value systems, data sets, networks, users, and communities – ideally towards a situation where all parties involved win. This capacity is deeply connected to a desire for a more integrated culture and economy characterized by dialogue, common codes, and mutual respect.

The specific technology used to facilitate these conditions defined various epochs. In many cases, the desire existed for an enhanced capacity to do business across extended distances without crossing between systems. This desire led to extending spheres of influence over ever larger portions of the globe – often through war and propelled by a need to spend excess capital. These disparate systems in the West could be broken down into:

1) Republican & Imperial Rome (500 BC - 500 AD) – a common currency, language, road system, slavery, and army to support interoperability; 

2) The Early Middle Ages (500-800) – a breakdown of interoperability and rise of feudal states; 

3) The Late Middle Ages (800-1350) – European unification, the rise of the city state, and significant accumulation of wealth; 

4) The Early Renaissance (1350-1500) – rise of interstate banks, naval commerce, and continued accumulation of wealth supporting significant building and exploration programs; 

5) The Age of Exploration and Colonization (1500-1776) – a rise of global commerce and the reintroduction of chattel slavery; 

6)Industry 1.0 (1776-1870) – Watt Steam Engine and corporation;

7) Industry 2.0 (1870-1970) – use of electricity, global manufacturing, and the age of ideology; 

8) Industry 3.0 (1970-2011) – the beginning of automation, software, financialization, post-structuralism, globalism, and deconstruction; and 

9) Industry 4.0 (2011-present) – IoT, AI, ML, social networks, reconstruction, integration, and relational thought. 

Each was accompanied by similar integrative and distributive forces happening in other cultures around the world – with this Western arc ultimately coming to increasingly influence and redefine those cultures. During each of these epochs, centralized power systems combated entropy in their attempt to hold together vast territories and support unified cultures. These efforts were supported by state security, armies, and cryptography going all the way back to the use of cyphers by the Roman Army. They were each predicated on a  power structure that required those within the ecosystem to make sacrifices for membership. Each, however, faced forces pulling them apart. Today, this threat continues as various countries and leaders critique the dominant powers of the 20th century and even the notion of relying on centralized authorities at all. This is occurring in the face of a lived reality characterized by a rapidly changing climate, increasingly severe environmental disasters, growing inequality, and food insecurity that leaves many at risk and deeply troubled. Some see the leadership of centralized power structures as having contributed to this criss and question whether such structures are capable of fostering the coordination required to solve the problem. Simultaneously, increasing power has been placed in the hands of individuals through the rise of the corporation, the entrepreneur, and the financial professional and the decline of the effectiveness of government. It is in this context where a decentralized technology such as blockchain that simultaneously promises the capacity for interoperability becomes highly compelling.

II. Building a Foundation

Before blockchain was introduced in 2008, digitalization supported significant interoperability across a range of different systems including the global financial system, shipping, navel, and air traffic, global supply chain and logistics, and weather and natural disaster tracking. Other areas that remain partially integrated include markets, telecommunications, defense, the United Nations, healthcare, design and construction, operations and maintenance, manufacturing, and things – specifically the efforts related to IoT. At the same time, within organizations, companies such as Microsoft and later Google and Amazon, as well as those supporting supply chain, organization management, and more recently artificial intelligence and machine learning, helped to support interoperability across organizations.

Each was faced with significant challenges related to integrating a wide range of data sets and creating a seamless user experience across a range of interfaces and platforms. These efforts were often characterized by integrating elements one at a time through APIs and processes that were costly and time consuming. They were often led by large legacy organizations that reaped significant rewards for the new efficiency they supported. Lacking in these efforts was broad connection across industries, efficiency of continuous integration of new tech and use cases, and a business model directly associated with the process of creating interoperability that sustains the upfront capital intensive investment before paying exponential dividends following broad implementation.

Blockchain promises to drive broader digitalization while enhancing the quality of our lived experience through a de-centered user-driven future. For producers, blockchain can support standardization of protocol for settlement, contract, ownership, authenticity, accounting, exchange, lifecycle tracking, archiving, memory, and user experience. This can take concrete form through recording an object, asset, consumers, collectors, place, and physical / digital traces. It opens the possibility of a common approach across geographies, scales, and level of physical / digital contact while also creating room for designing an architecture of this integration. For consumers, blockchain can provide increased transparency related to the objects they consume and collect. It allows for direct ownership in the production process, input and control, direct benefits related to how the object performs, and access to a record of what makes up a person’s world. This capacity will ultimately support marketing 4.0, tribes and communities that transcend the boundary of one brand and country, co-authorship of objects by producers and consumers, and collective memory.

A lot is at stake in this vision for the future of interoperability. It will determine how an object is tracked and engaged across its entire lifecycle as a capacity to enhance quality control and authenticity, banking the unbanked, enhanced direct to consumer sales, customer engagement and brand loyalty, and sustainability and recycling. It will support the standardization of interaction with digital and physical objects, how that interaction is recorded, the form that the data takes, how that data is compressed and stored, and how it interacts and triggers a range of events, machines, engagements, and values via smart contracts. Doing so will require a legal framework, a clear sense of jurisdiction and conflict resolution, and coordinated global regulation.

III. Adoption

Blockchain remains in an early stage of adoption. This can be seen in the relatively limited use of the technology by legacy institutions as well as the small fraction of the global financial system that has come to adopt cryptocurrency or rely on blockchain ledger technology. That said, major banks, corporations, and technology providers are rapidly testing ways in which this technology can support their organizations both in terms of their digital transformation strategy and the products they produce. These efforts have been accelerated by billions of dollars of investments by the most prestigious venture capital firms such as Andreessen Horowitz and Sequoia Capital that have allowed ecosystems such as Ethereum, Tezos, Eos, and many others to flourish. These investments have supported a wide range of apps that accomplish many tasks currently being accomplished by more traditional centralized service providers as well as entirely new universes that exist within the digital and that provide new means of integrating user experience.

In this sense, the technology is developing and the industry is stress testing. Risks have been exposed  and the blockchain ecosystem has witnessed a range of corrections at various scales and with a range of impacts for investors and users alike – most recently the collapse of FTX and, slightly earlier, the collapse of Terra Luna, 3 Arrows, and Celcius. In the process,  a large ecosystem of companies have developed IP – generally open source and, in some cases, proprietary – that can be used as a kit of parts to solve a range of challenges that companies seeking to use blockchain to drive interoperability might face. As the cryptocurrency market negotiates a correction, quite a bit of these applications will be looking for a use case tied to a profitable business model. At the same time – and even after significant capital evaporated during the industry correction – capital exists that needs to be deployed. In this context, an opportunity exists to deploy this capital towards using blockchain to support the production, tracking, and valuation of physical goods and services with the hopes of tethering a token's value to reality. 

This opportunity exists just as major corporations continue to experiment with tokenization and blockchain. Many have failed to fully commit, however, because of the volatility of the cryptocurrency space, the narrative surrounding cryptocurrency, and the fact that investment has pulled innovation and the innovators towards DeFi via promises of financial reward. At the same time, smaller organizations are not even beginning to explore blockchain options because they cannot afford the private permissioned bespoke solutions that large organizations rely on to mitigate risk. They are frightened by a lack of knowledge and guidance as well as significant regulatory and legal risks. A lack of standardization within and between industries is further slowing the pace of adoption. This is due in part to the fact that companies have not been given a truly convincing value proposition beyond claims that Industry 4.0 will revolutionize business efficiency.

Developing a convincing business model native to blockchain is essential in order to accelerate adoption. An upfront investment will be required to quantify the opportunity for producers and consumers to develop and use such business models to support investment in Industry 4.0. Doing so will ideally achieve greater control of their assets (data and objects), attain a level of accountability and visibility previously unthinkable, and benefit from new liquidity through accounting for and banking previously unbanked assets. In the process, it will be essential to classify how assets grow in value so that risk can be appropriately calculated. At the core, it will involve utilizing the enhanced ability to track an asset throughout its lifecycle to better predict how that asset will behave in the future, where it will travel, calculate and manage risk,  and how users and owners of that object will interact with it. The ability to monetize the data collected through this process, either as an individual or a collective, will more than offset the upfront investment necessary to build a functioning blockchain infrastructure.Companies responsible for making, selling, collecting and conserving our most valuable and coveted cultural objects will benefit tremendously from driving this adoption while also improving efficiency, supporting sustainability, and championing the integrated economy. 

IV. A Future State

The primary challenge hindering broader adoption is the narrative around blockchain, cryptocurrency, and non-fungible tokens (NFTs). It is imperative that we move beyond an era defined by JPEG NFTs and derivative-like cryptocurrency products to one where digital assets provide tools and services that fundamentally benefit people’s lives. At the same time, it is important to be aware of an aversion to change within legacy organizations. Byzantine organizational structures driven by fear of the unknown will stagnate corporate growth and leave industries vulnerable to obsolescence. 

In order to address these challenges, industries must be willing to inventory the structural failures present in the current ecosystem, thus, creating a roadmap for potential blockchain implementations. Next, individual corporations must work with multidisciplinary blockchain teams to build bespoke deployment roadmaps designed to optimize interoperability in the near and long term. Doing so will create a common space where all the assets and objects that someone might encounter can be collected, accounted for, insured, remembered, and passed on. This economy of memory – the simultaneous projection into the past and future with the digital / physical object at the center – will not only enhance and tether the value of that object to a lived experience fundamentally defined by this digital / physical intersection, but of the entire ecosystem that supports this valuation.