Why standardization needs to be blockchain’s biggest priority

Featured article by Peter Loop, Infosys

The roller chain is a small miracle of modern convenience. Its interlocking ovals, held together by links, are a reliable means of transmitting mechanical power through a variety of sprockets and gears. Because of its efficiency, the roller chain has found its way onto a variety tools, ranging from bikes and motorcycles to chain saws, farm equipment, industrial tools and, sometimes, even aircrafts. Not bad for a technology whose origins date back to Leonardo da Vinci sketches in the 16^th century.

But the roller chain’s success did not materialize at once. It took hundreds of years of refinement to go from idea to reality to everyday standard. In fact, its breakout moment wasn’t until 1879, when Hans Renold, a Swiss-born engineer working in Britain, began mass-producing roller chains. The timing was right: the means of mass production were long established, the materials were readily available and, thanks to Renold’s efforts, the chain had a standard design.

The same could be said of the Distributed Ledger Technology (DLT): the platform of linked transactions in a shared ledger, which underpins blockchain, could be applied to a wide range of uses. Its concepts are simple, but require network effects to realize its full benefits. It is a technology with the potential to become another small miracle of modern convenience, but all that’s missing is its biggest hurdle yet: a standard design.

The future of DLT depends on getting disparate parties to use standardized methods for interactions and semantic meaning for processes – driving efficiencies in time cost and resources. Ideally, this would be a set of data systems (a shared distributed ledger) capable of directly interoperating, negating the need for middleware or APIs. Unfortunately, the real world is rarely so collaborative. Complicated local custom, regulatory and political processes slow standardization. Industry organizations can have competing interests and some businesses enjoy having a perceived competitive advantage. Regardless of the machinations hindering DLT standardization, it’s in everyone’s interest to help ensure (some level of) standards emerge.

And interest is certainly there: DLT has piqued the interest of financial institutions across the globe. For example, Credit Suisse believes DLT to be “more of an opportunity than a risk,” especially for “vertically integrated U.S. derivatives exchanges.” NASDAQ is also looking — going so far as to develop its own private distributed ledger, Linq — to test the DLT waters. Swift, the “epitome of a middleman as it sits between many of the banks worldwide” is looking at the disruptive and beneficial forces of DLT to ensure the payment network remains relevant. It should be no surprise that these institutions are curious about the DLT’s implications. If successful, a DLT system would be a huge opportunity to provide newer efficiencies for customers while staying well within many regulatory guidelines.

The reasons are numerous: DLT could, potentially, standardize and justify ledger books between different financial entities. It could also simplify and modernize a plethora of old financial standards and methods, accelerate post trade processes, benefit record keeping, enhance fraud detection, manage data, and much more. And it can do all of this in a distributed, collectively managed ledger that is, essentially, immutable once data has been written into it, in a transparent and automated process.

But this technology may never become fully developed without standardization. Just as peer-to-peer traffic needs to rely on standard internet protocols instead of point-to-point interactions, DLT and, increasingly, machine-to-machine communication, will need to interact in ways that go beyond what’s available on the open web. A secure, resilient, standardized data management system is needed to enable machines to interact and transmit value seamlessly.

So, how may we bring forth this standardization?

Standards, usually emerge in one of two ways: by committee, or by virtue of de facto use. Regardless, a clear and open structure allows innovators and entrepreneurs to apply the same technology to new uses with little to no confusion about the underlying technology. Encouragingly, there are a few efforts towards standardizing different elements of DLT today. They include:

– Hyperledger: Sponsored by the Linux Foundation, Hyperledger seeks to identify the features needed for a cross-industry, and open, standard for distributed ledgers. The project aims to bring together a number of independent efforts to develop open protocols and standards, by providing a modular framework that supports different DLT components for different uses.

– Interledger (W3C): is an open-source, collaborative project seeking to build a universal payment scheme based on open-web standards allowing payers to pay payees regardless of medium (e.g., debit and credit cards, cash). A method or handshake, message and transport that works across networks.

– Ethereum: Run by the Ethereum Foundation, a Swiss nonprofit. Developed Solidity to standardize language for smart contracts — a system where applications and processes are both distributed and automated across nodes, reducing downtime and the risk of interference.

– W3C: The World Wide Web Consortium is working to help facilitate a range of DLT standards across the web, with a focus in interoperability.

– Other industry consortium and working groups are looking a blockchain resilience, scalability, latency, data structure, auditability, governance, legal jurisdiction, regulation and software version control. Others are looking to make smart contracts to be admissible in courts, while other are looking to set digital standards (that “clearly and precisely represent the binding contractual terms in mathematical/algorithmic form”) for all financial instruments.

These efforts are a positive development in DLT maturation. However, we do need to take a cautionary note: a race to establish different standards could give rise to a balkanized DLT system. Such an environment would be poisonous to progress, and render the many advantages of DLT null. Imagine the chaos, for example, of having a different type of rolling chain for each bicycle brand. While there may be different proposed standardization models, they will need to be consolidated for simplicity.

Will DLT follow the model of a public good – (both non-excludable and non-rivalrous) in that individuals cannot be effectively excluded from use and where use by one individual does not reduce availability to others or will it be used for exclusion and competitive advantage?

Just like the roller chain, and countless other technologies, the key to DLT’s success depends on standardization. Industry players will have to cooperate and collectively agree on open standards that are flexible and versatile. Governments and regulators also have a key role to play protect yet foster innovation. The stakeholders pushing the evolution of these standards will need to be imaginative, and envision a future where innovators leverage the standards they made to create new and powerful tools.

Peter Loop is an associate vice president and sr. principal technology architect at Infosys.