Distributed Ledgers and Interoperability
Introduction of DLTs
Distributed ledger technology (or a distributed ledger, blockchain, DLT) is a type of distributed database that has the following notable features:
● Distributed participation
● Distributed consensus
● Public-Private key cryptography
In a DLT, every participant shares a replica of the network’s transaction history. The information is updated to all nodes in near-real-time. However, due to network latencies, the arrival orde of these transactions to each node can be different order. This is why DLTs require advanced consensus protocols to agree upon the latest, common state of the database. This common state cannot be maliciously modified by a single party and even by small adversarial coalitions. Furthermore, it can be verified by reconciling one version of the database to another that is kept on a separate node. In short, unlike centralized solutions, there is no single point of failure for a DLT.
The consensus in a blockchain can take many forms including; Proof of Work, Proof of Stake, Proof of Authority, practical Byzantine Fault Tolerance, Single Authority, etc. Each form of consensus ensures transactional accuracy agreeable among network participants with varying degrees of assurance. This contrasts with traditional databases; whereby inputted information is assumed accurate until subsequently reviewed.
Public-private key cryptography allows participants to transact pseudonymously. To achieve this, the public key of a user is used to generate her address on a Blockchain. Transactions are sent to and from these addresses. Private keys and digital signatures provide authenticity for each transaction. That is only the owner of a digital asset or token can access and modify its state. In short, public-private key cryptography provides the necessary and sufficient security properties for the transactions on blockchain networks.
Because of their unique characteristics, such as establishing trust without a trusted third-party, DLTs are being used for a plethora of applications, such as cloud/fog computing, Internet of Things (IoT), data storage, network management, and digital content distribution. These foundational features are cornerstones on solving security (DoS attacks, collusion attacks, access control, confidentiality), privacy (anonymity, integrity), and trust (data credibility assessment) issues. Bitcoin as the first application and the first example of a common digital currency provides a solution to the lack of confidence in a decentralized, independent monetary system. It chronologically registers all valid transactions auditable by all network peers without human intervention. In the context of Smart Grid, Gao et al. proposed a blockchain with smart contracts for creating a tamper-proof system, avoiding inconsistencies between electricity companies and consumers regarding electricity usage and bills . For healthcare, Guo et al. introduced an attribute-based signature scheme to implement a blockchain-based electronic health system . By using threshold secret and function sharing, the signature scheme can resist N-1 corrupted authorities’ collusion attacks where N is the total number of authorities. The scheme is unforgeable in suffering a selective predicate attack. Throughput, latency, security, wasted resources, usability, multiple chains have been identified in  as the technical challenges and limitations for using blockchain. Aste et al.  conclude that the Blockchain has opened up new opportunities for businesses without intermediaries or central control points.
Conclusion 1: DLT can be applied in various environments with the potential to change the way transactions are conducted, provide benefits, such as security and privacy, and lower management costs.
Conclusion 2: DLT suffers from technical limitations and challenges. When applied in different environments, the throughput, latency, security, etc. issues of DLT must be re-considered.
Overview of DLT
There exist various DLT solutions currently in use differing in terms of read/write permissions, consensus algorithms, transaction latency, and throughput, security assumptions, etc. For instance,
● The Aion network  is a multi-tier blockchain designed to support a future where many specialized blockchains exist. The Aion protocol enables the development of a federated blockchain network, making it possible to seamlessly integrate dissimilar blockchain systems in a multi-tier hub-and-spoke model.
● Ethereum, developed by Vitalik Buterin, is using its own currency ETH. By providing a virtual machine as a secure environment, distributed Apps can be executed on the machines of voters. This enables the implementation of smart contracts.
● IOTA is a distributed ledger for the IoT. It represents a novel machine-to-machine communication suitable for industrial applications. It is based on multidimensional Directed-Acyclic-Graph technology.
● The Hyperledger-Project enables the users to develop their own blockchain implementations. Frameworks and tools that are tailored for specific applications, like bonds, financing, or digital identities were developed based on Ethereum Virtual Machine.
A traditional classification of DLT technologies based on ledger access and data validation policies is given in Table 1.
Table 1 categorizes the DLTs in two ways; permissioned/permissionless ledgers and private/public ledgers. A publicledger is public in the sense that all the participants have read access to the stored data. On the other hand, for a private ledger, a single party (or a coalition) controls who will have this access. In a public permissionless ledger, all the participants can also be involved in the consensus protocols and validate the transactions. On the contrary, for a public permissioned ledger, only a set of predefined/permissioned participants can validate. Still, as mentioned above, all participants can read all the transactions. When the number of users involved in a consensus is large, and when the identities of the participants are unknown (as in public permissionless ledgers), consensus becomes expensive yielding less transaction throughput and more resource usage for consensus. However, especially for distributed ledgers among a few institutions, using a (consortium) private ledger is the natural solution. Here, performance and scalability problems of DLTs can be addressed more easily, since the network is more trusted than public and permissionless ledgers.
DLTs are recently supported by Cloud providers to be used as a database alternative for applications running on the Cloud: Microsoft offers Hyperledger, Ethereum, and Corda for Azure, Amazon has Blockchain as a Service, Oracle has Distributed Ledger in his cloud, SAP offers Leonardo blockchain . As can be seen from the variety and richness of DLT support on Cloud, developers have many ledger alternatives with different characteristics. They are free to choose the one satisfying their applications’ requirements while only providing the necessary level of security and trust and using the necessary amount of resources. From a single developer’s point of view, this is natural to keep the application scalable. Unfortunately, from the beginning, a DLT is designed and proposed to work alone. It solves a unique, single problem (as establishing a cryptocurrency). Hence, it is hard for a ledger-based application to connect to the outside world and other applications running on different ledgers while keeping the same security guarantees its own ledger provides. Unfortunately, this restricts potential use-cases and exploitation of the full potential of DLTs.
Conclusion 3: Several platforms providing Blockchain have recently been developed. Thus, interoperability among these platforms put forward another challenge. In addition, with the increase of participants and ledgers, scalability becomes another issue to be considered when applying DLT.
DLT and Interoperability
Today, there are thousands of blockchain platforms. Each serves its own use-case – from digital currencies to provenance tracking in supply chains. Each of these solutions operates in its siloed ecosystem. Different platforms cannot communicate.
Conclusion 4: Without interoperability, a robust web3.0 is impossible to achieve as value and information cannot seamlessly federate on-chain. Off-chain conversion re-introduces centrality, which contradicts blockchain’s central tenet – decentralization.
Today, the protocols Aion/Mavennet, Cosmos, Polkadot, ICON, and Wanchain are developing solutions at the cutting edge of blockchain interoperability. Interoperability is the catalyst that will enable broad commercial adoption via increased scalability and transaction throughput. The following are some notable benefits to interoperability:
● Enable ecosystem applications such as identity, payment, and storage to interact across multiple blockchain platforms
● Enable enterprises to link public and private networks to optimize their cost, privacy. and security
● High-performance computing by spanning out workflows to fit-for-purpose blockchains
● Decentralized exchange of native coins and tokens across multiple blockchain platforms
● Assets/coins that outlive the network in which they were created
However, the following challenges complicate seamless communication via bridges and channels among heterogeneous networks:
● Bridges introduce longer finality time
● Different blockchains have different architectural designs (Bitcoin - 6 blocks, approx. 1-hour confirmation time. Aion - 90 blocks, approx. 15-minute confirmation time)
● Transaction signing is complex (Different networks use different cryptographic curves)
● Bridges need to be more secure but allow for more transaction throughput than the networks which they connect
● Pricing disparity between tokens trading on their native network and the same token on an external network
Conclusion 5: As of today, the problem of building a universal bridge remains unsolved.