The Oncoming Interoperability Coin Dominance
In the midst of chaos I always find it very motivating to reassess fundamentals & develop my investment strategy for the next cycle.
The current climate provides a big opportunity to invest in some discounted alts for those with the risk appetite. I’ve personally made my bed with interoperability coins, the below is a rationale as to why I think they represent the most obvious risk/reward slam dunk in the space for a long long time. Contrarian opinions and theoretical critique very welcome.
I’ll caveat that when the next bull comes along I believe we’ll follow historic patterns with capital initially flowing into the largest cap coins (ETH/BTC) before alts. Even with that front of mind I’m comfortable leaving the majority of my holdings in interchain projects…. as once the penny drops I have zero doubt we'll see market parabola at it’s most intense to date.
I’ll also be unapologetically shilling ICON (ICX) throughout. Quite frankly I’m doing you a favor! If you haven’t read the whitepaper, you should.
Lastly, I’ll mention that Eth has the potential to become an interoperability coin through the implementation of plasma. However, the lack of bespoke interoperability sophistication makes the task a lot more difficult compared to others in market.
Interoperability Conceptual Intro
Multi-chain networks are the 3rd major evolution of blockchain technology. The first being cryptocurrencies, the second smart contracts. Each of these technological advancements are revolutionary because they’re able to fundamentally change an organizational structure over a relatively short period of time.
I’ll split these interchain pieces into 3 parts for ease of digestion:
Part 1 (this piece) will be a conceptual view of crypto from a holistic level, I’ll be relating this back to the internet boom for analogous reasons. This emphasises in laymans terms the role of interchains from an infrastructural perspective and the dominant value they can generate relative to other coins.
Part 2 – will go a little deeper with a ‘fundamentals’ evaluation of the market. I’ll draw distinctions between chains I believe will do very well (those that evolve & adapt smart contract functionality to industry) vs interchains I believe will struggle (those that are too generalised).
Part 3 – Strengths, weaknesses and tradeoffs of the coins from a purely technical standpoint.
Distributed Ledger Technology 101
Before I even touch on interchains it’s important to understand the underlying technology we all buy into is and it’s NOT blockchain.
Contrary to mass opinion, DLT (distributed ledger technology) is the underlying tech behind crypto. Blockchain is quite simply a structural form of DLT – a sequential block form. DAG’s like IOTA are another form of DLT in non-sequential form although I won’t focus on them for now.
Back to blockchains: they can come in nuanced forms (permissioned, permissionless, federate, private, public). Each form allows for a threshold of technical specification, these specs are primarily concerned with 1. transaction types (basic or sophisticated) and 2. throughput (scale & speed of tx’s).
We can currently define the blockchain space into 3 different competitive spaces that generate different sources of value:
· Currency based protocols/applications – transactional value
· Smart contract protocols – network value
· Interchain (or multichain) protocols – interoperability value
Comparing these 3 value sources to the internet era….
These make up 90% of the coins on the market & facilitate more basic mediums of exchange. These include secondary layer applications such as ERC20 tokens but also standalone protocols like BTC (or DAG’s like IOTA).
Analogy: Apps (ERC20's) built on the ETH network can be viewed as websites being built on top of the internet’s most popular code (HTML). Standalone protocols like BTC or IOTA can be viewed as webpages built in alternate programming languages (e.g. JAVA) that are used for nuanced functions.
Currency protocols generally serve highly specified use cases/markets, just as websites are highly specific to certain industries or interests.
Smart contract protocols
This is the internet itself. By definition smart contract protocols and the internet are both operating platforms that enables further tech to build & innovate upon. Both provide networks for applications to leverage. Both capture value from a very broad perspective.
The connective tissue of entire system; the search engines. What Google & Yahoo have done for information aggregation & accessibility, interchains will do for blockchain automation and connection.
Impact of Interchains from a value perspective
We’ve seen major hype & gains when shiny new tech starts to become conceptualized en masse. See DAG’s like IOTA or 2nd gen smart contract protocols like EOS, Cardano or NEO. Pay close attention to the word conceptualized as the market really doesn’t care if there is a working product with viable timelines…. they just need to understand the concept and think it’s clever.
Some of the aforementioned coins are very interesting, I personally love EOS as a hedge against Ethereum but it’s important to distinguish that EOS, NEO, IOTA etc. are efficiency drivers that generate and steal value from within the current market dynamic.
Their focus is on improving the status quo (in most cases scaling) & they do not drastically alter the market from a structural standpoint. In essence their value is limited to the structural boundaries in which they exist (remember those sources of value I mentioned earlier?).
In comparison interchains fundamentally disrupt the organizational structure by overlaying a connective system on current blockchain silos.
Connecting independent cogs within a broader mechanism is a paradigm shift because it allows for a whole other realm of innovation that didn’t yet exist. It extends the structural & creative boundaries, in turn generating much larger amounts of ‘innovation value’.
Example of interoperability efficiencies
This part is a tad subjective, but the future landscape as I see it will be made up of myriad private and public blockchains, each chain designed for differing functions.
Corporates will build private chains to safeguard confidential/proprietary information, but they'll also use public chains to leverage ‘big data’ & realise broader economic efficiencies.
Just like extranets, private chains will be small and focus on internal, proprietary use cases e.g. accounting, supply chain, human resource etc.
Just like the internet, public chains will act as data warehouses where efficiencies can be realised by leveraging a socially coordinated network of users.
For longer form tasks to be processed from start to finish a connective thread needs to exist between the numerous private & public chains.
Using ICON as an example:
Context: A hospital procedure has taken place and a patient has claimed the hospital fee against their medical insurance. For the case to be settled information needs to flow between an insurance company, the hospital and the insurers bank who hold the insurers money. This all has to be done in line with US regulations where the procedure took place.
Requirements: The insurance company have their public records on the ETH network but they also have their own private chain to house confidential records, as do the hospital, as do the bank. Part of this data transfer can be done purely on the ETH network as all 3 parties have public records there. However, much of the data that needs to be connected is confidential and lies on private chains outside of the eth network.
To make things more complicated the bank need to manage their cash flows and requests money from other banks using Ripple. The insurer also uses OMG as a settlement system and would like to be paid by the bank in OMG tokens.
The solution: ICON’s able to connect all blockchain forms – private, public & networks in order for all of the information to autonomously flow in a correct, suitably confidential manner.
In this case hospital records from the hospitals private chain, insurance contracts from the insurers public/private chain & payment terms from the banks public/private chain’s.
ICON’s smart contract functionality can also be localised by region which allows for regulatory flexibility. This means that an insurance claim in the US vs an insurance claim in Denmark can be handled differently on the ICON network as per the legalities of each jurisdictions insurance laws.
From a value perspective ICON has facilitated and automated more processes from start to finish than any other chain. ICON in this respect IS the data sharing economy
A look at technological history and you’ll see that the major value is always captured by disrupters. I view the interoperability territory as a place where only a very select few niches can be found & interchain dominance will be in the hands of the few.
Just like search engines, interchains are sandwiched between protocol and application – connecting, capturing and leveraging value that’s been created on both sides. Just like search engines they create value through accessibility & connectivity.
With conviction, I’ll end this and say the interoperability space will deliver the Google of blockchain.
Did I mention you should read the ICON whitepaper?