R3’s commitment to interoperability
Interoperability has been near the top of our clients’ agendas since the first days of R3. Users want assurance that a technology or network choice today will not restrict their freedom to reach customers in other networks or access products in new markets. At R3, we have been ramping up our investment in interoperability capabilities over the last year, as this customer need has gone from a ‘nice-to-have’ to a ‘must-have.’ This is driven by a much clearer playing field of options for DLT platforms that are fit for purpose for regulated markets, allowing for better focus on which ecosystems ‘bridges’ to invest in. It is also imperative as we have now entered the production phase for blockchain ecosystems running enterprise-grade digital asset and currency networks.
The last year has seen the go-live of foundational blockchain networks across financial markets. Just a few examples within the Corda ecosystem include Wells Fargo’s DLT-based cash token network for cross-border book transfers, the central bank of Sweden’s retail central bank digital currency (CBDC) pilot, and the SIX Digital Exchange of Switzerland’s regulated digital asset exchange listing tokenized bonds that settle against a settlement coin that is backed by Swiss francs held at the central bank. We are also heartened to see momentum on Ethereum-based projects such as Fnality’s near-CBDC settlement infrastructure, Axoni’s Veris equity swaps network, and JP Morgan’s Onyx platform gain traction across the regulated space.
As more and more of these networks of value emerge, users will want and need to discover and transact across them. They should not be restricted by the underlying blockchain these networks are based on, nor should they need to compromise on safety when they do choose to expand to other ecosystems. At R3, we support a future where users retain ‘digital sovereignty’ over their assets, giving them control and freedom of movement of the assets they own, regardless of where these assets sit. To that end, we have increased the pace of our work on interoperability solutions across the two leading DLT ecosystems: Corda and Ethereum. And we are, of course, continuing to build out capabilities that support interoperability across the networks within our Corda ecosystem.
Paths forward for interoperability
When we think about interoperability, specifically around transacting digital assets across different DLT networks, there are two distinct models we need to pursue:
- Asset bridging: Moving an asset from one DLT platform to another
- Atomic swaps: Exchanging two assets on two different DLT platforms ‘atomically,’ such that both assets are exchanged within each network simultaneously
Asset bridging occurs when a user desires to move an asset from one ledger to another; for instance, moving an ERC-20 token from Ethereum onto a Corda-based network to bring the token into a regulated digital asset lifecycle management, or even a CBDC issued on a Corda network ‘wrapped’ and minted onto a Quorum network. This is typically achieved through burn-mint or escrow-mint mechanisms, where each network would behave in tight synchronicity, coordinating between the escrowing or burning of the digital asset on one network and the minting of the same asset on the other network.
Such models of interoperability aren’t new—in fact, they were researched by the Monetary Authority of Singapore (MAS) and Bank of Canada in Project Jasper-Ubin in 2018, where a Hashed Time-lock Contract (HTLC) mechanism was utilized to transact between two permissioned CBDC networks: one on Corda and one on Quorum. This model is also extremely common on public blockchains, but is better known through the technology that enables it: bridges. Any time an asset is bridged from a ‘Layer 1’ network to a ‘Layer 2,’ the need to securely immobilize the asset on the source network in lockstep with its re-appearance on the destination network arises. And as we have seen, it is paramount that such a bridging of assets is secure.
At R3, we have recently built a working prototype which demonstrates a bridging of a digital asset from public Ethereum to Corda. In this demo, we simulate the transfer of gold and silver ERC-20 tokens from Ethereum to Corda, the transacting of said tokens on Corda, and finally the redemption of these wrapped tokens back onto Ethereum.
Figure 1: Corda-Ethereum Bridge Demo
The second model, an atomic swap, assumes a simultaneous exchange of two digital assets, each on distinct networks (and likely on different ledgers). While on the surface this may seem like an extension of the asset bridge model, the underlying mechanism is actually quite different, as an atomic swap essentially coordinates two ‘in-ledger’ transfers of two assets.
A real-world example of an atomic swap was demonstrated in Project Jura, a wholesale CBDC project conducted by the BIS, Banque de France (BdF) and the Swiss National Bank (SNB). The challenge to overcome is how to allow for a business transaction to occur cross-border while ensuring that the asset (in this case, digital currency) does not leave the respective regulatory networks. Specifically, this project demonstrated an example of cross-border payment-vs-payment (PvP): a central bank issued digital EUR was paid and settled from one bank to another within a French regulatory network while, simultaneously, a digital Swiss franc was paid and settled in the opposite direction on the Swiss regulatory network.
Given that the swap occurs simultaneously and atomically, the transaction will either successfully complete or clearly fail in its entirety. In this case, the failure can be seen as a feature and not a bug, as this eliminates the dangerous and potentially expensive outcome of only one leg of the transaction completing. An important thing to note is this model requires strong coordination and alignment across both ledgers, including the respective token definitions of both.
The above is a short summary of the work we are undertaking directly at R3. We are also excited to see the interoperability work emerging across the wider R3 ecosystem, such as the orchestration and ‘inter-tradability’ of digital assets across Corda and other ledgers offered via Ownera’s FinP2P network, and the work of Lab577 (now under the BCB group) on interoperability bridges.
As the above lays out, while there is so much promise in unlocking safe interoperability, there is also much work left to do. Today, we are working with some of our market-leading customers to validate the various models listed above and the target use cases for them. As is also clear, this is much more than just a technology challenge; successful and safe interoperability needs open and active collaboration not just within ecosystems but across them. Therefore, we will be conducting as much of our interoperability work as possible in the open, in community forums and through industry groups.
Our ultimate goal is to unlock the widest possible reach for our users’ businesses and the assets and value they control with as little friction possible and with no sacrifice for safety. Our interoperability work, and the work of the industry, is critical in realizing this. If you share this goal and want to learn more about what interoperability may mean for you and your business, please reach out.