In this post I want to explain why the most important application that must be developed for blockchains is a mechanism for allowing exchange of information between blockchains. This is what Polkadot is trying to do.

Before going more in-depth I need to take a step back to explain the reasoning.

TCP/IP is the well-known protocol that runs the Internet. TCP/IP is a routing protocol, that is its job is to route information across a network from one point to the other. That’s it. It doesn’t care about the validity of the information transmitted.

SSL/RSA is able to some extent to guarantee the origin/integrity of the information by taking advantage of the private/public key encryption mechanism and to confirm the origin of the sender thanks to the authority certificates.

Blockchain is a protocol designed to guarantee order and validity. This is very important and not clear to everyone. The only difference between blockchain as a protocol and your local file storage is that in the blockchain protocol you have a “chain” of blocks and a forced structure of data that is determined by the rules of that blockchain. What blocks actually are is not so important but the principle of the chain is. Because of some cryptographic mechanism you can build a block on top of another and you cannot remove a lower block without removing all the blocks on top of it.

Just like if you’re building a skyscraper you cannot remove one of the bricks at the bottom without making all the ones on top collapsing. So when you look at the building it’s pretty obvious which bricks were put 1st and which ones were put last. Everyone can also look at the bricks and determine if they follow the rules that the architect has defined.

The creation of blocks in a chain (and so the value of miners) is only designed to prevent what is called a “double spend” which is nothing more but an agreement on which message (transaction) comes 1st and to prevent invalid messages from being sent (Unlike TCP/IP or a database which don’t really care about the content of the packet or the data)

Now that we have analyzed those 3 protocols let’s look at the specific needs of enterprises to see what exactly they will really need regarding blockchain and what applications should be developed to serve them:

First of all we must make a distinction between private and public blockchain:

Public blockchain has value because it is decentralized meaning that the token transfers and the token balances are always certain and cannot be manipulated. A lot has been said regarding the need of banks and financial institutions to use blockchain as a mechanism for settlement. I think however that this is far in the future as if you want to use blockchain as a sort of permanent settlement layer you must first tokenize the assets.

This is an important distinction, you first have to understand if what you are keeping on your blockchain is information or is an actual asset. If it’s just information we cannot properly talk about settlement but maybe about reconciliation.

If however all the assets have been transformed into tokens then the blockchain storing those tokens (which most likely should be public and decentralized) would be a settlement layer.

The settlement layer of a public blockchain that will allow the transfer of tokenized assets is probably not going to be a tool for enterprises, especially financial ones, but rather something that would make them irrelevant as it basically “remove the middleman”. If we are looking for a product to serve enterprises we should be looking elsewhere.

What they will NOT do is use a public blockchain unless they decide to tokenize all the assets, use that public blockchain as a real settlement layer and make themselves irrelevant in the process.

What they will do on the other hand is creating their own private blockchains for internal purposes. Those blockchains will then have to communicate with each other.

The communication between blockchains is not something trivial, because every blockchain has their own rules according to the way it was designed. Enabling this communication requires a trust less and decentralized system that will guarantee that the rules of both blockchains will be respected during the exchange of information.

What is going to be needed for reconciliation across companies is going to be a protocol which unlike the standard messaging protocols can enforce the order and the validity of the messages between the chains.

This is exactly what the enterprise world needs when it comes to blockchain. They don’t really need public blockchains (as assets have not been tokenized yet) they simply need a way to allow their blockchains to communicate.

From another point of view Polka also has a very interesting edge: it will reflect enterprise adoption of blockchain. One certainly cannot have a direct stake in the private blockchains themselves but can now participate in the framework that will allow those blockchains to exchange information.