piRNA pathway protects the genome from transposons. Many piRNA pathway genes are rapidly evolving, consistent with a host-pathogen arms race between the pathway and transposons. To directly assay for the functional consequences of piRNA pathway protein evolution, we rescued null mutation in D. melanogaster rhino (rhi) gene with rhi from the sibling species D. simulans. The rhino gene encodes a rapidly evolving HP1 homolog that associates with piRNA producing loci termed clusters, and has an essential function in piRNA biogenesis and transposon silencing. Expression of sim-rhino fails to complement null D. melanogaster rhi mutants, while expression of mel-rhino completely restores fertility. Small RNA sequencing and RNA-seq analyses show that sim-rhi is equivalent to a null allele. Rhino is composed of chromo, hinge and shadow domains. We therefore swapped individual D. simulans domains into a D. melanogaster-Rhino backbone and assayed for transgenic rescue of fertility, transposon silencing, and piRNA production. Hybrid proteins carrying the D. sim shadow domain are equivalent to a null allele, and mass spec analysis of proteins associated with full length and domain substitution hybrids indicate that the D. sim shadow domain fails to interact with Deadlock, which form a complex with Rhino and recruits additional components of the nuclear piRNA precursor processing machinery. These observations indicate that Rhino and Deadlock are co-evolving, which has generated a species-specific interface, which may be the target for transposon encoded inhibitor that drives an arms race between the piRNA pathway and mobile elements.