Discussing blockchain applications and misunderstandings from the perspective of distorted Bitcoin

Blockchain originated from IT technology, but is mainly used in non-IT industries such as finance. Due to the coexistence of industry professionalism and technical complexity in blockchain applications, two worlds have emerged: one is the world of programmers, where people talk a lot about decentralization, value transfer networks, and the fifth paradigm, but do not understand the characteristics and details of the industry, and it is difficult to implement specific applications; the other is the world of industry professionals, where people are familiar with compliance processing and understand industry processes, but are confused by the concept of blockchain. This article summarizes some common blockchain application problems, analyzes them, and puts forward some experiences and suggestions, hoping to inspire blockchain applications.

1. Distorted Bitcoin

Bitcoin is often referred to as currency by netizens on the Internet. Many people worship it fanatically, believing that Bitcoin's decentralization and total amount limit avoid inflation and that it is the hope for the future economy. Some even call on central banks to use Bitcoin. So is Bitcoin really as netizens say?

1. Can Bitcoin be used in the economic system?

Money is an important force driving economic development and social progress. It is the blood of the economic system. Under the credit currency system, the amount of money in circulation must match the total economic volume and circulation efficiency, otherwise it will have a counterproductive effect on economic development. Therefore, the total amount of money must be appropriately adjusted according to the current economic situation.

If the total amount of Bitcoin is unchanged and used as currency in the real economic system, inflation will certainly not occur. However, with the development of the economy, the social demand for the total amount of currency in circulation will also increase. Since the total amount of Bitcoin remains unchanged, the social demand will exceed the money supply, which is manifested in the increasing purchasing power of Bitcoin. Compared with commodities, the price will fall, causing corporate profits to decrease, resulting in a decrease in employee wages, thereby suppressing consumption. The suppression of consumption will cause commodity prices to continue to fall, corporate profits will further decrease, and then a new round of production reduction and investment will be triggered. Such a cycle is called spiral deflation in economics. The final result is: if Bitcoin is used as currency, the economy will gradually stagnate.

2. What is Bitcoin?

Since Bitcoin cannot be used as a currency, is Satoshi Nakamoto wrong? Here comes another misinterpretation: Satoshi Nakamoto never said that Bitcoin is a currency.

In economics, Currency and Cash are two completely different concepts. The base currency includes reserves, cash and other forms, and cash is only a part of the currency. First, look at the original English title of Satoshi Nakamoto's white paper: "Bitcoin: A Peer-to-Peer Electronic Cash System", and then look at the conclusion of the last chapter: "We have proposed a system for electronic transactions without relying on trust". The white paper always says that Bitcoin is an electronic cash system, and the conclusion also clearly states that it implements an electronic cash system that does not require a trusted intermediary. The word "Currency" is not used in the entire text. Electronic cash systems have appeared in the 1990s and are widely used in the banking industry, such as Mondex, Cybercash and other systems. They all have the same characteristics as Bitcoin, such as anonymity, cryptographic security, and non-repeatable spending. The difference is that Bitcoin implements peer-to-peer transactions without the need for a third-party trusted intermediary.

2. Blockchain Application Characteristics

From the example of Bitcoin, we can see that there are currently two common problems with blockchain applications. One is insufficient industry knowledge, and the other is misunderstanding and exaggeration of blockchain technology. The same problem also exists in the understanding of smart contracts.

1. What exactly is a smart contract?

Smart contracts are also called intelligent contracts. In many articles, there are descriptions of them, such as digital commitments, automated intelligence, self-finance, code is law, etc. The descriptions are rich and colorful, but the final result is that many beginners are increasingly confused about smart contracts. Peeling off the layers of packaging of smart contracts, it is essentially a program. The only difference is that this program runs on the blockchain. You can use existing programming languages ​​such as JAVA to write it. Of course, like traditional IT systems, different blockchains can also customize their own programming languages ​​and compilers. For example, Ethereum has defined Solidity as its smart contract programming language.

2. Differences between smart contracts and traditional IT programs

Why are programs running on blockchain called smart contracts? Because smart contracts inherit the characteristics of blockchain when running, so they can realize some functions that traditional IT programs cannot realize, making their characteristics similar to paper contracts. When different nodes run smart contracts, it is as if they are executing a trusted contract between them, so it is called a smart contract. Compared with traditional IT programs, smart contracts have the following four characteristics:

A. Data transparency

Because all data on the blockchain is open and transparent, the data processing of smart contracts is also open and transparent, and any party can view its code and data during operation.

B. Cannot be tampered with

Because all data on the blockchain itself cannot be tampered with, the smart contract code deployed on the blockchain and the data output generated by its operation are also not tampered with. Nodes running smart contracts do not have to worry about other nodes maliciously modifying the code and data.

C. Permanent operation

The nodes supporting the blockchain network often reach hundreds or even thousands. The failure of some nodes will not lead to the suspension of smart contracts. Its reliability is theoretically close to permanent operation, which ensures that smart contracts can be valid at all times like paper contracts.

D. Mutual verification

Inheriting the characteristic of blockchain that every transaction must be verified by all nodes in the entire network, the smart contract, as shown in Figure 1, also has all nodes running the same code at the same time and verifying the results with each other. Only when the output results of most nodes are consistent, the output is written into the blockchain as formal data. Therefore, malicious modification of the smart contract operation output of some nodes will not affect the final operation results of the entire network, effectively achieving data consistency.

Figure 1 Smart contract operation principle

(III) Notes on blockchain applications

Based on common misunderstandings about blockchain applications on the Internet, the following application considerations are summarized.

A. Blockchain does not achieve performance improvement, but changes in business models. On the contrary, performance has dropped significantly.

Blockchain currently uses existing technologies. By recombining these technologies, it realizes trusted transactions in peer-to-peer networks based on cryptography, at the cost of consuming a large amount of storage resources, CPU resources and network resources and reducing overall system performance. This removes the third party with trusted endorsement from the business model, flattens the entire application scenario, and realizes innovation in the business model.

B. The core of blockchain is not decentralization but disintermediation.

The purpose of blockchain application is to reduce costs and optimize business processes. It is only a technical tool for commercial activities. Its essence is to remove the intermediary of credit endorsement in the application scenario. Complete decentralization will not only not promote economic development, but will hinder it. Especially in the financial industry, a strong center is needed for supervision, otherwise it will lead to various illegal and irregular behaviors. The large number of fund-raising frauds in the P2P industry in the past few years are good examples. At the same time, if an existing intermediary is not removed when applying blockchain, then this application scenario is likely to be a pseudo-application.

C. Anything that can be achieved with blockchain can also be achieved with current IT systems.

Blockchain is different from other technological innovations such as artificial intelligence and nanotechnology. Its essence is the reconstruction of existing technologies. Therefore, in many application scenarios of blockchain, existing IT systems have already been or can be implemented, but the cost is higher and the efficiency is lower.

D. Trust can only be established on information generated within the blockchain itself, but not on information introduced into the blockchain from the outside.

The information input into the blockchain from the outside world is operated by humans. There is no cryptographic basis and no trust relationship can be established.

E. Blockchain applications do not necessarily require tokens.

The current consensus algorithms of public chains, such as POS and POW, are actually a kind of economic game mechanism, so tokens are needed to clarify economic rights and interests. However, in enterprise applications, by using consensus algorithms such as PBFT, mathematical algorithms are used to achieve consensus among nodes, so tokens are not needed.

3. Examples of Misunderstandings in the Application of Blockchain

Let’s look at the characteristics of blockchain applications from the perspective of several pseudo-applications and non-compliant applications.

1. Pseudo-applications of blockchain

A. Using smart contracts to realize automatic insurance claims

Some articles write about using the openness, transparency and immutability of smart contracts to automate the processing of insurance claims. In fact, smart contracts cannot automate claims. In this application scenario, decentralization has not been achieved. Smart contracts only implement the functions of ordinary programs and are pseudo-applications. The insurance industry has been committed to the development of automated insurance claims. On the one hand, it can achieve a better user experience, and on the other hand, it can greatly save operating costs. The current IT system can already meet the technical requirements. The main difficulty is the existence of claims fraud, and anti-fraud must rely on manual investigation by insurance companies.

B. Use blockchain technology to ensure the authenticity of milk powder purchased overseas

Some articles have written about the ability of blockchain to create trust, ensure the authenticity of the entire chain of overseas milk powder, and eliminate counterfeits. In fact, the only way to identify counterfeits in overseas milk powder is to verify from the only center - the milk powder manufacturer. It is impossible to achieve decentralized verification. At the same time, the circulation information of overseas milk powder in sales is also manually input into the blockchain, and the blockchain cannot guarantee its authenticity.

2. Non-compliant applications of blockchain

The application of blockchain in online mutual aid is a challenge to compliance. Online mutual aid is a new form of insurance that has emerged in recent years. By using blockchain technology, it can greatly increase the transparency, symmetry and security of information, and effectively increase mutual trust between people on the network. However, online mutual aid does not meet the regulatory requirements of the CIRC for mutual insurance, so it cannot be called insurance. The CIRC has strict regulations and supervision on insurance companies in terms of solvency, fund utilization, information disclosure, organizational form, etc., so as to fully protect the rights and interests of insured customers. Even if the insurance company goes bankrupt, the insurance policy held by the customer can still continue to be effectively fulfilled until the expiration of the contract. The lack of supervision of online mutual aid is very risky and needs to face various problems such as fund pools, insufficient solvency, and even bankruptcy.

4. Treat blockchain technology correctly

Gartner is one of the world's largest IT industry analysis and consulting service companies. The Emerging Technology Maturity Curve Report is a special annual report of Gartner, which aims to provide a cross-industry view on technology and trends for corporate strategists, chief innovation officers, and R&D team leaders. The 2016 Emerging Technology Maturity Curve shows, as shown in Figure 2, that the industry's expectations for blockchain have reached their peak, far exceeding the actual capabilities of blockchain at present, and there will be a gradual cooling process in the future.

Figure 2 Gartner 2016 Emerging Technology Maturity Curve

In general, I think the approach to blockchain can be summarized in three words: calm, professional, and persistent.

calm

Blockchain technology is currently in its early stages and is not mature. It is not as bizarre as in online novels, nor is it an omnipotent technology. It is just a tool that can transform some application scenarios, but we cannot deify it, because mythology will not have any good results except deception. Any technology has its objective and insurmountable limitations. What is important is how we make good use of it.

major

The application of blockchain technology requires not only IT knowledge, but also rich industry knowledge. Only by in-depth understanding of the specific situation in the industry can the application be implemented. Applications without a solid industry knowledge foundation will often become pseudo-applications or non-compliant applications.

persist in

Although there are still many problems with blockchain at present, risks and challenges are only stepping stones for blockchain technology to continue to mature. This is a necessary process for any new technology. As long as we proceed step by step according to scientific methods, blockchain will definitely have broad prospects and a bright future!