China Europe Business Review: The Triumph of Availability: From Bitcoin to Blockchain

In 2008, the mysterious hacker Satoshi Nakamoto proposed two great inventions in a paper published on the MIT Cryptography Technology Mailing Group: Bitcoin and Blockchain. The latter, as the underlying technology of the former, was coded and realized one year after the concept was proposed. Seven years later, Bitcoin has become the world's largest encrypted digital currency by market value and a digital asset recognized by all countries as valuable, with a total market value of nearly 12 billion US dollars, but it has also been controversial. It was even once considered a hotbed of anonymous transactions and crimes, attracting a lot of attention.

Another more eye-catching idea is blockchain. In the second quarter of 2016 alone, blockchain start-ups in the United States received $308 million in investment. Blockchain is recognized as the most revolutionary innovation in the field of financial technology in the past decade. In addition, it has caused a sensation in many social fields such as digital copyright, real estate, art, identity authentication, health, and elections. We once expected Bitcoin to subvert the world, but it did not do so. Blockchain gives us hope again.

Once upon a time, 10,000 Bitcoins were exchanged for two pizzas

Let's understand it from the perspective of "usability" and "availability". Usability is to look at what a thing is designed for, what its definition is, and what its functions and uses are from the perspective of an objective entity: for example, water, a compound of two hydrogen atoms and one oxygen atom, can be used to rinse clothes and clean floors. In this way, we look at Satoshi Nakamoto's invention - Bitcoin. Its most basic use is a currency that can serve as a general equivalent to purchase currency or goods. For example, on May 22, 2010, Laszlo Hanyecz wrote on BitcoinTalk: "I will pay 10,000 bitcoins in exchange for two pizzas, I want a bigger one, I will keep some for the next day. I like to eat leftover pizza. You can make a pizza and send it to my house, or order one for me. My purpose is to use Bitcoin to exchange for food, without having to prepare or order it myself." On May 22, 2010, the transaction was completed in the UK. Laszlo spent 10,000 bitcoins (currently worth $6 million) on BitcoinTalk to exchange for two pizzas worth $25. This was the first transaction in the history of Bitcoin, and of course the stupidest one.

If we look at Bitcoin from the perspective of affordance, it is undoubtedly "after many twists and turns, you may think there is no way out, but when you turn around, you will find another village." Affordance is a concept proposed by James J. Gibson, the most important cognitive psychologist in the 20th century. What is important about an invention is not only its objective existence, but also its own properties, what kind of environment it creates, people's perception of this environment, and what kind of interaction it can have with the environment. If we look at water from the perspective of affordance, water can be used as a mirror, a swimming pool, can lower the temperature of the motor, can irrigate the fields, and can be frozen into ice. We can create different environments and have various interactions with the environment formed by water, without falling into the single idea of ​​"water is a cleaning detergent." From this perspective, it is natural for blockchain to separate from Bitcoin and continue to derive new things. This is also the original intention of Satoshi Nakamoto, the father of blockchain.

Beyond a narrow monetary perspective

Can Bitcoin only exist as a currency? Obviously not, it is a digital asset. Because the total amount is limited and more and more people are constantly knowing about it, it is generally appreciating and is universally used, so it can be invested in the long term or speculated in the short term. This gave rise to digital asset exchanges based on Bitcoin, such as OKCoin. Because it is digital, has strong liquidity and divisibility, you can not only buy a large amount for long-term holding, but also buy only a very small amount, such as one hundred millionth of a Bitcoin (the smallest unit of Bitcoin, 1 satoshi), operate it 24 hours a day, 7 days a week, and use it as an intermediary for the conversion of US dollars, Japanese yen, and RMB, making personal assets more global.

Blockchain, as the underlying technology of Bitcoin and a distributed ledger recording technology, will have more incredible scalability.

Security of blockchain

The security of Bitcoin is due to the security of blockchain: all transactions on the chain are distributed and stored on nodes around the world, and it is difficult to attack all nodes to stop the service. The records on the blockchain cannot be tampered with and can be traced back in time. Therefore, this data recording technology is used for real estate title confirmation, asset title confirmation, and identification of luxury goods and artworks, and can even be used for anti-money laundering and anti-terrorist financing.

The Economist recorded such a case: "When the Honduran police rushed into Ms. Mariana's home one day in 2009 and wanted to evict her, she had lived in this dilapidated house for more than 30 years. Unlike her neighbors, Mariana even had a government housing certificate, but unfortunately, the information from the local government housing committee showed that the house belonged to another person, and this 'homeowner' applied to the court for an eviction order, and Ms. Mariana was eventually forced to leave. Due to unclear registration or lost records, this kind of wrangling is common around the world. The lack of security of housing ownership is also a source of injustice. This also makes it difficult to use houses or land as collateral for financing, etc." Blockchain can solve these problems. It allows landowners to verify using public keys: by using encryption protocols, the relevant information of landowners is recorded on the blockchain. This blockchain-centric system can reduce potential dangers, including fraud, errors and attacks. In the end, the Honduran government and blockchain company Factom proposed to establish a partnership to try to jointly solve such problems. Blockchain solutions are suitable for land registration, which corresponds to its four characteristics:

1. Record immutability: This helps prevent land registry scams that are all too common in developing countries.

2. No central point of failure: Shutting down a service is simply impossible. Since the service is running everywhere at once, hackers have no single target to attack.

3. Security: If anyone can find a security hole in the Bitcoin blockchain, he will receive a $12 billion "bounty". Thousands of hackers are trying now, just as they have before.

4. Traceability: It has the ability to track what changes occurred, when and where, and an immutable registration information is generated on the blockchain whenever new data is added or ownership is transferred.
   

What kind of ecosystem will be derived from automatic operation?

A software protocol can be embedded in the blockchain and automatically executed according to the rules in the protocol. By combining programmable smart contracts with the Internet of Things (IoT), smart devices connected to the Internet, blockchain technology can be used far beyond the financial field. For example, the startup Hellosent believes that smart contracts and IoT devices can be used to monitor the delivery of red wine. Sensors will continuously measure the temperature and humidity of the red wine during transportation. If either item is lower than the agreed level recorded in the smart contract, the purchase order will be automatically canceled.

In fact, this technology can be applied in a wider range, such as buying and selling assets in the financial field, and the work of traders will be replaced. Based on smart contracts, it is determined that the price of a certain asset is bought at the best time and sold when a certain condition is met. It is based on the idea of Code is Law , and it is compiled into a contract with code. On the basis of blockchain, the triggering conditions are automatically implemented and realized. This is also a very great potential of blockchain in the future.

In his speech in March this year, Zhou Xiaochuan, the governor of the People's Bank of China, mentioned that "the central bank is making its own digital currency, and blockchain has deployed important forces. Blockchain is one of the optional technologies... It should be noted that when we make the central bank's digital currency, it must be conducive to the effective operation and transmission of monetary policy." This is the programmable attribute of blockchain technology: the central bank has no way to ensure that the funds invested each year will flow to a certain field. Once there is a programmable digital currency, it can easily and accurately monitor the field where the funds flow: once the flow to a certain field triggers the conditions of the smart contract, it will automatically alarm, withdraw and withdraw the money, and ensure that the funds can only flow into the industry field set by the program.

What does it mean to be able to transfer directly without a third-party intermediary?

The blockchain establishes trust and consensus attributes at the bottom layer, turning three-party interactions into point-to-point two-party interactions. This attribute also allows point-to-point power supply and energy systems to be built on the blockchain.

On March 3, 2016, in Brooklyn, New York, a small company called LO3 and blockchain technology developer ConsenSys jointly established a new company called TransActive Grid. The new company runs a microgrid project in Brooklyn, and in their view, this small project is likely to rewrite the way energy is traded.
"On one side of Presidential Avenue, five households generate electricity through solar panels; on the other side of the street, five households can buy the electricity that the households on the other side do not need. The blockchain network connects this transaction, and almost no human involvement is required to manage and record transactions." If the energy industry has long realized that distributed generation is the trend of the future, before distributed generation has been rolled out on a large scale, people rarely think about what the operating mechanism supporting this change will be like. "This technology removes any intermediaries that may interfere with buying and selling." said Lawrence Orsini, founder of LO3. TransactiveGrid is a pilot project. If successful, it can be applied to the entire Brooklyn microgrid. Orsini said that 130 households are currently interested in this project.

From the perspective of availability and possible interactions, the narrow monetary perspective is opened up, and the blockchain's attribute of connecting all things shines.

The evolutionary sequence of blockchain

The first stage was from 2009 to 2015, which was the digital currency (Bitcoin) stage. During this stage, the entire blockchain industry formed a complete industrial structure around Bitcoin. OKCoin also became the world's largest Bitcoin exchange and China's largest digital asset exchange during this stage.

The second stage is from 2016 to 2019. This is the stage of blockchain to B, that is, the stage of Business Blockchain. Blockchain will be adopted and accepted by enterprises, banks, financial institutions, etc., and widely used in the business field: clearing, settlement, payment, such as Nasdaq's LINQ, etc. At this stage, the echelons of various blockchain companies will be initially formed within 3 years. OKCoin has also launched the global financial link network OKLink to meet the challenges of this stage. It is like a global Alipay system that can easily and securely link small and medium-sized financial institutions and enterprises in various countries around the world, allowing them to conduct value transfer and cross-border payment transnational financial business as easily as banking giants.

The third stage is expected to enter the third stage after 2020, which is the "civilian blockchain" stage for consumers. Personal asset mapping, notarization, information recording, and personal health data can all be better controlled by blockchain, so that the initiative of "big data" will be truly in the hands of individuals for the first time, rather than the current oligarchs.

Precisely because blockchain provides more and broader possibilities, its power is not limited to currency, but multiplies exponentially, penetrates into various fields, and reshapes the entire economy step by step.

When faced with a new technology, think beyond “what functions are available” and imagine what it is, why, and what kind of interaction is possible. Perhaps what unfolds before your eyes is another world.

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This article was written in July and published in the September issue of China Europe Business Review (No. 101). When it was published, the title was changed by the editor to: "Why blockchain reshapes the world"