Blockchain, is Jack Ma’s enemy coming?

In 2015, blockchain became the sector with the highest financing in US venture capital, exceeding $1 billion. A "2014-2016 Global Bitcoin Development Research Report" jointly released by Huobi.com, Tsinghua University PBC School of Finance Internet Finance Laboratory and Sina Technology in early July revealed that if we look at the current financing share of Bitcoin sub-industries, blockchain-related financing accounts for 17%. This innovative technology, born from Bitcoin, may be changing the financial industry and our lives. When questioning Ant Financial, which is valued at $60 billion and is about to be listed on the A+H shares, you may hear this answer: "Blockchain, Jack Ma's enemy is coming?"

A few weeks ago, Tang Ning, founder and CEO of CreditEase, discovered a very strange phenomenon at the Davos Forum. “Originally, it was a fintech forum that covered all aspects of the fintech field, but in the second half it became a special session on blockchain.”

Everyone loves Raymond and everyone talks about blockchain. Similar to Tang Ning, if a financial media cannot tell some "stories" about blockchain, it seems that its "status" will be lost in an instant. However, to some extent, there seems to be confusion about the concept.

What the hell is blockchain?

In short, blockchain can be defined as a technical solution and underlying infrastructure that collectively maintains a reliable database in a decentralized and trustless manner. Zhang Jian, the author of "Blockchain: Defining the New Landscape of Future Finance and Economy" published by Huobi.com, introduced that blockchain can not only carry transactions, but also any value-related information.

From the earliest pottery and clay tablets to today's electronic documents, the basic role of financial technology is to record relevant contracts or rights and interests for trading and circulation. Anti-counterfeiting, that is, how to prove the authenticity of rights, is the core of technological evolution. Since humans entered the private ownership, they have been facing the problem of property rights confirmation. Blockchain is a new means in the virtual space of the Internet and makes up for some of the shortcomings of the Internet. This is why Tang Ning not only discussed blockchain as a speaker, but also joined hands with IDG Capital to become the world's first $60 million investor in the D round of Circle, which was issued a digital currency license by the New York State Department of Financial Services (NYDFS) in June this year. The change of the financial industry has also evolved from "information asymmetry and bank-centered" to "information symmetry and decentralization" (as shown in Figure 2).

(Source: "2014-2016 Bitcoin Global Development Report" produced by Huobi.com)

(Source: China Blockchain Research Alliance)

A play on " decentralization "

When talking about blockchain, we cannot ignore digital currency, especially Bitcoin. After all, blockchain was created to meet the unique needs of Bitcoin.

Why do regulators pay attention to blockchain technology? What is its appeal? In a very down-to-earth document provided by the third-party Yingcan Consulting, we saw the most straightforward description of blockchain technology.

A long time ago, there was an isolated village on Earth called Bit Village, which had always lived a primitive barter life. Later, the village went through the physical currency era (gold), and then evolved to the paper currency era and the central system virtual currency era (i.e. the digitalization of currency), and the village chief played the role of a virtual bank.

For example, if Mr. Zhang wants to exchange one gram of gold for a sheep from Mr. Li, Mr. Zhang first calls the village chief and says, "Village chief, I want to spend one gram of gold to buy a sheep from Mr. Li." The village chief takes out the account book to see if there is gold in Mr. Zhang's account. If he confirms that there is gold, he will record a transaction in the account.

However, the village chief of Bit Village, Mr. "No Zuo No Die", was relaxed in his thinking, greedy, and embarked on a path that was contrary to the people. One day, he thought, "I know how much money each household in the village has, and I don't have the final say on how much is in the account book, so I am..." So he secretly transferred ten grams of gold from Lao Zhang's account to his own name. After the report of the "chaoyanger District people" in Bit Village, the village chief's affairs were exposed. The impeachment of the village chief was inevitable. However, through this incident, the villagers discovered the disadvantages of the account book being concentrated in one person's hands - if this person has a bad credit and tampered with the account book at will, the whole system will collapse; if this person's house caught fire, it would also bring a devastating blow to the entire system.

At this point, the biggest technical advantage of blockchain - decentralization, data storage, non-forgeability, and irrevocability, which can minimize credit costs - is reflected. The decentralized "collective maintenance" method (i.e. impeachment of the village chief) is used to manage the ledger. Because of anonymity, no one knows which villager the money in a certain account belongs to. For example, if Mr. Zhang still wants to exchange a sheep for a gram of gold from Mr. Li, in the case of collective maintenance of the currency system, Mr. Zhang does not need to call the village chief, but only needs to let everyone in the village know about it, and blockchain technology allows everyone in the village to see this event.

Wu Wenxiong, co-founder of 91 Finance, forwarded a news article titled "Central Bank states that digital currency may be based on blockchain" in his WeChat Moments, and commented that "it is the decentralized nature of blockchain technology that makes the transaction and use of Bitcoin particularly safe, so it is possible for it to become a true digital currency."

Back to BitVillage, if we imagine the village as the entire Bitcoin Internet system, then the Bitcoin credit system becomes a public ledger of Bitcoin. In this way, the decentralized operation of the blockchain becomes easy to understand.

First, the ledger exists in every household in Bit Village, and every household (node) has a complete backup. Second, the records in each ledger are the same, and each ledger records all transactions since the birth of Bitcoin. Third, the ledger is stored in blocks, and each block contains a part of the transaction record. Each block records the ID of the previous block, forming a chain structure (hence the name of blockchain). Finally, when a resident wants to initiate a Bitcoin transaction, he only needs to broadcast the transaction information to the Bitcoin-specific network and form a new block to be stored in the public ledger, and the transaction is completed.

Huo Xuewen, Party Secretary of Beijing Financial Work Bureau, introduced that the essence of blockchain technology is that in the case of information asymmetry, there is no need for mutual guarantee trust or third party (the so-called "center") to issue credit certificates. The nodes created by the encryption algorithm based on Internet big data are generally passed to establish a node trust mechanism. Any institution or individual can act as a node and participate in the creation of the trust mechanism, and the created blocks must be publicized on the entire network and visible to any node participant.

In this way, any capital flow becomes extremely transparent. The so-called capital pool and illegal fundraising can be solved - because you know clearly who your money is given to and where it flows. For China, where the credit reporting system is still imperfect, blockchain has too much significance. This is also an important reason why regulators and the capital market are optimistic about blockchain.

In addition, in life, we always encounter situations where we are required to prove that "my mother is my mother". Under blockchain technology, the above embarrassment is expected to be solved one by one. By then, all the information proofs belonging to us will be accurately and tamper-proof recorded in the block, and no one has the right to change it.

Not just Bitcoin

As mentioned earlier, when talking about blockchain, we can’t avoid the crazy Bitcoin back then.

After the Ya'an earthquake in Sichuan in April 2013, One Foundation announced that it would accept Bitcoin donations. Subsequently, One Foundation received 233 Bitcoins in just a few days, equivalent to about 220,000 yuan. Bitcoin became a donation in China for the first time. In May 2013, CCTV-2's "Economic Half Hour" program broadcast "Unveiling the Secrets of Bitcoin", and the word Bitcoin began to appear in the public eye. "At that time, many people were talking about Bitcoin, but few people knew what it was, let alone how to obtain it and how to circulate it." Li Lin, the founder of Huobi.com, recalled.

Huobi COO Zhu Jiawei introduced that in 2015, the proportion of women among Huobi’s VIP users was 10%, and this proportion rose to 15.63% in 2016.

Since Bitcoin is in its early stages, its price fluctuations and security issues have become a must-talk topic in industry discussions. Some people even say "Bitcoin is the reason for success and failure" when discussing blockchain and Bitcoin. After all, when it comes to the digitization of currency, Bitcoin is currently the most successful application of blockchain. Many Bitcoin companies are also authoritative speakers on blockchain technology.

"Last year and the year before last, there were some debates about whether we can talk about blockchain alone." In addition to being the author of a monograph on blockchain, Zhang Jian also serves as the vice president of Huobi Technology and the head of Huobi Digital Currency and Blockchain Research Center. "No matter how many industries and changes we talk about blockchain will bring to various industries in the future, the core is the transformation from information Internet to value Internet. This is why many people say that blockchain itself is not particularly complicated, but everyone has given it such great attention. In fact, the Internet is the same, but the Internet only cares about the transmission and dissemination of information, and does not care about the ownership of information. It is difficult for it to transmit valuable information. The transmission of value, whether it is the same value or the conversion between different values, is actually very costly at present, because there are a large number of intermediaries, and there is no infrastructure that can complete the point-to-point value transmission. This is why I firmly believe that blockchain can bring a very grand future."

The future is here, it’s just not popular yet

In May this year, Ping An Group announced a partnership with R3 CEV, a blockchain startup headquartered in New York, and officially joined its R3 blockchain alliance. Abroad, R3 is the two most well-known financial application scenarios of blockchain. Before R3, the international interbank SWIFT system and VISA and Master settlement channels interacted between various banks and correspondent banks, with many nodes, long processes, low efficiency, high costs, and easy errors. The introduction of blockchain technology solves cross-border bank payments, transactions and settlements. R3 CEV has attracted the participation of 42 giant banks, including Wells Fargo, Bank of America, Bank of New York Mellon, and Citibank.

"Blockchain technology is highly anticipated by traditional financial practitioners, Internet finance, financial technology companies, and regulators in various countries, who believe it has great prospects. But on the other hand, it is still in its very early stages, and such commercial application practices have just begun internationally," said Tang Ning in an interview.

Like Tang Ning, many practitioners are willing to use "a long way to go" to describe the blockchain in its infancy. But whether it is R3 CEV or domestic startups that have transformed from Bitcoin trading to technology service providers, blockchain is trying to break free from the theoretical matrix and be born in the real world around you and me.

Transformation Driving Force

Cai Kailong, co-founder of the Internet Finance Thousand People Club, will visit Silicon Valley next week to inspect projects. "Smart financial management" and "blockchain" will be the only topics on his trip.

The turning point came in March 2015 when global exchanges represented by Nasdaq and NYSE reached investment cooperation agreements with Bitcoin trading platforms Noble Markets and Coinbase respectively; in the following months of that year, Goldman Sachs proposed five major real-world application areas of blockchain in its latest report.

It is worth mentioning that the uncertain domestic policy environment towards virtual currency is also an internal factor for the transformation of Bitcoin companies.

In 2009, the Ministry of Culture and the Ministry of Commerce jointly issued the "Notice on Strengthening the Management of Virtual Currency in Online Games", stipulating that virtual currency can only be used in the community and cannot be used for physical payment; in 2013, the central bank and five ministries and commissions jointly issued the "Notice on Preventing Bitcoin Risks", defining Bitcoin as a virtual commodity that can only be bought and sold, and cannot be used for payment. The situation turned around at the 21st meeting of the Standing Committee of the 12th National People's Congress on June 27, 2016. The "General Principles of the Civil Law of the People's Republic of China (Draft)" proposed by the chairman of the committee included new regulations on new civil rights objects such as online virtual property and data information, which means that online virtual property and data information will officially become rights, and citizens' Bitcoin will be protected as an asset.

——"In fact, whether it is the virtual currency management measures issued by the Ministry of Culture or the notice on Bitcoin issued by the central bank, they are all administrative notices, not laws, nor judicial documents. They are all administrative documents issued by the government. The proposal of the General Principles of Civil Law regards virtual property on the Internet as legal property on the Internet in the form of law."

——Does Bitcoin now have its own legal status and characterization?

--"right."

This is a kind of positive for Bitcoin, but "how can the country's weapon be handed over to others?" Bitcoin, which challenges the issuance of governments and corporate centers, has been surrounded by many controversies since its birth, while the underlying blockchain technology is not the same.

"Blockchain technology itself is very mature, but if a technology is to be applied to real-world scenarios on a large scale, it must be proven to be problem-free through long-term practice before it can be promoted on a large scale." Examples of the Internet's gradual penetration and impact on our financial lives support the experts' judgment. When the Internet first appeared, we could only read the news. Later, online banking began to rise, and everyone was worried about what to do if money was lost in online banking? Slowly, online banking was tested on a small scale, and then it was expanded to a larger scale after it was found to be ok. Now that online banking has become popular, mobile banking has begun. Many people may be crazy again, what should I do if I lose money in mobile banking? Therefore, it is not that the technology itself is immature, but that it can only be applied on a large scale if there is no problem in practice, otherwise it may bring disastrous consequences. Blockchain actually has such a stage. "Now some peripheral areas of traditional finance, such as some bill transactions, are using blockchain, including many entrepreneurial fields.

Four futures of Bitcoin

There are four views on the future of Bitcoin:

The first view is that Bitcoin is a currency for a special group of people and will become a virtual currency coexisting with RMB, US dollars, QQ coins, etc.

The second view is that Bitcoin will become a means of settlement for micropayments. This is because Bitcoin is one of the few commodities in the world that has a counter-value to the currencies of various countries. If you want to exchange RMB for Brazilian reals in the Brazil Olympics on August 6, you cannot do so directly. You must first convert it into US dollars and then into reals. There is an international payment fee of about 3% in between. With Bitcoin as an intermediary for cross-border micropayments, the situation becomes simpler. For example, if a Korean is shopping in Berlin, Germany, he needs to first use Korean won to buy Bitcoin, and this Bitcoin can be paid to a German merchant instantly. This process can be exchanged instantly with a mobile phone, there is no intermediate fee, and there is no need to exchange it for euros in Korea in advance. Bitcoin will make cross-border micropayments cheap and efficient. Goldman Sachs invested in a Bitcoin company in the United States in order to use Bitcoin for cross-border payments.

The third view is that the future of Bitcoin is related to blockchain. If blockchain technology is to be applied on a large scale, it may need a layered design in the future. The Internet we use today has a layered design in terms of technology, with seven layers: physical layer, link layer, protocol layer, and application layer. For example, when replacing optical fiber with WiFi, the upper application layer does not need to be changed, so that the computer can be plugged into the network cable and connected to WiFi. In fact, it is only the physical layer that has changed, and the application layer remains unchanged. This structure of the Internet makes the Internet very scalable. The large-scale application of blockchain technology also requires a good design. Now some organizations and experts want to design Bitcoin's blockchain into the world's top blockchain, using Bitcoin's current computing power to ensure the security of the blockchain network.

The fourth view is that Bitcoin is an investment product that can be bought when it rises or falls.

(The article is from the author Huang Xinyu's "Chief Financial Officer", the article has excerpts)