IBM Fan Bin: How to select application scenarios for blockchain?

In the 22nd issue of Titanium Confession, we invited six Titanium experts to share their views on the "Application of Blockchain". This article is based on the sharing of Fan Bin, General Manager of Banking Industry, Greater China, IBM Global Business Consulting Services, entitled "Business Application of Enterprise-level Blockchain".

Mr. Fan Bin is the General Manager of Banking Industry in Greater China of IBM Global Business Consulting Services. He has been engaged in banking-related work for 20 years. He is familiar with traditional banking business and focuses on the changes and subversion of banking business by new technologies. He is a member of the IBM Blockchain Research Group and is responsible for the research on the application of blockchain in the banking industry in Greater China.

The following is what Fan Bin shared on Titanium Media, compiled by Titanium Media: Good evening everyone, I am Fan Bin from IBM Global Business Services, and I am currently in charge of banking business.

Market friction is the biggest obstacle to wealth creation

Recently, IBM Institute for Business Value released a report titled "Full Speed ​​Ahead - Rethinking Enterprise Ecosystems and Economic Models with Blockchain", which mentioned that the world is promoting human development based on wealth creation, but in the process of human development, market friction is the biggest obstacle to wealth creation, and the long history of human progress is a history of continuously eliminating friction.

At present, the main frictions are information friction, interaction friction and innovation friction, which pose challenges to improving business efficiency.

One of the main reasons for information friction is information asymmetry , which makes it impossible for all parties to obtain the same information. In the era of big data, such information asymmetry will put them in a more disadvantageous position. In the past, there was less information, and everyone could get relevant information in a very simple way. In the era of big data, it is very difficult to obtain information symmetry through information acquisition. Technical challenges in terms of information acquisition, storage, processing, and sharing will limit our access to rich data and its potential value, resulting in some information that cannot be collected or accessed. In terms of information friction, there is also an information risk, that is, the number of hacker attacks, cybercrime, privacy issues, and identity theft is on the rise. These costs will cause your information costs to continue to rise and will damage the reputation of your brand.

The main friction in interaction is in doing transactions. For example, the cost of transactions and the operating costs of a business are related to its complexity. Some complex businesses have a lot of back and forth in dealing with counterparties, which increases with the scale of resources to be managed. In almost all cases, complexity will erode your profits. The longer your process is, the more your profits may be eroded, resulting in higher costs for end users. Another cause of interaction friction is separation. As the world flattens, digital platforms connect completely different parties together, greatly shortening the distance. Because business processes are no longer transparent, there are delays. Some business transactions may have to wait for several days, and the management fees through intermediaries are also high, so the main target of the collapse of these flexible competitors is separation.

Interaction friction refers to the difficulty of entering the market. The main problem is that many companies cannot access the market or use their assets in an efficient way, including large companies. Many companies' assets are idle and there is no way to create new value for them.

One of the reasons for the friction of innovation is the inertia of the system. Sometimes some companies are relatively successful, and then complacency forms a rigid business model, which makes it difficult for them to adapt to innovation. This makes many companies vulnerable to the disruption of the current digital era. In addition, there are some restrictions in regulations. Due to the influence of strict supervision, companies have no way to take action.

There are also invisible threats that cause innovation friction, because new technologies bring about new competitive business models. These business models were originally unimaginable in this enterprise, and this rising uncertainty can bring many companies' original business success to an abrupt end. If there is no way to adapt to new technologies or if such business models are not thought of, it will be difficult for companies to survive under the challenge of new business models. Small businesses and professional large companies will have new methods. Although the failure rate is not low, once successful, it is possible to completely rewrite the entire industry landscape.

Blockchain can reduce market friction in five ways

Faced with the dilemma of the three frictions, IBM has conducted a global framework study on the properties of blockchain. We believe that blockchain will reduce friction in five aspects and promote the development of the entire society.

1. Distributed and sustainable. This means that the overall ledger will be continuously updated with each transaction, can be shared among all transactions, and can be selectively copied with participants in near real time, with privacy protected by encryption technology. An important feature of blockchain is that accounting is recognized by everyone. Reconciliation does not exist in the unified ledger of blockchain, which omits many related things and costs.

2. Secure and durable. Transactions can be authenticated and verified through passwords, and participants are allowed to view the relevant parts of the ledger. Once this condition is agreed, participants cannot tamper with the transaction records and can only correct the records with new transactions. This feature is for security and durability, and the frictions mentioned above are actually aimed at trust.

3. Transparent and auditable. Many banks now spend a lot of manpower, material resources and financial resources when implementing the Basel Agreement. If this transaction is done in the blockchain way, it will be transparent and auditable, which can save a lot of financial and manpower for many commercial banks, including the central bank.

4. Consensus-based and tradable. The relevant network must agree on the transaction to be valid, which is achieved through the consensus algorithm. The consensus algorithm is the most critical factor in maintaining the existence and sustainable development of the entire blockchain. The transactions or assets established by the blockchain are achieved through this consensus transaction, so you can see that there are many consensus mechanisms, POW, POS, Byzantine algorithms, and most frameworks will be made pluggable. Different consensus mechanisms are designed under different business models.

5. Coordinated and flexible. Since business rules and smart contracts based on one or more conditions can be built into the platform, the blockchain business network can continue to mature and support various end-to-end business processes and different activities.

Four characteristics of enterprise-grade blockchain

From IBM's perspective, we believe that enterprise-level blockchain has four characteristics that distinguish it from previous blockchain approaches like Bitcoin and make it more suitable for enterprises.

1. Shared ledger;

2. Smart contracts. Based on the shared ledger, smart contracts can be automatically executed in an end-to-end manner when certain conditions are met;

3. Privacy is a must for the entire enterprise blockchain. In some public blockchain applications, privacy may not be particularly important, but in enterprise blockchains, permissions should be guaranteed through cryptography of shared ledgers. Privacy is actually also achieved through cryptography, but they are achieved in different ways. In other words, what kind of user you are, what kind of permissions you have to do what, all of this needs to be definable;

4. Consensus mechanism.

In an application, if these four points are met at the same time or most of them can be met, this blockchain application will be a very good application. However, there are actually relatively few blockchain scenarios that meet all four points.

In the mortgage loan business scenario, there are lenders, the mortgage loan ecosystem, and the real estate economy. We can see that the current information asymmetry, for example, there are different difficulties such as 75% and 50%, if we use the blockchain system, how much will it be improved.

How to choose the application scenarios of blockchain?

Blockchain will change many things, including the improvement of existing business models and the innovation of some new business models in the future. However, we feel that there is no very complete application of enterprise-level blockchain applications, especially in the banking and financial industries, which is refreshing. Why is this so?

When we select a business scenario, we may first ask why we need to trust, who we need to trust, what trust we rely on, and what is the content of the trust?

Why trust? Within the same enterprise, the value community has a strong driving force. Long-term stable partners are the target community. The transaction parties are mutually beneficial. The two parties in the game exchange interests. Another is that there is no interest relationship. The stronger the driving force, the more suitable it is for traditional scenarios. The weak trust driving force, that is, when there is no interest relationship, is suitable for blockchain.

The second part is who to trust? The first is completely credible. Generally, we regard national credit, such as the government, as completely credible. The second aspect is that we regard industry alliances, such as UnionPay or more professional leaders, or completely credible parties. For example, in the banking industry, for example, the national policy bank, the National Development Bank, the position of the organizer of syndicated loans cannot be shaken in the entire country. Even the four major commercial banks will cooperate with the National Development Bank to do such related business. For example, syndicated loans must be led by the National Development Bank; there are also cross-industry alliances that are relatively large, such as Alibaba, some leading e-commerce or 1+X. The next is a real-name participant and an anonymous participant. So from the perspective of who to trust, we have summarized that if this is completely credible, then it is actually possible to use traditional methods to achieve it. As for who to trust, completely untrustworthy or less credible is actually suitable for blockchain application scenarios.

The third part, what is the basis for trust? I think the trust here has a certain relationship with consensus. The basis for trust is actually directly related to the consensus algorithm and how we design the blockchain system. The first is based on the owner of the asset. For example, the People's Bank of China issues currency, so there is no problem in trusting it; the second is some authoritative certification. For example, in our bank, UnionPay is an exchange, that is, the exchange party of bank cards, and it has credibility. Swift is actually an institution called the Interbank Telecommunications Organization in the interbank market. It connects various banks, including domestic and foreign global banks, to do bank-wide clearing, so it is also more credible; in addition, the credibility of third parties, including Alibaba and Taobao, which everyone thinks are more credible. In the past, some controversial transactions on them were basically put on Taobao. In the past, it was like Alipay, where people could deposit money into Alipay accounts, which was also a manifestation of credibility; there is also a rule of an agreement and a constraint of social rules, which may be in terms of legal morality or faith. We attribute it to the weak constraint part.

In the fourth part, we mainly look at what you trust. What you trust is complete business information, related business information, business transaction information, account transaction information, and core value information. From the perspective of value, we divide this into low-value and high-value parts. So from this perspective, for complete business information with relatively low trust value, traditional implementation methods can be used, while for core value information with relatively high trust value, blockchain is more suitable, that is, blockchain is used to manage the transfer of this value.

Therefore, if we want to find out the business scenarios, we will basically use the above aspects to judge whether this application or this scenario is suitable for traditional implementation methods or blockchain methods.

We have analyzed many cases from high to low based on the four parts mentioned above. For example, there is a traceability case. At present, I have seen many blockchain applications, and the most used one is traceability to ensure that the product is genuine; the second is points. From the results of our research, Bitcoin is still the best application in the blockchain . You can see that the reasons for trusting Bitcoin, who to trust, what to trust, and what to trust are all in a relatively low state.

At present, in addition to colored coins, the points exchange is probably what everyone does; others include bill platforms, supply chain financing, and interbank transfers. We have done proof of concept in many banks. But if we take this picture, you can see that the bill platform actually tends to have a higher degree of trust in terms of what to trust, because it is the asset owner, and the trust will be higher. Bitcoin is actually at a relatively low level in terms of why to trust, who to trust, based on what to trust, and what to trust. This is why we think the application of Bitcoin is more natural. In addition, you can see why the points exchange is more common in the current blockchain applications? In the part of the points exchange, why to trust, who to trust, based on what to trust, and what to trust, some of them are at a relatively low level, which can be supplemented or strengthened by blockchain technology to achieve a favorable position.

The above is a picture we often use when selecting blockchain scenarios.

In the first scenario, if there are parties with no interest in each other, they gradually form some interest relationships and form an alliance . However, except for applications like Bitcoin, this approach is not very meaningful in real situations, and lacks a better consensus mechanism. I think a large part of Bitcoin's success lies in its consensus mechanism.

The second scenario is that there are interested parties and a decentralized organization, which can actually form an alliance . In this case, we have found many commercial applications. In fact, there are interested parties. Generally speaking, there is a centralized organization, whether it is UnionPay or some industry organizations. If you can find interested parties and a decentralized organization, it is easier to form an alliance through blockchain, but it is not easy to find in the existing business scenario.

The third scenario is that there are parties with vested interests, and there are already centralized organizations, but the people or participants in these centralized organizations do not particularly trust each other. In this case, an alliance can also be formed, but the disadvantage is that in the current situation, because many financial institutions are already in centralized organizations, it is difficult to break the current approach.

We believe that there is still a lot of trust between interested parties and centralized organizations. On this basis, because the entire business process is an N2N process, this trust is discontinuous. For example, if I do trade finance, I may be trusted in the payment or guarantee chain, but other than that, it may be difficult to get trust, or the cost of trust is very high. In this case, this alliance can also be formed. What are the unfavorable conditions for the formation of this alliance? Because there are so many stakeholders involved, it takes a long time to see results. As a result, the initial investment may be relatively large, and it will require a relatively strong leader to do it. So in this regard, it is actually not easy to form this alliance. That is to say, when we do situational analysis based on the several situations we have seen so far, in addition to the business model that has been formed by Bitcoin, many other situations, on the one hand, need to be discovered, and on the other hand, there are relatively great difficulties.

IBM's exploration and practice in the field of blockchain

Currently, blockchain is in an immature and rapidly developing stage. There is a blockchain community and news community within IBM. Since January this year, different news, technologies, or new business models have been released every week. The changes are very fast. As you can see, during the Spring Festival this year, IBM joined the Hyperledger project and served as the chairman of the technical committee, contributing 44,000 lines of code.

In April and May of this year, IBM helped some foreign banks to conduct some POCs in asset trading. It also made some attempts and POCs in stock exchange clearing. Everyone has a certain consensus on the application of blockchain technology in inter-bank clearing, and has basically reached a general approach.

Generally speaking, the current development of blockchain is still very immature. We have held dozens to hundreds of seminars with domestic financial institutions, and we have discussed together and made many POC applications in different business scenarios. However, many industries are still in a wait-and-see state, and at most they are doing some research and POC. This is also related to traditional financial institutions and their way of doing things. However, I have seen many analyses that say that the most relevant use of blockchain technology is still in the financial industry.

For example, IBM's financing company, IBM Global Finance (IGF), built a network using blockchain. IBM produces mainframe hardware and has other business dealings with the ecosystem, such as the front-end manufacturers of server door panels or motherboards. After production is completed, they will be handed over to the next manufacturer and the payment will be collected at the same time. Many of these tasks involve financing of accounts receivable, accounts payable, and inventory. The traditional process may take 40 days. The capital cost of this time is very high. Now, using blockchain, the possible tax rates can be entered into the system in advance through consensus algorithms and smart contracts. Once the corresponding tax rates are encountered, the relevant financial operations will be automatically executed, and now it only takes ten days to complete. The original 100 million US dollars in working capital has almost all been released. In addition, many partners can clearly understand the capital operation model of the entire chain on this blockchain platform, providing a very rich view of their general ledgers and operating data, which is also of great help to IBM's future cooperation or business development direction.

In general, IBM is currently investing heavily in blockchain, and has complete solutions in consulting services, expert services, business design, blockchain concept verification and process change, project implementation and maintenance, and even infrastructure provision. IBM is stronger in technology, such as basic technology and the consensus algorithm mentioned above, encryption technology, and shared ledgers are the most basic things. But another very important point is that when we provide business consulting services, we can package the pain points of the business into solutions that can be solved by technology, whether through modeling or summarizing. This is a very important skill advantage.