Blockchain will make everyone a node in the social credit chain

Since the concept of Bitcoin was born in 2008, many fields have begun to pay attention to its underlying technology - blockchain. From the initial digital currency, to financial fields involving contract review such as securities trading settlement and accounting auditing, to public fields such as government and medical care, the territory of blockchain is expanding rapidly. In essence, blockchain is a decentralized distributed database. This decentralized, public and autonomous data structure can greatly save database maintenance costs and information transmission efficiency, so it is highly favored. From concept to application results, blockchain is quietly transforming the financial ecology.

Technology Origin

Blockchain 1.0 The blockchain was proposed to improve the efficiency of the traditional electronic transaction model. In order to alleviate the problem that money and goods cannot be cleared immediately in electronic transactions, the traditional model introduces a third-party institution as a credit intermediary in the transaction process, making the transaction possible. Therefore, indirect financial institutions once again play an important role in the era of electronic transactions. At the same time, although intermediaries provide convenience for electronic transactions, there are also problems such as increasing costs, low efficiency and double consumption.

First, intermediaries collect information on behalf of both parties to the transaction. In order to guard against the default of transaction participants, intermediaries often prepare all transaction materials for both parties to the transaction, trying to facilitate the transaction with comprehensive information, which undoubtedly increases information costs and time costs; secondly, intermediaries will charge high transaction fees to both parties to cover their own costs based on the principle of minimizing costs; finally, double consumption has always been one of the problems that financial institutions cannot solve. Since 2011, digital signature technology has been used as an experimental solution to the double consumption problem. However, due to the lagging development of encryption technology, the double consumption problem has not been completely solved. In order to effectively solve these problems, blockchain technology came into being.

On November 1, 2008, a cryptography enthusiast who called himself Satoshi Nakamoto proposed the concept of Bitcoin and blockchain in the paper "Bitcoin: A Peer-to-Peer Electronic Cash System". As the name implies, the birth of blockchain and Bitcoin is to build a "completely peer-to-peer electronic cash system that does not involve a trusted third party". Blockchain technology is the underlying technology for building Bitcoin data structure and encrypted transmission of transaction information. Its decentralized, tamper-proof, highly consensus-based and anonymous security characteristics have laid the foundation for its rapid development in the future. In the Bitcoin payment system, there is no need for a third party to provide credit. The database (or ledger) that records the generation and transaction of Bitcoin is distributed, and data is recorded and stored by each transaction node. In order for all parties to trust each other, all transactions must be verified and recognized by the entire network, and each block is open and transparent. For financial institutions that regard security as their top priority, the tamper-proof and anonymous consensus have made blockchain technology rapidly popular in the financial field. Its 1.0 era should mainly include centralized digital currency, payment settlement, KYC and AML.

In terms of digital currency, as early as 2015, the Ecuadorian government took the lead in launching a national digital currency. At the same time, many other countries are also exploring the feasibility of issuing digital currencies. For example, the Bank of England is commissioning University College London to design a digital currency RSCoin. The Dutch Central Bank also published a research report saying that it is developing "DNBCoin". China, Sweden, Australia and Russia are discussing plans to develop digital currencies.

In terms of payment settlement, it mainly covers the attempts and explorations of blockchain startups and traditional financial institutions. Typically, the R3 blockchain alliance has conducted cross-border settlement tests. Ripple's cross-ledger protocol has helped banks achieve fast settlement. Circle is committed to developing a C2C cross-border payment platform. Compared with blockchain startups, the attempts of traditional financial institutions are slightly lagging behind. Currently, JPMorgan Chase has completed the test of currency settlement. The National Bank of Korea has established a partnership with Coinplug to test international remittances.

In terms of KYC (Know Your Customer) and AML (Anti-Money Laundering), Deloitte has subverted the existing compliance model in the financial industry by applying blockchain in the field of Know Your Customer (KYC). In short, sharing the information of transaction entities through blockchain will reduce a lot of repetitive work and save a lot of compliance costs for various institutions. At the same time, this will provide great help for financial institutions in exploring potential business opportunities and identifying risk exposure. Recently, Chainalysis has also made innovative progress in the field of anti-money laundering, and successfully designed a blockchain-based abnormal transaction behavior monitoring and analysis system for many banks.

Throughout history, financial transactions have always required currency and contracts. Therefore, behind the scenes of the blockchain 1.0 era represented by digital currency, the financial field has fully ushered in the blockchain 2.0 era represented by smart contracts.

Application Extensions

Blockchain 2.0Melanie Swan pointed out in her book "Blueprint for A New Economy" that based on the programmable characteristics of blockchain technology, people can try to add the concept of "smart contracts" to blockchain. With the support of the contract system, the application scope of blockchain has also expanded from a single currency business to the four major financial businesses involving contract functions - banking, securities, insurance and asset management.

In the blockchain 2.0 era, it is the banking institutions that first sensed the business opportunities. From the establishment of the R3-CEV Alliance to the construction of private chains at all levels, it reflects the determination of traditional commercial banks to actively innovate and change. Undoubtedly, the use of blockchain technology to develop digital bills (hereinafter referred to as bill chains) is the most representative smart contract application in the banking industry on blockchain. The bill chain uses the value transfer of the blockchain platform and does not require specific physical bills or central systems for control and verification. The role of the intermediary will be replaced to a certain extent by a sub-center composed of multiple nodes. At the same time, it also reduces the moral risk and operational risk caused by human operation factors. In addition, the bill SPV system based on blockchain, the multi-bank model forms scale benefits, reduces costs and improves efficiency. Therefore, more and more banking institutions are investing in the research and development of the bill chain system. I believe that in the near future, the bill chain market will become active again.

In the application field of securities industry, corresponding blockchain platforms have been developed for smart securities, proxy voting, clearing and settlement, stock issuance and trading. For example, Digital Asset Holdings (DAH) is about to design a clearing and settlement system for the Australian Stock Exchange, aiming to allow all participants to conduct real-time asset transactions in the same database. It enables digital assets to be transferred between counterparties without any central agency to record transactions, thereby achieving real-time trading effects. Coincidentally, the issuance and trading process of traditional securities is complicated and inefficient. The intervention of blockchain technology allows participants in the financial trading market to enjoy equal data sources, making the trading process more open, transparent and efficient. Online brokerage OverStock launched T?, a blockchain-based private and public equity trading platform last summer. Nasdaq and Chain built a blockchain equity trading platform Linq. The Korea Exchange (KRX) has also actively invested in this field and developed its own blockchain trading system for over-the-counter transactions.

In the application field of the insurance industry, the importance of KYC identity authentication to the insurance industry is self-evident. John Hancock, a giant company in life insurance and financial services, is conducting a KYC (know your customer) trial, which is run in the legal department of Hancock and aims to simplify the company's back-end operations. In terms of insurance risk records, blockchain startup Everledger and Allianz France have cooperated to develop a risk record project. Everledger assists insurance companies in reducing core risks and provides a trustworthy record system. London Reinsurance Company, as a representative company in the traditional insurance industry that attempts to apply blockchain technology, uses blockchain technology to publish a claim record system to permanently record claim information. Insurance companies and reinsurance companies can accurately share costs on this platform.

In the application field of asset management, blockchain ABS is an asset securitization platform established by using blockchain technology on the basis of Internet ABS. The platform takes asset securitization as the core tool for business operations, and adopts leading financial technology and information technology as its support to meet the needs of the new generation of Internet information interaction and transaction circulation. This is mainly due to the two major natural attributes of blockchain - voucher and transaction. In the future, blockchain may become the infrastructure for building a future value free flow network. Recently, innovative asset management companies such as Overstock, Nasdaq and Xiamen Guojin in China have actively and effectively explored and developed blockchain ABS.

In addition, blockchain technology integrated with smart contract technology can process complex derivative transactions in a programmatic manner, making clearing more standardized and automated, and can also automate compliance checks on contracts, minimizing the possibility of violations from the time the contract is established. The fact that each block in the blockchain is connected in chronological order also makes it easier for regulators to discover illegal operations.

With the rapid popularization of blockchain technology, the application of blockchain will expand to the entire financial circle. From electronic systems for trading digital currencies, to banks and other deposit institutions that dominate traditional finance, to exchanges in charge of securities trading, and other financial service institutions in the fields of accounting and consulting, the business models and development directions of all enterprises will be affected. Blockchain technology will help these enterprises improve work efficiency, streamline corporate structure, and effectively control risks with its decentralized, open and autonomous characteristics, and transform the ecological environment of the entire financial field from the bottom up.

Imagine the future

Blockchain 3.0 With the increasing popularity and promotion of blockchain technology, the government, medical and other public areas have also begun to realize the importance of blockchain technology and gradually generated demand for this technology. In addition, in the future, we can rely on the blockchain platform, combined with artificial intelligence, big data and other technologies, to achieve cross-border integration, thus entering the 3.0 era characterized by "blockchain +" and cross-border cooperation.

"Blockchain + artificial intelligence" is the next development direction. After financial institutions use blockchain technology to establish a chain platform, they can apply artificial intelligence to this platform. Specifically, artificial intelligence can replace people to complete some decision-making behaviors, deepen the automation and intelligence of blockchain, and thus speed up the work efficiency of financial institutions. Taking commercial banks as an example, after banks establish blockchain platforms, they can apply artificial intelligence to handle various customer needs. When a customer applies for a loan, the blockchain platform will automatically provide the customer's real-time data to the artificial intelligence system, and the artificial intelligence system will quickly make an approval. The whole process is simple and fast, does not involve human factors, and can save labor costs and reduce operational risks to a large extent.

At the same time, "blockchain + big data" will have a wide range of applications. The blockchain network will store a huge amount of data. If big data technology is introduced into the blockchain, each node will be able to process the data in real time while obtaining the data. On the one hand, it improves the data quality from the source in data storage, and on the other hand, it can speed up the overall transaction speed. In addition, in the risk control process of financial institutions, "blockchain + big data" will improve the effectiveness of big data risk control, speed up the identification of risks while improving data quality, and prevent the occurrence of security incidents such as data leakage.

In short, blockchain technology is not yet mature, and there is still a lot of room for future development. Following the development of blockchain, its power to change the world is becoming increasingly apparent. With the continuous investment of funds and manpower, we have reason to believe that blockchain will create a new financial landscape in the future. We can boldly predict that each of us will become a node in the social credit chain and jointly realize shared finance. (Hande Financial Maker/Yang Wang)