Blockchain - the basic protocol of future global credit

Editor's note: This article is an excerpt from the book "Blockchain: From Digital Currency to Credit Society" written by Professor Han Feng. The author believes that the first generation of the Internet solved the problem of free transmission of information. "Information" itself can be copied, transmitted multiple times, and free of charge, which is fine. But "assets" cannot. Blockchain may become the basic protocol for global credit in the future. The future credit and authenticity will be achieved by notarizing a certain agreement across the entire network and relying on every computer on the entire network to become a bookkeeper.

Han Feng

PhD student at Tsinghua University, iCenter mentor, lifetime member of Bitcoin Foundation, former project leader of Tsinghua University's 15th Five-Year Plan key project "Evaluation and Selection of Innovative Talents Based on the Internet (Big Data)", and China partner of the Oracle Education Foundation.

In 2015, Alibaba Research Institute and the Institute of Finance of the Chinese Academy of Social Sciences held a seminar, and I was invited to attend. The theme of the conference was very grand, proposing to establish a theoretical system for Internet finance! Around this theme, many top Chinese scholars also put forward their own views. I was also deeply inspired, especially the rise of blockchain technology in recent years, which seems to have found the answer to this goal. Before discussing what blockchain can bring to Internet finance, let's first look at what the Internet will bring to finance?

First of all, the core of finance is undoubtedly the establishment of "credit". The most primitive commodity economy is definitely barter. But undoubtedly, everyone soon found that the transaction cost of this is very high. If you pull a few carloads of goods, but the transaction fails, it may be robbed by bandits. Not only is the transaction cost high, but there is also a high risk. So everyone thinks that in order to make the market economy develop better, the transaction cost must be reduced. So it quickly transitioned to the way of using credit to establish transactions. The establishment of credit is the core of finance. Of course, our traditional credit establishment is undoubtedly established by most "centers", such as the central bank, commercial banks, courts, and economic police.

But the problem with traditional finance is that the cost is too high. I like to ride my bike around Beijing. As long as I ride more than 100 kilometers, before I leave the suburbs of Beijing, the financial ecosystem has changed dramatically! I often can't find ATM machines or bank branches. I don't like to carry cash, but once or twice I couldn't stay in a hotel, eat, or even buy water in the suburbs of Beijing.

For example, it is like the human body. The aorta alone cannot reach many places. Capillaries are necessary to allow many parts of the body to get nutrition. If there is a problem with the human capillaries, you will get all kinds of diseases, which are very serious. So the first step of Internet finance is actually like Alipay. It takes a step forward to rely on big data to establish credit, which is unprecedented. When I started my business, I also went to the bank for a loan. The process was very cumbersome. They had to investigate your assets and wanted to find out all your assets before deciding whether to give you a loan. It is said that the so-called small loan in the bank at that time was 5 million. Why such a large amount? Because the cost could not be reduced. So relying on banks alone, not to mention that there was no ATM in the mountain valley, many small and medium-sized enterprises could not even get loan services. As a result, Alipay and Yu'ebao suddenly appeared. "Credit" is based on the big data of Internet transactions. This is a major breakthrough! Big data finance is basically the first step in establishing Internet finance. It makes the cost of establishing credit much lower than the cost of traditional bank deposit and loan methods. Later, P2P, crowdfunding, etc. emerged, which led to the trend of reducing the cost of establishing credit.

So why do we need blockchain? Because relying solely on big data from Internet companies to generate “credit”, let’s look at several problems that arise in traditional finance:

First, the big data of Internet companies actually form data islands. Every Internet company advocates the spirit of sharing, openness and transparency of the Internet. But in fact, will they share the big data they have with others? The answer is no. Under the current situation, big data must be an absolute internal resource of each company, and it is impossible to share it without boundaries, which leads to the problem of "big data concentration".

As a result, the development of the Internet has reached a paradox, going in the opposite direction of its original intention. The concentration of big data will cause the Matthew effect of the rich getting richer. If data islands are formed, big data resources will be concentrated in the hands of a few people and the whole society will not be able to form a circulation. These valuable data resources can only be used by a few data controllers. As the generator of big data, individual users have no initiative to obtain credit resources, which is very unfavorable to the further reduction of credit costs in the global market.

Second, data ownership is mismatched now. Massive data is generated by every participant, especially on software like Tencent WeChat. But does the ownership of big data belong to every participant? Can the participant control their own big data? The answer is no. In particular, a terrible thing happened in early 2016: the "Baidu sells the bar" incident. The ownership of data and resources generated by a "bar" on Baidu should belong to the users, including the "bar owner" who is also elected by the participating users. However, Baidu can publicly sell the big data benefits it generates!

Similarly, how much data do we generate on WeChat every day? The social and transaction data we generate every day should belong entirely to each of the producers. If we follow the spirit of sharing, equality and transparency of the Internet, this big data will generate a "global credit resource."

Therefore, the new innovation must solve the problem that big data must be shareable and have clear ownership. On the surface, these two points are somewhat contradictory. As we all know, the first generation of the Internet solved the problem of free transmission of information. "Information" itself can be copied, transmitted multiple times, and for free, which is fine. But "assets" cannot. In reality, "assets" have unique ownership during the transmission process, and the ownership of assets cannot be copied casually. Therefore, if we follow the first generation of the Internet TCP/IP protocol, it seems that we cannot establish an ownership and credit system on the Internet. Because the attributes of assets must be unique, this thing cannot be copied at will. If any ownership can be copied infinitely, no one will be willing to believe it, and there will be no credit at all.

The birth of Bitcoin in 2008 solved the above two problems. Satoshi Nakamoto believed that credit cannot be established by a certain center. Because any excessive centralization will result in information asymmetry, and there will be situations where the power of the center is used to harm the interests of participants and other parties in the market. Therefore, the Bitcoin white paper clearly stated: We want to create a payment system that does not require a third party or an intermediary, an electronic currency payment system. But this must first solve the problem of the uniqueness of asset ownership, that is, repeated payments cannot be made. Otherwise, this so-called electronic currency is nothing more than a stored number, and if it can still be copied countless times, it has no credit value. Before this, many people also tried to establish an electronic currency system. Similar to "Q coins", it is obviously issued by Tencent. Once Tencent collapses, Q coins will be worthless. But the P2P electronic currency payment system that "Satoshi Nakamoto" claimed to create does not believe in any center and does not need any third party!

The solution of Bitcoin is the blockchain technology we are discussing now. The first and most core concept is "timestamp". "Timestamp" itself was not invented by Satoshi Nakamoto. There have been national time stamp centers for a long time. For example, a contract can be stamped with a "network timestamp", which is equivalent to a proof. That is, at this point in time, the text of the contract has been formed. When a dispute arises, this proof can be used to sue. In order to prevent duplicate payments, each transaction in the Bitcoin system is stamped with a "timestamp". Because after the "timestamp" is stamped, the same asset cannot be paid to a second person. If someone pays twice, the time will not match, and the system will automatically identify it as an illegal transaction. The only legal transaction can only be the one with the "timestamp", which successfully solves the problem of duplicate payments. This sounds very clear, it can solve the problem of duplicate payments and proves the uniqueness of the property transfer at this moment. But the question is: who will stamp this timestamp? Satoshi Nakamoto is obviously a believer in the market, and believes that the market proposed by Adam Smith is composed of self-interested people. There must be certain rules of interest, and the "timestamp" is stamped by the so-called "miners". Miners timestamp every transaction on the entire network every 10 minutes - accounting. They are also motivated by profit. The miners' interest is the reward of the only legal accounting right that can only be competed for in the entire network every 10 minutes. Whoever wins the competition can get a certain number of bitcoins as a reward. At the same time, other miners in the entire network must synchronize their accounting and then compete for the right to record the next block. Initially, this reward was 50 bitcoins. According to the rules, it is halved every four years. In 2013, it was halved to 25 bitcoins. The so-called blockchain is a one-way accounting chain formed by linking one block ledger after another.

The blockchain of Bitcoin relies on consuming computing resources to testify to the entire network and re-establish the credit system. We often see discussions online, such as what the next generation of WeChat might be, what the next generation of Taobao might be, and so on. In our opinion, the next generation is most likely to be a truly decentralized system. The big data generated by everyone on WeChat is of great value to everyone. If this data is encrypted with a system like Factom to form a new digital watermark (hash) and then saved on the Bitcoin blockchain, the big data generated by each person cannot be tampered with, and the private key is in everyone's own hands, which means that the ownership of their own big data is in their own hands. When any of us needs to borrow money from a bank, we only need to provide our public and private keys to any bank in the world, and the credit status of the borrower can be obtained based on big data analysis, which allows everyone to obtain global credit through big data + blockchain.

Gao Hongbing, Vice President of Alibaba, told me: "The credit of traditional finance is built on reinforced concrete buildings. Do all banks have to build buildings? But the credit of the future will be built on blockchain data." Therefore, blockchain relies on distributed accounting across the entire network and free notarization to establish a consensus database, which is the data building of future credit.

Imagine the future. For example, your birth certificate, property certificate, marriage certificate, etc., need to be registered with the government before they can be recognized by the government. But once you cross borders, you will encounter endless troubles, including contracts. After crossing borders, contracts may not be recognized or enforceable. The entire traditional credit execution system is very costly, including courts, police, and corruption. These costs are borne by each of us. However, if the whole network notarization helps you prove it, it is almost impossible to falsify. Otherwise, as I just said, if you change the time, unless I have the ability to change everyone's watch. In the future, when you notarize something, such as notarizing your relationship, it will become a fact on the whole network. It is almost impossible to modify it, unless you go to every miner in the whole network to modify it, and the cost is too high to accept. Now, if you want to modify it, I have asked Bitcoin miners, if their world wants to tamper with the data on the blockchain in this way, the cost is about more than 10 billion yuan (and it is increasing rapidly over time). Once the cost is high, no one wants to falsify, because the cost is disproportionate to the gain.

In a new era, the future credit and authenticity will be realized by notarizing a certain agreement across the entire network and by every computer on the entire network becoming a bookkeeper. This has opened up a huge space in human history. What problem does it solve? In the future, credit will be generated by each consumer himself on the blockchain through big data, just as Secretary Huo Xuewen of the Beijing Financial Bureau said: "Blockchain will become the basic structure of global finance." This is the credit building of the future.