Blockchain: Building the Internet's Value Highway

Editor's note: This article is the preface written by Mr. Yao Yudong, Director of the Financial Research Institute of the People's Bank of China, for "Blockchain: From Digital Currency to Credit Society" (CITIC Press). The author believes that blockchain has the characteristics of distribution, disintermediation, trustlessness, immutability, and programmability. In the future, blockchain will be like the hierarchical design of the Internet's physical layer, network layer, transport layer, and application layer. According to different functional positioning, different application scenarios, and different open permissions of shared ledgers, it will evolve into different levels of protocols to form an interconnected chain.

Yao Yudong, Director of the Financial Research Institute of the People's Bank of China

Blockchain was born out of Bitcoin. People generally regard Bitcoin as a currency, but fundamentally, blockchain is more of a value transmission protocol. Compared with digital currency in the usual sense, blockchain is more similar to the Internet TCP/IP protocol. However, the TCP/IP protocol is designed for the information Internet, while blockchain provides a theoretical basis for the value Internet.

However, when exchanging value on the Internet, three problems need to be solved: first, to ensure the uniqueness of the value exchange; second, how to establish a trust relationship between the two parties in the value exchange? Third, how to ensure that the commitments of both parties can be completed and automatically executed by relying on the network's autonomous mechanism (smart contracts) without the intervention of a trusted third party? The birth of Bitcoin, a digital currency based on blockchain technology, in 2009 found solutions to the above three problems.

Blockchain is a new type of decentralized protocol. The data on the chain cannot be changed or forged at will, thus providing a credit establishment paradigm that does not require trust accumulation. Blockchain can be understood as a ledger. People only need to join an open and transparent database to reach a credit consensus through peer-to-peer accounting, data transmission, authentication or smart contracts without the help of any intermediary. This open and transparent database includes all past transaction records, historical data and other related information. This information is securely distributed and stored in a string of data blocks generated using cryptographic methods, that is, a block. From the genesis block to the current block, a blockchain is formed. Since each block contains the index of the previous block, that is, the hash of the block, each block is generated in chronological order. If you want to reverse the transactions on a block, you need to recalculate all the blocks after the block, which is almost impossible in terms of computational difficulty. As a result, blockchain has gradually become a reliable audit tool, and it also enables the establishment of trust between participants in the system.

Blockchain itself has the characteristics of being distributed, disintermediation, trustless, immutable, and programmable. These characteristics enable blockchain to make up for the shortcomings of traditional financial institutions, improve operational efficiency, reduce operating costs, flexibly update market rules, prevent information tampering and forgery, and also greatly improve stability and reduce downtime risks. Therefore, blockchain can be applied in a wide range of scenarios, and many financial institutions are studying the application of blockchain technology in the financial market.

Blockchain can be directly used in banking-related businesses. For example, anti-money laundering checks on accounts, bank settlements after transactions, and other businesses that involve manual review. The distributed network structure of blockchain enables information such as account assets and credit to be shared among banks, which greatly simplifies repetitive procedures and saves a lot of manpower and material resources. At present, central banks and commercial banks around the world are actively seeking to use blockchain technology to develop digital currency platforms. The R3CEV blockchain project has received support from many banks in the world. Currently, 42 banks have joined the research of the project to achieve real-time settlement and clearing functions.

Central banks can also use blockchain technology to try to issue eSDRs to build a new type of super-sovereign currency cross-border payment and settlement system, thereby appropriately alleviating the defects of the traditional monetary system dominated by sovereign currencies, and also helping to cope with the global "liquidity dilemma". The Bank of England plans to release RSCoin, a Bitcoin-like digital currency controlled by a central agency. This is a digital currency based on blockchain technology designed entirely based on the needs of the central bank. The technology will rely on a series of authoritative institutions, such as commercial banks, to prevent repeated consumption of currency. my country's central bank is also discussing the issuance of digital currency plans.

Since anyone can create their own blockchain system: the starting conditions are very simple and not difficult to achieve. We are currently experiencing the Cambrian explosion of blockchain, with a large number of open source or closed blockchain experiments being implemented. There are many existing blockchains, including public chains, alliance chains and private chains. In addition to R3CEV, well-known projects include Hyperledger promoted by the Linux Foundation, Ethereum, which is famous for its smart contract platform, and the lightning network and sidechain technology based on the Bitcoin blockchain system... Just as the legitimacy of blockchain data is based on algorithms to compete for the longest chain, these blockchain protocols and technologies also present a very fierce competition. Which one of them will win in the end, and which one of the alliance chain and public chain will have the last laugh and become the universal value transmission protocol of the Internet is still a mystery.

Perhaps, the early development of the Internet can bring us inspiration. The originator of the Internet is the military network of the US Department of Defense, called "ARPAnet". In the 1970s, ARPAnet had formed dozens of computer networks, but each network could only communicate with computers within the network. Different computer networks were isolated information islands and could not communicate with each other. It was not until 1974 that researchers designed protocols to connect packet networks, including the famous TCP/IP - Internet Protocol IP and Transmission Control Protocol TCP. Only then did these isolated islands connect to form the current Internet. Therefore, between the alliance chain and the public chain, between Bitcoin and Ethereum, and between other blockchain networks, it may not be a situation of life and death, winner takes all, but will form a unified blockchain by building a value transmission protocol between different blockchains: Interchain. Similarly, the Interchain will also evolve into different levels of protocols according to different functional positioning, different application scenarios, and different open permissions of shared ledgers, just like the hierarchical design of the Internet's physical layer, network layer, transport layer, and application layer.

If the TCP/IP protocol has brought us into the era of free information transmission, the blockchain will bring us into the era of value highways. The improvement of the blockchain protocol will constitute the infrastructure of shared finance. Today's Internet is entering the distributed era, gradually evolving from an Internet that transmits information to an interconnected chain for exchanging value. Out of the need for value exchange, humans have entered the era of data computability. The data structure has also evolved into a code with a computer program attached. Data can calculate and run itself, thus becoming intelligent data, opening the door for the entire human society to enter a smart society.