Minutes of the meeting on “Principles and Commercial Applications of Blockchain”

On April 19, 2016, Industrial Securities Shanghai Office held a sharing salon with the theme of "Scenario-based Applications of Blockchain". Da Hongfei, founder and CEO of Ant Financial, and Yang Fan, co-founder of Bubi Blockchain, shared their views on "Principles and Commercial Applications of Blockchain" and had a Q&A session.

The following is a summary of the guest speakers’ sharing:

What is blockchain?

"Block" refers to the "data packet" formed by packaging a chain of transactions together. "Blockchain" connects the transaction chains together through a hash algorithm. The core of blockchain technology can be described as a "distributed ledger".

The essence of blockchain can be described by Figure 1: The left picture shows the currently used "centralized ledger" technology: many related institutions need a commonly trusted intermediary to complete cross-time and space transactions and maintain the "centralized ledger". The right picture shows the concept of "distributed ledger" involved in blockchain. The emergence of Bitcoin has brought about a series of technologies that allow us to use cryptography and one-time algorithms to allow each participant to maintain and synchronize their own ledgers. This process does not require the participation of a "centralized" intermediary. Although such ledgers are distributed in physical form, they play the same role as "centralized ledgers" in logic.

From a technical perspective, there are two ways to achieve data consistency: first, shared storage, which is to store data in the same place, which is now the "centralized ledger" (left picture); second, information transmission, which is to continuously communicate and synchronize data (right picture).

Figure 1 - “Centralized ledger” (left) and “distributed ledger” (right)

The essence of blockchain technology <br/>Data structure: First, blockchain uses asymmetric encryption technology, namely digital signature technology. Current financial assets are in the form of "custody", for example, bank deposits other than cash are managed by banks; the emergence of blockchain technology will enable future financial assets to be completely controlled by individuals without the need for financial institutions to manage them. Whoever owns the corresponding "private key" on the blockchain will have the right to control the assets. Second, blockchain uses an unalterable data structure. This makes it impossible for anyone to modify historical data, otherwise all data on the blockchain will be invalid.

Network structure: The right picture in Figure 2 shows the structure in which each node is connected to the central node. Each node obtains services from the intermediate node. In this structure, the organization represented by the intermediate node can modify data that is unfavorable to itself at will. The left picture shows the P2P structure in which each node is connected to each other. Since everyone in the P2P network structure stores data encrypted with digital signatures together, in such a structure, even if a node user tampers with the data, it is easy to prove that it is "forged".

Figure 2- The “P2P” structure used by blockchain (left) and the current “centralized structure” (right)

Consensus mechanism: The entire network will reach a consensus on conflicting transactions, and determine which transaction is valid by the order in which the transactions occur. There are many consensus mechanisms here: the first is the mechanism used by Bitcoin - the proof-of-work mechanism PoW, which is a mechanism that combines computer technology and economic incentives. Specifically, it allows all computers in the network to calculate together. Whoever has greater computing power can have the "temporary accounting rights", and those who have this power can decide whose transactions are valid; the second is the proof-of-stake mechanism PoS. The concept of "equity" is similar to the concept of "equity" in a company. Whoever has greater equity has more opportunities to obtain the right to account. The third is the Quorum/BFT mechanism. Quorum refers to the legal minimum number of people similar to the "parliament", and BFT refers to Byzantine fault tolerance. The common principle of the two is to first select a group of accountants, and every once in a while (for example, every 15 seconds for Antminer), this group of accountants will take a form similar to the "parliament" to package and vote on the transactions that occurred during this period to reach a consensus.

Game mechanism: Having "data structure", "network structure" and "consensus mechanism" can only establish "private chain" and "alliance chain". To establish a "public chain", it is also necessary to design an economic incentive model, such as Bitcoin rewards.

Three stages of blockchain application <br/>Currency stage: represented by Bitcoin, mainly attempts are made in the aspects of currency issuance mechanism, distribution mechanism, currency value adjustment mechanism, etc. Since the value of Bitcoin fluctuates too much, it is only suitable as a speculative tool and not as a "currency". Now there is a method similar to a tiered fund that can stabilize the value of digital currency: A shares obtain stable interest, and B shares bear all fluctuations; corresponding to digital currency, A shares are linked to a certain currency to obtain the same purchasing power as the US dollar, and B shares bear all fluctuations of the currency. People who use digital currency as a payment tool can buy A shares, and people with risk preferences can buy B shares to use leverage to obtain higher returns.

Contract stage: Blockchain technology can be applied to contracts in multiple fields, such as equity, debt contracts, securities and financial contracts, mutual insurance, registration, transfer of rights, gambling, anti-counterfeiting, Internet of Things, smart contracts, etc. If blockchain technology is applied to the field of mutual insurance (eg: anti-cancer commune), it can prevent the organizer of the mutual insurance from ignoring the insurance waiting period and temporarily joining the commune to defraud insurance. In the field of Internet of Things, users can install mining chips on an appliance in the Internet of Things. When the appliance works, the chip also starts "mining" and finally obtains "digital currency" equivalent to the electricity consumed. When users need to pay for shopping activities such as changing light bulbs, the system will automatically pay with digital currency without the need for users to bind their bank cards to pay. In the field of "smart contracts", once a contract is generated, it can be automatically delivered on the blockchain without any manual operation.

Governance stage (programmable society): such as identity authentication, judicial arbitration, voting, health management, artificial intelligence, and decentralized autonomous organizations.

Types of blockchain <br/>Blockchains are divided into private chains, alliance chains and public chains according to business needs. Banks are more suitable for private chains because they involve some private data: blockchain technology can reduce bank costs in several aspects, including: cross-border payment infrastructure, securities trading and regulatory compliance. Private chains are suitable for use within enterprises and are controlled by an organization; alliance chains are used between enterprises; public chains can be used by the entire network, and all data is open to the entire network.

Several applications of blockchain
R3: More than 40 of the world's top banks, including Barclays, BBVA, Commonwealth Bank of Australia, Credit Suisse, Goldman Sachs, JPMorgan Chase, Royal Bank of Scotland, State Street, and UBS, have joined the R3 Alliance to explore the application of blockchain technology in interbank business.

Ripple: Preparing to do Swift 2.0, which is the international interbank exchange business. Due to the low participation of banks, Ripple has not developed very well compared to R3.

Equity management, securities trading: Nasdaq and Chain.com have jointly developed the Linkq project to manage equity of non-listed companies. T0 is a blockchain-based trading platform created by online retail giant Overstock, which plans to trade its own stocks on this platform. Xiaoyi Technology is currently mainly engaged in digital asset registration, management, transfer, and trading. In the future, our first entry point will be "equity crowdfunding", providing a platform for managing equity for companies after equity crowdfunding and facilitating the liquidity and realization of investors' equity.

Smart contracts: The most famous company in this field is Ethereum. Its biggest advantage is that anything that can be expressed by a program can be done with Ethereum; its disadvantage is that it is not suitable for use in a purely commercial environment.

Limitations of blockchain <br/>Scalability: For example, the number of transactions that can be processed per second is limited.
Privacy: For example, how to protect personal privacy when a lot of information is public on the blockchain?
Security: For example, the lack of necessary infrastructure to protect private keys.
Energy consumption: The current global electricity cost for mining is about 6 million RMB per day.
Blockchain Ecosystem Map

Introduction to Bubi Blockchain <br/>Bubi Blockchain is a commercially available blockchain. Bubi covers seven major areas: exchanges, points (multiple points, grid points), insurance (Sunshine Insurance will launch accident insurance on our blockchain in a month, and blockchain can greatly reduce channel costs), equity crowdfunding (Jingu Chain, etc.), supply chain finance (Qianxiang, etc.), supply chain (has reached cooperation with Wulian), jewelry anti-counterfeiting, etc. Some funds cooperating with Bubi have promised an investment of 150 million yuan. Bubi plays the role of "LP" in the fund, helping the fund identify blockchain-related companies and invest in them. At present, the average amount of angel investment obtained through Bubi Blockchain is about 3 million, with an average valuation of more than 40 million.

User scenarios of blockchain in the next 10 years <br/>Currently, everyone’s data is not their own but belongs to BAT and other Internet companies. In the next 10 years, blockchain can realize “data belongs to users”. Many institutions share and maintain user data on blockchain. At the same time, users can also put their own servers on blockchain to maintain their own data, and then input their own data into different applications on the Internet. This is also the direction that Bubi is currently working on.

Main application areas/cases <br/>Equity crowdfunding: Blockchain technology can solve the problem of the credibility of the "ledger" of P2P platforms;
Supply chain case: Taking the recent "illegal vaccine case" that shocked the whole country as an example, vaccine manufacturers can write the number of qualified vaccines they produce into the blockchain, and hospitals can write the number of qualified vaccines they purchase and the patient information of the injected vaccines into the blockchain. Since the data on the blockchain cannot be tampered with, the existence of illegal vaccines can be eliminated to a certain extent.

Q&A Interaction

Q1: How to convert virtual currency into real currency in the virtual world?

A1: There are two modes: First, the bookkeeping mode, which only uses virtual digital currency as a bookkeeping tool, without real delivery. Settlement and delivery are conducted by another institution after the account book is reviewed and then transmitted to the bank for execution. This mode is the most convenient mode to connect with the real world; second, the recharge mode, which allows real currency to be recharged into the blockchain. This process needs to go through a third-party gateway similar to Alipay. When the user issues a command similar to "recharge to Xiaoyi" on the gateway, the gateway will automatically deduct the specified amount from your account, and at the same time, your Xiaoyi account will have an additional "token" of the same value. You can withdraw it at any time in the future, and recharge the tokens on the blockchain back to your original account, thereby converting them into RMB. In addition to Alipay, any third party with good credit and technical support can play the role of "gateway".

Q2: Is it only one-way recharge currently possible?

A2: Although models such as Q coins are one-way, the digital currencies issued by gateways are now exchanged in both directions. In the future, it is very likely that institutions with third-party payment licenses will play the role of "gateway". Since the current business volume is very small and has not attracted widespread attention, only some small institutions now act as "gateways".

Q3: Will too few nodes on the blockchain lead to people’s distrust of the blockchain?

A3: The power of nodes involved in bookkeeping and consensus is very limited. Taking Bitcoin as an example, bookkeepers only have the following powers: First, because bookkeepers do not have the user's private key, they cannot create a transaction out of thin air, so they cannot modify other people's account information; but they can reject someone's transaction, which is conducive to combating illegal transactions such as hackers; second, they can sort transactions, but if there is no correlation between transactions, then this sorting is not very meaningful; third, they can refuse service, make the network unavailable, and make no information recorded on the blockchain. As mentioned above, since bookkeepers have little power, even if the number of people involved in bookkeeping is small, the service provided is much better than that provided by existing centralized nodes.

Q4: Why is the application of blockchain in data developing more slowly than the application of blockchain in digital assets?

A4: Blockchain can be used to prove the existence of digital data. The main obstacle is that it cannot prove that a certain person is the creator of the data. Some additional services are needed to help achieve this.

Q5: A block can only record 7 transactions every 10 minutes. Will it affect the development of blockchain?

A5: A block will package a transaction list every 10 minutes. The size of this data packet is artificially set to 1M, and the number of transactions that can be stored in 1M capacity is just about 7 (Note: The original Q&A has a biased understanding. Currently, the Bitcoin network processes an upper limit of 7 transactions per second under the 1MB block limit, rather than recording 7 transactions every ten minutes). However, the 1M capacity limit was arbitrarily set by Satoshi Nakamoto, without much scientific basis. It can be set to any size as needed. According to the current network speed, it can be set to about 50M. In addition, by using isolation authentication and other means, the efficiency can reach 700 transactions per second.

There are currently two views on further improving its efficiency: the first view is that Bitcoin is not a small payment network but a clearing network. In fact, this has evolved into a layered model, that is, small payments are made outside the chain, and large clearing is done on the Bitcoin layer. The second view advocates making Bitcoin a universal payment tool, and all transactions should be conducted on the blockchain, so certain technologies are constantly needed to make the "blocks" larger and larger. Personally, I think the first idea is more feasible.

Q6: Will the high energy consumption problem hinder the large-scale application of blockchain in the future?

A6: Currently, new blockchains basically do not adopt the "proof of work" approach. Our current applications are all closely related to traditional finance. When designing a blockchain, it is actually a process of making trade-offs between "availability" and "finality": "availability" means that you can join and exit at any time without approval from anyone, but it sacrifices "finality", which is reflected in the fact that a transaction being written into the blockchain does not mean that it will be finally recorded. It usually takes 6 confirmations before it will be finally recorded. An extreme case in the proof of work model is that when a longer chain appears, all previous chains are invalidated, and all participants switch to the longest chain, then all previously recorded data will also be invalidated. The lack of "finality" makes the proof of work approach unsuitable for applying blockchain to the financial industry.

The mechanism adopted by the new blockchain can now ensure "finality" (the number of account keepers is relatively fixed and cannot enter and exit at any time), but the "availability" is also reduced.

Q7: If a fixed person is responsible for keeping accounts, will it reduce credibility?

A7: The trust model of Bitcoin is that all rational people will run their own computing power on the longest blockchain; while the trust model of Bubi and Ant is to trust that all bookkeepers will not unite to "do evil" in the same direction.

Q8: Is Bubi’s blockchain a public chain or a private chain?

A8: It is now running independently on the public network and can be understood as a public chain.

Q9: If decentralization is achieved in the future, will a certain number of banks still be needed to jointly “keep accounts”?

A9: Under certain consensus mechanisms, a certain number of banks are required. If the Bitcoin consensus mechanism is adopted, these banks are not needed. If the transaction volume is relatively large, the average cost of choosing Bitcoin's proof of work method is still relatively low, but if the transaction volume is small, it is more economical to choose other methods.

Q10: What is Ant Financial’s profit model?

A10: The profit model of the public chain is to provide certain services in the public chain ecosystem, such as extracting a certain commission from each transaction after establishing an exchange. Ant Financial's goal is to build a digital asset blockchain. The first entry point is equity. The equity transfer of non-listed companies is a very large market.

Q11: Is it legal to use blockchain to transfer equity?

A11: The business of Xiaoyi and Bubuy is now fully compliant. I have read the Company Law, Contract Law, and Electronic Signature Law many times. We put the offline procedures for signing equity transfer agreements on the blockchain and use the electronic signature law. This entire process is recognized by the law and can be connected with industrial and commercial registration.

Q12: How is blockchain data stored? Does blockchain completely replace cloud computing or is there a combination of the two? If so, what kind of architecture is it?

A12: The data of the blockchain is generally stored on each full node. Full nodes refer to those nodes that synchronize all blockchain data and perform verification and storage. In contrast, there are also accounting nodes (miners) and light nodes. In addition to storing verification data, accounting nodes also participate in reaching consensus. Light nodes do not store or only store a small amount of data, such as mobile client. Blockchain can be based on cloud computing. Xiaoyi is now cooperating with UCloud. Starting today, Xiaoyi's image can be directly obtained on UCloud. UCloud users can deploy Xiaoyi blockchain nodes very conveniently. Therefore, blockchain can be combined with cloud computing. The cloud computing platform provides the underlying computing platform, and the blockchain runs on various cloud computing platforms in the form of baas (blockchain as a service).

Q13: What is the difference between the encryption mechanisms of public chains and private chains? How does private chain encryption establish a trust mechanism? What are the different industrial applications of the two?

A13: The difference between public and private chains lies not in the encryption mechanism but in the access conditions. Public chains are fully open systems with no entry barriers and anyone can access them at any time. Private chains generally refer to blockchains controlled by an enterprise or institution, and access requires the approval of the enterprise/institution. In between the two is called a consortium chain, which means that multiple institutions form a consortium organization, and only members of the consortium or institutions authorized by the consortium can access the blockchain. The trust in private chains comes from trust in the organization, while the trust in consortium chains comes from trust that the consortium will not join forces to commit evil, and that evil deeds will leave cryptographic evidence and be subject to legal or commercial sanctions. Private/consortium chains are more suitable for today's financial institutions to use without drastically changing the status quo, while public chains are completely disruptive innovations.

Q14: How do we view the issue of blockchain data volume? Will there be a problem in the future where the data volume is too large to be carried?

A14: The amount of data in the blockchain is an issue related to scalability. The problem of excessive data volume is usually solved through a layered structure. Nodes at different levels store different data. For example, super nodes can store complete data, ordinary nodes can store data for the past three years, and light nodes only store short-term data or data related to themselves.

Q15: Does blockchain technology require specialized talent? Can traditional computer companies do this work based on existing technology and talent?

A15: Blockchain technology is mainly the intersection of distributed systems, consensus algorithms, cryptography, game theory, and institutional design. Blockchain designers are best to have a composite background in computer science, economics, law, and other interdisciplinary disciplines. There is no systematic training course yet, and the training on the market often focuses on the upper-level development of a certain blockchain rather than the core technology of blockchain. At the same time, blockchain technology is developing rapidly, and new architectures and algorithms are emerging one after another. Therefore, it can be said that the blockchain industry still has strong technical barriers.