How to build a value circulation network with blockchain

About the author: His real name is Chen Hao. He is a C++/Python/blockchain engineer. He won the third prize in the 2016 Shanghai Blockchain Hackathon and is the technical leader of Weiyu Consulting.

There is a translated article in my blog "An Internet Architecture of Currency - blockchaindev.org", which deeply analyzes how to establish a layered value circulation network in various financial activities. Today I plan to talk about this.

This article intends to explore six questions:

1. What is the simplified model of blockchain?
2. What problems does blockchain solve and what problems does it not solve?
3. The distribution problem of blockchain application scenarios.
4.What is a blockchain exchange?
5. What are digital assets and why are they important?
6. Talk about possible technical architecture.

1. What is the simplified model of blockchain?

The reason why we want to talk about this issue is that many people still have a vague concept of blockchain, so we want more people to have a more intuitive understanding. Now consider the situation:

Imagine a distributed database cluster of 100 machines:
Scenario 1: The actual owner of these 100 nodes is an organization, and all the nodes are in the organization's intranet , so the organization can make these 100 database nodes do whatever they want. In other words, these 100 nodes are in a trusted environment and are controlled by an entity that has absolute arbitration and allocation rights .
Scenario 2: Imagine that these 100 nodes are owned by different people, and each person's node data is the same, that is, completely redundant, and all nodes are in a wide area network . In other words, there is no trust between these 100 nodes, and there is no entity with absolute arbitration power.
Now consider scenario 2. What kind of algorithm ( consensus model ) can provide a trusted environment so that:
The data exchange process of each node cannot be tampered with;
Exchange history records cannot be tampered with;
The data of each node will be synchronized to the latest data, and the latest data that has been agreed upon will be recognized;
Based on the principle of majority rule, the data maintained by the overall node objectively reflects the exchange history.

The above is the background.
Now let’s talk about blockchain. Blockchain is essentially a technical solution to solve the second scenario mentioned above. To be more precise, it should be called a distributed redundant chain ledger solution.
As long as it contains:
A technical solution that can solve the above problems from a P2P perspective, in a chain-like manner and maintaining only one general ledger, is called a blockchain technology solution.
The above situation can be understood as a simplified model of blockchain.

Now let's summarize the three core elements of blockchain:

data
Data Authentication
Consensus Model

Data is broad in scope and refers to any data. That is to say, blockchain can not only be used in financial activities, but is also applicable to any scenario that requires strong consensus and strong authentication.

Data authentication refers to the authentication of data ownership, which corresponds to the verification of public and private keys in Bitcoin. Of course, we recognize any solution that can achieve this effective authentication.

In the above, data and data authentication are combined to form a terminal database, that is, the database in scenario 2 described above. Then this terminal corresponds to financial activities and expresses a universal concept, that is, the concept of asset digitization, which we will discuss later.

The consensus model is a very interesting and complex concept. People who are new to blockchain or Bitcoin will be stuck in concepts such as mining. In fact, it is easy to understand in an abstract way. It refers to any process that turns disordered and chaotic data into trusted shared data (ledger) . Mining is a solution for completely open scenarios. Sometimes we also call the consensus model a consensus protocol.

2. What problems does blockchain solve and what problems does it not solve?

Blockchain only solves the problem of bookkeeping, but does not solve the problem of matching supply and demand information.

That is, blockchain only solves the problem of effective delivery of assets, which can be understood as guaranteeing the situation after the transaction occurs, but who are you trading with? The supply and demand relationship is not shown.

Therefore, relying solely on blockchain cannot build an efficient value circulation network, so it is time for exchanges to come into play.

The function of the exchange here is similar to that of a traditional exchange, and it only does one thing: build a matching market and provide liquidity.

3. The distribution problem of blockchain application scenarios.

The value circulation network is divided into private network, semi-open semi-private network, and fully open network, which corresponds to private/alliance/public blockchain on the blockchain.

I have an overview diagram here, but I haven't done any research, so it may not be accurate. I will do some data research to supplement it later.

The purple line indicates the number of applications of value circulation networks in the current Internet, such as Xfubao, Xxinpay, and Xlian.

The red color represents the distribution of possible application scenarios of blockchain in the future, which means that the openness and transparency of the value circulation network will move forward as a whole.

Here is an organizational chart I envisioned early on:

That is, in the future value circulation network, we have many options, such as traditional centralized payment, alliance payment between enterprises, personal public chain wallet, etc. In terms of terminal applications, you can choose the corresponding network according to your personal ability and preference, that is, the terminal application should be portable and compatible.

4.What is a blockchain exchange?

The blockchain exchange is such a matching trading platform:

a. Compatible with traditional matching rules and matching engines

b. Fund custody and delivery methods are replaced by blockchain

Such a blockchain exchange can solve the problems that blockchain has not solved, namely the problems of supply and demand information release and liquidity.

5. What are digital assets and why are they important?

In the article “What are we talking about when we talk about blockchain?”, I talked about the three necessary elements of the blockchain world:

Digital Asset Smart Contract Consensus Model

Digital assets are analogous to data structures, smart contracts are analogous to software algorithms, and consensus models are analogous to software architectures. With these three elements, the entity of the blockchain is ultimately produced: a trusted and shared general ledger . (Smart contracts may not be necessary, but such a blockchain is also weakened).
Anyone who has learned programming should understand the importance of data structure. Digital assets are similar concepts:

In the world of blockchain, digital assets are operated entities and valid and authenticated entities. If there is no concept of assets, then blockchain can only provide notarization services and cannot transfer value.

Bitcoin defines digital currency through the method of "mining".

So whether it is Bitcoin, Ethereum, or other blockchain services, they can essentially be regarded as a kind of asset. Since they are assets, why can't they be digitized? Have you heard of the concept of asset securitization?

Whether it is R3 CEV or Hyperledger, no matter what kind of distributed ledger they use, they must ultimately define the valid entities stored in the distributed ledger - data + authentication - digital assets .

6. Talk about possible technical architecture

Next, let’s talk about how to build a blockchain value circulation network:

It is divided into 3 stages:

Phase 1: Building a traditional exchange.

Phase 2: Replace the traditional central database with a private blockchain.

The third stage: Open the blockchain to allow other nodes to participate in the consensus process (supervision and transparency) to form a local value circulation network, such as application in supply chain finance.

In the third stage, we have actually completed how to build a local value circulation network, but we still have one step to go.

What’s missing? An Internet of Value like an Internet of Information!

However, how to build a value Internet and let value circulate on the Internet at high speed like information is a very macro and great proposition, which is as significant as the birth of the Internet. The author can only look forward to it here:

First of all, we must build a stable, strong, and low-cost local value network;
Secondly, the local value network must penetrate the entire enterprise life cycle;
Furthermore, we will encourage enterprises to form autonomous alliances, and through this enterprise alliance, formulate value exchange gateway protocols , which can be based on the TCP/IP Internet protocol, such as the layer above the IP layer.
The figure below is a solution proposed by Meher Roy, the designer of HyperLedger, which is to build a basic protocol on top of the TCP/IP protocol.

The author believes that if you want to build a value exchange gateway, you can directly add an exchange protocol to the application layer of the TCP/IP protocol, a protocol parallel to basic protocols such as HTTP/FTP, as shown below:

MEGW = Money Exchange Gateway = Value Exchange Gateway Protocol.

At this point, all local area networks can be interconnected based on this protocol, forming a valuable Internet.

Discussion is welcome, and meaningful objections are welcome.

The End, Thanks.

Author: Chen Hao
Bitcoin thank you address: 18FTNjsWVihVntRTd9r6kADVDjgVZ5zmAa