Blockchain eliminates the possibility of Internet finance running away

Blockchain actually uses technical means and mechanism design to achieve mandatory trust, and can be understood as the trust layer for the future development of the Internet.

If the earliest data finance is channel information matching, corresponding to the emergence of various online financial supermarkets and financial products. The initial development is service matching, corresponding to the emergence of P2P and big data credit. Now, especially when Jinlu Financial Bank suffered a run, Zhongjin Capital was investigated, Shenzhen e-life Wealth was exposed to withdrawal difficulties, and P2P was once again pushed to the forefront of public opinion, the emergence of blockchain, a decentralized and mandatory trust model, is bound to promote the establishment of a more efficient and transparent transaction and payment mechanism, which will play a subversive role in future financial innovation.

Blockchain Prequel: The Amazing Bitcoin When we talk about blockchain now, it is not limited to Bitcoin. The important reason is that Bitcoin, as a decentralized emerging digital currency that wants to replace traditional legal currency, has entered a dead end. The biggest feature of this dead end is that 70% of the world's mining computing power is in China, which is an irony for those who are determined to decentralize the value network. That is why many foreign Bitcoin tycoons were pessimistic and sold Bitcoin some time ago. From this perspective, Bitcoin is an experiment, and it is an experiment of blockchain with very high goals from the beginning. From scratch, it is a completely open and public value network with the ultimate goal of subverting currency. It is a very radical and remarkable blockchain application with great historical significance. At the same time, because of some deep-rooted problems of Bitcoin and its nature as a new thing, it only represents the beta era of blockchain for the time being.

Now, to be precise, since the end of 2010, blockchain has been abstracted from Bitcoin and has become a new mechanism and a new ecology. Then it has been combined with our current finance, the Internet, property rights transactions, notarization, and real industries, all the real industries we can imagine. However, this process is currently limited to finance, especially with financial applications such as credit, clearing, payment, issuance and circulation of securities in the financial field. The real combination with the real industries we see in our daily lives has not yet begun. Regarding blockchain, we will introduce it in three parts: what exactly is blockchain; the application models of blockchain that have appeared now; and the investment opportunities of blockchain applications in the primary market. (The emphasis on the primary market is because there are no targets in the secondary market now. From the perspective of secondary market investment, we can only guess which companies will get involved in the blockchain industry, which companies have better qualifications, and the blockchain industry that can be deployed next. If you want to pick a blockchain target in the secondary market, there is currently none in China.

What is blockchain?

Before explaining what blockchain is, I hope everyone can understand that our entire form of value exchange is undergoing a qualitative change. Let me talk about two changes. For example, what will be the subject and content of future transactions? Now the subject of the transaction is people - I sell a house to my friend, which is equivalent to him giving me money, and then I trade the property rights of the house to him. This is a transaction between people. The content of the transaction is the house, which is the ownership of a physical object. The frequency of transactions and the granularity of transaction value are relatively large.

But in the future, the three dimensions of transaction subject, content, granularity and frequency will undergo qualitative changes. First, the subject of the transaction is no longer a person. If the subject of the transaction is between devices, such a transaction form is the Internet of Things. For example, transactions between sensors, sensors and systems, sensors and starters, and other related devices. To put it in a more vivid way, for example, in the home Internet or smart home, furniture, electrical appliances and grid meters are traded autonomously, without human participation. This is the so-called change in the subject of the transaction. The content of the transaction is changing. The transaction content is divided into two parts. The first is that the commodity we trade in the future is not the ownership of a commodity, not a house, but the right to use a certain physical asset. For example, Airbnb, Uber, and Didi are actually transactions of the right to use real estate and vehicles. The second is the right to income of the traded commodity, such as securities (the actual corresponding asset income rights of securities). It represents that the content of our transactions in the future may not be physical assets, but information and data. The time granularity and value granularity of transactions will also change greatly. Because the transaction subject and transaction content are changing, the transaction amount can be large or small, and the small amount may be a few milliseconds, and the corresponding transaction granularity will become very small. Under such background conditions, our current human-centered and highly centralized form of value circulation is not feasible and cannot cope with the new value ecology of the future. A new value circulation network is necessary.

What is blockchain? There are actually two definitions of blockchain today. One definition is to regard blockchain as the mechanism by which Bitcoin operates. That is, Bitcoin forms a data block through everyone's joint accounting. Then, through cryptography and computing power competition mechanisms, this block is connected to the previous data chain. In this way, the data on the chain is made tamper-proof through technology. Because it has the characteristics of time inheritance and is encrypted with SHA256 strength. Another important point is that different blockchain mechanisms will use different authentication to ensure the uniqueness and finality of data, as well as its tamper-proof nature. The authentication mechanism used in Bitcoin is POW, Proof Of Work, computing power proof. It is to let hundreds of thousands of Bitcoin mining machines around the world mine at the same time. The so-called mining is actually accounting, and then the uniqueness of this ledger and the absence of data forks are ensured through computing power competition.

In addition to being a data recording mechanism, what is another definition of blockchain? Another definition of blockchain is an ecosystem. It is an excellent solution to jointly maintain a reliable distributed database through decentralization and mandatory trust, and build a new business model and ecosystem based on distributed databases, cryptography, and authentication mechanisms. Because the core of blockchain is the distribution of databases, and then use various applications to call these data and provide various services, similar to the various SAAS, PAAS, BPAAS, etc. that everyone often mentions in the cloud era. Blockchain will also have BAAS (Blockchain As A Service) based on blockchain. Among them, the most popular application is smart contracts.

The so-called smart contract is to use these data in the distributed database that cannot be tampered with as the underlying basic data of the smart contract to execute various agreements and contracts. Smart contract, in the final analysis, is a contract. It's just that the common contracts we have now are all written in natural language, that is, Chinese, English, French, etc. These human languages ​​are called natural languages. There are many problems with contracts written in natural language. Limited by the imprecise logic of human language itself, ambiguous interpretations often occur. In addition, natural language contracts necessarily bear economic costs. Because drafting a contract requires economic and time costs, you also need a lawyer to help you draft it, third-party notarization, third-party arbitration, court enforcement, etc. So if you go to the supermarket to buy a box of chewing gum, you don't need to write a contract, because its value granularity is too small and it is not economically cost-effective. Only some transactions with relatively large value granularity need to use contracts, such as real estate transactions.

But in the future, the time granularity and value granularity of the transactions mentioned above will become very small, and the common natural language drafted agreements or contracts will no longer be usable. Moreover, the underlying change is that the subject of the transaction is not a person, but a device, which cannot understand human language, not to mention that human language has many defects. Therefore, it is necessary to write this contract in computer language, and based on the blockchain data with mandatory trust, the contract terms of both parties of the transaction are automatically executed through code. This gave birth to smart contracts. With distributed databases and smart contracts, it is also necessary to design a very clever verification mechanism according to the blockchain application scenario to ensure the uniqueness and finality of the data in this blockchain distributed database. Therefore, it can be found that blockchain actually uses technical means and mechanism design to achieve the role of mandatory trust, which can be understood as the trust layer of the future development of the Internet.

The cost of many economic activities nowadays, in the final analysis, comes mostly from the cost of trust. As Premier Li Keqiang mentioned last year, how to prove that "your mother is your mother"? This seems like a stupid question, but it is a dilemma that each of us will encounter. For example, when we go through security check on an airplane, we have all experienced this procedure. The security personnel will compare your face with your ID card and ticket to check whether your face matches the photo on your ID card. This is actually a very inefficient and unreliable way of identity verification. Because the face can get fatter or thinner, and it is also possible to change your appearance through plastic surgery. In terms of time cost, everyone will spend at least two minutes on the face check at security, which often leads to long queues at the entry gate. This is actually the time cost of trust. In China's current trust environment, there are countless similar cases. The biggest problem we are facing now is the lack of a good trust environment, and trust is the basic guarantee for the future value transfer and service of the Internet, because you don't know whether the person opposite the computer is a person or a dog. Blockchain truly uses technology to ensure that it cannot be counterfeited, and reconstructs the trust environment required for economic activities to occur. Therefore, it is not an exaggeration to call the blockchain-based value Internet the "next generation Internet."

“Next Generation Internet”

There are many types of conventional Internet. When you open a web page or read a piece of news, we call it "information Internet". It is actually based on our conventional communication infrastructure and information transmission protocols to achieve information flow. Another form of Internet is "energy Internet", which is the flow of energy flow. Information Internet is the flow of information flow, and energy Internet is the flow of energy. There is still one thing missing - a network for value flow, that is, value Internet.

Blockchain is a very important means to realize the value Internet.

Moreover, blockchain has an advantage in that it does not violate the current TCP/IP transmission protocol. In fact, blockchain is a data layer and data layer-based application built on the TCP/IP network transmission protocol. This means that the hardware layer of our current Internet, the host and network communication equipment for data storage, processing and transmission, including optical fiber, routing, servers, etc., and various underlying and physical layer communication infrastructures do not need to change at all, and blockchain can be transplanted into the existing information Internet and social and economic life operations, providing everyone with mandatory trust and decentralized services.

#Decentralization + mandatory trust#

Blockchain is both very disruptive and will overturn many things we are accustomed to. It also has very good inheritance. This allows it to go fast and far. The reason why blockchain will overturn many things we are accustomed to is that in blockchain, many concepts need to be deconstructed and reconstructed. For example, what is an intermediary institution, what is a bank, what is the role of a securities company, and what is the role of a stock exchange. What are the roles of accounting firms, law firms, guarantee companies, insurance companies, rating companies, etc., these so-called third-party institutions? Blockchain will make many of the current trusts no longer necessary. It is no longer necessary to use a strong centralized means and a centralized institution to provide trust endorsement for various economic activities. What is mandatory trust? Blockchain uses technical means, an unalterable distributed database, and a very clever verification mechanism based on different applications, plus cryptography to ensure the value transfer and value self-certification between multiple parties. The "mandatory trust" of blockchain is actually to achieve strong trust through technical means. This is also the magic of blockchain and also the subversion.

Real applications of blockchain

Taking Bitcoin as an example, let's briefly introduce how blockchain implements transaction functions. Take a Bitcoin payment as an example. I want to pay one Bitcoin from my Bitcoin wallet to my colleague's Bitcoin wallet. How do I do it? First, install the Bitcoin wallet application on both of our phones. This Bitcoin wallet application is completely open source and can be downloaded from any Bitcoin-related website. Then I use my phone to scan the QR code in my colleague's Bitcoin wallet. This is actually initiating a transaction. The Bitcoin QR code of my colleague's Bitcoin wallet is its public key, the address of his Bitcoin account. When I scan it, I am actually sending a payment request. When he receives this request, he uses his private key to receive it.

While I was scanning his QR code, our transaction information was broadcast to the entire network through the Internet. Who are the recipients of the broadcast? Nearly 200,000 Bitcoin mining machines in the world. They are actually servers, busy keeping accounts and recording Bitcoin transactions happening every minute and every second around the world. These 200,000 Bitcoin mining machines are actually competing for the right to record a block. And this block is the collection of all payment transaction ledgers in the past ten minutes, that is, the ten minutes between the establishment of the previous block and this block, packaged into a block. Then the uniqueness and immutability of this block are ensured through cryptographic algorithms. When a mining machine mines such a mine, that is, establishes a block, it will broadcast a message to the entire network saying that I have mined this block, and your other mining machines can stop and no longer mine this block. Then it will connect this block to the main chain, which is a unique data chain, and a new block on the blockchain is built.

But think about it, why do so many mining machines need to record various transactions? What are the benefits? Satoshi Nakamoto, the inventor of Bitcoin, came up with an excellent idea, which is to use Bitcoin as an economic incentive mechanism. Any mining machine that competes for the right to build a certain block can get 25 Bitcoins in return. This process not only mobilizes the enthusiasm of massive computing devices around the world, but also builds a network for value exchange, which is very clever. There are two reasons for taking the Bitcoin blockchain mechanism out for special discussion. First, through the Bitcoin blockchain mechanism, it is easiest to understand how the blockchain works, what is a block, what is a chain, what is the meaning of virtual currency, and what kind of authentication mechanism allows it to realize the payment and transfer of value. Another reason is that it must be praised. Bitcoin is a thing that can realize the role of the value network. There are two development paths for the blockchain. One of the paths is like Bitcoin, using the most radical way to build a completely open chain and aiming to achieve a monetary revolution. Another way is what many financial institutions are doing now, which can be called the "small steps and fast running" method, that is, starting from the simplest dedicated chain, the private blockchain within a single financial institution, that is, the distributed database within the financial institution. After the private chain is established, it will be combined with other companies’ private chains to form a consortium chain for blockchain applications and development. Both paths are likely to succeed.

Summary

In summary, blockchain has many characteristics, one of which is decentralization. Take Bitcoin as an example. There is no centralized organization, such as the IMF or the World Bank, to manage and promote Bitcoin. And you will find that the Bitcoin payment applications that can be downloaded online, such as Bitcoin wallets, are all open source. So it is a decentralized and transparent value network. In addition, the data of the Bitcoin blockchain is publicly available. You can go to blockchain.info and find out all the transaction information from the first block to the latest block. Blockchain also has a good privacy protection function. If you want to view the transaction information of any block, you need to obtain the permission of the owner of this information. This means that when you try to open a public key with a private key, the owner of the information must also use his private key to ensure that you can see his data. Basically, we no longer have to worry about personal information being sold layer by layer.

Any organization or individual who wants to call my data from the database built by blockchain must obtain permission from my private key. In the entire blockchain process, the government will inevitably play a very important role because it is an omnipresent regulator. There may be some super permissions in the future. This super permission can open any block without anyone's permission, which is inevitable. Decentralized organizations will still encounter centralized supervision. As for the mandatory trust feature of blockchain, it is particularly valuable at a time when some investors are stuck in a quagmire and P2P is facing a crisis of credibility. Removing fraud risks and maintaining trust can be said to be the biggest cost of social operation at present. Blockchain also realizes the democratization of equipment and business. The database is established and maintained by everyone, and the related blockchain-based applications are developed and enjoyed by everyone. This is actually a kind of great democracy in the era of business and data.

#Blockchain is not omnipotent#

Many people question whether this completely decentralized application is more efficient than the current centralized application. Recently, there is a very popular blockchain business application called openbazzar. It is a P2P product sales platform that uses blockchain. But you will find that even if it is developed to the extreme, the user experience is similar to that of Taobao. So decentralization is not omnipotent. It may not be as good as some centralized business models in many fields. At the same time, decentralization will inevitably encounter the pressure of centralized supervision. It is not that something has value just because it is put on blockchain.

Where are the targets of blockchain applications?

To see what is suitable for blockchain, it is recommended to follow three standards. First, the participants are very diverse. For example, in cross-border payments and supply chain finance, the participants, whether payers or receivers, the financial institutions, credit investigations, and third parties involved are very complex, and a strong trust environment is especially needed. Second, incremental economy. A new ecology, without the drag of the stock system, can build an ideal ecology from scratch. For example, the sharing economy, blockchain applications based on the sharing economy will soon be available. The third is virtual commodity trading. For example, securities are the best virtual commodities. Stocks are a certificate of ownership of a company's shares, and bonds are certificates of the company's debt income rights. Similar virtual commodities or commodities with information as carriers are most suitable for blockchain. Based on the above three scenarios, there is a lot of room for imagination when looking for an entry point for blockchain.

#Existing value model of blockchain#

The first value model is property notarization. Property notarization not only solves the problem of your mother being your mother, proves who you are, and that you are the owner of something, but also solves the problem of transferring the property rights and income rights of something to another party. So now a large number of financial models or business models involve notarization. We say that Alipay actually plays a role in guaranteeing that the money does not have to reach the seller before the property transaction, but Alipay is a centralized regulatory system. The reason why Alipay can do this is because users trust Taobao, Alibaba, and Jack Ma. If a new company with unknown origins jumps out and wants to provide users with centralized trust endorsement services, would you believe it? Definitely not. Trust has boundaries. In this case, property notarization is very important, but currently it can only be done by a centralized third party. Blockchain is different. Blockchain can do P2P, what we call Peer to Peer property transfer. At the same time, each transfer of property rights is completely irreversible. When the data is transmitted, the property rights have actually been transferred to the recipient.

The second model is called the exchange between different assets and securities, that is, the exchange between various securities, currencies, precious metals and other assets. Suppose we want to exchange US dollars for RMB. You go to the bank to exchange currency, the country buys your US dollars and then gives you RMB, and then the central bank uses this US dollar as a reserve base asset to issue RMB. This is the current process of currency exchange. The actual exchange can be very simple through blockchain. Ripple, the world's first open payment network, realizes the exchange between various assets and securities through a decentralized market maker system. Blockchain can achieve the equivalent exchange between different physical assets and different valuable assets, while greatly reducing the procedures in asset transactions and the process costs of the middle and back-end. Not only for valuable assets, but also for currency transactions, houses, land, vehicles and precious metals, it can also play the same trading role.

The third model is inter-institutional clearing. In fact, the issuance of legal tender can also be understood as inter-institutional clearing, because this is the process of internal clearing between the central bank and commercial banks. The so-called clearing, in the final analysis, is a bookkeeping process, and the same is true for the issuance of currency. We divide currency into M1 and M2. M1 is base currency, also known as strong currency. The central bank has its own Balance Sheet, and it must have underlying assets behind it to issue base currency. M2 is the central bank issuing M1 to the commercial banks below, or other financial institutions with credit capacity. These financial institutions then expand M1 through their own credit means and then issue M2. This is broad money, our current currency value circulation network. Through blockchain, the central bank can fully realize the role of directly and accurately issuing currency, which is actually a means of currency issuance called "helicopter money".

The fourth type of value application is cross-border value settlement, and cross-border payment is one of them. Due to its complex process and numerous participants, the concept of cross-border payment is also popular in the current capital market. Blockchain can completely simplify its procedures. Only the initiator and the receiver can complete the value transfer. But there is a problem here. If it is too simple, it is suspected of evading supervision or even money laundering. If blockchain can simplify the process of value transfer and gain the approval of regulators at the same time, it will take some time. In essence, blockchain is conducive to supervision. Any transaction can find the block where the data is located on the blockchain, and then obtain super permissions through cryptographic authorization to view the data in this block. Therefore, if the blockchain is used well, it can actually greatly reduce the cost of supervision and achieve a new round of Internet ecology.