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Five years after the emergence of Bitcoin, its underlying blockchain technology began to move from being an experiment by a small group of liberal cryptographers and computer hackers to becoming a new hot spot for investment by high-tech companies, multinational financial institutions and venture capital funds.
The latest news is that Microsoft announced that it will join hands with the R3 blockchain alliance to develop and test a new technology for major banks and enterprises to replace the old systems currently in use and improve the efficiency of their systems. It is reported that Microsoft hopes to enable its partners to expand the use of Blockchain-as-a-Service through Azure cloud services and make this transformation process faster.
In September 2015, R3 CEV was formally established. Its core functions are to develop industry standards for blockchain technology development in the banking industry, explore practical use cases, and establish a blockchain organization in the banking industry. Its CEO is David Rutter, who was the CEO of the electronic brokerage business at the famous electronic settlement giant ICAP and is an expert in cross-border clearing and settlement.
The distributed ledger system tested by five blockchain vendors and three cloud computing providers. The five vendors providing blockchain technology to the alliance are Chain, Ethereum, Eris Industries, IBM and Intel. The cloud infrastructure is provided by Amazon, IBM and Microsoft Corporation.
As of early 2016, R3 has 42 founding financial institutions as partners: Citibank, Credit Suisse, Danske Bank, Deutsche Bank, JPMorgan Chase, Goldman Sachs, HSBC, ING Bank, Santander, Bank of America, Barclays, BBVA, BMO Financial Group, BNP Paribas, Bank of New York Mellon, Canadian Imperial Bank of Commerce, Commonwealth Bank of Australia, Intesa Sanpaolo, Macquarie Bank, Mitsubishi UFJ Financial Group, Mizuho Financial Group, Morgan Stanley, National Australia Bank, Nomura Securities, Northern Trust, Scotiabank, Sumitomo Mitsui Banking Corporation, Royal Bank of Canada, Royal Bank of Scotland, Societe Generale, SEB, Toronto-Dominion Bank, UBS, UniCredit, U.S. Banco, Wells Fargo and Westpac.
At present, the R3 Alliance has completed two rounds of testing with large-scale participation of financial institutions, which basically include the world's top 50 banks (except China). According to analysts from all sides, the blockchain technology advocated by R3 may soon be used in the field of international financial payment and clearing, first subverting the existing payment system.
It is worth pointing out that its application in the financial field is only blockchain 1.0.
According to Melanie Swan, founder of the Blockchain Science Institute, the development of blockchain technology can be divided into three stages or fields: Blockchain 1.0, 2.0 and 3.0. The so-called blockchain 1.0 refers to innovations in the field of digital currency, such as currency transfer, redemption and payment systems. 2.0 is more about innovations in contracts, that is, commercial contracts involving transactions, such as stock and securities registration, futures, loans, clearing and settlement, so-called smart contracts, etc. 3.0 corresponds more to the transformation of human organizational forms, including health, science, culture, and blockchain-based justice and voting.
Let us take a look at the following:
1. What is blockchain technology?
On October 31, 2008, a crypto enthusiast (or team) who called himself Satoshi Nakamoto created a project he called Bitcoin - "a completely new P2P electronic cash system that does not involve a trusted third party." Since banks have long existed as trusted third parties, the Bitcoin currency framework proposed by Satoshi Nakamoto envisions a mechanism that does not require any government support or bank operations.
Blockchain is essentially a distributed network of computers (nodes) used to maintain a shared source of information. Each node participates in maintaining the security and accuracy of information by keeping a copy of a complete historical database.
At present, most systems have a place to store electronic files behind them - a database. Users can add, intercept, update, delete and other operations on the data in the files. The current common model is that whoever is responsible for the system will manage the database. For example, Taobao's database is maintained by the Alibaba team, and WeChat's database is maintained by Tencent. People outside these teams have no chance to maintain their databases. But blockchain technology allows every node in the entire system to have the opportunity to read and write this database.
According to Gong Ming, founder of Blockchain Pencil and consultant of Wanxiang Blockchain Lab, if we assume that the database is a ledger, reading and writing the database can be regarded as a bookkeeping behavior. The principle of blockchain technology is to find the person who can keep the book the fastest and best within a period of time, and then send this page of information in the ledger to everyone else in the entire system. This is equivalent to changing all the records in the database and sending them to every other node in the entire network, so blockchain technology is also called a distributed ledger.
Take the application scenario of blockchain technology in Bitcoin as an example. This ledger tracks who owns how many Bitcoins. These coins themselves are not physical objects or digital documents, but entries on the blockchain ledger, so owning Bitcoin is actually owning a piece of information on the blockchain.
Unlike banks’ centralized and private ledgers, blockchain’s “ledger” is public and widely distributed, meaning anyone can download a copy. Except for the encryption that protects user identities, the system is completely transparent.
Blockchain is a string of data blocks generated by cryptographic methods. Each data block contains information about a Bitcoin network transaction, which is used to verify the validity of the information and generate the next block.
Putting the blockchain in a chain in order prevents anyone from spending the same bitcoin twice. Because the blockchain is a shared, public ledger that everyone can check, and is not controlled by any single user, the system cannot be tampered with by any one party. Unlike a bank ledger that can be changed by its owner or government, a change to the blockchain must simultaneously change all the tens of thousands of copies used by "miners" at that moment. Because Bitcoin does not have a central bank at the helm, controlling the entire system would require someone to control 51% of the computing power of about 10,000 "miners", which is extremely unlikely, making the entire system more secure.
2. Why did blockchain take the lead in occupying the financial field?
Since blockchain technology originated from Bitcoin, the earliest users and applications were mostly financial institutions. Currently, the most involved in the traditional financial industry are banking, securities trading and registration. Currently, applications in the fields of medical care, supply chain, Internet of Things, games, government affairs, justice, social networking, artificial intelligence, etc. are mostly in the primary or conceptual establishment stage.
Magister Advisors, a technology industry M&A consulting firm, previously estimated that by 2017, banks' funding for blockchain development will exceed $1 billion, the fastest growth rate of all enterprise software sectors.
R3 CEV, a startup company established in September 2015, initiated the R3 Blockchain Alliance, which has so far attracted 43 giant banks including Wells Fargo, Citibank, Deutsche Bank, HSBC, Morgan Stanley, Royal Bank of Canada, National Australia Bank and Societe Generale to participate in the development of industry standards and protocols for the use of blockchain technology in the banking industry.
On December 30, 2015, Nasdaq also completed the first securities transaction based on the blockchain platform, which was a milestone in the decentralization of the global financial market.
In addition to helping bring high transparency and security to financial transactions and reducing the risk of fraud, blockchain technology advocates also suggest that blockchain technology can also help improve efficiency and reduce expenses. A research report released by Spain's Santander Bank in June last year suggested that by 2022, blockchain technology could save the banking industry $15 billion to $20 billion annually by reducing costs in cross-border payments, securities trading and compliance.
Da Hongfei, the founder of the first blockchain project in China, Xiaoyi, believes that "the impact of blockchain technology on the banking industry after its popularization is revolutionary. The underlying infrastructure of finance will change. Some of the original roles may not be needed in the future, and some new roles may emerge, so the underlying infrastructure will cause great changes." For example, there are some registration and settlement institutions in the financial sector, such as China Securities Depository and Clearing Co., Ltd. in the A-share market and China Bond Depository and Clearing Corporation in the bond market. These institutions can be completely replaced by blockchain technology. The Australian Stock Exchange is working with a blockchain startup called Digital Asset Holdings (DAH), which provides technology for them to build a clearing and settlement system based on blockchain technology.
3. Many governments and central banks are stepping up their research efforts but none of them have been implemented. The People’s Bank of China has also proposed the idea of digital currency
As blockchain begins to attract a lot of investment enthusiasm from high-tech companies, multinational financial institutions and well-known venture capital funds, central banks in various countries and regions have also conducted research and expressed their views on the potential impact of virtual currency and blockchain technology on the financial system and regulatory thinking.
In recent months, a growing number of central bankers around the world have begun suggesting that blockchain technology could be used to create more centralized digital currencies.
In an exclusive interview with Caixin Weekly in February this year, Zhou Xiaochuan, governor of the People's Bank of China, said that "blockchain technology is an optional technology" and that the People's Bank of China has also deployed important forces to study and explore blockchain application technology. However, "so far blockchain still takes up too many resources, both computing resources and storage resources, and cannot cope with the current transaction scale. Whether this problem can be solved in the future remains to be seen."
Ben Broadbent, deputy director of monetary policy at the Bank of England, said in a speech at the London School of Economics in March this year that if blockchain technology continues to develop, it may indeed be possible to transfer and register value without having to go through a credible third-party institution (such as the central bank). Strictly speaking, the central bank is a bank with very simple business. Its main function is to manage the reserve assets of commercial banks deposited in the central bank, namely "central bank money", which is bonds or central bank promissory notes to the central bank. The most familiar form of central bank money for ordinary people is the cash circulating in the market. If private operators use blockchain technology platforms to promote digital currency on a large scale, then the most effective countermeasure for the central bank is to increase the circulation of central bank money as much as possible, expand the scope of financial and non-financial institutions that directly borrow from the central bank, and even allow all individuals to open accounts directly at the central bank, and legislate to prohibit the use of cash and coins. Such an extreme situation can theoretically be achieved without blockchain technology, but blockchain technology may make things simpler.
In other words, the public central bank digital currency and the private bank digital currency may be based on the same technology, but their purposes and usage scenarios may be very different. The closer the central bank account is to a general commercial bank account, the more the central bank digital currency can serve the people, the more competitive it will be in the market, and even have counter-cyclical characteristics: when a financial crisis occurs, deposits may flow from commercial bank accounts to central bank accounts. This phenomenon, Broadbent believes, may make the financial system safer.
According to Gong Ming, governments and central banks have not yet officially started using this technology, but are only examining its feasibility. The British government has issued an 80-page report specifically exploring its feasibility in various fields.
The UK's current real-time gross settlement system (RTGS) is unstable and crashed for nine hours on October 12, 2014, so the UK government has been hoping to find a more stable solution, and is currently investigating the blockchain system. The current status is that it has not yet been put into practical use, but is studying the plan to issue the digital currency RSCoin, but the details are still under investigation and testing.
According to the latest annual report published by ABN AMRO on March 16, the Dutch central bank is working on developing an internal blockchain prototype called "DNBCoin". The Dutch central bank said that blockchain technology may have an impact on the existing revenue model of banks and the banking supervision system. Through new digital currency exchange methods, it will be possible to create new revenue for banks, reduce costs, and have an impact on the financial supervision capabilities of the Dutch central bank. But this is still in the research and development stage.
4. Commercial operations are in their initial stages, and major global consortiums are already taking action.
Blockchain, which collectively maintains a continuously growing database in a decentralized manner, provides an optional direction for future upgrades in the financial industry, and is therefore attracting the attention of global financial giants and investors.
According to Melanie Swan, founder of the Blockchain Science Institute, the development of blockchain technology can be divided into three stages or fields: Blockchain 1.0, 2.0 and 3.0. The so-called blockchain 1.0 refers to innovations in the field of digital currency, such as currency transfer, redemption and payment systems. 2.0 is more about innovations in contracts, that is, commercial contracts involving transactions, such as stock and securities registration, futures, loans, clearing and settlement, so-called smart contracts, etc. 3.0 corresponds more to the transformation of human organizational forms, including health, science, culture, and blockchain-based justice and voting.
At present, the development and application of blockchain technology are mainly in the 1.0 and 2.0 exploration stages. At the same time, major financial institutions around the world are investing heavily in blockchain technology research and blockchain projects, including Nasdaq, Goldman Sachs, Citibank, JPMorgan Chase, UBS, State Street, Santander, Barclays, etc.
Of course, the most important one is the R3 blockchain alliance mentioned above.
In the first half of 2015, Bitcoin companies Coinbase, 21 Inc and Circle successively received investments from giant companies such as American venture capital firm Andreessen Horowitz, chip maker Qualcomm, New York Stock Exchange (NYSE), and financial giant Goldman Sachs. The three startups received a total of US$241 million in financing.
Since the second half of 2015, the concept of blockchain has begun to rise, and traditional financial giants have also begun to try to deploy blockchain or distributed ledger projects. According to statistics, in 2015, there were 13 investment events in the non-Bitcoin blockchain field, accounting for 19%; the investment amount was US$129.3 million, accounting for 23% of the total investment amount;
5. Possible application scenarios of blockchain
Qin Yi, the Chinese representative of Deloitte Rubix team, believes that blockchain is a very new technology. What role it can play in every link of specific business, including whether the existing technology can achieve the effect of use, is still in the process of verification. It also involves regulatory information, including how much information can be known to regulators and what can only be known to individuals in transactions. This will be reflected in the design of blockchain. Therefore, the embodiment of its commercial value must first create a business scenario. If blockchain can be used in this business scenario, how many regulatory conditions must be met in this business scenario, and these conditions must be achieved through design. The following are several application scenarios of blockchain technology:
1. Global decentralized real-time settlement and clearing system
R3 CEV, a US startup, has united 43 of the largest institutions except China to form a blockchain alliance, with the goal of creating a global decentralized real-time settlement and clearing system. Currently, remittances abroad and currency conversions need to go through the SWIFT system, and this process often takes t+1, t+2, or even t+3. If blockchain technology is used, real-time settlement and clearing can be achieved in theory, which is equivalent to a global Alipay system.
In this ideal situation, banks will benefit the most because they no longer need to go through the SWIFT system, which greatly reduces costs. At the same time, due to real-time settlement, it also reduces the risk from counterparties. This global decentralized real-time settlement and clearing system can bring the global financial volume to a new level.
2. Decentralization of medical care
In the medical field, the main application of blockchain is the preservation of personal medical records, which can be understood as electronic medical records on the blockchain. If you imagine medical records as an account book, it is in the hands of various hospitals, and the patients themselves do not have control over it, so patients have no way to obtain their own medical records and historical conditions. Just like a bank account cannot see past transaction records, this will cause great trouble for future medical treatment. But now if blockchain technology can be used to preserve it, there will be personal medical history data, whether it is for future medical treatment or for planning your own health, there will be data available, and the real owner of this data is the patient himself, not a hospital or a third-party organization. In addition, these data are highly private, and the use of blockchain technology also helps protect patient privacy.
This application is decentralized, more open, and users can have more autonomy. It can achieve a new form of organizing information, where everyone has their own information, instead of having to entrust the information to a certain organization for safekeeping as in the past.
3. Smart Lock (Slock)
Slock.it, a German startup, wants to make a smart lock based on blockchain technology, connect the lock to the Internet, and control it through smart contracts on the blockchain. Anyone who controls the lock can issue one or more private keys and customize the private keys in a complex way, setting when the lock is enabled and when it is opened. In this way, the sharing economy can be further decentralized, and anything that can be locked can be easily rented, shared, and sold. The concept of Slock goes beyond the scope of serving Airbnb users. It wants to further subvert this sharing economy, allowing users to pay directly to a lock and then open it; the lessor can also change the customization of the private key at any time after Fang Ke leaves, making the whole experience more convenient and safe. People can also use this technology to rent bicycles, password lockers, etc., and even let others charge the car at their doorstep and charge a fee.
Link: Who is Satoshi Nakamoto? No real person has appeared yet.
Satoshi Nakamoto is the creator of the Bitcoin protocol and its related software BitCoin-Qt. He published the paper "Bitcoin: A Peer-to-Peer Electronic Cash System" on the cryptography mailing list of the metzdowd.com website in 2008. The paper describes an electronic currency he calls "Bitcoin" and its algorithm, and details how to create a decentralized electronic transaction system that does not require mutual trust between the two parties.
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