Analyzing the value of blockchain from the perspective of "copy-bookkeeping" and "shareholding system"

Blockchain technology will inevitably change human society as profoundly as the copy-entry bookkeeping method and the joint-stock system, and it is also the next hot spot in Internet finance.

"The current situation of blockchain is similar to when TCP, IP or HTML first came out. There were no practical applications, and apart from Bitcoin, there was a lack of killer applications. Bitcoin is only blockchain 1.0, while smart contracts are 2.0. The higher application of blockchain is in the Internet of Things, to achieve real-time credit confirmation," said Huang Shengshi, a friend of the author and a long-term observer of Internet finance.

The author heard a story a few days ago that an ordinary IT staff member of a local unit was invited by a high-end central agency to give a lecture in the capital overnight. Looking at the hundreds of hungry eyes in the audience, this buddy who had conducted in-depth research on BT currency and blockchain due to personal preference was dumbfounded.

What is blockchain? What is its relationship with finance? What are its application prospects? How can traditional financial institutions transform?

Digital currency is just a specific application of blockchain technology. In the next 20 years, blockchain technology will, on a larger scale, subvert the economic structure and social relations of the entire human society. On a more detailed scale, it will abolish the Federal Reserve, the Central Bank and other central banks of various countries, and replace various credit reporting agencies, thus revolutionizing them.

Let's analyze it in detail below:

1. What is blockchain?

Some people say that blockchain is a shared public ledger. I think it is more like a "multi-dimensional authentication system". The so-called multi-dimensionality includes "individual dimension", "spatial dimension" and "time dimension".

Baidu: The essence of "blockchain" is to add timestamps to all transactions through hashing, merging them into an ever-extending chain. Blockchain is a series of data blocks generated by cryptographic methods. Each data block contains information about all Bitcoin network transactions in the past ten minutes, which is used to verify the validity of the information (anti-counterfeiting) and generate the next block.

Under the blockchain technology, an organizational system that operates autonomously without human intervention and management can be formed:

1. There is no mandatory central control;

2. The secondary units have an autonomous quality;

3. The secondary units are highly connected to each other;

The influence between points forms a nonlinear causal relationship through the network.
The characteristics of blockchain are as follows:

Seeing these obscure terms, you will definitely shout: Speak human language! Okay, let me analyze it in a simpler way.

2. Blockchain Value Analysis

1. First of all, blockchain is a more efficient value exchange technology that emerged under the Internet

Human society is determined by the economic base and superstructure. The so-called economic base is the sum of all production relations; the so-called production relations are nothing more than the exchange of various values. Looking at the development of human society, it is a process of constantly optimizing the way of value exchange and constantly improving the efficiency of value exchange.

In order to improve the efficiency of value exchange, different media and intermediaries will appear when the economy reaches a certain stage of development.

Let’s talk about the medium first: from primitive people who had no private property to barter, from using cattle and sheep as currency to shells, salt, and metal currency, from paper money to bank cards, credit cards, and then to Bitcoin, they are all solving the problem of “storing and exchanging value across time.”

What are the characteristics of the medium? With the improvement of information technology and productivity, it is constantly updated to meet the depth, breadth and dimension of exchange and improve efficiency.

Let's talk about intermediaries: Why do we have intermediaries? Now when many people mention intermediaries, they say that we should use the Internet to eliminate intermediaries, as if intermediaries are negative and should be eliminated. This kind of thinking is completely wrong. Intermediaries appear because they can improve the efficiency of exchange and reduce the cost of transactions. From the earliest escort agencies, pawnshops, money houses, ticket houses, to modern banks, and then to Alipay, it is all the same.

Whether it is a money house or a bank, they are all tools for value exchange in human society. Under certain conditions, banks are created, and in the future, they will inevitably disappear. At this stage, power is concentrated in the central bank because, under the technical means of the past, the central bank's centralized "total guarantee" is conducive to improving value efficiency. In the future, blockchain technology will decentralize power to improve efficiency. This decentralized efficiency is higher than that of the central bank.

2. Blockchain-based value exchange will be more efficient than central banks

As mentioned above, banks are intermediaries in value exchange. What is the most important feature of value intermediaries? Reliability, or “reducing future uncertainty”.

Money houses have a business philosophy of being honest and trustworthy. Is it because the owners of money houses are kindhearted? No, it is because only in this way can people feel at ease to deposit their money in money houses. Banks are often located in the most prosperous and expensive areas, and the interior decoration also strives to reflect luxury and solemnity, telling the outside world from the sense of ceremony that we are old and reputable.

The central bank of each country is the overall controller of the country's medium (currency), intermediary (bank), and integrity (credit reporting system). One of its main responsibilities is to maintain financial stability. It is precisely because of credit reporting and the ultimate guarantee of the central bank that everyone is confident in letting banks assume the responsibilities of an intermediary.

The central bank mainly stimulates or suppresses economic development by regulating commercial banks, controlling the liquidity of money, and manipulating interest rates. See the figure below for details: "What is a central bank?" (edited from "The Nature of Finance", by Ben Bernanke)

In his book The Nature of Finance, Bernanke said: The central bank is not an ordinary bank, but a government agency, which is at the core of a country's monetary and financial system. The first function of central banks in various countries is to "promote macroeconomic stability", pursue stable economic growth, avoid large fluctuations (such as recession), and maintain stable low inflation; the second function is to "maintain financial stability", ensure the normal operation of the financial system, and prevent "financial panic" and "financial crisis".

Before the emergence of central banks, were there similar structures? Yes, but they were all private institutions. Central banks with government backgrounds have stronger financial resources and more credibility. Take the United States as an example. In 1914, in order to improve macroeconomic and financial stability, the United States decided to establish the Federal Reserve to manage the gold standard and exercise the function of the lender of last resort.

Traditional banks also face many problems. For example, the biggest problem in issuing currency is whether the amount of currency issued meets the actual demand. Excessive issuance will lead to inflation. From the "gold standard" to the current "credit standard", and then to the future, there must be an algorithm that will automatically calculate the amount of media required for all transactions and stop inflation.

3. Why is blockchain more powerful than the central bank?

In his new book, The Inevitable, Kevin Kelly specifically mentioned Bitcoin and blockchain when discussing "decentralization". KK concluded that "people's trust in the government has been replaced by trust in mathematics."

He made the following analysis: "(Traditionally) a sound monetary system requires accuracy, coordination, security, execution, and an institution to be responsible for all of the above. Therefore, behind every currency there is a vigilant central bank. Bitcoin is a completely decentralized, distributed currency that does not require any central bank to be responsible for its accuracy, enforcement, and regulation. When I transfer $1 to you through a credit card or PayPal account, a central bank is required to verify the transaction. When I send you 1 Bitcoin, there is no central intermediary involved. When I send you 1 Bitcoin, there is no central intermediary involved. Our transactions are recorded in a public ledger. The blockchain is a ledger that is distributed to all other Bitcoin holders around the world. This shared database records the transaction history of all existing Bitcoins and who owns them. That's pretty crazy, like everyone having the complete transaction history of all US dollars! This distributed Bitcoin database is updated six times an hour to record all new transactions made by Bitcoin; before a new transaction between you and me is completed, it must be mathematically verified by a large number of other Bitcoin holders. In this way, a blockchain establishes trust in money through a peer-to-peer system. As Bitcoin supporters say, when you use Bitcoin, you replace trust in the government with trust in mathematics."

From KK’s discussion, we can see that the existence of the central bank is because the exchange of value requires a “general guarantor” of credit, and blockchain technology makes this “general guarantor” unemployed because the credit reporting system it creates is more complete and efficient.

After all this talk, you may ask, well, what do you say is common sense, what does it have to do with blockchain? To make it easier for everyone to understand, let me analyze a few similar cases:

4. Analyzing the value of blockchain from the perspective of “copy-bookkeeping” and “shareholding system”

Double-entry bookkeeping: Single-entry bookkeeping, also known as running account, is very easy to falsify, while double-entry bookkeeping refers to a bookkeeping method in which each economic transaction is recorded in two or more interconnected accounts at the same time with equal amounts. In the Middle Ages, some cities in the Mediterranean had very developed commerce, with very active commerce (including maritime trade) and silver and money exchange industries, and they urgently needed to obtain important information about economic transactions and business results from bookkeeping. After a period of gestation, the bookkeeping method finally made a major breakthrough, and the scientific double-entry bookkeeping method was born in Italy.

Through the double-entry bookkeeping method, all business operations of an organization will leave traces. The double-entry bookkeeping method meets the requirements we just mentioned, namely, improving the transparency of information, reducing transaction costs, and improving the efficiency of value exchange.

However, double-entry bookkeeping also has the possibility of fraud. Copy bookkeeping records in two directions, while blockchain records in multiple directions, which cannot be forged or copied (I personally think unless a super brain appears).

The blockchain records not only current evaluations, but all information is traceable, and all your past records form your current credit.

Scammers need to hide their past. Traditional scammers usually dress themselves up as successful people, with many followers and fine clothes. But in the credit reporting system based on blockchain, scammers have nowhere to hide.

Let's talk about the shareholding system. The shareholding system effectively solves the problem of balancing ownership, management rights and profit rights in a market economy. The so-called corporate governance is nothing more than the relationship between shareholders, owners and managers.

The joint-stock system was also born in the modern commercial society, and companies that cannot truly realize the joint-stock system can only rely on hometown, blood, and family to control the company. However, family ownership cannot achieve the survival of the fittest within a small scope and ensure the long-term competitiveness of the organization, so China has the problem of wealth not lasting more than three generations.

The shareholding system solves all of these problems. Like the Hilton Hotel in the early days, many family businesses have considered the shareholding system, which balances the relationship between shareholders and operators, improves information transparency, and reduces risks and uncertainties in the organization's operations.

3. Analysis of blockchain application prospects

To quote my friend Huang Shengshi, a long-term observer of domestic Internet finance, "The current situation of blockchain is similar to TCP/IP (a technology that appeared in 1969 and was not fully applied until 30 years later) or HTML when it first came out. There is no killer application except Bitcoin. Bitcoin is only blockchain 1.0, while smart contracts are 2.0. The higher application of blockchain is corresponding to the Internet of Things, achieving real-time credit confirmation."

The following figure shows some of the current application directions of blockchain. I am personally more optimistic about equity crowdfunding, Internet finance, and credit records.

In short, blockchain can be used wherever a trust mechanism needs to be established and value exchange is needed. All we need to do is accumulate technology and wait for the "skylight" to appear.

I boldly make the following predictions:

The first entry point of blockchain technology is areas with high trust requirements and high costs of traditional trust mechanisms. The introduction of blockchain technology can reduce the corresponding costs, such as banks, securities, credit reporting systems, and notarization; then equity crowdfunding, insurance, and then widespread electronic currencies, which will completely subvert and change our lives.
The digital currency launched by the central bank is definitely different from the electronic currency that everyone understands. It is just an electronic currency with Chinese characteristics.
In the next 1-3 years, Internet financial technology based on blockchain will have killer applications.

4. Response of Traditional Financial Organizations

In the United States and Europe, blockchain venture capital companies have become the target of various capital and financial giants. Traditional IT companies such as IBM and Deloitte have also launched their own blockchain applications in an attempt to gain the upper hand.

On January 20, 2016, the central bank held a "Digital Currency Seminar". Governor Zhou Xiaochuan personally attended the seminar and invited experts from Citi and Deloitte to discuss the overall framework, evolution, and national cryptocurrency of digital currency issuance. After the meeting, the central bank issued an announcement (see "Read the original text" for details), proposing a strategic development plan for digital currency in my country's banking industry, which can be summarized as follows:

We must strive to issue my country's digital currency as soon as possible and enhance the central bank's control over money supply and circulation, so as to reduce money laundering, combat tax evasion, and improve payment and clearing efficiency.

The financial system in today's world is created and controlled by the United States. The strategic layout of "overtaking on the curve" by using new technologies is correct. However, judging from the announcement of the central bank, "Zhou Xiaochuan and others" are still in the early stages of understanding digital currency, or "pretending to be confused while knowing the truth." The core of blockchain is decentralization, which transforms trust in "Big Brother" into trust in numbers, groups, and multiple dimensions, and this trust is more reliable.

Author: @清风徐来 has been engaged in information technology and management work in traditional enterprises for a long time. He is now committed to studying the changes and practices of traditional management under the impact of Internet thinking.