What is “blockchain” after Bitcoin?

Author: Hou Benqi Zhao Fei works at Industrial and Commercial Bank of China

    On Halloween night, amid the messages of ghost costumes and heated discussions about blockchain, a question suddenly arises: What exactly is blockchain?

     After the release of the "Notice on Preventing Risks in the Bitcoin Industry" by five ministries in 2013, the glory of the price of one Bitcoin reaching RMB 8,000 has long gone. After the Mt. Gox incident, Bitcoin, which was associated with drug trafficking and smuggling scandals, gradually faded out of the public opinion. After the digital currency industry went from being hyped to rational and calm, giants such as banks, exchanges, and auditing companies began to turn their attention to the underlying technology of Bitcoin - blockchain. Recently, a blockchain startup called R3 CEV announced that it has obtained the support and participation of 25 major international banks.

From “Coin” to “Chain”

     For the general public, the concept of blockchain first appeared in discussions about Bitcoin. Bitcoin is a controversial digital currency, and blockchain is the underlying technology of Bitcoin. Bitcoin is just the most famous application of blockchain.

     Blockchain is a distributed peer-to-peer network without a central control point. It uses a distributed collective operation method to implement a set of tamper-proof and trustworthy database technology solutions. Its characteristics are decentralized storage, highly transparent information, and not easy to tamper with.

     To put it more simply, blockchain is a "public ledger" that uses computer programs to record all transaction information on the entire network. Nodes in the blockchain network obtain the right to record accounts by calculating a difficult calculation problem; any node on the blockchain network can observe the entire general ledger; blockchain data is jointly maintained by each node, and each participating maintenance node can obtain a copy of the complete database. Unless more than 51% of the nodes in the entire system can be controlled at the same time, the modification of the database on a single node is invalid and cannot affect the data content on other nodes.

     In the past two years, the discussion about blockchain has gradually transitioned from 1.0 to 2.0. If blockchain 1.0 refers to recording digital currency transactions led by Bitcoin on the big ledger of blockchain, then blockchain 2.0 is based on this and adds a wider range of applications.

  Hitting the pain points

     Optimistic technology experts believe that anything involving decentralized records and interactions can be considered for developing related applications based on blockchain technology. The following are various possible application models that are being explored.

The first is registration. Blockchain has the characteristics of trust and traceability, that is, blockchain uses an algorithm called "Proof of work" and some consensus rules to ensure that only legal blocks can be added; a block is linked to the blockchain after verification and will be stored permanently; the account chain database native to the Internet is indestructible, and the recorded information fields are associated and correspond to the generation time. The information in the trusted account chain is unique and cannot be tampered with. Therefore, blockchain can be used as a reliable database to record various information.

For example, Bitproof and Blocknotary attempt to record contract transactions on the blockchain, which is equivalent to saving the contract on a public ledger. Colu manages assets through digital tokens. Verisart uses this distributed technology to verify the authenticity of artworks. London-based Everledger has recorded 830,000 diamonds on the blockchain to avoid losses in the diamond industry each year due to fraud.

The second is to confirm ownership. The open source and sharable nature of blockchain allows all institutions and individuals to participate in the operation of the entire system. Each participating maintenance node can obtain a copy of the complete database, thereby confirming the ownership of the information. Blockchain is an ideal solution for storing permanent records, such as authenticity verification, land ownership, equity transactions, and more applications. The "Xiaoyi" system is trying to use blockchain to register company equity (shares), becoming a company's shareholder register and a legal place to record shareholding information.

The third is intelligent management. Blockchain supporters believe that the core contribution of blockchain is to solve the trust problem in the process of multi-point information interaction - the "Byzantine Generals Problem". This problem originated from the Byzantine Roman Empire. Due to the vast territory of the empire, the generals of the imperial army were geographically separated, and there were traitors among the generals. Traitors would mislead the generals' decisions, making them unable to win, and it became a difficult problem for the generals to reach a consensus based on the correct information.

     Translated into computer language, the "Byzantine Generals' Problem" refers to the difficulty faced by information interaction in traditional systems, where any node in the entire network cannot trust the other party it is communicating with. However, based on a rigorous and powerful algorithmic consensus mechanism and distributed maintenance principles, blockchain can ensure that all nodes in the entire network automatically and securely exchange data in a trusted environment.

     This is a big help to IBM , which is investing heavily in the Internet of Things . IBM is trying to use blockchain technology to achieve the key problem of Internet of Things technology - to achieve self-management and intelligent interaction of each device through a distributed cloud network. ShoCard is also studying the realization of intelligent management of contracts, that is, once certain terms are met, the contract will be automatically processed.

  Internet Finance 2.0

     Internet finance version 1.0 has changed the business and service model of finance, but the essence of finance has not been shaken. Some experts even believe that "Internet finance will become history." Blockchain, as the infrastructure for digital currency and information exchange, may provide a direction for Internet finance to upgrade to version 2.0.

     Although global financial giants including Nasdaq , JPMorgan Chase , Citigroup , UBS Group and Goldman Sachs are busy setting up blockchain laboratories and competing to invest in related technology companies, what they want may not necessarily be the transformation of financial infrastructure. What may arouse their interest is the application in the following areas that may help them improve operational efficiency and reduce costs.

First, improve the level of automation and reduce operating costs. Financial institutions' various business systems and back-end work often face long processes and multiple links. Blockchain provides the possibility to simplify and automate these manual financial service processes. Management consulting firm McKinsey released a report saying that blockchain finance will realize the electronicization of bond trading, blockchain and programmatic trading, and reduce front-end and back-end labor costs. The report also mentioned that the future business model of banks will undergo tremendous changes. On the sales and trading side, digital channels will become the "standard configuration" for transactions with customers.

The second is to improve payment efficiency. For banks, the main attraction of blockchain is that it can be used as a record system: reliable, detailed and irreversible. The most promising application in the short term will be payment. Last year, the global cross-border remittance market reached 583 billion US dollars, which is a huge amount. Ripple is making it a reality. It is a payment settlement system based on a distributed ledger. Inspired by Ripple, Earthport launched a distributed ledger service in August 2015, which combines the potential of Ripple with Earthport's cross-border payment service and uses the local automatic clearing house ( ACH ) for international balance of payments. At the same time, some financial institutions are seriously considering using the blockchain technology behind Bitcoin as an alternative to their clearing and settlement systems.

The third is to meet the requirements of regulators and customers for data records. Deloitte believes that blockchain technology solves the difficulties that the audit industry has always faced in meeting the requirements of the public and regulators, and can ensure the integrity, permanence and immutability of all financial data.

  The future is still short-lived

     The designers of blockchain, which is based on cryptography, have built a new financial infrastructure and methodology. However, "the success or failure is due to Xiao He", this origin and various disintermediation characteristics may become a challenge for its practical application. As a technical school, blockchain "ignores" concepts such as legal jurisdiction, taxation, and the state. Blockchain has built a set of autonomous norms according to the principle of "greatest convention". (See Melanie Swan, "Blockchain: Blueprint of a new economy").

     Financial leaders involved in blockchain research should all admit that distributed ledger technology may have a revolutionary impact on financial services such as payment and clearing. However, for any financial innovation, banks must ensure that it can provide economic benefits, meet regulatory requirements, and not deviate too far from the existing operating system. Therefore, whether the application of blockchain can be successful depends on practical experience.

     Moreover, on the technical level, blockchain still needs to solve many problems, such as network security and block capacity.

In the foreign Fintech field, new concepts and new terms continue to emerge. In the domestic Internet finance field, investors are looking for new opportunities and new hot spots. Is blockchain the dawn of new technologies and new applications, or is it another flash in the pan of hype? With curiosity and awe, the author visited the website of R3CEV, which claims to have 25 world-renowned banks as partners. The technology and business information he saw was pitifully small, but the company's own press releases and media reports on the company were very comprehensive.

     At a time when conceptual ideas outweigh practical applications, and impetuous noise outweighs rational deliberation, angel investors, PE investors, and financial tycoons should remain calm and sober in the face of new concepts introduced and hyped by so-called overseas elites. Learn from the lessons of the hype about "face recognition" and figure out what exactly blockchain is before investing.