Blockchain: The End of Internet Finance

Editor’s Note:

This article is the preface of the book 《区块链：新经济蓝图》 , written by Xiao Feng, the founder of Wanxiang Blockchain Lab. Dr. Xiao Feng is the Vice Chairman and Executive Director of China Wanxiang Holdings Co., Ltd., Vice Chairman of Minsheng Life Insurance Co., Ltd., Chairman of Wanxiang Trust Co., Ltd., Chairman of Minsheng Tonghui Asset Management Co., Ltd., Chairman of Tonglian Data Co., Ltd., and Chairman of Tonglian Payment Network Services Co., Ltd. Dr. Xiao Feng has more than 20 years of experience in securities and asset management. Boshi Fund Management Co., Ltd., which he founded, is currently one of the largest fund companies in China in terms of asset management scale.

Recently, the 2015 First Global Blockchain Summit hosted by Wanxiang Blockchain Lab will be held in Shanghai on October 15 and 16. The book "Blockchain: Blueprint for the New Economy" will be released at the conference as the first book in the "Wanxiang Blockchain Lab Series".

This article provides a concise and easy-to-understand introduction to blockchain. Let’s take a sneak peek before the book is officially released.

Blockchain: The End of Internet Finance

A recent article on the Chinese version of Forbes magazine said: Have you never heard of blockchain? You may know very little about Internet finance!

This is definitely not the work of the headline party. In China, where Internet finance is almost a bubble, the debate about whether there is really Internet finance in the world can still rise from time to time like sediment. No wonder someone wants to make this reminder. In fact, any Internet finance technology or business model prototype we see in China originated in Europe and the United States, without exception! It’s just that they don’t call it Internet finance, but FinTech, financial technology! If the US ambassador to China gives you a business card with a Chinese name, you must not go to the United States to look up the person according to the Chinese pinyin! In FinTech, the most popular technology at present is blockchain technology. It is reported that major financial institutions around the world and even the Nasdaq Stock Exchange have already or are about to establish blockchain laboratories to test the application of blockchain technology in various financial scenarios. Citibank even issued its own digital currency "Citi Coin" internally. The Swiss Union Bank (UBS) has tested more than 20 financial applications on the blockchain, including financial transactions, payment settlements, and the issuance of smart bonds.

Some people predict that Internet finance will disappear in ten years, because by then Internet finance will be integrated into the world like the Internet, and everything will be connected and invisible. I have always wondered what Internet finance will be like at that time? The book "Blockchain: New Economic Blueprint and Introduction" may help us find a better answer.

We all know that trust is the basis for the transfer, transaction, storage and payment of any value in the world. Without trust, humans will not be able to complete any value exchange. Initially, people relied on blood and clan to establish trust, then people relied on religion and morality to establish trust, and later people relied on laws and organizations to establish trust. Otherwise, human society cannot complete more and more various value transfers and exchanges. As human society becomes more and more digital, as the Internet evolves from an information Internet that transmits information and eliminates information asymmetry to a value Internet that transmits value and reduces the cost of value exchange. People began to try to establish a trust relationship between the two parties of the transaction through数学算法, so that weak relationships can rely on algorithms to establish strong connections, making some value exchange activities that were almost impossible to complete before the high development of Internet technology a reality. This is a major progress in the field of value exchange in human society throughout history. Among them, financial exchange activities are the main and most important application.

Blockchain is essentially交易各方信任机制建设的一个完美的数学解决方案, and Bitcoin is the first great application of blockchain technology. The principle of blockchain technology comes from a mathematical problem: the Byzantine Generals Problem. The background of this problem is that during the Eastern Roman Empire, several generals of the alliance who were besieging a castle could only rely on messengers to convey information. How could they prevent themselves from being deceived and confused by traitors and making wrong decisions? Mathematicians designed an algorithm that allows generals to add their own signatures after receiving the information from the previous general and then forward it to other generals except the one who sent the information to themselves. In this chain of information circulation, the generals can reach a consensus without finding a traitor (finding a traitor would be the most costly and least efficient solution), so as to ensure that the information obtained and the decisions made are correct.

The basic structure of blockchain is the same. People pack information within a period of time, including data or code, into a block, stamp it with a timestamp, and connect it with the previous block. The page header of each next block contains the index (hash value) of the previous block, and then write new information in the page to form a new block, which is connected end to end and finally forms a blockchain. As of August 29, 2015, there were 372,016 blocks on the Bitcoin blockchain, with a total data capacity of 40G and a computing power of 400P (that is, 400 million floating point calculations). At present, the computing power of my country's Tianhe-2 supercomputer is only 33P. Blockchain technology uses pure mathematical methods to establish a trust relationship between all parties; second, the establishment of a trust relationship between the parties to the transaction does not require the help of a third party; third, the cost of establishing a trust relationship is almost reduced to zero. This is also the core of what I predicted that blockchain will help achieve the ultimate model of Internet finance.

Based on blockchain and a series of auxiliary methods built on blockchain, people are building a complete set of Internet governance mechanisms on the Internet. These include: 1.工作量证明机制(to tamper with data on the blockchain, you need to have more than 51% of the computing power of the entire network, which makes the cost of falsification higher than the expected benefits); 2.互联网共识机制(consensus is used to ensure correctness without distinguishing between good and bad); 3.智能合约机制(programs are used instead of contracts. Once the agreed conditions are met, the network automatically executes the contract. Financial activities change from exchanging data to exchanging codes); 4.互联网透明机制(accounts are open to the public on the entire network but account names are hidden, transactions are irreversible and transactions are recorded by third-party "miners"); 5.社交网络的互动评分机制(this allows the smile of a private car driver to be exchanged for benefits while the smile of a taxi driver cannot); 6.密码学公私钥匙等这些互联网治理机制are bringing huge impacts to classical economics, finance, management and even sociology. Theoretical structure, corporate structure and financial structure are all facing the proposition of deconstruction and reconstruction.

Blockchain is the underlying technical architecture of Internet finance. Only when blockchain technology matures can Internet finance mature. This is because:

1. It is a public ledger for all valuable assets in the digital world. One ledger can handle all the authentication, recording, registration, storage, transaction, payment, and circulation of any digital asset.

2. It is a decentralized big data system that has everything needed for recording, transmission, storage, analysis, and application.

3. It is a distributed cloud computing network with no central server. The Bitcoin blockchain alone has 400P of computing power, which is provided by countless computers around the world connected to the Bitcoin system.

4. It is the infrastructure for future decentralized organizational structures.

5. It is the underlying protocol of the Internet governance mechanism. Most of the aforementioned Internet governance mechanisms are built on blockchain.

Standing on the blockchain, imagining the future of Internet finance, I think it will have the following characteristics:

1. It is intelligent. The financial exchange carrier has changed from data to code, and traditional finance has become programmable intelligent finance.

2. It is a decentralized organizational structure. Point-to-point, end-to-end, P2P.

3. It is algorithm-driven finance with near-zero friction.

4. It is an integrated system where identity recognition, asset registration, transaction exchange, and payment settlement are all connected on a single blockchain system.

5. It is a real-time, scenario-based, 24/7 financial system that seamlessly connects the real world, the virtual world, the physical world and the digital world.

Dr. Han Feng and several colleagues in the digital currency industry (especially those who have studied digital currency 2.0) plan to translate and publish the book "Blockchain: New Economic Blueprint and Introduction". In order to let more people understand the significance of blockchain, they wrote introductions for each chapter based on Chinese experience. Their sincere heart is evident! At that time, I was busy preparing to establish a blockchain laboratory in Shanghai to promote blockchain technology in China. At present, the blockchain circle in China is not large, and we met soon. The two sides had a good chat and felt that they had met too late. We reached a plan on the spot to use this book as a starting point and the blockchain laboratory as a support to publish a series of blockchain laboratory books in the next few years. On the one hand, it is to promote this blockchain technology, which is still relatively unfamiliar in China but may play the role of terminator in the future; on the other hand, I also want to leave a series of written records at this critical moment that may change history to witness this great change.

Let us look forward to the future finance that will be reborn on the blockchain, which will be more inclusive, smarter, more real-time, and more cross-border!