The author is Wang Yangyang, Hongyuan Strategy Research Department of Shenwan.
Blockchain has recently received a lot of attention, Ogawa Governor publicly said that the central bank will study blockchain technology; In 2015, blockchain became the most funded sector in US venture capital; Ethereum, the open source blockchain platform founded by 26-year-old Vitalik, has become a new unicorn with a market value of $1 billion since its launch in July 2015.
Blockchain has high application value in finance, sharing economy, Internet of Things and other aspects, attracting the active layout of Goldman Sachs, Citi, NASDAQ, Deloitte, Airbnb and other giants. So what is blockchain? What are the characteristics of blockchain technology? What is the application value and potential of blockchain?
1. What is blockchain?
Blockchain is essentially a decentralized, distributed ledger database that is the underlying technology of Bitcoin, and it goes hand in hand with bitcoin. The blockchain itself is actually a string of cryptographically related blocks of data, each containing valid confirmation of multiple transactions on the Bitcoin network.
Every time a crypto transaction occurs, a network of powerful miners uses algorithms to decrypt and verify the transaction, creating new blocks to record the latest transaction. New blocks are added to the end of the original blockchain in a linear chronological order, and the ledger keeps growing and lengthening.
Through a complex setup of public and private keys, blockchain networks broadcast a ledger of all transactions across the financial network in real time, distributing the transaction records to each client in real time, while ensuring that each person can only make changes to his or her own property. Of course, there are other people’s transactions in the ledger, and while you can see the value and address of the transaction (which is basically a long jumble of letters and numbers), you can’t really know who the trader is without using other techniques. (To get a more intuitive understanding of blockchain technology, visit blockchain.info to get a taste of how the global Bitcoin exchange works.)
2. What are the advantages of blockchain technology?
(1) Distributed decentralization: each node and miner in the blockchain must follow the same billing and transaction rules, which are based on cryptographic algorithms rather than credit, and each transaction requires the approval of other users in the network, so there is no need for a set of third-party intermediary structures or trust authority endorsement.
In traditional centralized network to a central node (for example, the third party pay intermediary) execute effective attack Destruction of the entire system, and in a decentralized, such as block chain network, to attack a single node is unable to control or destruction of the entire network, master of 50% in the grid nodes is just the beginning of the control.
(2) No need to trust the system: in the blockchain network, through the self-restraint of the algorithm, any malicious deception of the system will be rejected and inhibited by other nodes. Therefore, the blockchain system does not rely on the support of central authority and credit endorsement.
In the traditional credit endorsement network system, participants need to have enough trust in the central organization. As the number of participants increases, the security of the system decreases. In a blockchain network, contrary to the traditional situation, participants do not need to trust anyone, but as more nodes participate, the security of the system increases, and the data content can be fully open.
(3) tamper-resistant security and encryption: block chain take ChanXiangHa algorithm, at the same time, each new blocks in strict accordance with the order linear time and the irreversible time lead to invasion of any attempt to tamper with the data in block chain information behavior is easy to be back, caused by other nodes, which can restrict the relevant illegal ACTS.
3. What are the current defects of bitcoin blockchain?
After five years of development, the current market value of Bitcoin has reached $7 billion, which is close to the GDP of a small and medium-sized country. A relatively large market value provides a better liquidity guarantee. But it also exposes many problems, such as:
(1) The price is highly volatile, and Bitcoin is highly hyped. However, it is subject to regulatory restrictions, so it is highly risky;
(2) Increased transaction costs. Although the transaction costs of Bitcoin are very low, as the transaction becomes more frequent and the value of bitcoin increases, the transaction costs also rise sharply.
(3) Capacity limitation. At the beginning of the design of the Bitcoin blockchain, the capacity of a block was artificially set at 1MB. As the transaction volume increased, the capacity began to be limited and the processing speed was affected.
(4) The confirmation time becomes longer. Due to capacity limitation and workload proof, bitcoin cannot handle more than 7 transactions per second at present, and it cannot compete with payment methods like Visa on the latitude of speed.
(5) Due to its strong concealment, Bitcoin is widely used in drug trafficking, arms trading, kidnapping and ransom payment, etc. At the same time, bitcoin was also used for foreign exchange transfer during the devaluation of RMB recently. Therefore, it is difficult for regulators in most countries to accept the widespread use of Bitcoin.
4. Various forms of blockchain innovation
The emergence and maturity of innovative blockchain technology makes the industry begin to focus on the blockchain technology itself. First, there is the innovation of deployment blockchain, which now extends the federation chain and private chain beyond the public chain (everyone can participate) form of Bitcoin. These chains are limited in how much information they can disclose and how much central control they have.
(1) The alliance chain adopts multi-center type, and the participating members are set in advance according to certain characteristics (for example, the strategic analysts of various securities firms). Alliance chain is easy to set control permissions and has higher application scalability, which is of great application value for trading, clearing, settlement and audit within the industry (such as securities firms) or with alliance institutions across the country.
(2) Private chain is not decentralized, but has distributed characteristics. The central controller specifies the scope of members that can participate and validate transactions. Private chains are of great value for corporate government audits and testing.
(3) After the shortcomings of Bitcoin began to be exposed, a large number of competitive coins also began to appear to expand the application scope of blockchain technology. For example, Ripple, the world’s first open global banking remittance and payment system, is a Ripple payment protocol based on the decentralized idea of the Bitcoin blockchain, thus challenging the traditional interbank SWIFT system.
In the Ripple system, virtual currencies such as Bitcoin and physical currencies such as us dollar, euro and RMB can be circulated and supported by the system. Ripple provides liquidity and security for the system.
The key to the rapid rise of Ethereum, an excellent improvement in alternative blockchain, lies in its good combination of blockchain and smart contract technology. Smart contracts are about embedding code into assets that automatically and intelligently determine where and how related assets operate in a network. Ethereum aims to build an excellent underlying protocol that provides a strong Turing-complete scripting language.
On the basis of this protocol, blockchain combined with smart contracts can open up a large area of commercial application space. Users can create any advanced smart contract, such as: crowdfunding protocol, currency, voting, financial derivatives, company management applications, etc.
5. What is the application value and potential of blockchain?
According to the current development, blockchain technology has broad application potential in payment, financial transaction, Internet of Things and other fields, among which smart contract is the key. While traditional payments use a “pull” model (where users provide their personal information to a third party, which then uses the information for payment processing), blockchain technology uses a “push” model, bypassing the third party directly and dramatically improving security.
At the same time, blockchain automation can greatly reduce payment costs and shorten processing time, while decentralized and open features can help innovation within the platform. As the core technology of blockchain extension, smart contract opens the application space of interconnected intelligence in various fields of blockchain.
In the field of financial transactions, blockchain technology can reduce the time of settlement review from hours to seconds. Strong automation can greatly reduce intermediate costs. Combined with smart contracts, it is possible to automatically issue digital securities and trade financial derivatives.
In the aspect of the audit, the company does not need to hire special auditors to the company’s internal audit books, all transactions can focus records stored in the internal block chain, because the block chain has irreversibility and between the postmark function, accounting firms and other external auditors and regulators by tracking the blocks chain can real-time monitor the company’s books, Institutions could also drastically reduce their reliance on auditors to review financial transactions, making the auditing business more efficient.
For the Internet of Things, there is an exponential growth in the number of smart devices, and blockchain technology creates a low-cost direct communication bridge between these devices, while enhancing the security and privacy of the system through a decentralized consensus mechanism. Blockchain overlay smart contract technology turns smart devices into self-sustaining, self-regulating individuals that can perform functions such as exchanging information or verifying identity with other individuals based on predefined or embedded rules.
6. What is the current development stage of the blockchain industry?
Developed countries are actively deploying blockchain and blossoming in various fields. As the limitations of bitcoin begin to reveal, the application space of blockchain technology combined with smart contract opens up and its advantages begin to show. The investment focus in the industry has shifted from bitcoin mining hardware to blockchain technology related applications. Currently, the highest funded blockchain company has exceeded $100 million, and many startups are now ambitious in payment, transaction, risk control and other fields.
Financial institutions, such as Goldman Sachs, Citigroup and NASDAQ, are actively exploring the application of blockchain in the financial field and vigorously deploying blockchain technology companies related to financial transaction clearing. Nasdaq, the pioneer, has begun to use blockchain technology for private equity issuance and transaction. Internet of Things and cybersecurity related companies are relatively easy to attract government and large institutional investors; The payment sector is favored by banks and e-commerce. It should be noted that the big four (Deloitte and PWC) are very active in exploring the application of blockchain technology in the field of auditing.
Related institutions in China have little investment in the industry, which is expected to break through in the future. In the past, China paid more attention to mining, quotation, information provision and consulting, with a relatively simple business model. In-depth business model research, there is a certain scale of application projects are relatively scarce.
At present, the industry has begun to show a trend of development and investment in the commercial application and in-depth exploration of blockchain, but the volume is small and the lack of government support from large financial institutions. The blockchain laboratory under Wanxiang Group is a rare RESEARCH and development project supported by large institutions. Wanxiang Group also owns blockchain fund. The person in charge of Wanxiang Group is Mr. Xiao Feng, the former general manager of boshi Fund.
With the central bank attaching more importance to blockchain, the spillover effect from the latest scientific and technological progress abroad, the gradual recognition of ethereum as the standard of blockchain technology overseas, and the more mature application of blockchain and the increase of investable bidding, blockchain is expected to become the next hot object after “Internet plus”. This will stimulate the enthusiasm of entrepreneurs and users, thus forming a virtuous cycle of China’s blockchain development. Industry dynamics are worth following.
8. What are the entrepreneurial directions of blockchain? What stage is blockchain in?
There are opportunities in areas where the cost of credit is high or there is a lack of trust, such as cross-border trade finance, financing, collateral between two countries, etc. Another example is the small ant blockchain, very promising, its slogan is to do the Uber stock market.
Securities market has a big problem now, a lot of money on the primary market and secondary market threshold is extremely high, there is always a government rent value exists, and small ants to provide a solution, reduce the threshold is very low, it is using a set of product can issue digital assets, are all these digital assets can be traded, as long as there is exchange willing to circulate it, It’s going to run.
Others, such as medical case sharing, auditing, notarization, Internet of Things (traceability of goods), supply chain finance, insurance (sales cost is too high) and so on, all have entrepreneurial cases.
Right now blockchain is in its first bubble phase, it’s too hot, but it may not be at the top yet; Foreign funds are billions of ground to invest in this field, but domestic funds have not moved, so it has not reached the top, should be rising stage.
Blockchain — A new credit mechanism based on underlying decentralization
Tao Rongqi, a blockchain expert, said the development of digital currencies and blockchain gives us a sense of “reality”. I have been working in the blockchain field for about two or three years, and I have witnessed the process of biological evolution similar to the earth’s ecology, from nothing to gradual evolution.
In the seven years since its founding in 2009, Bitcoin has grown little by little. We see it as a currency, a phenomenon, a state of being that has come out of nothing, and it is a great honor to observe it. The impact of being able to observe how a system, an organism, and, more broadly, a state develops from nothing was completely bottom-up, from nothing.
Such growth is consistent with economic principles, the first meaning is to go to the direction of low cost; I understand the second meaning of economics, which is to meet people’s needs. The growth of Bitcoin and blockchain in recent years is just like this.
Many of the economic and social conditions we see now, such as the supply-side reform and the sharing economy, are in essence because the cost of meeting people’s needs is too high. Blockchain can also see this trend, as it is able to build a bridge of trust between people.
Nowadays, trust activities between people are more based on the current system of national government and cultural customs. The accumulation of cultural customs is deep and there is no problem, but the state machine is defective, and the problem lies in the lack of time after the test. After all, the state machine has only been established for several decades, and it may not be perfect enough.
It can be seen that the cost of the credit system created for us by cultural conventions and the state machine is currently high, especially the state machine, because it forces many institutions and many people (perhaps more than 10% of the population) to maintain it. At the same time, no matter what generation, the labor cost is similar, so no matter what era, 10% of the people to maintain the system, the cost is bound to be too high, let alone the current credit system is not good enough, for example, the Spring Festival Gala to propose the establishment of an honest society, the essence of the society is not honest. The emergence of a low-cost credit mechanism that slowly thrives, namely blockchain, is bound to get attention and promotion.
Trust in blockchain comes from the underlying technology, which trades historical information for current trust. Now when we look at the financial statements, we wonder whether the financial statements have been modified in advance. Meanwhile, the current financial statements are cross-sectional. The Bitcoin blockchain is 10 minutes to create a block and stamp it.
Cryptographically, once stamped, the block is impenetrable. Every 10-minute timestamp from inception to the present contains all the trading information in the world during those 10 minutes, meaning that the historical trading information is in your hands and cannot be tampered with.
The impact of blockchain is to buy people’s trust with time. Similarly, the longer a government lasts and does what it says it will do, the more people trust it. Bitcoin is designed to be harder to tamper with the longer it runs.
Another dimension is blockchain interaction. A blockchain is essentially a distributed public ledger, but at a deeper level, it’s actually a smart contract for Ethernet. Satoshi Nakamoto used the concept of smart contract to design bitcoin. For details, please refer to chapter 2 of “Blockchain — New Economic Blueprint”.
Party A and Party B design a contract that describes a condition or state, which will be executed once triggered. In traditional contracts, party A and Party B need to seek arbitration from state machines and government agencies if there is any problem when the conditions are triggered. This can be done by block chain in smart contracts. Some people say that blockchain is decentralized disintermediation, but in fact, it is not completely removed, just from the state machinery, government agencies and so on to the blockchain itself to do.
Of course, ordinary programs can design many contracts, but the problem is that the code can be tampered with, so the content is not guaranteed. Blockchain makes everything public and uses the concept of time stamps to make everything untampered with, so smart contracts are enforced, removing third-party arbitrations and trust agencies and allowing blockchain to execute them.
It’s actually going from an institution of people to an institution of machines, and machines cost less than humans, so it makes economic sense. But we are still talking about trust, and we are not trusting. This letter state institutions, government agencies, cultural customs enforcement, now transformed into blockchain, machine, really can be believed? There are two important questions: first, will machines replace humans? Second, will the machine break down? These questions remain to be discussed.
Now there is a concept of blockchain called public chain, federation chain and private chain. The public chain refers to that the participants of the blockchain are all the miners in the world. For example, in the public chain of Bitcoin, how many bitcoins in each coin address are completely open, but who the address points to is completely unknown, so bitcoin is semi-anonymous.
Banks that want to use blockchain but don’t want to make the information public can use private chains. This is a controlled blockchain, where you can make some of the information in the blockchain public and some of the information not public, and the switch can be set by itself.
Although banks want to maintain blockchains in their own computer rooms, there is a difference between this and a normal database. Because of the existence of private chain, almost all financial institutions are studying blockchain, especially the banking industry, almost every department has a research.
Alliance chain refers to the fact that the blockchain information is input by multiple people, and the objects in the alliance can share information (the degree of information sharing is another matter), while those outside the alliance cannot get information, which is similar to the Union Pay card organization. Blockchain solves the betrayal option of the prisoner’s dilemma, enables enforcement, and is an improvement over cooperation across borders, where trust is weak.
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