The Past, Present, and Future of Blockchain
On the afternoon of October 24, the Political Bureau of the Central Committee of the Communist Party of China held its 18th collective study on the "current status and trends of blockchain technology development." General Secretary Xi Jinping emphasized that we should take blockchain as an important breakthrough for independent innovation of core technologies, clarify the main direction of attack, increase investment, focus on conquering a number of key core technologies, and accelerate the promotion of blockchain technology and industrial innovation and development.
This news caused “blockchain” to once again become the most popular term in the capital market.
Blockchain is a disruptive invention that can establish reliable trust between peers in a network, which brings endless possibilities. So what exactly is blockchain, what are its core and extended technologies, what are its characteristics, and where are its future applications and business models?
Today, let's start from the essence of blockchain and look at its past, present, and future.
The birth of blockchain marks the beginning of humanity's construction of a truly trustworthy internet. The most notable aspect of blockchain is its ability to establish reliable trust between peers in a network, eliminating the interference of intermediaries in the value transmission process, making information both public and private, allowing for both collective decision-making and the protection of individual rights. This mechanism improves the efficiency of value interaction and reduces costs.
I. Evolution of Bookkeeping Methods
(1) Accounting Currency
Regarding the question of what money is, there have been two diametrically opposed theories in history. Metallists believe that money is equivalent to precious metals, that money must have metallic content and intrinsic value, and that the value of money depends on the value of precious metals. Nominalists, on the other hand, deny the intrinsic value of money, believing that money is merely a symbol, a nominal existence. With the collapse of the gold standard, the currencies of almost all countries in the world are now credit currencies, and the outcome of this debate is becoming increasingly clear, with nominalism gradually dominating. American economist Mishkin, in his book "The Economics of Money, Banking, and Financial Markets," defines money as: "Money, or the money supply, is anything that is generally accepted in payment for goods and services or in the repayment of debts." [1]
Keynes was a typical representative of nominalism. In his "Treatise on Money," he said: accounting currency can bear debt, prices, and general equivalents, and is the most basic concept in monetary theory. Objects that exist in the trading scene as convenient media of exchange will gradually evolve into money, because they represent a way to hold general purchasing power. Accounting currency is a description, while money is the object that corresponds to that description. [2]
The development from paper credit currency to the currently widely used electronic currency, such as credit cards, online banking, and mobile banking, further reflects the characteristics of accounting currency ——When you transfer money to others through online banking, there is no transfer of physical currency; only the accounts in the bank's accounting system have changed.
(2) The Essence of Blockchain
The essence of blockchain is a decentralized accounting system, and Bitcoin is the "digitally existing" currency carried on this system. We can consider the relationship between blockchain and Bitcoin to be the relationship between accounting currency and money as described by Keynes, or we can use Felix Martin's understanding of money [3] to illustrate the relationship between the two ——Bitcoin is only a representation of accounting, while blockchain is the underlying system composed of credit records and the clearing of credit records.
II. The Birth of the Bitcoin Blockchain
From a technical point of view, blockchain is the basic infrastructure and implementation method of Bitcoin. Without blockchain, there would be no Bitcoin. In other words, discussing the invention of Bitcoin is the same as discussing the invention of blockchain.
(1) Centralized Bookkeeping Methods
Because the content on the ledger must be unique, bookkeeping is an inherently centralized activity. In an era of underdeveloped communication, this was inevitable; in today's information age, centralized bookkeeping still covers all aspects of social life. However, centralized bookkeeping has some obvious weaknesses: once the center has problems, such as being tampered with or damaged, the entire system will face a crisis or even collapse.
A typical example is the Enron incident of the early 21st century: this American energy giant reported revenue of $101 billion in 2000, but due to deep involvement in accounting fraud, it collapsed in 2001. If the ledger system supports the entire monetary system, it will face the risk of over-issuance by the central manager. Historically, there have been many cases of hyperinflation caused by over-issuance of currency, and even in today's world, they still occur frequently, such as in Zimbabwe. From 1980 to 2009, Zimbabwe issued four generations of Zimbabwean dollars, all of which fell into severe devaluation. In November 2008, Zimbabwe's daily inflation rate was as high as 98%. In 2015, the Zimbabwean dollar lost its circulation status, and the local currency could only use foreign currencies such as South African rands, Indian rupees, euros, Japanese yen, Australian dollars, US dollars, and Chinese yuan as circulating tools.
Image source: Wikipedia
Therefore, this centralized bookkeeping method has extremely high requirements for the ability of the center itself, corresponding regulatory laws and means, and the trust of participants in it.
(2) The Difficulty of Decentralized Bookkeeping
So, can we build a reliable bookkeeping system that does not rely on any center or third party? If possible, we can overcome the weaknesses of centralized bookkeeping. However, in fact, building such a system is far more complex than imagined.
From the perspective of designing a bookkeeping system, to achieve the goal of decentralization, it is obviously necessary to meet the following two conditions:
Condition 1: The storage of ledger data must be decentralized. No participating party can be designated to have special rights to store the ledger, or in other words, we need to allow all participating parties to have equal rights to store the ledger.
Condition 2: The bookkeeping process itself must be decentralized. No participating party can be designated to have special bookkeeping rights, or in other words, we need to allow all participating parties to have equal rights to record accounting data.
Let's analyze how difficult it is to achieve both conditions simultaneously.
First, let's look at the first condition. This is not complicated; we only need to ensure that every participant in the system can maintain a complete ledger. Next, let's add the second condition. Now we encounter a problem: under the premise that all participants can maintain their ledgers, granting all participants the power to record transactions will inevitably lead to inconsistent ledger data. This is quite simple: even without considering malicious participants, due to the different physical environments of each participant, the received accounting information cannot be entirely consistent. As an accounting system, data consistency is the most basic requirement. If we cannot have consistent ledger data and everyone's records differ, the entire accounting system will undoubtedly be in chaos and will be worthless.
Based on the previous analysis, since simultaneous record-keeping by all participants will lead to confusion, to ensure data consistency, we must choose to allow a specific participant to have the power to store or record the ledger. However, this will violate at least one of the two conditions above. This seems to be an unsolvable problem.
Satoshi Nakamoto's Ingenious Invention: The Blockchain Economic System
Satoshi Nakamoto constructed an extremely ingenious system that solved this seemingly impossible task. This system is called “blockchain”. Literally, "blockchain" is a chain composed of "blocks." So what is a block? We can make an analogy: if the blockchain is a physical ledger, then a block is equivalent to a page in the ledger, and the information carried in the block is the transaction content recorded on that page.
So, how did the blockchain's architecture ultimately solve the problem of decentralized accounting? The competitive accounting mechanism was the key.
Here, we introduce the concept of “nodes”. In the current information age, computers are naturally responsible for accounting, and each computer connected to the accounting system can be called a node.
The so-called competitive accounting is a mechanism that uses each node's computing power (referred to as “hashrate”) to compete for the right to record transactions. In the Bitcoin system, a hashrate competition is held approximately every ten minutes. The winner of the competition obtains the right to record transactions, i.e., the right to write a new block to the blockchain's general ledger. In this way, within a certain period, only the winner of the competition can complete a round of record-keeping and synchronize the newly added ledger information to other nodes. This process is the process of block generation.
It should be noted that hashrate only determines the probability of winning the competition. For easier understanding, we can use a lottery system as an analogy: nodes with high hashrate are equivalent to people who can buy many lottery tickets at once, while nodes with low hashrate can only buy one or a few lottery tickets at a time. In a round of lottery draws, people who buy many lottery tickets only have a higher probability of winning, but they are not guaranteed to win.
So, how is hashrate competition achieved? Who has the right to determine the result of the competition? The blockchain system achieves this through a mechanism called “Proof of Work (PoW)”. For example, if you need to assemble a batch of toys, I give you some parts in the morning, and when I come back in the evening, I see the toys on the table. Although I didn't watch you make the toys all day, I can still confirm that you did this work. This is a simple understanding of Proof of Work—a specific result (verifiable by everyone) can confirm that the (competing) participant completed the corresponding amount of work. The mechanism and implementation details of PoW will be detailed in the following sections.
However, hashrate competition has a cost. Without incentives, nodes will not be motivated to compete. In Nakamoto's design, the node that wins each round of competition and completes the record-keeping will receive a certain amount of Bitcoin as a reward from the system. [4] This reward process is also the process of Bitcoin issuance. [5] Nodes continuously perform calculations in order to obtain Bitcoins issued by the system. This design is quite ingenious —it perfectly combines the competitive accounting mechanism with currency issuance, solving the problem of issuance in decentralized currency systems while introducing competition. This process is similar to the process of gold mining in real life, so it is figuratively called "mining".
Ultimately, blockchain solves the problem of decentralized accounting by constructing an economic system centered on competitive —accounting—rewards. In this system, each node only needs to act in its own interest. The competition driven by "selfish" purposes ultimately creates a huge hashrate foundation that protects the system's security and improves its reliability. Bitcoin uses blockchain to create a positive feedback economic system, allowing it to naturally grow and expand without the support of a powerful centralized institution or organization.
III. When Transactions Become Smart
In traditional ledgers, the data on the ledger is merely a record. However, on the blockchain ledger, this data has a meaning beyond the ledger —it is programmable.
This is a qualitative change. Due to the programmable nature of the blockchain, it can carry not only ordinary transactions but also smart transactions that can be automatically executed based on programs.
(1) Scripts and Multi-Signature Technology
Transactions on the Bitcoin blockchain can be implemented through scripts. The so-called script ( Script) is executable computer code written in a specific descriptive language. Bitcoin's scripting language is very simple, with only 256 instructions, 75 of which are reserved and have not yet been given any meaning. The instructions in Bitcoin scripts are similar to those in other programming languages and include basic syntax and logic. In addition, they also include some cryptographic instructions such as hash functions and signature verification.
Bitcoin's multi-signature technology is a typical example of using scripts to implement programmable transactions. Its basic principle is to create an account in the system that is jointly managed by multiple people. Only when the pre-agreed number of people agree can the funds in this account be used, and this process is guaranteed by the system itself and does not require any third-party intervention.
Generally speaking, a Bitcoin address corresponds to a private key. To use the funds in this address, only the holder of the private key needs to initiate a signature. Multi-signature technology requires multiple private keys to sign together in order to use the funds. For example, a certain amount of funds corresponds to Three private keys are required, and at least two of them must participate in the signature to use the funds; a signature with only one private key is invalid. This 2/3 can be generalized to any m/n, such as 3/5, 4/7, 6/11, etc., where m is less than or equal to n.
Multi-signature technology has a wide range of applications. One of the most intuitive scenarios is similar to Alipay, where the seller, buyer, and a third-party guarantor can create a multi-signature transaction, stipulating that at least two parties must agree to determine the flow of funds. Other easily conceivable applications include: more secure online wallets, joint property, partnerships, fund supervision, etc. The above scenarios are relatively simple; more flexible and diverse forms will certainly exist in practical applications.
(II) Smart Contracts
The concept of smart contracts can be traced back to 1994, appearing almost simultaneously with the World Wide Web. Cryptographer Nick Szabo first coined the term "smart contract." Essentially, smart contracts work similarly to conditional execution statements in computer programs. When a pre-programmed condition is triggered, the smart contract executes the corresponding contract terms. Due to the programmability of blockchain, the application of smart contracts on blockchain and digital currency is a natural progression.
For example, let's consider the El Clásico. Suppose you bet one Bitcoin on Real Madrid winning, and your friend bets the same amount on Barcelona winning. Before the match starts, you and your friend send your Bitcoins to a neutral account controlled by a smart contract. After the match, the smart contract automatically sends the corresponding funds to the winner's account based on the results.
Another example is online shopping. If you buy a product online but don't want to pay the seller immediately and prefer to pay after shipment, you can create a contract that automatically checks the logistics data of the courier. Only when the purchase is confirmed to have been shipped will the funds be sent to the seller.
These are just simple explanations and examples. Smart contracts are computer programs, so they are easily applied to other necessary scenarios. ——Adding more detailed control conditions to achieve more complex execution logic. This is somewhat similar to traditional contracts. We can also consider smart contracts as contracts coded onto the blockchain, but this brings a fundamental difference: it does not require anyone to supervise the execution of the contract, and neither party can unilaterally breach the contract before completion. Everything is automatically executed according to the terms of the contract. With the popularization of blockchain and the development of intelligent transactions, it is believed that this will have a huge impact on future transaction models and business structures.
From a practical perspective, because Bitcoin's scripting language is not Turing-complete [6] the scalability of the asset definitions and transaction models currently supported by the Bitcoin blockchain is relatively limited.
Therefore, some in the industry have begun to try to develop blockchains different from the Bitcoin blockchain that support Turing-complete scripting languages. Ethereum (Ethereum) is a typical example. Currently, the market capitalization of Ether (ETH) on Ethereum has reached one-tenth of Bitcoin's, becoming the second-largest cryptocurrency globally.
IV. Connecting Blockchains
If consensus mechanisms and value carriers are the key to expanding the inherent capabilities of the blockchain, then technologies that can connect different blockchains, represented by sidechain technology, are the key to expanding the external structure of the blockchain.
(I) Limitations of the Bitcoin Blockchain
Many people say Bitcoin is the most successful application of blockchain, which is partly true. However, a more accurate statement is that when Bitcoin was created, there was no existing underlying technology architecture to support its operation, so Satoshi Nakamoto created the blockchain. In other words, Satoshi Nakamoto's original intention in creating the blockchain was to implement a peer-to-peer electronic cash system. Therefore, when we have higher expectations for the uses of blockchain, some of its limitations become apparent.
First, the design of the Bitcoin blockchain only considers Bitcoin transactions and does not inherently support defining other assets or defining complex transaction logic. Adding new functions requires upgrading the system. The difficulty lies in the fact that for a completely decentralized system like Bitcoin, any changes require community consensus, making rapid changes extremely difficult.
Second, most changes are unnecessary or even impossible to achieve because greater flexibility often means increased complexity and consequently decreased stability. Considering the diversity of real-world needs, and even conflicting needs, a single blockchain is destined to be unable to meet all requirements simultaneously.
The above limitations of Bitcoin directly led to the birth of some competing cryptocurrencies, which use different blockchains with their own characteristics and innovations. However, due to the lack of widespread consensus and trust, most cryptocurrencies based on new blockchains do not possess the stability and security of the Bitcoin blockchain protected by strong computing power, and the stability of their value is also generally poor. More importantly, digital assets cannot be transferred directly between different blockchains, leading to value isolation, just like isolated "local area networks" that cannot interconnect. “LANs”.
(II) Sidechain Technology
To facilitate the transfer of digital assets between different blockchains, sidechain (Sidechain) technology has emerged. Simply put, sidechains are like pathways that connect different blockchains to achieve blockchain expansion. Sidechains are completely independent of the Bitcoin blockchain, but the two ledgers can "interoperate" and interact.
In sidechain technology research, Blockstream is a leading company. In October 2014, Adam Back, led by [7] and his development team officially released the sidechain whitepaper; In June 2015, Blockstream announced that it would release an open-source code library and test environment for its sidechain project. [8]
The sidechain whitepaper proposes a new technology ——"pegged sidechains," which allows for the mutual transfer of assets between different blockchains. Because sidechains are independent systems, technological and conceptual innovations are not limited by the main chain. Even if innovation fails or a malicious attack occurs, the damage is limited to the sidechain itself.
Essentially, blockchain is a carrier of different digital values, while sidechain technology is a channel connecting different blockchains. It is still impossible to assert the final mature form of sidechain technology, and we don't even know whether the technology that will be truly used on a large scale for blockchain interconnection in the future will appear in the name of "sidechain technology", but the development and maturity of the concept and core functions of sidechain technology are undeniable.
V. Characteristics and Value of Blockchain
Blockchain technology has five basic characteristics: decentralization, openness, autonomy, information immutability, and anonymity. These five basic characteristics constitute the cornerstone of blockchain's transformation of traditional application scenarios. In the application scenarios of traditional systems, there is usually a centralized database, the management party is responsible for system management, information is closed and encrypted, the management party can modify the database content through technical means, and all transaction data is real-name registered. It can be seen that the two show diametrically opposite performance in key properties, which is also the reason why blockchain can solve problems disruptively.
1. Decentralization: Using distributed calculation and storage, there is no centralized hardware or management organization, and the rights and obligations of any node are equal.
2. Openness: The system is open. Except for the private information of the parties involved in the transaction being encrypted, the blockchain data is open to everyone, so the entire system information is highly transparent.
3. Autonomy: Blockchain uses consensus-based norms and protocols, enabling all nodes in the entire system to exchange data freely and securely in a trustless environment, so that trust in "people" is changed to trust in machines, and no human intervention works.
4. Information Immutability: Once information is verified and added to the blockchain, it will be stored permanently, unless it is possible to control more than 51% of the nodes in the system at the same time, otherwise, the modification of the database on a single node is invalid.
5. Anonymity: Since the exchange between nodes follows a fixed algorithm, the data interaction is trustless, so trading partners do not need to use a public identity to make the other party trust themselves.
From the above characteristics, it can be seen that the fundamental problem that blockchain can solve is the high cost of establishing credit. Through a decentralized architecture, system participants jointly maintain a credit system constrained by technical standards. This credit system does not require human participation, and relies entirely on technical means, while technical means can also ensure that the credit system is not tampered with or destroyed.
Therefore, in traditional industries, any scenarios related to credit and authentication can solve the economic, time, manpower, and risk costs generated in the operation process through blockchain technology.
The characteristics of blockchain can optimize the application scenarios of many industries.
1. Finance: Solve many problems such as node trust in cross-border payments, separation of transactions and clearing, insurance contract management and fulfillment, securities issuance, risk control, and credit data.
2. Energy: Solve the trust issues in the production, sales, and purchase of energy, simplify the entire trading process, and support the underlying data architecture of the energy Internet of Things.
3. Intellectual Property and Social Management: Solve the problem of identifying the authenticity of data in scenarios such as copyright, authentication, and food product traceability.
4. Medical: Solve problems such as information storage, sharing, and privacy protection.
VI. Blockchain Business Models and Mainstream Standards
(1) Blockchain Business Model
Blockchain, as an underlying technology, can derive multiple application scenarios and product forms. There are four main business models.
1. Cryptocurrency Investment Cryptocurrencies represented by Bitcoin have been sought after by a large number of individual investors due to their "liquidity", "security", and "low threshold" in the global scope. Cryptocurrency investment has become one of the most important business models of blockchain technology. Therefore, a large number of cryptocurrencies have flooded the market, driving the explosive development of industry chain links such as cryptocurrency exchanges, information media, mining machine manufacturers, and mining pools. However, the promotion of the payment function of cryptocurrencies has encountered bottlenecks, and Stripe [9] in April 2018 stopped supporting Bitcoin, mainly because the volatility of Bitcoin's asset attributes greatly affected the currency attribute's transactions.
2. ICO ： ICO tokens have gradually evolved from initial application attributes (Ethereum, Ripple, Wankebi) to equity attributes and debt attributes. Therefore, the model of supporting platform operations with token revenue has changed to a model of jointly increasing the market value of the project with token holders to obtain financing and investment returns. The advantages of ICO are low threshold, strong liquidity, and strong dissemination ability; the disadvantages are uneven project quality, high fraud risk, and relatively large policy risks.
3. Blockchain Technology Services At present, technology services mainly include project development, platform services, and cloud services. The main goal is to apply blockchain technology to various scenarios in different industries to transform the operation mode of the original scenarios. These companies are the core force in the current development of blockchain technology, but their development is still in its initial stage, and the business model is relatively traditional. However, in some applications, such as the field of supply chain finance, technology companies can get transaction commission.
4. Derivative Application Products On the one hand, blockchain, with its tamper-proof characteristics, can generate digital assets other than cryptocurrencies by combining with application scenarios, such as combining with games, culture, and emotional scenarios; on the other hand, blockchain The application of tokens, tokens, or points can attract public participation and significantly improve the promotion and operation efficiency of crowdfunding businesses.
(2) Mainstream Organizations and Standards of Blockchain
Beyond decentralized blockchain organizations such as Bitcoin and Ethereum, technology companies and industry firms have formed numerous blockchain technology standard organizations to accelerate the application and implementation of the technology in various industries. Currently, financial institutions and tech giants are the most active participants. Their involvement not only brings capital support but also provides diverse application testing scenarios. Meanwhile, government financial institutions in some countries and regions are actively conducting blockchain technology research and testing to advance the technology's maturity and standardization.
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References:
[1] Frederic Mishkin, The Economics of Money, Banking, and Financial Markets, seventh edition, P44.
[2] Keynes: "A Treatise on Money", P1.
[3] Felix Martin, Money: The Unauthorised Biography.
[4] Only the node that completes bookkeeping on the longest chain will ultimately receive the Bitcoin reward given by the system.
[5] More accurately, the reward given by the system consists of two parts: one part is the transaction fee included in the block, which is not part of the Bitcoin issuance process; the other part is the new coin reward, which is halved every four years and constitutes the Bitcoin issuance process. Currently, the reward for packaging blocks is mainly in new coin rewards.
[6] Turing completeness means that a language can do everything a Turing machine can do and can solve all computable problems. Turing-incomplete languages often have limited loops or recursion, unable to implement data structures such as arrays or lists, which limits the programs that can be written.
[7] Adam Back is a British cryptography expert, the inventor of Hashcash, and the president of Blockstream.
[8] Quoted from https://elementsproject.org/.
[9] Stripe is a well-known third-party payment platform in the United States. In 2014, they became the first third-party payment company to support Bitcoin payments.
This article is excerpted from Issue 12 of "Zhongji Research" - Blockchain Industry Research Report, Author: Li Jingyi, original content of China Zhongji Investment. For reprint, please contact us through the WeChat background.
