1. How Society Runs on Credit
First, let’s do a Q&A:
@ask:Why can you ride the bus with just a card?
@answer:Because I topped it up.
@ask:Money? Then where did your money come from?
@answer:My monthly salary.
@ask:Why does the company pay you a salary every month?
@answer:We signed a contract. I work every month, and the company pays me a salary every month.
@ask:So why does the bus company prefer you to tap a card, and even give a discount, rather than pay in cash?
@answer:Convenience.
@ask:One last question β why is the bus company willing to accept the money you give it, I mean paper or digital?
@answer:Because they can go buy other things with it, pay their employees, pay dividends to shareholders. What kind of strange questions are these? Isn’t it all obvious?
In the life we take for granted, money and credit circulate everywhere, and the essence of money is credit. One could say that modern society runs on credit. The paper issued by a central bank, as a medium for exchange and payment, has no value in itself. But with the will of the state as its endorsement, people are willing to accept it as payment. The bus company earns its reward from passengers by providing a ride service. But for a large company to operate, it usually relies not only on its own funds but on financing. A bus company that could originally buy only 100 buses buys 200 through financing, expanding its service coverage and making more people willing to take the bus. The bus company’s revenue grows, and the financing institution gets a reward as well β a win-win. But why is the financing institution willing to lend money to the bus company? Because of credit. Just as you are willing to work every month and the company is willing to pay you a salary every month, the two sides reach an agreement through mutual credit.
Keep thinking. Why does the bus company prefer people to tap a card rather than use cash? Exactly β tapping a card means hiring fewer people to handle cash and avoiding counterfeit bills. Put plainly, it is to lower operating costs. Costs! So does the bus company need to bear a cost to raise financing? Of course it does. Raising financing is not just issuing an announcement saying, “Our company needs to expand its business, so anyone with money should hurry up and invest and get a 20% dividend every year.” That is not enough, and it is not even legal. The financing process requires not only a large number of finance professionals but also people in legal, PR, and copywriting roles. These are all costs of financing. Getting a company running costs even more.
If we could find a way to lower the cost of credit, would more people be willing to start companies, and would more financing happen? Yes. The whole society’s economy would become more active as a result. And such a method has already appeared: blockchain technology. The traditional approach regulates credit behavior through law; now, through blockchain technology, behavior can be regulated by technology.
Over the past few centuries, we have gone through the industrial revolution, the railway revolution, and the oil revolution. Each change brought a completely new form of energy and, at the same time, reshaped how society is organized. Its hallmarks are a significant reduction in cost, entirely new means of communication, and a change in infrastructure and logic. Changing existing ways of thinking and replacing them with new ones is a huge transitional process; it requires new skills, capabilities, and knowledge, and it fundamentally changes how enterprises operate. Blockchain technology takes part in potential revolutionary innovation in several related fields: the digital revolution, distributed development and transparent record-keeping, non-hierarchical network systems, cryptography, and software engineering β lowering the costs that processes bring.
2. Bitcoin
Bitcoin’s success made blockchain technology famous. In fact, Bitcoin’s three key technologies β asymmetric encryption, peer-to-peer networking, and hashcash β had long existed and were not its own invention. Bitcoin’s breakthrough lies in combining existing technologies in an innovative way and running them in a manner people can accept. Bitcoin can be transferred to anyone who holds a Bitcoin wallet. This gives illegal transactions a payment channel, and it is also the censorship resistance that regulators do not want to see.
Bitcoin is not controlled by any central institution; transactions require public confirmation by the whole network; everyone is equal before the algorithm; and every person and every node can participate and supervise. It is precisely its decentralization that makes it fundamentally different from all other virtual currencies. Later virtual currencies such as altcoins β coins that are still controlled by their issuer β ultimately find it very hard to develop. The blockchain algorithm lets Bitcoin’s transactions be gathered into blocks and added, through cryptography, to the chain formed by the existing blocks. Anyone can add a block containing transactions by solving the cryptographic puzzle required to produce a new block.
A traditional central bank must make people trust that it will not debase the currency, and a bank must make people trust that it can manage money well and circulate that wealth as electronic money. But historically, getting central banks to promise not to debase the currency, and banks not to use money to create credit bubbles that shrink private wealth, has been impossible. But Bitcoin achieved it, using cryptographic puzzles to limit the number of bitcoins to 2100W.
2.1 Development History
On November 1, 2008, Satoshi Nakamoto posted a new message in the “Cryptography Mailing List”: “I’m working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.” He then answered all the questions from members of the cryptography group in detail, and proposed a workable scheme in the white paper.
On January 3, 2009 β two months later β Nakamoto released the first open-source version of the Bitcoin client, announcing the birth of Bitcoin. He also obtained 50 bitcoins through “mining,” and the block that produced the first batch of bitcoins is called the “Genesis block.”
Nine days later, Nakamoto transferred an amount of bitcoin to the cryptographer Hal Finney. This was the first peer-to-peer transaction in human history completed without a third-party financial trust institution.
In 2010, WikiLeaks announced that it would accept donations in bitcoin. The community cheered, but Nakamoto unexpectedly raised an objection, believing the Bitcoin project needed to grow quietly.
On December 12, 2010, Nakamoto posted his last message on the Bitcoin forum. After that, the frequency of his public activity online gradually declined. It was not until April 2011 that he issued his last public statement, declaring that he had “started to focus on other things.”
3. Blockchain Technology
A blockchain is essentially a decentralized distributed ledger database β an asset database that can be shared across a network made up of multiple sites, different geographic locations, or multiple institutions. Such a database is inherently very hard to attack, because it does not use a single database to store records; instead it keeps multiple shared copies of the same database, so a hacker attack must target all copies at the same time to succeed.
Blockchain technology has the potential to help governments collect taxes, distribute benefits, issue passports, register land ownership, ensure the traceability of goods supply chains, and generally ensure the correctness of government records and services. Given the nature of a ledger, it may contain personal and confidential records ranging from financial to family and health information. Blockchain technology has the opportunity to provide better security for this data than existing database technologies. Distributed ledgers come in two kinds: permissionless (anyone can add blocks) and permissioned (only designated people can add blocks).
3.1 Characteristics of Blockchain Technology
- Reconciliation through cryptography. After transaction information is broadcast, every node updates the information in its own ledger.
- Data replication. Distributed storage, multiple backups of the data. Through reconciliation computation, the correctness of the data can be verified.
- Access control. Keys and signatures are used to manage who and which records can enter the ledger.
- Transparent yet private. Nodes hold backups and can verify whether data is genuine. This allows people to make private information public without worrying about tampering.
3.2 Applications of Blockchain Technology
Blockchain technology can make companies and governments operate more efficiently, without worrying about the high costs of reconciliation and backup. Blockchain technology may disrupt traditional financial services centered on currency and value transfer. Blockchain technology systems bring a challenge to any hierarchical structure, because what they establish is a distributed network in which no central institution needs to be trusted or is even necessary. Blockchain technology has already had a profound impact on how private companies manage data and how they interact with customers and suppliers. If applied within government, it can lower costs, improve transparency, raise the degree of financial inclusion for citizens, and ultimately stimulate innovation and economic growth. It reduces operating costs, including fraud and errors in the payment process. Transactions between government agencies and citizens have greater transparency. It brings greater financial inclusion to people currently on the margins of the financial system. Blockchain supports the disintermediation of data and can significantly reduce complexity and cost. Blockchain technology can provide a solution to the current problems of global money transfers being slow, expensive, and unreliable.
3.3 Smart Contracts
A smart contract is a set of promises defined in digital form, including the protocols by which the parties to the contract can execute those promises. It works like the if-then statements of other computer programs. A smart contract interacts with real-world assets only in this way. When a preprogrammed condition is triggered, the smart contract executes the corresponding contract terms. The blockchain provides a trusted way to record data for smart contracts.
3.4 Internet of Things
Before blockchain technology, building a trustworthy IoT network was a very costly undertaking. Blockchain technology not only provides a suitable solution for recording the data of all IoT units, but also guarantees that once data is recorded, it can no longer be changed.
4. References
On January 19, 2016, the UK Government, “Distributed Ledger Technology: Beyond Blockchain”
