1. Why there is blockchain innovation?

The starting point of the first generation of the Internet is the TCP/IP protocol, which is an open code that execute all the nodes with unified format for the transmission of peer-to-peer information. However, the impact of such an uncomplicated innovation on human beings is epoch-making.

It has made the basic values, including freedom, equality, and philanthropism, of the global unified market, programmatic, protocolized, and executable, by which the STMP mail protocol and the HTTP domain name protocol are derived from. The decentralization realizes the low cost and high efficiency of global information transmission.

Gao Hongbing, vice president of Alibaba, said: "The Internet is the (information) supply chain which eliminates the low-value and high-cost issue- it is open, interconnected, equivalent, globalized, decentralized."

As it is known to us, the essence of the market is the decentralization. It automatically implements the decentralization protocols of “equivalent exchange”, as Nobel Prize winner Ronald Coase summed up: “The market economy is built on two profound cognitive bases “the recognition of ignorance and the tolerance of uncertainty.” Adam Smith also described the market as “invisible hand”! Therefore, the market must require low-cost flow of information decentralization, and the Internet came along with its adaption to the situation the formation of the global unified market.

However, the first generation of Internet decentralization solved the problem of low-cost and efficient transmission of information. It did not solve the credit problem of information. Therefore, the second generation of Internet must break through on how to decentralize the establishment of global credit to have value transfer in a low-cost and efficient way.

What is the problem with the original centralized credit system? As we all know, centralized credit, such as national currency, it has different credit value, and the liquidation system is also incompatible, which adds a lot of cost to global trade. At present, the global credit system centers on the US dollar, while it has a "Triffin Paradox" in the mechanism (the essence is that a country's legal currency cannot simultaneously resolve conflicts between the domestic economic interests and the needs of the global economy). Hence, in the 2009, Zhou Xiaochuan, the governor of central bank, called for the creation of super-sovereign reserve currency. In the same year, Satoshi Nakamoto issued the first generation of blockchain source code on the Internet -- "bitcoin"

2. How does the blockchain system work?

First of all, Nakamoto knows that establishing the credit of the payment system must solve the problem of “repeated payment”, namely, the counterfeit currency can not be made. The centralized credit system relies on state machines to prevent counterfeiting. What about "bitcoin"? The great innovation of Nakamoto is to “timestamp” every transaction every ten minutes for one block (block: equivalent to the network account book), the full-network transactions for every ten minutes are correctly timestamped. The question is who is going to stamp it? Nakamoto did not assume that people were selfless on the Internet. He agreed with Adam Smith’s view that the people in the market are greedy. He asked the so-called "miners" to compete for the accounting rights of a block in ten minutes. The rule of competition is to solve the SHA256 problem while correctly accounting on the book. Who can prove that he has the fastest accounting ability (so-called PROOF of Work Mechanism) will win the legal accounting right of the ten-minute block and will receive twenty-five bitcoin rewards. This is the so-called "mining" process, which is actually the establishment of a decentralized credit process of blockchain for the whole network. Thus the essential function of the miners is the "bookkeeping”!

In Satoshi Takemoto’s Bitcoin white paper, he describes in detail the process of establishing this credit system:

Step 1: Each transaction must be broadcast to each node (node: miner) in order for validation of the entire network.

Step 2: Each miner node must correctly timestamp each transaction for the ten minutes and record it in that block;

Step 3: Each miner node will compete for the legal accounting rights of the ten-minute block by solving the SHA256 problem, and strive for a reward of twenty-five bitcoins. (In the first four years the reward is fifty bitcoins per ten minutes and will be decremented by half every four years);

Step 4: If a miner node solve the 10-minute SHA256 problem, he will announce all the time-stamp transactions of the ten-minute block records to the entire network, and the records will be check it by other miners on the whole network;

Step 5: Other miners on the whole network check the correctness of the block record (because they have also time-stamped, but they did not win legal block accounting rights. There is no reward). The miners who were correct in the previous legal block will compete for the next block, forming a legal accounting single chain, which is the general ledger of the bitcoin payment system - the blockchain. In general, each transaction must be confirmed by six blocks, namely, there are six ten-minute bookkeepers, in order to be finally recognized as a legitimate transaction on the blockchain. The following is the accounting format for Bitcoin: The so-called "bitcoin" is an accounting system: it includes the owner electronically signing with the private key and paying it to the next owner, and then the time stamping is done by the "miners" of the whole network to form blockchain.

3. What innovations are in the blockchain finance of Bitcoin?

1) Trying to establish a global Internet decentralized credit is possible to let the value circulate in high speed and with low-cost in the whole network (currently, each transfer rate cost is only one in ten thousand of the original cost).

2) The monetary aggregates are decided by the cryptography agreement;

3) Compared to gold, digital currency is infinitely separable;

4) The value of currency can be built on a large number of P2P transactions;

5)  Financial management is completely transparent (every transaction can be found on the blockchain).

The whole network accounting system of Bitcoin Blockchain has a market capitalization of $10 billion. Therefore, Wu Xiaoling, dean of Tsinghua PBCSF, pointed out that the blockchain experiment established distributed credit, which is an upgraded version of Internet TCP/IP, to upgrade from information transfer to value transfer;

4. What are the inherent defects of Bitcoin's blockchain system?

Bitcoin's blockchain system has been successful run with open source since 2009. Although it does have many advantage, it still also shows some intrinsic flaws that are difficult to overcome:

1) The total amount cannot change with the market conditions, and the boom-bust is inevitable.

2) The high carbon of mining causes that there are less than 1% of the miners can win the accounting rights of the ten-minute block, and more than 99% of the miners involved in the competition are the waste of the energy.

3) About 10% of annual inflation has greatly increased the cost of the Bitcoin financial ecology and even has threatened its survival;

4) As a decentralized self-organizing DAC system, the partial operation costs of accounting and distribution are relatively high.

5) As a global payment system, its efficiency is far from the actual requirements of global trade. The Bitcoin network currently only can confirm up to 7 transactions per second. In contrast, Visa's network system can process up to 10,000 transactions per second. Alipay's record is 80,000 transactions per second in the 2014 Singles Day!

5. The development of blockchain technology 2.0

As a 2.0 upgrade development of the blockchain, the first concentration will be solving the high carbon mining of bitcoin bookkeeping:

When we discussed how to overcome the high carbon of bitcoin mining, Liu Taoxiong, professor of Tsinghua University of Economics, pointed out that mining was relying on computing competition, and finally only one could win the legal accounting rights, and the other 99% of miners’ participation would a waste of time. Wasting resources obviously is not reasonable. If the whole network transparently knows the legal accounting rights of the next block, and it will be randomly generated in the whole network, which will eliminate the high carbon of competition accounting! After listening to it, we all praised Professor Liu’s idea, because now the successful second generation coin NXT is using this kind of mechanism. The white paper of NXT is called “transparent forging”, however, the probability of the bookkeeping right is proportional to the NXT token holdings of each miner node wallet, which is called the PROOF OF STOCK. Apparently, this also has sparked an unfair debate that NXT distributes tokens to early-stage investment developers!

RIPPLE is a blockchain semi-decentralized project that uses "trusted gateways" for blockchain accounting. Its credit is based on a consensus ledger protocol where gateways do not simultaneously do illegal things.  

The most ambitious attempt is Ethereum, which combines the technology of blockchain with Turing completeness, and hopes to develop a basic platform that will meet the needs of various blockchain system construction in the future, and can support various credits, digital assets, smart protocols and even the development of financial derivatives. Its system design is the unified blockchain accounting of the ETHERUM platform, which is used by all developers, and perhaps its official version will be released in the near future.

6. The possible application of blockchain innovation in other areas:

Now, the attempt to establish decentralized credit in the blockchain is not limited to the financial sector, but has been concerned by various fields of society, especially in some central credits such as the “Red Club” in China that are in the“collapsed” situation. The chain provides a new way of thinking and technical options for social management. Here are some of the new developments and related discussions we have learned:

1) The combination of blockchain and Internet of Things will unify digital assets and atomic assets, will smooth out the difference between consumer assets and cash assets, will expand the credit of the public, and will accelerate the flow of value; (IBM-Samsung)

2) Establish an intellectual property protection system on the blockchain, to record the intellectual property by using accounting system on entire network, and to establish a global advertising market;

3) The blockchain may provide technical support for the issuance of protocol-type crypto-currency for emerging economies in the “One Belt and One Road” Plan;

4) Blockchain and cloud computing can evolve into decentralized self-media and community systems;

5)  Blockchain can build a decentralized equity crowd funding system, allowing innovative projects to enter the circulation ahead of time;

6) The blockchain can develop a fully transparent financial management system;

7) The blockchain can support the establishment of a global decentralized company organization.

In short, in the era that the credit has become a scarce resource, the technological innovation of the blockchain, as a model of distributed credit, provides financial and social management, talent evaluation and decentralized organization construction for the global market with a broad development prospect.

By Han Feng