Why blockchain is a great experiment rather than a revolution

Xiao Feng

Xiao Feng, vice-president of WanXiang Holdings and founder of WangXiang Blockchain Lab, has shared his insights on blockchain on multiple occasions. Here is a collection of some key ideas from his speeches on blockchain:

 

Blockchain in essence is a trust machine

What’s the fundamental difference between economic activities before and after the occurrence of blockchain?

Before blockchain appears, all trades require an intermediary. Trades can’t be made between strangers without intermediaries. With blockchain, we can replace intermediaries with a set of algorithms and provide a trustworthy environment for both parties.

 

What is decentralization?

Decentralization is a result from blockchain. During economic activities, decentralization can be:

  1. When we make trade without third party involvement. The third party is a center.
  2. All economic activities on blockchain don’t need corporate structure to be properly operated.
  3. When working for a centered institution, we will be obligated to a certain position and incentivized with reward to build it for better. But in the blockchain chain world, incentives are not provided by any centered institution.

The concept of decentralization is not a new idea. Elinor Ostrom was awarded with 2009 Nobel Memorial Prize in Economic Sciences for her “analysis of economic governance, especially the commons”. She has been working on autonomous organization and administration for a long time. And her work can be viewed as decentralization in another angle.

 

Why 2009?

Because the 2008 global economy crisis has made people aware that the traditional market is at risk, neither government nor market itself can handle the crisis properly. Then, a bunch of tech geeks believed that they need to transform the way currencies are generated and use mathematic rules to ensure an appropriate money supply. That’s the background for the birth of Bitcoin. That could also be the reason for Elinor Ostrom being awarded with Nobel Prize.

Decentralization does not mean displacing government or regulators. Under certain circumstances, government administration can be necessary. What decentralization provides, is just another way out, it might be more effective in specific use cases.

 

How to build autonomous organizations on a blockchain system?

I believe a blockchain system should have three layers. The first and the most fundamental one is distributed network. A blockchain system should be built on a distributed network.

The second one is adding a cryptographic ledger system onto distributed network and making it a distributed ledger. Current financial activities are independently recorded among different institutions and rather inefficient. An international wire usually involves five to six international finance institutions and requires high fees.

On a distributed ledger, all parties will share the same database and once a process has been made, all parties can see it. It will eliminate tons of repeated work, improve efficiency and lower operation costs.

The third level is to add digital currency system onto distributed ledger, just like blockchain. Traditional currency, no matter how they are digitalized, they are still digits. While digital currency, they can be a pre-set program, like smart contract, and execute processes without human intervention.

 

Why digital currency is a necessity on public blockchain systems?

Is it ok not issuing tokens for a blockchain project? It’s ok, only that the project would only be a distributed ledger. For a blockchain project that built on public chain, digital currency is a necessity. Because you need to implement incentives for participants to work for the system, to make the system work autonomously.

Public blockchain system can play an important role in disruptive business models, but probably can’t fit into current economies due to drastic conflicts. Distributed ledger, on the other hand, can be plugged into traditional industries.

 

How has blockchain involved in past years?

The launch of Bitcoin in January in 2009 marks blockchain 1.0. The contribution Bitcoin made is providing a new way of account booking. However, it has one drawback – all the rules are predetermined, therefore we cannot develop apps on Bitcoin network.

The launch of Ethereum in July, 2017 marks blockchain 2.0. The best part about it is that people can implement algorithms and apps on blockchain and thus a large-scale cooperative network can be built globally. Smart contract enabled on Ethereum can ensure the enforcement of any pre-set agreements.

But as blockchain 2.0, Ethereum still has much to improve. For example, performance on trade rate is still unsatisfying. Ethereum can only process no more than 20 trades per second. It is far from centralized financial systems.

In 2018, blockchain is looking into a 3.0 era. EOS might be that, but we still need time to see the outcome.

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Zarc Gin is an analyst for Warp Speed Fintech, a Fintech, especially InsurTech-focused Venture Capital based in China.

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