Blockchain As Infrastructure: A Deep Dive Into China's DLT Strategy

Blockchain As Infrastructure: A Deep Dive Into China's DLT Strategy

There is an old saying in China: "Building the road is the first step to becoming rich". Asian countries use infrastructure to boost economy, and China is probably the most aggressive - its average annual spending on infrastructure is one of the highest at 8.3% of gross domestic product from 2010 to 2015, according to Statista data.

In the past two decades, China has built the largest number of high-speed highways and railways, and has now decided to expand infrastructure development to a digital dimension. China's "new infrastructure" plan includes blockchain technology, 5G, artificial intelligence and cloud computing as the new information infrastructure.

The research and exploration in China of blockchain technology and digital currencies has a longer history than people think. It started in 2014 when the central bank of China formed a special task force to study the feasibility of issuing digital currencies.

It was not until October 2019 that President Xi Jinping announced blockchain, a core technology, drawing public attention to this national strategy . The subsequent deployment of digital money / electronic payment, or DC / EP, testing and the blockchain-based service network is a sign that the social strategy is gaining momentum.

The blockchain vision in China

Before blockchain technology, each network participant could only use their own database, and as the number of network participants increases, the validation of the data request increases exponentially, resulting in high costs and ineffectiveness.

If all participants keep a database together, the frequency and cost of interactions between participants can be greatly reduced. Blockchain technology is a tamper-proof public database that records all transactions and data from day one. You can trust the transaction history, essentially the general ledger state, without having to trust a particular actor to verify this information.

Instead of bringing in auditors to extract and reconcile data from all these different points, you can directly audit the blockchain itself. Or potentially, regulators can step in and use the blockchain itself as the original source of information.

Using blockchain technology, we can create apps that didn't exist before. Satoshi Nakamoto used a blockchain to record a cash book, and thus Bitcoin (  BTC  ) was born, which showed the immense potential of the technology.

However, China has its own vision for the use of this technology. He wants to use a blockchain to encourage data sharing, make businesses more efficient, and build better credit systems in various sectors - including the Internet of Things, supply chain management, and government services.

Let's take a look at the two major initiatives under such a vision.

DC / EP: The sovereign digital currency

The digital format of the Chinese national currency, or DC / EP, is an example that shows how China uses blockchain technology on deliberate considerations.

"The main objective of the introduction of a digital central bank currency is to protect monetary sovereignty, for fear that Bitcoin and other cryptocurrencies may have an impact," said Mu Changchun, project manager of DC / EP, in a recent report. He continued:

"DC / EP will also improve the efficiency of the payment system and improve the convenience of RMB payments."

After reading all the existing documents, what caught my attention the most is that DC / EP is able to:

  • Make transactions without a bank account (the current electronic payment system requires a linked bank account) - for example, you just need to open a DC / EP wallet.
  • Allow a small number of anonymous payments, which is not supported by the current electronic payment system. For a greater number of transactions, the DC / EP wallet needs to know your client's information for reasons of combating money laundering, tax evasion, corruption and the financing of terrorism.
  • Perform offline and peer-to-peer transactions once the wallet is configured.
  • Integration with smart contracts. During a trial in Suzhou, DC / EP was used to pay public transport subsidies to government employees.

Mu also said that after years of researching the technical specifications of blockchain technology, the decision maker had come to the conclusion that blockchain technology, as it stands, still had security concerns and could not not handle the strong competition for payment; therefore, the Chinese government does not use blockchain technology for issuing digital money.

The Blockchain technology itself is a combination of many existing mature technologies such as asymmetric cryptography, the consensus algorithm, time stamp, etc . As shown in its latest disclosed patent, DC / EP is integrated with asymmetric cryptography, unspent transaction output and smart contracts.

The digital yuan adopts a two-tier system for issuance and distribution - the central bank issues DC / EPs to banks or other financial institutions, and then these institutions further distribute digital money to the public. While the issuance of DC / EP is centralized, the dissemination could be based on traditional financial account systems or blockchains.

DC / EP transactions - which are not based on financial accounts - could bypass the SWIFT system and be more convenient for cross-border payments, said Zou Chuanwei, chief economist at Wanxiang Blockchain, in a recent report. He stated:

“Foreign entities can simply open a DC / EP portfolio to carry out the cross-border transaction. The requirements to open a DC / EP wallet are much lower than those to open an RMB deposit account. Peer-to-peer transactions can be initiated between two DC / EP portfolios. "

As an example, he said this explains why the People's Bank of China had previously announced that the DC / EP pilot scenario included the venues for the Winter Olympics. What happens if DC / EP transactions occur on public blockchains? This will help the yuan to internationalize.

Blockchain-based applications

To explore the possibilities of blockchain-based applications, China invited banks, telecommunications companies and the Internet that   have registered the most blockchain patents in the world.

In areas where there is a high need for reliable information sharing and a low need for foreign exchange, such as settlement of transactions, trade finance or transfer of property rights, blockchain technology is already widely used. and the majority of blockchain applications are based on authorization / consortium blockchains.

For example, Chinese banks have been exploring the use of blockchain technology in various segments since 2016. Some of the biggest projects are:

  • The Bay Area trade finance blockchain platform was launched by the central bank and launched in 2018. As of December 17, 2019, 38 banks had joined the platform, with a business volume of more than 87 billion Chinese yuan .
  • The Blockchain service platform of the state administration of cross-border currency exchanges is the first blockchain application built by a national regulator and launched in 2019. As of January 10, 2020, the platform had completed a total of 13 $ 9 billion in loan receivable financing. At the same time, the platform has 170 banks serving 2,276 companies (70% are SMEs).
  • Blockchain electronic invoicing was launched by the Shenzhen and Tencent municipal tax offices and launched in 2018. By April 2020, more than 18 million blockchain electronic invoices had been issued by 15,000 companies.

The need for public blockchains

From the above use cases, it appears that enterprise blockchains can meet the performance and privacy requirements of application scenarios and improve efficiency with reduced costs.

However, any new participant must first trust the collective behavior of multiple participants in a blockchain without permission and be willing to join and collaborate.

If you want to broaden the boundaries of your application scenario and attract more participants, you will need to use open, unauthorized blockchains that the public can freely access, and most importantly, it creates consensus by everyone without having need to get permission to enter and exit.

Although the current use cases in China relate to corporate blockchains, they will ultimately converge on the power of open and public blockchains, as these are a stronger form of technology.

Compared to corporate blockchains, unlicensed blockchains are more like borderless infrastructure and similar to the Internet TCP / IP standard. The limits depend on the effects of the network - the larger the network, the more the value of the assets can circulate in the network.

If greater global consensus is to be reached, it can only be achieved through public and open blockchain networks.

It seems Chinese policymakers are also aware of this, and the technical design of BSN reflects this.

BSN: A national “integrated development environment” for the creation of blockchain applications

Led by the State Information Center, China Mobile Communication Corporation and China Union Pay, the BSN aims to promote the use of blockchain technology by industry by reducing the technical difficulty and the cost of deploying blockchain applications.

According to its introductory white paper, BSN supports multiple corporate blockchains - Hyperledger Fabric, FISCO BCOS, Baidu Xuperchain and CITA - and public blockchain frameworks like   Ethereum   and   Eos  . He also says to support as many blockchain frameworks as possible.

BSN itself is not a blockchain protocol; it is a centralized platform. This is more like what we call a large integrated development environment, or IDE, for developers, providing a low-cost environment for the development, deployment, maintenance, interoperability, and monitoring of applications that integrate multiple resources. cloud, underlying blockchain frameworks, operational environment, management key, software development kit and gateway application programming interfaces.

Ma Xiaojun, the chief architect of BSN, said in a recent interview:

"We hope to find and provide a low cost deployment solution so that a large number of small and medium enterprises, even students, including individuals, can use blockchain technology for innovation and entrepreneurship, thereby promoting the rapid development and popularization of blockchain technology. “

BSN does the heavy lifting for developers, so they can connect and play, deploying applications on blockchains at a cost as low as $ 150- $ 300 a year. Regardless of whether the underlying layer is heterogeneous or not, all application chains on BSN can interact with each other, which results in a similar situation similar to communication over the Internet.

As with any technology, affordability can dramatically accelerate the adoption curve. BSN has the ability to unleash the potential of blockchain technology.

In the pilot phase, BSN will deploy more than 120 public nodes in China and abroad. It is reported that hundreds of blockchain applications havedeployed within the BSN platform from beta to current commercial use - including public data security sharing services, smart sterilization supervision platforms, electronic contract management, the depositary of government affairs, as well as product traceability. Ma believes blockchain technology can be used in cross-border payments, letters of credit, payment clearing and other financial areas, as well as electoral voting, social assistance lotteries, public welfare. He said the philanthropic services sector could be the first to mature and make great use of blockchain technology.

In addition to the various corporate and public blockchain executives in the BSN is a strong strategic position . BSN will act as an abstract layer connecting authorization blockchains to open and unauthorized blockchains, which are just two formats for using technology, and together they will weave an efficient and reliable network for the economy. digital.

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