Blockchain | How to Forecast the Development of Blockchain Industry: Game and System Design

1. Blockchain Concept
   
   From its name, “block” means the package of transaction histories, while “chain” means that the blocks are linked together with proceeding timeline. Through cryptography and P2P network, the consistency of the information is secured.

From technology aspect, blockchain is considered to have following attributes:

Decentralized distribution: Network is good even with 1/3 abnormal nodes.

1. Anti-tamper: Once the block is created, the data will not be altered or deleted.

2. Privacy protection: Cryptography secures the data privacy, and the unauthorized visitors will not be able to crack the code.

Based on the above attributes, the blockchain provides with the following business advantages:

Trust-worthy: Blockchain technology provides with decentralized platform that no centralized third-party can take a control.
Cost reduction: Compared to traditional technology, blockchain is able to use shorter time and less manpower to keep efficiency.
Security: Blockchain guarantees the audit management and accounting settlement, which reduces the possibility of crimes and potential safety risks.

1. Blockchain Technology Bottleneck and Chanllenges
   The three questions forms the basic technology of blockchain:

Decentralization: everyone needs to have the accounts that can participate and record;

Consistency: every node and transaction should be recorded consistently and timely;

Capability: improve trade volume and scale, in the meanwhile reduce the transaction time.

Current blockchain application is hard to maintain all the three attributes. For instance, bitcoin blockchain ensures the decentralization and consistency, but the capability is undermined, the trade frequency is 7 per second. Another example is POS\DPOS verification, it undermines decentralization, not everyone needs to be verified. While the other two attributes are maintained properly.

1. Blockchain Applications
   After defining the basic blockchain concepts and attributes, the development of the blockchain applications in the future 3–5 years would be experiencing 3 stages:

Information “Blockchainize”
Value “Blockchainize”
Application “Blockchainize”
Stage 1: Chaining of data solves information fragmentation problem.

Blockchain ensures a public ledger. Usually, every technology becomes popular because it solves the problem in a most efficient way.

Bank transactions are intermediate, but it takes a long time for cross bank and cross country transactions. Huge resources including manpower are required to check and verify the information repeatedly. According to Fan Bin, the managing director of IBM Global Business Services and is responsible for IBM Hyperledger project, many banks are planning or implementing the consortium blockchain, which removes the redundant work and improves efficiency of overseas and cross bank transactions. Blockchain public ledger allows data synchronization cross country and cross banks, simplifies the procedures, and allows the banks to have a full picture on users’ credits which reduces the risk.

Besides the paper documents and payment, other social problems caused by the information segmentation also find a solution from blockchain technology. For example, if the hospital uses blockchain technology to build a public health management system, where all the health information of one person can be collected on the “chain”, it will help achieve the precision medicine and in the meantime, provide with a huge amount of effective data for medical research.

To take a further step, if the government can establish a blockchain personal identity system that incorporates one’s health chain, financial credit chain, education chain and career development chain, it will change the society and bring about a lot of benefits. What’s more, the privacy and security are guaranteed by cryptography.

Take the medical industry as an example, hospitals do real-time synchronization of each patient’s medical information from his birth to the present, including vaccination, cold and fever, stomach ache, bleeding, inflammation and genetic diseases, etc. The synchronization helps to establish a management system of public health across the entire network. On one hand, it is convenient to collect users’ health information. On the other hand, it provides a comprehensive view of the patient’s health to the doctor, achieves precision medicine, and can provide a sea of complete and effective data sets for medical research uses. Through methods such as Zero-Knowledge Proof, health information of users can also be guaranteed.

In the near future, if the government or public institutions build up a blockchain identification system across the entire network, each person’s health information chain, financial credit chain, education experience chain and career development chain, etc. will joint the “identification chain” on the major chain. This will completely achieve chaining of information and solve the problem of information fragmentation, which facilitate people’s life services and increase their happiness index in a great extent. Of course, chaining of information does not mean the information is completely transparent. It uses symmetric encryption and asymmetric encryption to achieve information authentication, and uses Zero-Knowledge Proof to protect the privacy of users’ information.

At this stage, the major business opportunities lie in the natural digital industry. For example, those in financial industry center on payment, real estate finance, asset securitization, asset management and bill finance, etc. In this way, risk can be better controlled and the cost in transaction process can be reduced. Digital identities may be combined with techniques such as biometrics to map individuals to the chain, performing authentication, remote login and interacting with Ethereum applications, etc. The day that various medical institutions share information in the medical industry is just around the corner. In the future, wearable devices and big data analysis can also be combined to conduct personal health management.

Stage 2: Chaining of value to achieve disintermediation of transaction

Chaining of value mainly stems from the distributed structure of blockchain and its derived disintermediation. In stage 1, the major achievement is the chaining of fundamental information mostly in the form of consortium blockchain. In the second stage, peer-to-peer transaction starts to occur based on the trust of machine and its random algorithm so that the disintermediation of transaction can be achieved.

It is easy to understand that, traditionally, the transaction requires the participation of a third party to guarantee a stable mechanism with high frequency. Equivalent exchange formed the most primitive economic model. With the increasing frequency of trade, currency which is the general equivalent gradually emerges. The origin of currency is from natural rare species such as shellfish, copper coins, silver ingots, and gold, to paper money.

Inevitably, from the game point of view, if the cost of issuing the currency is lower than the nominal value of the currency itself, the issuer has a strong incentive to issue excess money. Otherwise, the issuer will tend to issue the currency with higher par value. That is why there is no currency with extremely low par value such as 0.0000001 in real life.

Standing on the same point, our project team has faced a problem. There was a third-party certified company of fruits and vegetables, aiming to rate and label fresh fruits and vegetables in the market, showed poor performance and their rating system was not commonly accepted. Later, through analysis, they found that it was not because of their poor ability or unprofessional rating system, but the game itself that caused profitable rating agencies difficult to survive. For example, they rated the farm for green fruits and vegetables with fees charged. After the farm paid the fee, the price will go higher for those with the same quality or the quality will be worse to remain the same price. As time goes by, the farm tends not to pay the rating fees to profitable agencies, hence makes the agencies perform poorly and not well-accepted.

Back to the trade itself, if it is only between A and B, once C participates, there must be extra cost, either the time or the manpower and materials. Then C will surely take back the benefit by excessively issuing money, bilateral processing fee and deposits and he will be at a higher position during the trade. As the main parts of the trade, A and B will be affected by C. Thus, for trade that requires the third-party security, the process between A and B will be affected to some extent. It will also lead to problems such as low efficiency of value transfer, high cost and disagreement.

Currently, those relatively successful blockchain applications such as Bitcoin and Ethereum, have achieved automatic execution of transaction, tampering-resistance and other effective mechanisms through distributed structure. There is no need for the third-party intermediary agency to participate and they greatly restore the nature of the transaction. Based on the smart contract of Ethereum, these applications can even bear more digital loads and achieve free circulation of value and assets.

There are many predictable application scenarios of chaining of value. Generally, they have the following features:

The products or services exchanged between two parties can be digitized
Product/service is standardized and the assessment system is clear
The service is provided by an individual and consumed by an individual
The network has a greater value as individuals gradually join
Take a simple example. In ridesharing industry, the major provider of the service is the driver or the car owner and the consumer is the passenger. The whole transaction ends when the driver takes the passenger from A to B and the passenger gives payment to the driver. After the driver takes the passenger from A to B, the fee can be automatically generated in a public calculation method, by GPS calculating the distance and the timer recording the duration. Then the money from the passenger’s account can be automatically transferred to the drive’s account after the driver confirms the destination is reached. As more passengers and drivers join blockchain network, it is more convenient for drivers to receive suitable orders and for passengers to take a ride.

At this stage, the major business opportunity is the application scenario with disintermediation, such as Didi, Meituan and Taobao on the chain. Since these centralized companies do not have many technical barriers. For example, the algorithm of order allocation for Didi and Meituan is not complicated at all and it is easy to reproduce. The point is to acquire users and to solve the problem of transaction throughput. The problem solving relies on public education on blockchain knowledge and technological development. Other industries with similar features, such as peer-to-peer insurance industry, credit industry, betting, forecasting and gaming, etc. can also achieve disintermediation of transaction and solve the problem of transaction trust through chaining of value as long as their application scenarios satisfy the above four features.

Stage 3: Chaining of scenario to reduce the entropy of the whole system

Based on the first stage, after the chaining of some basic information, a complete set of identification systems are formed as the infrastructure of the blockchain world. On the basis of this, in stage two, the chaining of value can be connected to the identification system and develop some Zero-Knowledge Proofs to protect users’ privacy at the same time. The third stage is defined as chaining of scenario, mainly including various application scenarios. The process continuously develops to the third stage through chaining of information and the cycle of value exchange.

In the complicated real scenarios, asymmetric information always occurs. For example, you never know whether Taobao is selling fake goods, whether the quality of second-hand cars is good enough, whether the design product is excellent and whether the production cost for the supplier is high or low. In such condition, products with low quality and low efficiency are always in the market. High-quality products will fade out of the market since it is not well recognized by users and lemon market, the economic phenomenon where bad money drives out good money, will show. Blockchain has the chance to symmetrize information via distributed storage verification record. It may also lead the lemon market to the positive circulation system to facilitate more products and services with high quality.

Symmetrizing the information, in terms of production and operation management, means the completeness of the information will dramatically increase the overall market performance and reduce the cost of product and operation management, hence achieve the goal of reducing the entropy of the whole system.

At this stage, the business opportunity lies in chaining the real social asset and the accurate execution of on-chain output information. There is possibility that the standardized and digital mapping of the natural world can be achieved, such as price of the real estate, evaluation of the rental services, the accurate reflection of production and information process in the supply chain, the mapping of content copyright field on the chain and the trust rating of information on the chain. The accurate output of information on the chain may require combination of IoT, artificial intelligence, robotics and other automated technology to achieve.

1. Summary and Prospect
   At present, based on the analysis of the loading capacity of the chain and the features of the information, the information that needs chaining and node-distributed verification record usually has the following features:

The value of information is relatively high, such as transfer of Bitcoin
The information is independent and does not interfere with each other
The first feature is to assure the economic incentive to have more nodes participated in the verification. It is acceptable if a number of data with little value are put into a centralized server. The second feature is, to some extent, to filter the information. It is effective if the “block+chain” series are packed in independent information streams. Otherwise, the structure will not be that effective.

There may be trust rank of information in the future development. The quantitative evaluation is conducted according to distributed storage and randomness of verification.

It is predictable that only little information that needs affirmation of ownership and transaction record will require a lot of or even all the nodes in the network to verify. Articles in APP, pictures, videos and music, etc. are only the mapping of the strings on the chain to the natural world.

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