Blockchain Gives Birth To A New Business Model — Distributed Business

This is an old article, but the idea has never been old.

Abstract: The first layer of blockchain is distributed network, namely point-to-point network technology. The establishment of a set of cryptographic ledger system based on point-to-point communication becomes the second layer of blockchain — distributed ledger. On the basis of distributed ledger, the integration of incentive mechanism and governance mechanism is the third layer of blockchain, which is called the public blockchain. This whole system is a trust machine. The application of blockchain is divided into 1.0/2.0/3.0, which are BitCoin, Ethereum smart contract and the upcoming cross-chain technology respectively. The 3.0 era will provide the possibility for large-scale commercial application of BitCoin. The core of blockchain is not decentralization but distribution. Distributed architectures emphasize right of use more than ownership. Financial industry and Internet of Things will be the first ones to apply blockchain technology, and 2018 will be the beginning of the era of blockchain technology 3.0.

1. Analyzing BlockChain from the Perspective of Mechanism Design

Today, there are still some readers who are very vague about the concept of blockchain, and even a few people regard it as a hoax. So, I will explain what on earth blockchain is from the perspective of mechanism design.

From the perspective of mechanism design, blockchain can be divided into three layers. The first layer is distributed network, which mainly solves the problem of point-to-point communication network and is the foundation of building blockchain. Point-to-point network technology has existed for decades, such as the early P2P network, the current NVIDIA computing chip and so on. Nvidia’s computing allows each sensor to have its own computing power, eliminating the need for a centralized database to process data.

A set of cryptographic ledger system based on point-to-point communication can move from point-to-point communication to point-to-point transaction, which is the second layer of blockchain — distributed ledger.

The distributed ledger is featured by the convenience that all people can keep accounts in one ledger, and everyone can open his own account with a password in this ledger without the approval of any institution or individual. Once the account is set, the payment, transaction and exchange of valuables can be completed independent of any financial intermediary, making it a typical distributed ledger for point-to-point value exchanges. This is a system where the accounts of all affairs and all relevant parties can be recorded respectively. Everything can be recorded in the same ledger, which greatly saves labor, material and money.

Adding new incentive mechanism and governance mechanism on the basis of distributed ledgers is the third layer of blockchain — public blockchain, such as the most typical BitCoin blockchain where global point-to-point transactions, payments and exchange occur every second. The network has no shareholders, boards of directors, management, employees, business offices, funds or any assets, but there has been no mistake, and the whole system has not experienced a one-second downtime.

This system can automatically issue digital currency as an incentive, and combine with consensus algorithm based on game theory to build a new governance mechanism is constructed. People who work on BitCoin blockchain get paid in BitCoin which is a self-circulating incentive mechanism. Without management deciding how much bonus people should get, everything is automatically distributed by the system.

Blockchains are characterized by high consistency, non-tampering and complete transparency of data. Because the block chain is based on a point-to-point distributed network, it is an equal network in which every node has the equal right to access the information. In a fully symmetrical information system, there is no need for the board of directors and management. Everyone makes point-to-point decisions and use a set of algorithms to reach a consensus on the Internet to decide what to do and what not to do.

This is why blockchain can establish a set of governance mechanism that does not require a third party, and the technical theory behind it is game theory of algorithm. Relying on these theoretical foundations and the development of cryptography, blockchain will indeed make disruptive changes to existing social relations, business civilization, enterprise organization forms and business models.

2. The Development of Blockchain has led to the Emergence of Distributed Business Model

So what exactly is blockchain? You can use the cover article of the Economist magazine in 2015 to answer, “Blockchain is a Trust Machine”! Instead of trust intermediaries, machines can be used to manage the economy and society.

Taking the banking system as an example, when we go to the bank to apply for credit cards or loans, we need to provide a lot of proof materials to prove that our credit investigation is good, which takes time and energy. But in the tens of thousands of transactions in the BitCoin blockchain, no proof materials was needed, and no fraudulent transaction occurred. In this case, the cost of credit transaction established by the machine is zero, and the cost of trust is zero.

But what is the point that needs to be emphasized here? The core of blockchain is not decentralization, but distribution. Decentralization is a process, not an ultimate goal. If we are not sure about this, blockchains are difficult to be accepted in the financial system, and areas like intellectual property. If you want it to be completely decentralized, it cannot be applied to many existing systems.

But if we look at it as distributed, it can be well connected with many of our existing systems, so as to maximize its value. So I say that the weak center, sub-center and network structure autonomy mechanism should be the largest common divisor agreed by all parties involved in the blockchain. Then we will be able to use this technology well on a large scale and in a wider range.

With the development of blockchain, a new business model is on the rise and a new organizational structure is also starting. This model is distributed business.

The main features of the distributed business model are:

1) The basic technical architecture is embodied in the distributed network structure, and the relevant participants are in a point-to-point relationship and not affiliated to each other.

2) The value creation mechanism is reflected as zero marginal cost under the digital rules.

3) The value growth mechanism is embodied in “Moore’s law”. Once it crosses the inflection point, it will achieve exponential growth immediately.

4) The organizational mechanism is embodied in the operation framework of community autonomy, platform organization and ecosystem;

5) The collaboration mechanism is reflected in relying on consensus rather than instructions;

6) The incentive mechanism is embodied in the Internet thinking that the payment does not come from the buyer.

7) The benefit distribution mechanism is reflected in sharing.

Despite its diverse forms, the distributed business model has not yet exhausted its capabilities at such an early stage. But they all have one common characteristic: emphasize right of use more than ownership and even there’s no ownership.

Such as open source software communities, shared economic models, non-profit institutions, and Distributed Autonomous Organization. (In blockchains, people called the Distributed Autonomous Organization “DAO”), refer to organizations that operate in a point-to-point, end-to-end way without central control mechanism and third-party intermediary services.

Public blockchains like BitCoin blockchains and Ethereum blockchains are the most typical cases of distributed business organizations. Product copyright is completely open source and free. There are no servers, organizations and maintenance personnel. A set of software released to the network completely relies on the volunteer community for development and maintenance in which anyone can download terminals to become a network node without permission. They are non-profit blockchains without right holders to whom no earnings are distributed.

3. Why the prospects of blockchain applications are limitless?

Finally, I’d like to talk about the prospect of blockchain applications. The prospects for blockchain applications are almost limitless. As the most digital industry, financial industry is considered to be the first industry to apply blockchain technology. At present, the goal of most blockchain entrepreneurs is indeed to target a variety of financial industry applications, such as payment, cross-border remittance, crowdfunding and digital asset transaction.

There are also dozens of financial application scenarios, which are being tested and verified in the blockchain innovation laboratories of all major financial institutions, and will be added to the production environment of the financial industry in the near future. It is expected that in 10 years, blockchain technology will become the basic platform for the core production system of the financial industry, which will certainly take on a new look.

In contrast to the attitude towards Internet finance, the major financial institutions around the world are very active in Financial Technology this time. Not only a few heavyweights from Wall Street cross the border to start a business in blockchains, but also two of the most important blockchain alliances in the world built in New York. It is reported that in 2016, New York surpassed Silicon Valley in venture capital in financial technology.

Another great application prospect of blockchain technology is in the Internet of Things. The White Paper Device Democracy published by the international Business Machines (IBM) in 2014 concludes that when the number of online devices reaches 100 billion in 2050, the communication bandwidth and the central database can not transmit, store and process the equivalent data, and the identity authentication of this large-scale device can not be well managed by the existing technology.

Blockchains may be the most elegant solution to Internet of Things with hundreds of billions of devices. To establish a society with sharing economy where ownership and right of use are separated, blockchain technology may indeed be the best solution. If the identity of the taxi tenant and the car are registered in the blockchain ledger, renting a car is as convenient as going downstairs to drive one’s own car. The taxi renter can also confirm the identity of the tenant in seconds on the blockchain. Combined with wisdom, everything will be done automatically, and there is no difference between owning it and using it.

We have moved from the Era of Information Internet to the Era of Value Internet, and the Internet is becoming the infrastructure of all industries. As the second generation of the Internet, the blockchain technology is the value transfer protocol as important as HTTP in the Internet TCP/IP structure. In other words, HTTP and the value transfer protocol (BLOCK CHAIN) are at the essential core in the Internet application protocols. Because of the information Internet, human society has undergone tremendous changes and social welfare has been significantly increased. The human society will also usher in a more perfect revolution due to the value Internet.

It is precisely because of this consensus that some governments take a positive attitude towards blockchains. For digital currency Bitcoin, EU recognizes the first product of the blockchain, as a currency and regulates it as a currency. The United States classifies Bitcoin as an asset, equivalent to oil and other commodities.

Blockchain is one of the infrastructure and core technologies of financial technologies. SandBox has been set up in some countries to support blockchain technology and other financial science and technologies. Sandbox means that in the world of computers, if a new system is to operate, a test environment is usually set up before it can enter the real production system for the sake of safety. Regulators in Britain, Singapore and Australia also announced their approval of each other’s sandbox mechanism, in which all three countries share the results of a start-up’s sandbox experiment. Central Banks in the US and the UK have announced they are exploring the issue of legal digital currencies.

Blockchain technology has entered a new stage of accelerated development. The blockchain was originally developed by a group of grass-roots technology geeks in the way of community. In recent years, a number of entrepreneurs began to use venture capital funds to support them to start. And then in 2016, Microsoft, IBM, Intel and other companies have entered the blockchain industry, which means the speed of the maturity of blockchain technology will accelerate.

It is expected that the blockchain technology will enter the 3.0 era in 2018. At this stage, blockchain will support large-scale commercial application development in performance, technology and application.