Opinion | How will blockchain technology affect the way countries are governed?

Source: Surging News, original title "Blockchain Technology and Governance Transformation"

Author: Yan Bing Qian (assistant CASS Institute of Finance researcher Strategy, Doctor of Management)

For some time, the blockchain has attracted the attention and learning of the whole people. In fact, in the "Thirteenth Five-Year Plan" International Informationization Plan issued by the Chinese government in 2016, it was clearly stated that "the innovation, testing and application of new technologies such as blockchain should be strengthened in order to realize the dominance of the new generation of information technology" . In the following two years, China's blockchain technology research has also made a series of progress.

Bitcoin is often associated with the blockchain. Indeed, Bitcoin is one of the important applications of blockchain technology. However, unlike the Bitcoin speculation in 2017, this time the society is more concerned about the blockchain technology behind Bitcoin. Many people believe that blockchain technology will bring about profound changes in the world. Among them, there are many viewpoints: blockchain technology has the characteristics of "decentralization, distributed, self-organization", and the existing intermediary institutions will gradually be replaced. Blockchain technology can achieve "self-organization" of business processes. There is no need for the company to exist. Eventually, it will form a "beautiful world" with no center (no government), no intermediary, self-governance, and autonomous operation. Is blockchain really so powerful? Can it really replace all the central nodes completely? With the modernization of the national governance system and governance capabilities, how will it affect governance?

"Decentralization" ≠ completely "de-intermediation"

Literally, a block chain is a chain of blocks (ie, text records). The protection of the content on the blocks and the concatenation of the blocks are done by cryptography. Based on the blockchain technology, some information such as transactions are confirmed by the consensus mechanism of the network nodes, and then recorded on the new block and linked to the existing blockchain. The decentralization of the blockchain technology itself (information is disclosed to all nodes), the information cannot be tampered with and traceability, making the blockchain a cornerstone of creating trust machines and building value networks.

Traditional value transfer, whether it is an inter-bank transfer or asset ownership transfer, requires the intermediary institution (bank or notary institution) to verify and confirm the transferor's assets based on the existing ledger, transfer and register through asset transfer. It can be seen that the ledger is only held by the third-party intermediary structure, and its information has the potential risk of theft. Moreover, the value transfer across intermediaries requires information to be confirmed back and forth between the two parties, reducing transaction efficiency.

In contrast, the blockchain is like a distributed ledger of this disclosure, and value transfer can be done without intermediaries. The trust created based on algorithms and data is cheaper and more efficient than centralized trust, so the centralized trust intermediary function will gradually weaken and be replaced by the blockchain. It is worth noting that this does not amount to the demise of intermediaries. In addition to information storage, identity verification and value transfer that can be replaced by blockchain, intermediaries also have other blockchain functions that cannot be replaced, such as asset and information verification and collection, and credit guarantee. Therefore, the decentralization of the blockchain does not mean de-intermediation, but only replaces the function of value transfer among the many functions of the intermediary.

The trust creation function of the blockchain cannot be underestimated. Trust is the basis of social operation and business operation . If any blockchain is based on its distributed ledger, it will set up a consensus mechanism based on game theory and an incentive mechanism based on digital currency in advance. Operate autonomously without any administrative management. It can be seen that the blockchain will have a profound impact on the way of business organization and national governance, and it will also bring opportunities for governance modernization.

Enrichment of business organization

Bitcoin is only a type of blockchain technology application, and is a typical representative of the public chain. In fact, in addition to the public chain, the blockchain has two modes: private chain and alliance chain. Private chain, alliance chain and public chain respectively represent private, alliance and shared blockchains. The read and write permissions of each blockchain are open to a node, a node joining the alliance and all nodes. The degree of "decentralization" of the three has been strengthened in turn, and the role of the "invisible hand" played by the market has also gradually expanded. How much can "centralization" go, and how much can the "invisible hand" play? There is no need for the company to exist. Can the public chain completely replace it?

First, at the technical level, for the blockchain, decentralization, data security (or immutability), and operational efficiency, like impossible triangles, cannot be met at the same time. Since all nodes have read and write permissions, the public chain has the highest data security and decentralization, but the lowest operating efficiency. For example, Bitcoin does not exceed 10 transactions per second, and the speed of dozens of transactions per second on Ethernet is doomed to large-scale transactions. At the same time, the public chain must rely on the token's incentive mechanism to achieve self-operation, resulting in repeated calculations by miners, resulting in huge energy consumption. Therefore, whether it is completely "decentralized" requires a trade-off between the consumption of resources in the operation of the public chain and the increase in administrative efficiency brought about by it.

Second, aside from the constraints of public chain technology, is it still necessary for the company to exist? Most analytical habits today start from the "boundary of the business." The company's internal production costs are compared with the costs of market-based production outside the company to determine which businesses are "internal" and which are "external", thereby determining company boundaries. It is undeniable that blockchain technology has greatly reduced the cost of contract signing, management and payment, and the company can outsource some non-critical business, so that the global value chain will be more detailed. However, even if the development of the public chain technology makes the coordination costs of different businesses tend to be zero outside and inside the company, it does not mean that no company node is needed on the global production chain. The unique competitive advantage of some companies means that coordinating and building trust within the company is still more cost-effective than the open market. These competitive advantages may come from the core technology they have mastered, or they may come from the system as a whole or the advantages of the system itself. Even if the market can imitate any activity in the system, it will not be able to obtain the same benefits.

Therefore, looking at the existing blockchain applications, most of them are concentrated in private chains and alliance chains. With the advantages of some aspects of blockchains, they can make up for the shortcomings of existing business models and organizational methods. With a new underlying architecture and trust creation mechanism, the company will continue to exist, and it will be able to place more and more easily modularized businesses on the market, retaining only key capabilities to achieve its competitive advantage. Companies will become more condensed, borders will continue to be extended inward, and cooperation between companies will be more flexible. This new way of teamwork will promote innovation and value sharing.

Modernization of state governance

If it was said that before the blockchain, third-party intermediaries were set up to solve the problem of information asymmetry, then the reason why the blockchain can be "decentralized", no endorsement by the intermediary is needed to achieve value transfer, is exactly Because the information transparency is improved, the problem of information asymmetry between the two parties in the transaction is solved, and trust is established between the two parties in the transaction. It can be said that information symmetry is the premise and basis for the efficient operation of all economic transaction activities: under the role of information symmetry and a completely competitive market, the self-interest behavior of "rational economic people" can ultimately achieve the optimal allocation of resources and promote public welfare. Ascension, which is what Adam Smith calls the "invisible hand" of the market. In real life, there are very few perfectly competitive markets. The vast majority of cases are asymmetric information or "market failure" situations that require government or third-party monitoring agencies to intervene and promote resources through "tangible hands" such as intermediary agencies. Reasonable configuration. Supervision by the government or third-party organizations is often time-consuming and laborious. For example, the verification of the qualification of a loan enterprise requires several staff to work for several days. The blockchain uses algorithms to create trust, allowing the market role of the "invisible hand" to be brought into play again, thereby reducing system maintenance costs.

The "invisible hand" cannot replace the role of the "visible hand" in all areas: The basis for preparing blockchain applications is still based on real-world laws, such as asset identification; disputes on the Internet and real life The natural disasters in China still require independent third parties to arbitrate and remedy. However, with the power of the blockchain, government governance will become more transparent, efficient and modern, and even more so in the handling of public affairs. For example, identity verification can take advantage of the fact that blockchain technology cannot be tampered with and can be traced back to record everyone's identity information on the blockchain network to build a personal digital ID, thereby eliminating traditional identity information data management expenditures, saving Expenditure for human, material and administrative management required to carry out identity-related activities. Another example is medical care, which uses blockchain technology to build patient electronic medical records and links patient data from different medical institutions together to ensure that patients get more accurate diagnosis at a lower cost. Another example is the central fiscal appropriation and local debt. Blockchain technology can be used to record and track accounts, and to clarify whether the whereabouts of central appropriations and local borrowings have actually been implemented, effectively avoiding the bad use of accounts. Finally, waste sorting can even be achieved using the blockchain-based IoT.

Blockchain's promotion of national governance modernization is not only reflected in the modernization of governance technology, but also in the fundamental transformation of governance relationships brought about by it. On the one hand, the non-tamperable and transparent information characteristics of the blockchain mean that the government can divide and transfer the power of governance to social citizens for common governance. At the same time, the blockchain-based electronic credit information system will promote the consciousness of cultivating social citizens and achieve their "self-rule." On the other hand, the government's governance will be more transparent, and a series of policies that promote fairness, such as targeted poverty alleviation, can be implemented point-to-point, and the government and social citizens can implement cooperative management of public affairs.

Way forward

Blockchain technology is still in the early stages of development and has not yet formed a unified technical standard. Many technologies need to be tackled.

First, the blockchain cannot yet support large-scale commercial applications in performance. Because the approval of all nodes is required, the transaction speed of the public chain is the slowest, while the speed of the alliance chain and the private chain is faster. In the future, we should explore the combination with off-chain cloud computing and other technologies to improve computing capabilities.

Second, in terms of security, the design of smart contracts and the trading platforms of some digital currencies such as Bitcoin are vulnerable to hackers. For example, in 2018, a major loophole in the BeautyChain smart contract appeared. Hackers used this loophole to generate unlimited tokens, which caused the token value to almost zero. The open source nature of the code brings information transparency and potential risks. The security of the blockchain needs to be strictly controlled at various levels, and the contract code must go through repeated tests before going online.

Third, there is still room for improvement in the public chain's consensus algorithm and digital currency-based incentive mechanism. For example, bitcoin's mining design and digital currency-based incentive mechanism can easily lead to the opportunity to obtain bitcoin concentrated in a few mining pools or nodes, making bitcoin occupied by a few people, forming a monopoly, contrary to the original "decentralized" Designed to achieve the vision of a true "shared economy".

Fourth, the corresponding regulatory measures also need to keep up, especially in terms of digital currency transactions and financing through the initial electronic currency public offering (ICO), to avoid illegal acts such as money laundering, and to strengthen the traceability of blockchain nodes.

The complete "decentralization" of the blockchain is not the purpose, and the transparency and immutability of the information is the application potential of the blockchain technology. Facing the impact of new technologies, the correct attitude is not to suppress them, but to learn and think about how to run new technologies to improve operating processes and improve governance efficiency with an open mind. In the process of improvement, the company further shaped and condensed new competitive advantages, and national governance gradually realized modernization.

Of course, blockchain technology is still in its infancy, and some technical and legal issues need to be resolved. We may not yet be clear about future developments, just as we couldn't imagine 30 years ago that the Internet today involves all aspects of life. But it is conceivable that blockchain technology will eventually reshape the way of organization and national governance in the business world. Together with other technologies, it will jointly promote the fourth after the steam technology revolution, the power technology revolution, and the computer and information technology revolution. The realization of the sub-industrial revolution.