Report State of the Chinese Blockchain Ecosystem (中国区块链现状)


As the old saying “Seeing is better than believing” goes, I set out on a 4 weeks trip to China in November 2017 and January 2018 to understand the state of the Chinese Blockchain ecosystem. With some tough real-world problems waiting to be solved in China the primary question for this trip was: if we cut through the noise, where are Chinese Blockchain projects standing in terms of practical applications for the world’s most populous country?

State of the Blockchain in China blockchain beyond hype

The trip first took us (joint work with Julian Hoelz) to Hong Kong and then to the tech hubs Shenzhen, Shanghai, Hangzhou, and Beijing. Besides more formal events, such as the 19th China High-Tech Fair, TechCrunch Shanghai, and the Swissnex China Blockchain Conference, I enjoyed and meeting and learning from Chinese Blockchain teams in their offices.
Overview on the Chinese Blockchain ecosystem: 4 weeks deep-dive into China's blockchain ecosystem
 Here are my findings.

Lesson 1: Bitcoin’s most likely path to success in China will be as a store of value.

Digital payment systems especially Alipay from Alibaba and WeChat Pay from Tencent are already deeply integrated into Chinese society. These systems are omnipresent and are used to pay rent, utilities, salaries, taxi rides but also for simple grocery items. Even watermelons on local farmer markets. WeChat Pay is fully integrated into the messenger platform WeChat (940 Mio users and processes north of 600 Mio transactions every day). While in the western world offering digital payments often requires complex tech integrations into existing point-of-sales systems, in China all you need to get starting receiving digital payments is a QR code. In the exhibit below you can see a taxi driver showing us a QR code – all you need to do is scan the QR code and money is transferred (no fees) to the WeChat wallet of the driver.

Bitcoin's likely path to success in Asia will be as a store of value but not for digital payments.

A recent report by Tencent (Mobile Payment Usage report by Tencent) shows that people in China have widely adopted a cashless lifestyle. A staggering 74% of Chinese nationals are living an almost cashless life. As a foreign visitor to China without a fully-functioning AliPay or WeChat Pay account, you will inevitable run into difficulties. For examples,  it is almost impossible to find an ATM inside Shanghai’s Hongqiao railway station (上海虹橋站) – the largest railway station in Asia.

Given that mass adoption of digital payment is already here the obvious conclusion is that it is very hard to make a case for bitcoin (or other cryptocurrencies) as a feasible day-to-day payment system for China in the near term. It is about brand, market penetration, and the user experience that matters to users which makes switching costs very high. AliPay and WeChat Pay did an excellent job here and are household brands.

Personal wealth is harder to protect in China as in other jurisdictions

However, an important factor to understand is that personal wealth is being harder to protect in China as in other jurisdictions. According to a study of Bain and Company, a consultancy, half of China’s ultra-wealthy now have investments overseas. Similar, the Chinese upper-middle class is looking into ways to protect or diversify their domestic savings and hedge themselves from possible RMB fluctuations. China has about 50% gross savings as share of the GDP compared to the US with 18% and Germany with 25%. A reasonable hedge for some seems to be to buy into bitcoin as some form of diversification and long-term store of wealth.

Lesson 2: Even Chinese Blockchain entrepreneurs have not (yet!) found profitable use cases for the technology.

One of the questions I tend to ask all the people in the community over and over again is: do you know a blockchain use-case that is running in a live production system is driving either a surplus in revenue or a significant reduction in cost for a business out there? The answer, every single time, was a resounding: No I cannot think about any. I’ve heard that company X has experimented with blockchain Y in a pilot and they found that they might realize savings — but in a production system with real customers, definitely not (yet)!

Is it too early to base your main business idea on blockchain technology ?

If no-one has cracked a use-case yet why should you try? Let’s analyze that for a bit. There are actually companies that make a tremendous amount of money from blockchain technology. Every day. It is the fiat-crypto exchanges that are the true economical winners in the current cryptocurrency boom. They make money off the difference they create between buy and sell orders. If you buy cryptocurrency X, the price will be slightly higher than if you want to sell at the same time (in traditional exchanges this is called “spread”). But one can argue that exchanges are not really advancing the state of the art of blockchain technology.

Panel discussion on Chinese Blockchain ecosystem: It is still early for entrepreneurs - no one has built a blockchain-based solution that has real impact on the bottom line of a balance sheet

The real question is what is the next big use-case beyond exchanges? If the internet was about aggregation and platform based business models (AMZ, FB, DiDi Taxi) the blockchain is about true peer-to-peer sharing models. Instead of taking existing business models and “porting” them onto the blockchain entrepreneurs will not only need to be radical in the deployment of a new technology they also need to radically rethink how business is done today. It is, for example, not about integrating blockchain into an ecommerce App, it is about rethinking how ecommerce is done today.

Seasoned entrepreneurs are moving into the game

A seasoned entrepreneur who sold a very successful business to Alibaba recently started a new blockchain business in Hangzhou. The team’s aim is to replace Alibaba entirely with a secure distributed ecommerce system where the trust between buyer and seller is provided by a proprietary blockchain consensus algorithm. The important learning is that, yes it is still early for blockchain entrepreneurs but it is now to start developing the first mass-market business models for blockchain technologies. Rethink the status quo!

Lesson 3: National Chinese Blockchains are on the rise.

The past decade brought along the rise of the mega platforms. The dominant players in this field have upended entire industries though the platform business model. A platform business is in the center between buyers and sellers and the dominant business model is to take a cut on the value that is exchanged. With Facebook, Google, and Amazon in the US and Alibaba, Baidu, and Tencent in China the EU is definitely lagging behind in the platform age. How will that game evolve in the blockchain age?

Where do you want to have your medical records stored?

Will US citizens be ready to have their medical records stored in a Chinese blockchain where large part of mining infrastructure or even nodes are controlled in China, or vice versa? The two options this could play out are (i) a globally distributed infrastructure where power is distributed equally or (ii) national infrastructure, e.g. dedicated Chinese blockchain solutions, where a country is controlling its own blockchain infrastructure. One argument against the first option is the current situation in the bitcoin network where the most miners and thus voting power about the truth in the network is concentrated in China.

Citizen IDs on the blockchain in Guizhou province

Digital identity is identity information of individuals, organizations, or things that are stored in electronic form based on a private-public-key infrastructure. Identity services will be inevitable to make blockchain business models a success. What if you want to offer a service exclusively for people aged 18 or older (car rental)? What if you are obliged by local law to know the identity of your customers (selling alcohol, cigarettes, adult content)?

The Chinese startup Onchain, backed by the investment giant Fosun develops blockchain solutions for local governments in China. One curreny project with the local Government of GuiYang aims to create a blockchain based service for identity verification. With citizens identities on the blockchain becoming a reality in China, who will build the national counterweights for the US and the EU?

Lesson 4: Peer-2-Peer protocols are back and will be the key enabler for a distributed web.

P2P sounds like a throwback to the 90s where people were downloading music from the internet with Napster, eDonkey, and Bittorrent. What all these have in common is that they rely on a P2P network – a distributed architecture to share large files. When you were downloading a song back then the download did not happen from a central server, instead the download happened through peers in the network. This is different to YouTube where streaming happens from a central server.

Why are Peer-2-Peer protocols relevant for the Blockchain at all? Isn’t that a thing from the past?

In a simplified view distributed applications need 3 technology layers.

  • The first and the oldest is the blockchain as a distributed ledger and trust provider. The global bitcoin blockchain is such an example.
  • Second are smart contracts, computer programs that are executed by every single node in the network. This layer represents rules and conditions to settle transactions.
  • The third layer are P2P protocols to enable exchange of large files between nodes.

China’s Peer-2-Peer pioneers are turning to Blockchain technology

Even two world-class pioneers of P2P systems I met in China, Mr. Wu of Xiami (one of China’s most successful P2P streaming application, later sold to Alibaba), and Rong Chen (early internet pioneer at Microsoft in the 90s), are turning their interest to blockchain technology. Both are workingon P2P technology and operating systems that will make real-life applications on top of the blockchain stack possible. Imagine a powerful P2P data exchange layer coupled with a digital currency and a set of smart contracts to enable micropayments – this is when the vision of distributed applications are becoming reality.

Lesson 5: The Chinese Blockchain sector is professionalizing quickly.

Besides the noise of ICOs and bitcoin price rallies it is easy to see that the Chinese Blockchain sector is professionalizing quickly. What was once the Wild Wild West is becoming more structured:

  • Serious entrepreneurs are building their next big thing based on Blockchain technology.
  • Professionals from traditional venture capital and investment banking are entering the Chinese Blockchain space and bring the rigor of their profession into the game.
  • The bar for Initial Coin Offerings (ICOs) is rising quickly as the first early ICOs are failing to deliver promised results or find a viable business model.

Investors are learning the ropes

ValueNet Capital is a venture fund focusing on Blockchain in BeiJing. Their blockchain investment team comprises a dozen specialists to perform due diligence on the next deals. Lastly, it is important to understand that China never banned ICOs entirely – it was a important step to protect the naive retail investors. The government is in general very supportive when technology can solve real problems and Alibaba, Baidu, and Tencent are already invested.

Lesson 6: The EU is seriously lacking behind.

Time to catch up! Having zigzagged through China, visited industry conferences, stealth startups, long-term entrepreneurs and state-sponsored research parks it is easy to come to the conclusion that China’s massive push into AI and blockchain is very much contrasted with the prevailing skepticism about blockchain technology in Europe.

Time to have a factual debate how Europe can leverage Blockchain for its citizens

We need to have a factual debate in Europe with industry and government leaders about the importance of the blockchain as the next computing infrastructure. This debate should not get distracted by the noise from Initial Coin Offerings (ICOs) and roller coaster like cryptocurrency valuations. We are on the verge to open a new chapter of computing infrastructure – a chapter after the platform business model and this time it is important not to be left behind another time.

About the author:

Dr. Thomas Reinbacher is a computer scientist and management consultant and works as independent adviser in Munich and Beijing. If you want to work with me please find me on

This research was joint work with Julian Hoelz. ©  Thomas Reinbacher. Disclaimer: All information presented herein is given strictly on a non-reliance basis and under the exclusion of any responsibility or liability, in particular with regard to loss or damages and/or administrative and regulatory sanctions

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