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

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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 http://dr-reinbacher.com/

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

Elastos Blockchain: The return of the P2P protocols – an interview with Rong Chen, founder of Elastos

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We (joint work with Julian Hoelz) visited Rong Chen, founder and chairman of the Elastos foundation, and his development team in Shanghai in November 2017. We sat down with Rong to discuss the next technological frontier that needs to be captured in order to make the distributed web a reality: Operating systems and peer-to-peer protocols for the Elastos Blockchain.

The technology stack for the distributed web is made up of blockchains, smart contracts, peer-to-peer protocols and the distributed applications that run on top of that. While we have seen a lot of progress being made on blockchains and, recently, smart contracts we have yet to see how the peer-to-peer protocol layer will be built. The field, however, is not new at all. P2P protocols became hugely popular in the late 90s with the rise of Napster, eDonkey, and Bittorrent. Information exchange between distributed nodes in today’s blockchain systems (Bitcoin, Ethereum, Neo, etc.) is often limited to settlement information only, large scale data exchange is not yet possible. This is where P2P protocols come into play.

Can you tell us about the motivation behind Elastos?

Rong Chen: I think the internet as we know it today is broken. Broken from a cybersecurity point of view. For example, according to Kaspersky Labs, on peak days we can see about 1500 individual Distributed Denial-of-Service (DDos) attacks every day. Some of these attacks last a whole day. What worries me is that we are now moving to build really safety-critical applications on top of this “broken” infrastructure. Let us take autonomous cars as an example: how can we make sure that our loved ones are not hacked when they are being shuttled in an autonomous car? That was one of the triggers for us to realize that we will need a paradigm shift in networking for this class of applications. Instead of relying on the classical Client – Server architecture, over the past years we have developed an operating system for the distributed web: Elastos

And Elastos will be an operating system that is run by distributed nodes, is that correct?

Rong Chen: Yes, Elastos runs on virtual machines by distributed nodes. Elastos has three fundamental pillars. First, there is the Elastos runtime which allows developers to build truly distributed apps on the one side and on the other side abstracts away any direct access to the network from the application. This is a key concept to make the network secure. There is no need for concepts such as drivers or sockets, apps are prohibited by design to directly access the network. Network access is managed only by the runtime. Second there is the the Elastos Peer-to-Peer (P2P) Network, a set of P2P protocols that will enable efficient data transfer between distributed nodes, such as video and audio streaming or text messaging. The third pillar is the Elastos Blockchain interface to public and private blockchains. This will allow Elastos computers to access services such as settlement or identify verification on blockchains. We are collaborating with the teams of existing blockchains to have interfaces to their systems.

Can you tell us in what stage of the project you and your team are? Were you able to build a prototype of the three pillars that you mentioned?

Rong Chen: Elastos has a long history. I started working on the concepts on Elastos as early as 2000 upon my return from the US. In 2013 Foxconn came onboard as an investor. In 2015 we had a first version of Elastos running on two different devices: An ARM Cortex A7 based Banana Pi and on a home router, we called the Elastos Smart-Router. Last year we were porting it on a Smartphone and the popular Raspberry Pi 3. Our team is currently working on finishing the blockchain integration. Since January 2016 all our code can be found on Github. In 2017 we created the Elastos foundation and we are in the last stages of preparing for an Initial Coin Offering of our Ela token. Tokenizing the foundation will keep it independent and in the hands of the users, thus helping us realize our vision of a truly distributed web?

Since you witnessed the rise of the internet when you worked for Microsoft in the 1990s, what gets you excited about the distributed web when you compare today to the times back then?

Rong Chen: I think we are living in very exciting times. The internet we developed in the past decades is not up for the new challenges that will emerge from the mass-scale deployment of safety-critical applications, such as the autonomous cars we discussed. Blockchains will provide identity authentication and settlement, and now is the time for a paradigm shift to a much more robust network on top of that, a network without DDoS attacks, a network where nodes have no direct access to the communication channel but an operating system will manage that. That new type of network will be distributed and I hope that Elastos will play a key part in this. I would like to invite the international community to come and check out our project. When was the last time you could contribute in building something that big? I was at the first Linux conference by Linus in Seattle in the early nineties, and I remember how excited I felt back then. I feel now is a similar time.

About Rong Chen:

  • Rong Chen graduated from Tsinghua University, Beijing, in 1982.
  • MS degree from University of Illinois at Urbana-Champaign in 1987.
  • Rong was a Microsoft veteran in the early days of the internet from 1992 to 2000. He collaborated in the development of a wide portfolio of projects at Microsoft, for example OS research, IE3 ActiveX, Ole Automation, ECOM, .NET.
  • Rong founded his own company Kortide Corp in 2000 following his long-standing dream to create his own operating system: Elastos. After 17 years, Rong believes that the smart-web powered by the blockchain is the future for Elastos. He established the Elastos Foundation with partners in June 2017.
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More information about Elastos Blockchain on the website: http://Elastos.org, Code geeks check out the Elastos Blockchain github at https://github.com/Elastos

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 http://dr-reinbacher.com/

Interview led by Dr. Thomas Reinbacher and 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