The dawn of crypto­fi­nance is upon us

China Daily European Weekly - - COMMENT - Wu Jian­gang The au­thor is a lec­turer at the Man­age­ment School of Shang­hai Univer­sity, co-founder of pub­lic blockchain FU­SION and a re­search fel­low at the China Europe In­ter­na­tional Busi­ness School’s Lu­ji­azui In­ter­na­tional Fi­nance Re­search Cen­ter. The view

Find­ing so­lu­tions to some key prob­lems will usher in an ex­cit­ing new era for the ‘in­ter­net of value’

The “in­ter­net of value” is aris­ing, in which value trans­ac­tions can in­stantly oc­cur any­where, but fi­nan­cial applications on it are few. What are the rea­sons for the cur­rent sta­tus and fu­ture of crypto­fi­nance — the fi­nance on the in­ter­net of value?

The rise of the in­ter­net has brought fun­da­men­tal im­prove­ment to peo­ple’s daily lives and great trans­for­ma­tions to many in­dus­tries. But the im­pact of the in­ter­net on fi­nance is not as big as it has been on tra­di­tional in­dus­tries. So-called in­ter­net fi­nance only helps such en­ti­ties as banks, se­cu­ri­ties com­pa­nies and ex­changes to up­date some of their pa­per­work to elec­tronic form, but the or­ga­ni­za­tional forms have not yet ex­pe­ri­enced huge re­con­struc­tion. For ex­am­ple, although mo­bile pay­ments are very pop­u­lar in China, the un­der­ly­ing bank­ing sys­tem re­mains the same. The in­ter­ac­tion of val­ues be­tween or­ga­ni­za­tions still mainly uses pa­per con­tracts.

The rea­son be­hind this is that con­tracts and sig­na­tures are ex­ten­sively used in fi­nan­cial trans­ac­tions. Although elec­tronic con­tracts and elec­tronic sig­na­tures can be used within an or­ga­ni­za­tion, they are not eas­ily ap­plied on a large scale among in­di­vid­u­als and or­ga­ni­za­tions. In or­der to pre­vent dou­ble-spend­ing and make trans­ac­tions au­to­matic, cen­tral agen­cies are needed to pro­vide book­keep­ing ser­vices, such as dig­i­tal ledgers, con­tracts and dig­i­tal sig­na­tures. This is why, although they are nei­ther flex­i­ble nor scal­able, such ser­vices are still im­por­tant in cur­rent so­ci­eties.

The rise of blockchain means for the first time that cen­tral­ized book­keep­ing can be re­placed by dis­trib­uted ledgers on un­stop­pable peer-to-peer net­works; peo­ple’s hand­writ­ing sig­na­tures can be re­placed by crypto sig­na­tures; and pa­per con­tracts can be au­tom­a­tized by smart con­tracts. It seems that blockchain tech­nol­ogy is the one that will bring fun­da­men­tal changes to tra­di­tional fi­nance.

Tra­di­tional fi­nance is un­sat­is­fac­tory. The sub­prime mort­gage cri­sis and the Euro­pean debt cri­sis made peo­ple re­al­ize that the most de­vel­oped coun­tries can also have fi­nan­cial crises, and there are al­most no ef­fec­tive so­lu­tions for them. Crypto­fi­nance can solve the prob­lems of trust, so it seems that peo­ple should em­brace it whole­heart­edly.

How­ever, af­ter the cre­ation of the first blockchain, there was a long night for crypto­fi­nance. From Jan 3, 2009, when the first ap­pli­ca­tion of crypto­fi­nance went live, to the end of 2016, de­spite a large num­ber of alternative cur­ren­cies, no laud­able crypto­fi­nan­cial ap­pli­ca­tion had been cre­ated.

In essence, fi­nance is de­fined by its func­tions. Although the forms of re­al­iz­ing fi­nan­cial func­tions are changing with time, fi­nan­cial func­tions them­selves are sta­ble. Fi­nan­cial func­tions can be gen­er­al­ized into two lay­ers: The first in­cludes the mon­e­tary func­tions, which in­clude pay­ment, pric­ing, value stor­age and in­ter­na­tional cur­rency. The sec­ond layer in­cludes the fi­nan­cial func­tions de­rived from the mon­e­tary func­tions, such as debt, eq­uity, in­surance, trust and de­riv­a­tives, which are the re­or­ga­ni­za­tion of the fi­nan­cial as­sets in space and time.

The mar­ket cap­i­tal­iza­tion of the world’s tra­di­tional fi­nan­cial mar­kets is quite large, with more than $300 tril­lion (243 tril­lion eu­ros; £212 tril­lion) — nearly four times the global GDP. How­ever, it is a lit­tle dis­ap­point­ing that in the phys­i­cal world, and any­one who has some to­kens can ex­er­cise his or her rights and be de­liv­ered the rep­re­sented to­k­enized atomic as­sets.

Although the boom of as­set map­ping has an­nounced the dawn of crypto­fi­nance, there are still many prob­lems to be solved. Among them, the mul­ti­to­ken smart contract prob­lem and the mul­ti­trig­ger smart contract prob­lem are the top two prob­lems.

The mul­ti­to­ken smart contract prob­lem, how­ever, is also the prob­lem of in­ter­op­er­abil­ity of the in­ter­net of val­ues. It is a shame that the present to­kens in the crypto­fi­nan­cial world should be ex­changed with one an­other in the tra­di­tional fi­nan­cial ex­changes. Tech­nolo­gies such as side chains or re­lay chains are try­ing to solve th­ese prob­lems, but what peo­ple want is not atomic trans­fers but in­ter­ac­tion of to­kens within smart con­tracts in a pro­grammable way.

The mul­ti­trig­ger smart contract prob­lem is about the au­to­ma­tion and off-chain data visit ca­pa­bil­ity of smart con­tracts. Cur­rent smart con­tracts are not smart enough. They are not au­to­matic: They can only be trig­gered by an­other trans­ac­tion; oth­er­wise they will not run au­to­mat­i­cally. They are also blind, be­cause they can­not read off-chain data.

Th­ese two prob­lems ex­plain why there are al­most no fi­nan­cial applications in the sec­ond layer of fi­nan­cial func­tions. We be­lieve that those who can solve th­ese prob­lems can re­al­ize all the fi­nan­cial func­tion­al­i­ties in the crypto­fi­nan­cial world, and they will usher in an ex­cit­ing new era of the crypto­fi­nance for the in­ter­net of value.


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