Q: Got it. So please share your vision on the current state of the industry, and on the applications you mentioned earlier.
Currently we are seeing the penetration of blockchain into a number of industries, following its previous penetration into the financial industry. To serve this goal, many projects and protocols have been and are currently being created. Among them exist two distinct approaches:
⦁ One Chain, one application. By nature, these applications are easier to implement. Being mostly isolated, they have a shorter list of security and privacy requirements, which makes the integration and implementation process easier. However, this approach goes mostly in the opposite direction from the key ideology behind blockchain technology — decentralization.
⦁ Applications as part of a large chain. Interoperability is a key advantage of this approach. It requires sophisticated security and privacy settings, but that is the big vision for blockchain adoption by industries. It features decentralized applications,and tamper-proof smart contracts that rely on the computation power of the whole network, distributed among millions of users and various applications that “talk” to each other,through multiple blockchain protocols.
But let’s leave the blockchain industry for a moment and get back to transactions between businesses, by reviewing the process of purchasing a service or product. Domestic and cross-border transactions consist of four main elements:
Terms confirmation by the counterparties, payment, product or service provision, and dispute resolution if a transaction fails.
The terms of a collaboration are confirmed by the parties and written into a contract, which is then signed either on paper or electronically. This is followed by payment and provision. Which happens first depends on the particular industry and the type of agreement, but the important thing is that the provision process is also reflected in various documents (shipping documents, service delivery proofs, confirmation from authorities about a change of asset ownership, cargo location updates, etc.).
Either before or after shipment, a payment is transfer redusing some intermediary institution (e.g. bank). This creates a situation where, if one of the parties is not happy with the outcome, he or she can simply pick up the phone and stop the payment, even when the service or product has already been provided. When that happens and the parties are not in agreement a dispute arises.
So how can blockchain help here?
There are currently multiple debates about the possibilities of smart contracts mimicking traditional contracts. Let’s review how smart contracts could be implemented, and what the advantages are.
Smart contracts are digital agreements, made tamper-proof because they are run on a decentralized infrastructure.
Agreement terms can be put on the blockchain via smart contracts and accepted by parties using their digital identities. The Chinese court already accepts such implementation as digital evidence.
In a more sophisticated manner, such terms may be connected by an incremental payment agreement. For example: “I will pay you when the goods have arrived, when the goods are confirmed to be in the proper condition, when the customs bureau has released them, and when ownership records have been changed.”
The main concern related to smart contracts mimicking traditional agreements is the necessity of obtaining data from the real world. They cannot “talk” to data itself, so there must be a means of connecting to the sources of such data.
Among them could be different blockchain applications (supply chain visibility, production tracking, etc.), data feeds directly from iOT devices, aggregators of such data, public/authority registries, different ERP systems, feeds from shipping companies, etc.
These applications may be using different blockchains, or may also be built using Plasma implementation. For any proposed implementation to operate efficiently, it must be blockchain-agnostic, meaning it is able to connect to different blockchains, and not limited to operating with only one root protocol.
As an example of integration with OCR paper invoices, shipping documents, certificates, documents from customs, etc. could be converted into JSON strings and recorded to the blockchain for further processing.
Receiving such data confirms successful performance on the provider side, and payment is then executed. This is a somewhat sensitive topic in China, but for informational purposes we will review a few possible implementations:
⦁ The smart contract is connected to a banking or other payment system. When Oracles deliver information about the successful performance of a provider, the smart contract sends an unconditional signal to a bank account or other payment system to initiate a payment.
⦁ The smart contract initiates payment using cryptocurrencies. This is not currently possible in China, but let’s review it, just as an example. This is an initial sample of a smart contract on the blockchain.
Currently such constructions, if present, are mostly connected to one particular protocol and/or cryptocurrency, which makes it a bit selective and limited. We think the ability of such transactions to connect to multiple blockhains for processing transactions is a must.
In the long run, if and when different entities, industries or governments accept standards based on different blockchains, cross-blockchain and cross-protocol implementation will be more favorable, providing more flexibility and advantages.
⦁ The smart contract initiates payment in stable coins associated with a particular currency. This is an interesting sample. In our implementation, each token has its unique ID, similar to the money we have in our pockets. Combining this with the fact that participants have unique digital identities presents interesting opportunities for implementation.
For example, an authority may issue a certain amount of such tokens to a responsible company, to deliver a particularly complex project. With token IDs, the issuing organization would be able to track how the issued amount of money was spent, and to whom it was transferred.
This allows for the control of cash flow and prevents the use of the funds for fraudulent purposes. Basically, it closes the gap that once allowed Bitcoin to be spent on various illegal activities and become a tool for shady money transfer between countries.
Having the terms of an agreement confirmed in one place and approved by the counter parties, provision and payment information enables a perfect “container” for arbitration should a dispute among the counter parties arise.
For certain types of agreements (e.g. certain types of international trade agreements) arbitration could take place directly “in” this smart contract, where the arbitrator, after reviewing all the stored material, makes a decision to execute or not execute the transaction.
For other types of agreements, it gives both parties and arbitrator faster access to all the relevant information, which helps to increase the speed and reduce the cost of the arbitration procedure.
A Chinese arbitrator in Nanjing is already implementing blockchain to store and process cases and negotiate resolutions. It is quite realistic that such activities will end up providing access points for implementation, similar to the one described above, because of the obvious advantages for all participants in the market.