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How blockchain enhances business trust

ALTHOUGH most people are now familiar with bitcoin (BTC), much less is known about its relative, blockchain.

To begin with, according to Wikipedia’s definition, a blockchain is “a distributed database that is used to maintain a continuously growing list of records, called blocks.” And it is essentially a core component of bitcoin and other popular digital currencies like ETH.

If this definition still eludes less tech-savvy readers, figures alone will suffice to encapsulate the long way these virtual currencies have come.

First conceptualized in 2008, BTC has surged from almost zero and now trades at around US$2,800 apiece, more than double the price for an ounce of gold, valued currently at about US$1,260.

Over the years, the bitcoin craze, related irregularities and even frauds have elicited heightened regulatory oversight and prompted crackdowns, but that does not justify negating the potential of the key technology behind it, said Zhang Hong.

The CEO of Shanghai Shell Coin Internet Technology Company, a start-up specializing in blockchain, Zhang recently told a forum at the Shanghai National Accounting Institute that blockchain will have a big role in reshaping our future lives and even revolutionizing the way society is organized.

According to her, we are now witnessing blockchain 3.0, after the 1.0 and 2.0 phases. The 1.0 phase was represented by the invention and initial use of bitcoin. The first purchase with bitcoin was reportedly two Papa John’s pizzas for 100,000 coins. Today, 10,000 bitcoins are worth US$28 million. One bitcoin can buy 100 pizzas.

According to Zhang, blockchain 2.0 is exemplified by smart contract. This concept, as the name implies, is meant to eliminate unreliable factors in business transactions. Unsurprisingly, this often refers to human greed or propensity for fraudulent behavior.

Zhang pointed out that traditional methods such as moral indoctrination and legal punishment are only “partially” effective in curtailing contractual frauds. For a businessperson to be convinced of a potential partner’s credibility, the old-schooled approach is to glean comments from the latter’s relatives, friends and colleagues. This considerably slows things down and pushes up transaction costs.

That’s where smart contract can come in and make a difference. Since blockchain works like an open, distributed ledger that records transactions in a verifiable and permanent way, it reveals every single trace one leaves on his or her social record, leaving no stones unturned. In this way, those with malicious intents or a shady past are filtered out and identified as high-risk candidates. Discretion is then advised.

Moreover, the “ledger” can also be programmed to trigger transactions automatically, which means that businessmen don’t necessarily have to know each other well to strike deals. Once a deal is completed, money is automatically transferred from one blockchain “wallet” to another, said Zhang, adding that trust will cease to be an issue that bogs down deals and negotiation.

In addition to creating currency and facilitating deals, the third and perhaps most exciting dimension of blockchain is its immense implication for retooling the way we live and society operates.

How DAO works

As Zhang explained, those of us feeling trapped in or increasingly dismayed at working for a centralized, hierarchical entity will be offered a way out by the so-called DAO (decentralized autonomous organization), another spin-off from the blockchain technology.

The emergence of these DAOs might provide new solutions to many seemingly intractable social issues, while also generating value for those actively involved in finding those solutions.

A case in point is the difficulty of elderly citizens to cook their own meals, as some live separately from their offspring and are too old to manage themselves.

Traditionally, they can count on publicly-run community canteens or kind-hearted neighbors to cook for them. But when these saviors are not available, due to high operational costs or lack of empathy, a charity DAO instead can come to their aid. And this is exactly what a group of Tsinghua University students were pondering when they formed a DAO to reward those who cook for the elderly, Zhang recalled.

As a patron of this entrepreneurial endeavor, her company has been providing the technology to enable payment for these services with virtual “Good Samaritan” coins. When charitable causes like these gain ground, in the form of numerous enthusiasts buying coins to express support, this will naturally lead to the appreciation of the coins’ value.

That’s how the Good Samaritan gets rewarded. The longer he is possession of the coins, the more expensive they get. Of course, coins can be redeemed for cash. “Unlike in a usual top-down organization, anyone within a DAO can start an initiative,” said Zhang.

This is especially relevant for China, where popular trust in public charity foundations has been eroded over the years by a slew of scandals involving bribery and misappropriation of donations. The scourge, a severe lack of transparency, is to blame as the public is usually left in the dark about whether their money really goes to the needy. And awareness of how to monitor the money flow eludes them.

Under the DAO model, no corruption can be swept under the carpet and likewise, no good deeds will go unnoticed and unrewarded, said Zhang.


 

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