Why would companies want cryptocurrency-free blockchains? | Word on the Block
Angie Lau: Welcome back to Word on the Block. I'm in conversation with Yifan He. He's founder and CEO of Red Date Technology, the firm behind Blockchain Services Network (BSN).
And you're learning about more of this now in 2022. We talked in the early days of BSN, and when you started to roll that out, there were two very clear paths — one for domestic China, which you talked about, and one for the rest of the world. So, the rest of the world can still engage in cryptocurrency if they want. But you've also — interestingly here — forked some permissionless blockchains that remove the cryptocurrency gas fee structure and then put in a fiat layer. So that's really interesting.
And you're breaking down protocols by the incredible demand internally in China. That's really fascinating to hear. And I want to address this with you directly: A lot of people still have this perception that this is a China system, a China policy. There are some concerns, obviously, and anonymity is one huge concern for blockchain users, especially for permissioned networks, which can theoretically track the activity of their users.
And you've said that — very specifically because of China policy — you have to be able to do that. But how do you deal with the issue of user anonymity as you launch permissioned and permissionless networks outside of China? And the question is: Are the users of BSN-based dApps (decentralized apps) trackable, or can they stay anonymous? How does this differ from your permissioned and permissionless applications? Are rights respected here? Yifan He: First of all, let me talk about the BSN-DDC (Distributed Digital Certificate) Network inside China, because there's a very complicated law structure, regulation structure, inside China to govern the internet. So, the DDC Network and all the blockchain applications on the internet are still under that domain. Some of the regulation actually talks about (the fact) that you need KYC (know your customer), which means wherever activity or data moves, you need to trace back to who moved that data, by law.
So, that's why on the DDC Network, we need to make KYC available. And also, we need to have some kind of power to disable some wallets. We cannot delete anything on the chain, but we can disable some. So, by law, we have to do that. Any business inside China building IT infrastructure needs to comply with those laws, no matter how big they are or if they're foreign companies.
Everybody needs to do that. But outside China, remember, BSN is still a commercial project, no matter the big SOEs (state-owned enterprises) and government agencies involved. It's still a commercial project, but with the dream that we can build the next layer of the internet and become, eventually, something like the internet.
We've always (described) the current internet as only serving private back-end systems. And the new second layer of the internet should serve public IT systems. So, that's basically our big goal. Outside China, we definitely need to follow the global international standard. So, using the Spartan Network anonymously is one of the major goals. When you use the Spartan Network, it's just like using Ethereum, which means you don't need to actually go somewhere to register your name, who you are, do KYC.
For using the Spartan Network, it's the same: you can create your wallet, then you just find a data center to top off your wallet with gas credit, then you can just connect to the chain and do whatever you want. If you really need to set up your own nodes, which we actually call data centers because we have multiple channels — one data center can contain many nodes — when you start out with a data center, you only need to import an email address. That's it. That's everything we collect. Because sometimes we need that everybody knows security patches, updates. You can use Gmail, have it your way, we don't care.
Everything is open-source, 100% open-source. Even all the smart contract governance and management smart contracts are open-source. You can check everything. Then you can download the codes, install the data center locally in your own system, and then those data centers' software only interacts with the channels you've installed.
That's it. It doesn't call anything. You can check the code. For data center owners, they need, actually, to purchase (Spartan Network token) NTT. So, when they purchase NTT, we give them choices with USDC to purchase — it's Polygon, the USDC on Polygon.
So they can go to Polygon to have their USDC transferred to our Spartan Network USDC account. And with their wallet on Spartan, we automatically detect the Spartan Network NTT wallet address, and then we receive the USDC, then we top up their NTT wallet with NTT. So, everything is anonymous. There's no way that we know who you are. And especially with the end user, we actually consider the data center owners and operators our direct customers. Then their end users have nothing to do with us.
We have no idea. We only know — and it's public information — how many wallets are on the chain. Ok, that's it. So it could be, for example, a small cloud services provider in Europe (saying,) 'This Spartan sounds very good. We checked the code, we reviewed everything. It's fine.
So let's set up a small data center.' It only costs like US$200 each month to set up the data center. So, then we'll actually open up the Spartan access point to my own cloud services customers. So, on our interface, we added Spartan access. Then you click. You pay with your credit card to the cloud service provider and get the gas credit and use it.
But all of those users actually belong to this cloud service provider. We have no idea who they are. We only deal with the data center operators, whose email address is the only thing we know. So, that's basically how we set this up. Angie Lau: It's highly controversial, as you can imagine, to have public blockchains that are cryptoless. You've actually removed a big, powerful incentivization for that ecosystem to be able to conduct business in crypto.
You've actually removed that. Why do you believe that crypto has no future? Why are you removing it? I mean, you're really kind of making a huge bet on non-crypto blockchains. Yifan He: Because, personally, I was a private equity investor for 10 years, so I kind of don't believe in cryptocurrency as a viable investment vehicle, because it doesn't link to any production, any products, any real-world assets. So, that's why, personally I don't believe in that. Even though I have many, many cryptocurrency friends, I never have had a wallet, which means if someone said, 'Ok, I want to give you 100 Bitcoin,' I don't even know how to receive them.
But also, what I can see here is that it's already been proven in the past 10 years — no traditional IT system will use a public chain with cryptocurrency on layer-1. No one will use it. It's proven.
If you see some bank use some Ethereum, check their application. It's just for testing. It's very small, maybe with 10 transactions, so I don't see any massive application from the traditional IT industry. Why? Because we always think about cryptocurrency as just one single application based on blockchain technology. It's not blockchain technology.
Without this application, we use pure blockchain technology to serve cheaply and easily other IT industries. So that's basically the goal of BSN: to go beyond cryptocurrency. Angie Lau: Ok, help me understand.
There's a lot of work that still needs to be done with blockchain. If I'm using this layer-1 protocol, so I'm using, let's say, Ethereum, for example, and I'm asking it to do some serious heavy lifting for us, from an enterprise perspective, people are going to have to work. We're going from proof-of-work (PoW) to proof-of-stake (PoS), the Merge is coming, all of that. And that's really designed to reduce the work, if you will, of blockchains. But work still needs to be done. People still need to be incentivized.
So, if you're artificially reducing the payment of people who are actually doing the work on the back end of the blockchain from three to one, even though the market is demanding much more, doesn't that mean that as more people are crowding into — let's say — a very affordable blockchain version of what you've created, but if there is no monetary incentivization, no monetary support through cryptocurrency, where's the incentivization for all of those people to do PoS or PoW — that people who actually need to create those blocks that enterprises are depending on on the back end. How does that work? Yifan He: For enterprises, when they use blockchain technology, let's say, not just for cryptocurrency, basically they just want to do some IT transactions, handle some IT process. Just remember, right now, 99.9% of the IT industry is using centralized systems, like
AWS (Amazon Web Services), Google and Microsoft — 99%. Even 85% of public nodes are installed in those three big clubs. Why? Remember, there's no incentive for them.
And they're paying those three companies. Why? Are they crazy? Why don't they just go to public chains to get the incentive — get paid for using the public chains. For so many IT industry companies, they have their own business, with nothing to do with cryptocurrency, and they're willing to pay for services, not get incentives to do some work. So, those two are totally different industries. For cryptocurrency, when you do work, you're not doing real work — you do some work for the cryptocurrency ecosystem. What I'm talking about is that for people who merchandise overseas to produce cars, to run the traditional banking process, why do they even need these universal, consensus-based, cryptocurrency-based public chains? They are just willing to pay for good services.
That's why for a centralized environment like AWS, which is controlled by one single company, millions of companies are paying them a lot of money just to have the infrastructure. So, BSN Spartan Network is just like AWS. I always call it a decentralized AWS. Why come here? Why set up a data center? Because they have business needs.
No one comes here to set up a business center just for receiving the incentive. But we also have incentive programs on the Spartan Network. But it has different philosophies. For cryptocurrency, if you do some work, you can get an incentive. But for the Spartan Network, whoever comes here has business needs.
The purpose of our incentive programs is not for you to make money, but for you to reduce cost. That's what they care about. So, our incentive program is: no matter how much money you spent last month, we give you 20%, 30% back. It's like the loyalty points of shopping malls and airlines. You go there, spend more money, then you get more money back. So, this is a totally different philosophy.
Angie Lau: It is a different philosophy. YifanHe: Yes, here you spend money to fulfill your business needs, but you can get some back when you're spending more. Angie Lau: I get it.
It sounds like, for the layer-1 in cryptocurrency, you're incentivizing for mass. What you, specifically, are doing at BSN Spartan, BSN DDC, is incentivizing for enterprise. So, two very different gamification models and incentivization models designed for two very different audiences. Ok, I get it.
We could go on, but we definitely want to talk about the synergies that we're seeing between BSN and the digital yuan project and more to come out of China. Yifan, we've been talking about CBDCs (central bank digital currencies). We've been talking about e-CNY.
And China's at the forefront of CBDC development, with the digital yuan being piloted across more than 20 cities across the country. How are you involved in the development of e-CNY, and are you planning for BSN to leverage the digital yuan for payments in the future instead of NTT? Would we see a digital yuan in fact integrated into the domestic version of BSN in China? Yifan He: For now, the BSN and the digital yuan are two separate projects — those two are not related in any way. But the digital yuan project is massive and very smart. I talked to people there. It's a really smart project, and (Chinese authorities are) actually taking very steady steps to do this. They don't rush, which I really, really admire.
But right now, it's still halfway. It's not a full central bank digital currency we talked about, because right now, if you want to use the digital yuan, you still need to go through a commercial bank. So, the wallet you'll receive actually sits with the bank, not really the central bank digital currency system yet. So, right now some of the end users say, 'Ok, when I use the digital yuan, it's no different from WeChat Pay and Alipay, because it's just a special commercial bank account.'
But it's already a big, big step, because right now the structure is more that the individual cannot open their own wallet directly in the central bank digital currency system, which is a centralized system. It's not decentralized. But if the big banks actually open up big wallets, then they have digital currency within the big wallets.
Then, within the banking system, they actually allow users to open up bank-related wallets. Then they divide the big wallets into smaller ones. But right now, the individual wallets are controlled by the bank. Now there's a digital currency system. Of course, they need to be verified by the central digital currency system. So, eventually — and I think last week, the director of the digital yuan project actually began to talk about smart contracts — they'll set up some kind of smart contract system for people.
It could be still within the banking system, I think, because right now there's not much detail. But a public (system) deployed within each commercial bank that becomes a script which can be triggered and somehow on a certain level you can have control over your own accounts — it's a big step. But you can see the steps — small steps — once in a while. But it's really towards a well-built central bank digital currency system.
Eventually, each individual will have their own wallet. When that happens, then there is a question: Where will it be circulated? How do we manage those wallets? So, at that time, I think the issuing will always be centralized, but the circulation could be decentralized. I think when we reach that time, BSN is definitely one of the choices to integrate digital yuan, to somehow manage individual wallets for individuals or companies to use smart contracts, to manage their wallets. But we still have a long way to go to reach that point. But right now, I think the steps are really, really good. This is the right thing to do.
Angie Lau: It's been clear to us from day one when we started Forkast in 2018, that the innovations that we were seeing out of China were significant and notable. And that remains true with this conversation. What can we expect from China in 2023? Yifan He: I think we'll see first a lot of improvements in the central bank digital currency. You'll see some really amazing use cases, and a lot of industries will begin to adopt the central bank digital currency.
Because, besides the technical improvements over the time, there's also the monetary policies. Right now, a central bank digital currency in China is considered M0 (monetary base zero), which is cash. So, it's really hard for enterprises to use digital yuan to pay each other in millions. I think that will also change — if not this year, in the next two years it will move — which means enterprises can open up digital yuan accounts and transfer a lot more money.
So, I think the central bank digital currency will move in a very smooth way this year, and we will see a lot of change here. Secondly, we also will see blockchain technology, because there are new frameworks coming out of China, like ChainMaker. Those chains, like the BSN-DDC Network, actually handle a lot of transactions. They are frameworks. They actually, slowly, will also move to the international market. I've talked to some of them.
They all say, eventually, as a pure technology, they want to open-source and code internationally. And also in China this year, I think you guys will see some amazing use cases based on the open permissioned version of those public chains, because this year we're seeing some very nice ones. There's a very, very remote local government — 70% of their city is basically covered by forest — (and) because right now they need to calculate the carbon credit from each tree, they're actually planning to use NFT (non-fungible token) technology to represent each tree. Actually, they have inventory control — I don't know how, but it's millions of trees.
They actually know how much each tree grows each year. Angie Lau: Incredible. Yifan He: And how big the tree is, what kind of tree it is. For each NFT, they track this for the next 10 years, then, when you calculate the carbon, you actually have very credible records for each tree on public record, and from the past 10 years. How easy for any firm to do an audit? Angie Lau: That's the promise of blockchain technology. What's fascinating about this conversation, Yifan, is that what we've learned is that blockchain and enterprise use is being stress-tested with those 1,300 companies that are currently using BSN-DDC internally, domestically, in China.
You have bigger transaction volumes in China alone than the global transaction volumes of the Ethereum network. You are stress-testing it to enterprise-grade. That's just going to be really, really interesting for an international community, especially with the international version of this product. We're fascinated to learn more about it.
Thank you so much. I know we're going to have you back. You're going to tell us more about it in 2023, all the new developments. We're going to be keeping a very close eye. But certainly, you've become a controversial figure in the crypto world by being very anti-crypto.
But you've made your case today from an enterprise point of view. And I really appreciate you spending time with us. Yifan He: Also I really appreciate that you gave me the opportunity to explain. This is actually a pretty complicated matter. Angie Lau: It's complicated. This is what we do at Forkast.
We unpack it and we give our audience access to understanding with better clarity instead of just the very short headlines that most of us are inundated with. So, thank you for that today, Yifan. We really appreciate it. And thank you, everyone, for joining us on this latest episode of Word on the Block. I'm Angie Lau, Editor-in-Chief of Forkast.
Until the next time.