The first use case of blockchain was Bitcoin – its original sin. Since then the space has developed into many elements, from payments projects to DeFi to memes, all dedicated to speculating on built-in tokens.
The promise of Web3 as a decentralized, more secure alternative to Big Tech monopolies has been sullied by the need to turn every aspect into a casino, financializing everyday services.
More prosaically, the unregulated peer-to-peer nature of Decentralized Finance has made it difficult for regulated entities to engage with it – depriving them of the genuine benefits of blockchain technology. Enterprises have responded with private, permissioned blockchains, that operate like clubs. These are efficient but lose out on the promise of blockchain to be “reachable” to anyone who wishes to share a node.
At the extreme end of controlled blockchain is the Chinese model. China has effectively banned Bitcoin and other open, public, permissionless blockchains. The government insists on full control over these activities, especially anything to do with money. This is not a model that appeals to most foreign societies, and it has also created a schism between China and the world.
As DigFin wrote in September 2020, a consortium within China called BSN, for Blockchain Service Network, has been working to make domestic blockchain projects interoperable. It also launched a separate legal entity to forge bridges with international blockchains such as Ethereum.
The visionary behind BSN is He Yifan, CEO of Red Date Technology, a Beijing-based fintech. He launched BSN in China in 2020 in partnership with China Mobile; China UnionPay; and the State Information Center, a think tank under the National Development and Reform Commission, the powerful agency responsible for managing state-owned corporations and other aspects of the “commanding heights” of the economy.
The following year BSN set up BSN Foundation in Singapore with a broad group of members, including Red Date and non-Chinese banks, telcos and government bodies.
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But the operations for its non-PRC arm operate from Hong Kong as BSN Enterprise, a platform to integrate multiple blockchain protocols, including permissioned ones like Hyperledger Besu and open, public chains like Ethereum – across a variety of cloud services and data centers.
On May 24, at a presentation in Hong Kong, He announced the coming launch of BSN Spartan Network, the platform to make this connectivity happen. It is slated to go live August 31. One of its immediate benefits is that it will translate applications built on public blockchains like Ethereum so they can operate in China.
“This lays the basis for blockchain development in Hong Kong,” said Min Tan, general secretary of the BSN Development Association in Beijing. “This will interconnect Hong Kong and the world, and boost the digital transformation and innovation in the real economy.”
He Yifan says an easy way to understand Red Date’s vision is to compare it with telephony. The telephone was invented in 1873 but it took another hundred years before companies introduced conference calling. Until then, phone calls were all one-on-one, making it a bad technology to coordinate multiple people.
“With a regular call, the data moves between two people,” He said. “A conference call is the broadcasting of data, among people in a network who already know each other. BSN is doing this with machines instead of with people.”
Even today, the Internet’s underlying communications protocols are point-to-point. The blockchain is the first version of a broadcast tech for IT systems.
But blockchains, especially public, permissionless ones, depend on consensus to get anything done. That can mean getting tens or hundreds of thousands of computers to validate a transaction, making these systems slow and expensive for users.
To He, that’s an opportunity rather than a problem.
“How do you make all these systems on Ethereum reach consensus? By broadcasting data. Broadcasting is the key – not consensus,” he said. Consensus is the output, not the thing itself.
Calling all nodes
But what is broadcasting?
He says the BSN environment has three characteristics. First, it’s any IT system that allows any user to transmits data to all participants (so it’s not centralized around a single company or entity that monopolizes data transmission). Second, any responses are “reply all”. Third, the users are known to each other, so they know who’s going to see their communications.
This last point is what differentiates Red Date’s vision from public, permissionless blockchains. The workings are public (unlike an enterprise distributed ledger), but the membership is pre-approved. Public, permissioned chains enjoy the security and trust of a decentralized network, and the efficiency and transparency of a closed-loop system.
This approach naturally appeals to government authorities. King Au, executive director at Hong Kong’s Financial Services Development Council, a government thinktank, says blockchain’s decentralized nature makes it a potential shield against cyberattacks.
But regulators need to update rules, to acknowledge the role encryption and verifying data can play in preserving privacy; and to reconcile data laws with a blockchain’s immutability and lack of centralized control. “There’s a lot of tensions,” he said, noting the inability of current smart contracts to reverse transactions or allow human interpretation of events.
If this sounds a little too good to be true, maybe it is – in today’s blockchain. “Blockchain technology isn’t there yet,” He said. “But it’s the first operating system based on broadcasting data technology. It’s limited because it needs consensus.”
He added: “How many conference calls end up with everyone reaching agreement? Very few. On most of my conference calls, I basically just yell at people.”
Therefore, for public permissioned systems to work, the world is going to need what He terms a “public IT system”, to broadcast data publicly. It’s not a centralized system like a bank’s back end that the firm controls – and which to customers or counterparties is a black box.
Today the financial system depends on those black boxes, because that’s where companies and banks store sensitive data such as personally identifiable information (PII). A public IT system would do away with these black boxes. Blockchain is a crude first attempt, in which the network would verify that data and rely on decentralization to safeguard it.
The new data center
No software operates in isolation: everything still requires the metal and silicon of hardware and the fiber optics of cables, housed in data centers. Cloud is the leveraging of many data centers to pool resources for efficient storage and computing. Public IT infrastructure will also rely on this hardware.
But today’s hardware isn’t configured to support He’s public IT system. Therefore, he expects the Internet to split into two layers. The bottom layer will continue to rely on hardware and cable.
The existing setup uses this hardware for point-to-point data transmission, via protocols such as HTTP (which is used for website URLs). These function within an operating system, such as Linux or iOS, and rely on relational databases, either provided by vendors such as Oracle or open sourced like MySQL.
In other words, it’s the Internet.
Alongside will emerge the public IT system. Data will circulate among new operating systems, which today consists of blockchains that have been created for the purpose of cryptocurrency. He argues for the development of new blockchains that have no crypto component: not because he dislikes speculation per se, but because “Layer 1” blockchains like Bitcoin and Ethereum are slow and clumsy because they need to validate their coins. Get rid of the coins, and a new generation of Layer 1s can emerge that are fast and efficient, and therefore super-cheap or even free to use.
They will also require a relational database to know how to organize and categorize data. None yet exist for a public IT system, but He says NFTs (non-fungible tokens) are an early database technology.
Within this new ecosystem, He describes BSN as the first new type of data center, a virtual data center built using physical hardware, to enable a new type of cloud service for the development of operating systems, databases, and applications for the public IT system.
“We’re the Layer 0,” he said. While there are other companies out there attempting other root-level models – there’s even a company in the U.S. called Layer 0 – they are aimed at moving crypto more efficiently. They are still part of the world spawned by Bitcoin.
Go tell the Spartans
BSN is trying to build a public IT system for mainland China, or at least create the foundations for one. China requires KYC and other compliance measures, which means the only open blockchains allowed are permissioned ones. To that end the network is already uniting disparate blockchains and enabling an explosion of new apps, including a China version of NFT.
Beyond China, BSN Spartan Network will focus on public chains. “We’re not against public chains,” He said. “I believe in public chains. We’re against crypto.”
Jehan Chu, co-founder and managing partner of Hong Kong blockchain investment firm Kenetic, is a backer of BSN. “I believe in decentralization and crypto, but it’s not the end of the story,” he said. “Maybe there’s another paradigm, which is public chain plus permissioned chain.” He notes that public blockchains have incredible advantages versus centralized Big Tech platforms, but it doesn’t work for all – and it doesn’t work at all in China.
“The industry has struggled to shoehorn purely decentralized economics and tokenized ecosystems into other industries,” Chu said. “We believe the future is hybrid, both decentralized and semi-decentralized.”
He Yifan clarified his “against crypto” statement to mean that crypto is just one application that should be a Layer 2, and that blockchains designed for the purpose of a single token, like Bitcoin, are lousy for anything else: they require fees and resources to pay miners to validate the token. “You can’t make money on infrastructure,” He said. “If you try to make money, no one else will use it.” Cryptocurrency is fine if it is included as an app, and it meets regulatory requirements.
Spartan Network’s mission is to build and connect non-crypto public chains. It is working with backers such as investor Kenetic and some of its portfolio companies to build a non-crypto version of Ethereum that can be used in China.
It is likely to use fiat money – in this case, China’s digital renminbi – to pay for “gas” (transaction fees). At some point, Spartan might also support stablecoins or central-bank digital currencies. Whether users pay with fiat or crypto, He argues their costs will be low or even free on Spartan.
He acknowledges that selling a “made in China” technology to the world is hard these days. He notes that Spartan is fully open sourced, so users can check its code; the network has a governance setup separate from BSN in China.
Ultimately, while the first efforts of BSN Spartan Network are projects like a China-ready Ethereum, its bigger impact will be exporting its vision of a crypto-less blockchain to governments and industries around the world. To date, pure club-like enterprise DLT remains limited by its closed nature; while most companies, financial institutions and governments are leery of crypto’s anarchic, volatile and often scammy nature. What if there’s a middle way?
“This is the future, but the journey will be hard,” He Yifan said.