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The Economic Principle of Blockchain Application

The blockchain technology is widely believed to have a profound impact on human society, because of its openness, immutability and other characteristics.

In this article, the basic concepts of trade, trust and other further defined in order to explain the application of the blockchain of economic principles for the application of this cutting-edge technology to provide theoretical support.

Transaction and transaction costs 

The purpose of the transaction is to achieve a Pareto improvement of the utility of both parties by exchanging material or rights under established constraints.

A complete transaction consists of three basic elements: the subject of the transaction, the substance or right to be exchanged, and the time sequence of the transaction.

The transaction costs refer to the sum of the costs incurred by all participants in the whole transaction, including the cost of searching for and identifying counterparties before the transaction, the cost of executing the transaction terms during the transaction, the taxes and fees paid, and the default of the counterparty Contingent costs.

The transaction costs in addition to the implementation of costs, taxes and fees of two fixed composition, the other by the counterparty is not the normal performance of the uncertainty caused by the transaction costs and uncertainties are positively related. From a transaction sequence perspective, the 7 sources of transaction costs mentioned by Williamson are mostly resulted from the default uncertainly of the transaction counterparty on a certain timeframe. These elements will add up the transaction cost.

The main reasons for abnormal counterparty performance: 1, At some point in the transaction, both parties enter the non-reciprocal state(Time series characteristics of the transaction), so that the transaction side of the abnormal performance of the impetus; 2, The subjective understanding of the terms of the differences in the transaction, in some cases subjectively finds that the other party does not perform normally.

Trust and Credit

The credit refers to the transaction subject in a transaction subject to the counterparty to determine the normal performance of the possibility of compliance. The better the credit, the less likely it is that the normal performance is considered to be abnormal.

The trust refers to one party in order to achieve the transaction is willing to bear the other side of the abnormal performance of the uncertainty of behavior. The countering counterparty abnormalities with purely market instruments (such as the enforcement of additional terms, or some form of precautionary action) would incur transaction costs, and trust could significantly reduce transaction costs in that situation.

A trust relationship is an event in which one party is willing to take on the uncertainty of the counterparty’s performance in respect of an uncertain event. Each set of trusts includes a party that is trusted (generally good credit) and a party that trusts the other (willing to take uncertainty for the transaction) and a specific uncertainty event. The better the counterparty credit, the less the other party to bear the uncertainty, the lower the corresponding transaction costs.

The accumulation of credit. The credit is generally accumulated over the past several transactions, the following figure for behavior, histology and other disciplines to obtain more recognition of the relationship between the degree of trust and the number of transactions (positive correlation).

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The Transitivity of Credit. People judge the credit level of the opponent according to the past transaction experience. When the information is close to the same, people will judge the credit level of the opponent according to the external information (transaction experience of the counterparty with others).  Transaction counterparty may accumulate credit rating easily when executing standardized business online due to the fast and efficient broadcast of transaction records.

The Economic Principle of Blockchain Application

Trust relationship exists widely in business activities, especially in the financial system. Behind each group of trust relationships in the transaction, it represents the existence of corresponding uncertainties and the corresponding savings in transaction costs.

The blockchain technology makes the information flow of transactions that can be trusted absolutely, which makes the trust of people in many transaction links turn into the trust of people and technology, the uncertainty will be 0, and the trust in the whole transaction process Relationship reorganization, so that the overall decline in transaction costs as possible.

The blockchain technology applied to practice, in addition to improving efficiency as a whole, need not bring significant negative impact. At present the application of blockchain in the transaction speed (7 tx / second), privacy, asset recoverability (Mt.Gox hacked), there are some less than ideal place, and business organizations in a stable operation of the business , The relevant format will be accompanied by supporting the interests of the distribution mechanism to determine accordingly, the blockchain in the application of technology to be adopted or not the interests of policy makers do not have a significant negative impact (such as blockchain technology to solve Che Kwun Officials delete the problem of illegal records, but the existing operating system space is the decision-making level to subordinate hidden income to enhance the enthusiasm of the team, so the block chain technology is temporarily difficult to adopt).

The Generalized inference

In the transaction of traditional business organization, all the transaction information could be manipulated  when the information is spread to the general public. There is no transaction information which is absolutely credible to the whole people.

One of the revolutionary advances in blockchain technology is to make absolute trustworthy transactional information flow a reality, which results in an absolutely trustworthy transaction information database, absolute credible asset ownership, and absolutely trustworthy transaction executor (smart contract)and many more.

The general transactions in the general trust problems, the blockchain has potential application space, visible applications such as fraud (resume fraud, financial fraud, financial fraud), notarization (property notarization, will notarization), seal (electronic check (The deletion of credit blacklists, the deletion of vehicle regulations, mutual insurance platform fraud protection), etc., and block chain information flow can be absolutely trustworthy to support the quality of transactions to prove its main credit level, such as Stock traders with the investment platform, intelligent investment with the investment platform.

With the continuous production of blockchain information flow of the transaction is absolutely credible, and derived from the absolute credibility of other information or behavior, driven by rational behavior to reduce transaction costs,the man-to-man trust mechanism will shift to man-to-technology trust, a significant reduction in uncertainty, business activities can be achieved at lower costs. Because trust relationships are prevalent in business activities, the use of blockchain can be very broad.

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