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Using blockchain technology to track the life cycle of debt
Editor’s note: This was written by Zhong Weixiao, the head of the Technical Team at PINTEC’s Dumiao, and responsible for the overall technology architecture and implementation of the Smart Credit business modules. Before joining PINTEC, he worked for Nokia and several software companies.
Blockchain is currently one of the most popular technologies. The technology is increasingly used in the financial sector, beginning with cryptocurrencies and cross-border transfers, to more recent applications, such as asset-backed securitization.
Blockchain is essentially a distributed ledger technology. For example, many businesses involve multiple parties, and different parties need to initiate transactions at the right time. These different parties need to be able to complete the flow of business and synchronize information across these various transactions. Usually, two participants in a business will define a set of data interaction interfaces that contain requests and queries for the business to be conducted. Both parties need to develop applications for these interfaces to ensure the correct implementation of their business rules.
For the security of the interface, a complete set of authentication, encryption or signature mechanisms are also needed. Behind these interfaces, both sides will have their own business databases to save their records of the transaction. It’s also often necessary to provide a reconciliation mechanism to ensure transaction consistency. When a transaction requires multiple participants, the complexity increases exponentially. This kind of problem exists in many business scenarios, and it creates an enormous workload.
By using blockchain, business parties—the nodes on the blockchain—do not need to interact with each other. Instead they all “deal” with the blockchain. The blockchain provides a set of abstract infrastructures that address the issues described above. Each business party adds its business event to the chain each time it completes a business operation, and blockchain technology ensures that the event on a node will be broadcast to the whole chain and that the information on the chain gets the consensus of all parties. Other business parties can “read” this business event from the chain, and each business party has a copy of the information on the chain. This ensures that all participants get the same information on the blockchain, which is unchangeable, and this ensures that the transaction process is totally transparent.
Moreover, relevant business parties write smart contracts on which all parties have consensus. Smart contracts are abstractions of the core business rules within the business. When a business event is added to a “linked list” – which means a linear collection of data elements – it needs to be checked by the smart contract.
Leveraging blockchain to track the life cycle of debt
The advantage of blockchain is particularly notable in the retail credit business. Retail credit, such as the digital lending business, usually involves a large number of consumers in need of small amounts of credit. There are multiple participants, including technology companies and financial institutions, which make the transaction process very complicated from a technology perspective. In the life cycle of debt, the authenticity of the debt, a clear attribution of assets and a clear asset structure are key issues.
Blockchain technology can solve the above problems. With the blockchain, each participant in a business transaction becomes a node in this distributed system. The smart contracts that are abstracted from the business flow are recognized by all parties as business rules, and the roles of all parties are guaranteed in the smart contracts.
Take signing a contract as an example. When a user signs a contract, all nodes in the system will receive this signing event, and with a consensus, all parties will write this event in their respective “ledger”. After the event is documented on the chain, it will be generally accepted that this asset has been generated. When the asset is pushed to a financial institution in the future, it will know when the asset was generated, and the borrower, loan amount and other information.
Similarly, in the future, when borrowers make repayments, financial institutions would raise such a business event, which tells all the participants at the time of repayment the amount of principal, interest, and fees the borrower repays. This information does not need to be particularly updated with all the participants, but only needs to be recorded on the blockchain nodes and checked by the nodes of each participant as conforming to the smart contract and consensus as it is recorded. Based on the data on each blockchain node, each party can have access to the most updated status of the repayments.
At the present stage, PINTEC Dumiao uses blockchain to manage the life cycle of debt. From the time of the user’s credit application, through to contract signing, making a loan by financial institutions, and finally, to the users’ debt repayment, all of the changes in the asset structure and ownership can be traced back via blockchain. PINTEC Dumiao hopes to further expand the application of blockchain in the future, in such areas as Asset Backed Securities. All of the changes related to an asset package and ownership, including asset pooling and replacement, will be acknowledged by all parties via blockchain consensus mechanisms.
Recording the generation and circulation of debt is what PINTEC Dumiao calls “lifecycle management of debt.” One of the obvious benefits of using blockchain to track the life cycle of debt is that it can ensure the authenticity and reliability of the transaction while standardizing the transaction process. The consortium chain, which is being developed by Dumiao with their institutional partners, will be launched very soon. All parties will participate in the network as nodes. They have developed a smart contract for asset transfers. It will make sure that the creation of assets and all subsequent transactions are recorded on the blockchain, and that it can be validated through intelligent contracts to ensure a collective acknowledgment of the transaction. The blockchain solution avoids the complicated technical details of communication by traditional methods and avoids a series of complicated business processes, such as transaction reconciliation between the two parties.
PINTEC Dumiao blockchain project is developed based on Hyperledger technology, and we have built a blockchain transaction gateway and event delivery guarantee program based on open source technology. Hyperledger open source solutions are the industry’s most widely recognized solutions for consortium chains and private chains.
Hyperledger provides distributed ledger technology and uses the underlying blockchain open platform to simplify business processes. As a point-to-point network, it is completely shared, transparent and decentralized, which make it very suitable for the financial industry.
Cool thinking amid blockchain fever
Blockchain has been a hot concept in recent years. In the past few months, the market’s attention to blockchain has been more on the cryptocurrencies. Companies that truly believe in technology innovation would rather explore the commercial value and implementation paths of blockchain technology.
The problems that can be solved by blockchain solutions are very similar actually: any business transaction that involves multiple parties and complex processes with rules and constraints, while also requiring consistency among all the parties. Only in such circumstances can blockchain technology maximize its inherent value.
The problems we face today in our business are exactly the kinds of problems that blockchain can solve. For example, when several parties complete a business transaction online, the transmission mechanism varies between each party. This problem is obvious for the fully automated digital lending business.
In fact, blockchain is abstracting business activities (including multi-party communications, business rules validation, data transmission encryption and confirmation of final reconciliation), from a business level to an infrastructure level. Therefore, the smart contracts are first defined by all participants and deployed in all recording rules. The blockchain provides a consensus of transmission mechanism. We use a standard solution to ensure the timeliness of data transmission and recognition.
We use blockchain to solve the problems we face in our business and reduce biases in reaching consensus. We need the technology, and the technology happens to be there.
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