Note: This article was first published on TechNode China (in Chinese).
Tokenization, DeFi, DAOs, Smart Contracts, NFTs, GameFi – these terms are often used when discussing Web3, a catch-all term to describe the vision of a new, better internet based on blockchain technology. Web3 supporters dream of a future stage of the internet that is led by users, organized in a decentralized network, and run on blockchain technology, in contrast to the current internet, which tech companies and other entities control.
Many have doubted China’s appetite to support Web3 due to the country’s preference for centralized systems and controls and its tight regulations on cryptocurrencies. Yet while overseas venture funds are actively investing in Web3 ecosystems, the Chinese government and top Chinese tech companies have also devoted themselves to building consortium blockchains and have successfully launched blockchain projects in government affairs, commerce, and the broader society.
This article attempts to illustrate the development of the Chinese Web3 industry by assessing the technical characteristics of Chinese blockchain projects and identifying the unique value that differentiates China’s Web3 from other cryptocurrency-based financial markets.
Public chain and consortium chain: Two technical routes in Web3
When it comes to the difference between Web3 in China and in other countries, it is essential to distinguish between two blockchains: the public chain and the consortium chain.
The public chain is open for anyone to join and offers unrestricted access for all users to participate. Data is transparent and cannot be tampered with. It is considered to be a truly decentralized blockchain. The consortium chain is jointly managed by multiple verified organizations. Each organization manages one or more nodes to uphold common goals and ensure accountability. Consortium chains tend to enjoy good privacy protection, low transaction costs, and fast transaction speeds. The core difference between the two chains is that the public chain has a token incentive layer that the consortium chain does not have. Therefore, the former is also known as blockchain with cryptocurrencies, whereas the latter is blockchain without cryptocurrencies.
The differences between the two chains has also led to two directions of Web3 applications: the digital asset direction and the industrial blockchain direction. In many countries, the applicability of Web3 mainly revolves around the investment and transaction of cryptocurrencies. Cryptocurrency projects and crypto exchanges generated on various public chains have thrived, as have cryptocurrency wallets, decentralized autonomous organizations (DAOs), NFT trading platforms, and other related industries.
In China, however, token issuance and financing have long been banned, and the government has continued to crack down on crypto mining and virtual currency speculations. As a result, the attempt to adopt Web3 in China began in a more controlled environment, based on the research and popularization of blockchain technology in relevant industries.
Because many people regard digital assets as the core feature of Web3, they tend to conclude that the development of Web3 outside of China is further ahead, that there are no actual Web3 projects in the country, and that consortium chains can only be useful in fringe applications.
However, from a technical standpoint, the public and consortium chain can be applied in various scenarios based on different needs. The public chain does not have an absolute advantage over consortium chains.
In fact, absolute decentralization is also a natural enemy of efficiency, as it requires confirmation by every network node, resulting in lower transaction speed than the consortium chain. Moreover, cryptocurrency is only a basic application of blockchain technology. Each time the cryptocurrency market plunges, the so-called decentralized wealth creation system points to one scam after another.
China’s focus on the “chain” rather than the “coin” helps ensure that cryptocurrency hype does not affect the development and utilization of blockchain technology. In the early stages of blockchain development, China proposed focusing on technological breakthroughs and ecological improvement. In the later stages of blockchain development, China actively guided blockchain technology to support economic growth and improve people’s livelihoods in many aspects, including inclusive finance and digital transformation.
How currency-less blockchains work in China
Web3 also has to align with the laws, rules, and cultural customs of current society, in a way, a permissioned “consortium chain” with centralized characteristics fits better with Chinese conditions.
Luo Yihang, founder of tech media outlet Pingwest, wrote in an opinion piece (in Chinese) that he believes establishing a consortium blockchain network, where laws and regulations form centralized governance to achieve consensus, will lead to greater safety and transaction efficiency. Ultimately, this can create more practical value for the Chinese government, organizations, commercial institutions, and consumers across the nation, he added.
In the consortium chain space, IBM is the leader in BaaS (blockchain as a service). In China, many entities have built their own consortium chains. They include leading internet companies such as Tencent, Baidu, JD.com, Ant Group, and Bilibili, financial institutions such as China Construction Bank, Industrial and Commercial Bank of China, Ping An Insurance, and blockchain technology service providers such as Hyperchain and Tianhe Guoyun. State-owned enterprises, local governments, universities, and research institutes have also established various consortium chain projects like BSN, Treemap Chain, Changan Chain, and Spark Chain.
In the service economy, China’s consortium chains are applied across industries, including food, copyright, law, health, insurance, credit reporting, taxation, carbon trading, supply chain finance, anti-counterfeiting traceability, logistics, transportation, and environmental protection. In addition, the government is also committed to providing the underlying infrastructure of blockchain tech and digital intellectual property rights.
Web3 is expected to transform the internet from three dimensions – technology, industry, and economics – according to the Web3 Prospective Research Report released by the China Academy of Information and Communication Technology, a state-backed scientific research institute, and blockchain company OKG. This article will dive into three use cases of the consortium chain in China’s Guangdong-Hong Kong-Macau Greater Bay Area. The Bay Area operates on “one country, two systems and three jurisdictions” and has accumulated unique advantages in blockchain development. Tencent, Ping An and other companies leading the development of the aforementioned consortium chains are headquartered in Shenzhen, a tech center in the Bay Area. In addition, a large number of consortium chain projects have been launched in the area, greatly accelerating the development of the blockchain ecosystem in the region.
Case 1: Data transfer
Hong Kong, Macau, and mainland Chinese cities in the Greater Bay Area have vastly different data transfer policies. Due to historical reasons, these regions operate in different jurisdictions, putting the area at risk of becoming “data silos.”
The Guangdong-Macau data verification platform developed by FISCO BCOS (a financial blockchain platform founded by Tencent’s WeBank) promotes cross-border transfers of trusted data using blockchain technology. Taking advantage of blockchain tech’s transparent, traceable, and non-tamperable characteristics, professional service agencies can rely on hash value comparisons to verify the authenticity of the data source, thereby accessing credible data to complete requests made by data owners.
The platform mainly provides safe, credible, and efficient cross-border data verification for institutions and residents in Guangdong and Macau. In addition, it serves business scenarios such as cross-border asset certification, bank account opening, mortgage management, and wealth management. For instance, the platform has successfully shortened the process for Macau residents to apply for asset certification-related materials to 5 minutes.
Case 2: Tracing trade
As a major trading port, the Greater Bay Area involves buyers, sellers, logistic firms, custom authorities, tax authorities, banks, insurance companies, and many other related entities. The demand for data sharing is high, but there is also a high cost and difficulty in collaboration.
In November 2020, the Greater Bay Area port logistics and trade facilitation service platform was officially launched, built jointly by China Merchants Group and Ping An Group. The platform cross-checks information of trading parties on blockchains, helps identify the authenticity of trade, and solves practical problems such as personnel and goods entering and leaving the port or trade financing for import and export enterprises.
The platform greatly improved operational efficiency, reduced corporate trade costs, enhanced personnel and cargo customs clearance experience, and increased customs clearance efficiency at service ports. Since its launch, the platform has saved more than RMB 24 million in customs declaration fees for shipping companies annually. Streamlining the connection between international liners and inland barges, the terminal enterprises have shortened the average storage period from 5.7 days to less than two days, significantly improving the efficiency of the terminal site and container turnover.
Case 3: Cross-regional credit
Because the Chinese central banks’ credit information system does not cover non-credit groups or enterprises, banks, and other financial institutions, sometimes it is necessary to introduce market-oriented credit information institutions. However, many of these credit bureaus usually have strong regional attributes, making it hard for companies to do loans and financing cross-regions.
The “Pearl River Delta Credit Information Chain,” established under the leadership of the central bank and the guidance of the bank’s Guangzhou branch, is supported by blockchain technology, realizing cross-regional, cross-system, and multi-dimensional enterprise credit information sharing and interoperability, connecting banks and enterprises to financing and promoting regional economic integration.
Since its launch more than a year ago, the chain has dealt with 14,700 user queries for 207 financial institutions and has accumulated 97,700 authorizations on the chain, according to a government report on blockchain development in the Greater Bay Area. Relying on this platform, financial institutions have granted credit to more than 52,300 households, amounting to more than RMB 323.35 billion.
The future of China’s approach to Web3
As demonstrated above, the consortium chain controlled by state agencies or government organizations has also helped various industries to work together better and opened up new possibilities. The benefits of China’s approach to Web3 largely lie in contributing back to the real economy.
From a global perspective, the future of Web 3.0 is unclear. In China, Web3 has huge potential. According to an IDC report, China’s BaaS business market reached $188 million in 2021, growing 92.6% from the previous year. Presently, Web3 in China still faces obstacles such as a weak technical foundation, financial risks of speculation and fraud, and uncertainty in regulatory policies.
Specifically, the construction of Web3 in China requires the government to actively introduce new applicable scenarios, play a role in driving innovation among enterprises, academia, and research institutions, and help create a user-led environment by opening and sharing the source code through safe and verified channels.
By placing heavy emphasis on developing the underlying infrastructure of the digital economy, such as blockchain technology and establishing new regulatory rules, China can build its Web3 ecosystem through practice and feedback.
Recently, the Chinese government has also been exploring the construction of NFT trading platforms and the digitization of assets to promote Web3 as a part of the digital economy development plan. In addition, with the popularization of the digital yuan, China is also expected to explore the application of digital assets in the future. Such developments all indicate that China is relying more on industrial blockchain and government-led initiatives to prepare for the Web3 era.