We have written our fair share of articles that pertain to blockchain technology or individual sectors of the blockchain world here on ChinaFund.com:
- An article on China’s love/hate relationship with individual cryptocurrencies (bitcoin and the thousands of altcoins that exist), which can be accessed by clicking HERE
- An article on China’s far better relationship with blockchain technology itself, which can be found HERE
- An article on the possibility of China eventually creating its own stablecoin (a cryptocurrency type), which you can find HERE
- An article on China’s less accommodating attitude when it comes to third-party stablecoins such as the Libra project Facebook has in mind, viewable HERE
- An article on bitcoin/cryptocurrency mining and the various challenges associated with it, HERE
… again, a fair share of content has been dedicated to blockchain technology.
However, we wanted to avoid a mistake that tends to be quite common among publications that occasionally cover cryptocurrencies and even publications dedicated to the crypto world: not making a step back and analyzing blockchain technology in a broader context. In other words, rather than considering blockchain technology the beginning, we need to understand that it simply represents a step further in the broader world of peer-to-peer (or P2P) technology and decentralization.
In fact, the blockchain is not the first P2P technology implementation and upon taking a step back, we end up realizing that the blockchain has “ancestors” such as file sharing technology.
What needs to be understood is that “decentralization” is the operative word as far as P2P technology is concerned and file sharing-related implementations represent a decent enough vehicle for understanding this.
Let us ask ourselves: how can Person 1 share a file with Person 2?
The easiest approach would involve simply visiting a third-party website, with Person 1 uploading the file in question and providing a download link to Person 2. In other words:
- Person 1 visits the file sharing website, uploads the file and provides the link to Person 2
- Person 2 visits the file sharing website using that link and downloads the file
As can be seen, there seems to be a major point of vulnerability here: the fact that the file is stored on the server(s) of the file sharing website, with many of the potential issues this brings about. For example, someone can send a legal letter to the company in question and ask them to remove the file. The same way, perhaps the servers themselves can be seized by the local authorities, rendering the entire platform obsolete.
To narrow it down further and describe the problem using just one word, we are dealing with CENTRALIZATION, the fact that the file sharing process is dependent on the file sharing website acting as a middle man.
Peer-to-peer file sharing came as a natural response.
Instead of using an easily-targetable third party website, Person 1 and Person 2 can download directly from one another by for example installing open source file sharing software on their own computers. The direct result of this ends up being represented by the fact that taking action becomes far more difficult to the point of oftentimes logistically impossible.
From sending a threatening letter to an easily identifiable company and stopping the entire file sharing process in one fell swoop to having to track down each party individually (frequently in completely different jurisdictions) for each file sharing situation, decentralization essentially makes interference in general much more difficult.
What has been done for files ended up being tried for… of course, currencies.
Once again, since there is no middle man involved such as PayPal, nobody can “close down” someone’s cryptocurrency wallet (decentralized wallets, that is, there are centralized options as well which represent exceptions), which brings about one of the main advantages of cryptocurrencies: unconfiscatability.
The same way, peer-to-peer technology can be taken one step further by projects such as ethereum, which allow the implementation of smart contracts and essentially turn the cryptocurrency in question from a simple currency into a currency plus app.
It is debatable just how needed or useful one implementation of P2P technology or another is but this much is certain: decentralization makes them quite appealing, especially in trigger-happy jurisdictions such as China.
This perspective ultimately makes it clear why China can be excited about blockchain technology but dislike most specific projects. When it comes to the latter, let’s just say China is not exactly thrilled about decentralized currencies that can be used for capital flight and not directly controlled by the Communist Party of China.
Does China have no options?
Direct ones, no.
Indirect ones, yes.
In other words, while it cannot “close” another person’s let’s say bitcoin wallet directly, it can make the life of bitcoin holders difficult by for example making exchanges illegal and therefore eliminating a wide range of options through which people can turn bitcoin into fiat currencies. The same way, China can influence other bitcoin-related industries such as mining, either by banning them altogether or on the contrary, by “enticing” miners and bringing about an extreme dominance of China in the sector, only to eventually nationalize the operations and gain control over a chunk of bitcoin mining so significant that the network itself could be put at risk.
These are just speculative scenarios, of course, and this much is certain: China will never be thrilled by technology that facilitates meaningful decentralization and will do everything in its power to take action. In the case of P2P currencies, its options are for the most part indirect ones and it is questionable just how effective they can be (with the Great Firewall of China being a textbook example of the fact that even highly complex measures can be circumvented by savvy members of the general public) but if there is one thing we have learned over the years, it is never to question the ability of China to implement “creative” solutions.