With the deepening and popularisation of blockchain technology, relevant applications have been introduced to the cultural and creative industries, bringing more room for further development. In this issue, we have invited Prof. Wang Zhong, associate dean of the Faculty of Humanities and Social Sciences of the City University of Macao, to draw us a clear picture of blockchain applications in the cultural and creative industry and the impact of blockchain on business models.
Part I The origin of blockchain
Blockchain as an emerging technology is a result of technological advancement and integration. It actually has its cultural background which can date back to an anarchist movement called cypherpunk movement in the 1970s in the west. Anarchists show extreme distrust to governments and do not believe in any institution. They advocate that governments need to be transparent and that individuals should enjoy the right to privacy. In addition, they also strongly believe that society should protect individual freedom. According to anarchists, there wouldn’t be a free society if there is no privacy. To ensure privacy, they make use of cryptography and codes to fight against governments and build a safe and free Internet. Julian Assange, who is well-known for heading WikiLeaks, is also a member of the cypherpunks.
On March 9th 1993, cypherpunk Eric Hughes published A Cypherpunk’s Manifesto that is over 1,600 words long, pointing out sharply that an open society requires anonymous transactions and therefore it is important to develop electronic money. The manifesto marked the start of the cypherpunk movement. The efforts made by countless top-notch hackers and cypherpunks eventually led to Satoshi Nakamoto’s paper Bitcoin: A Peer-to-Peer Electronic Cash System published on November 1st 2008. Later on January 1st 2009, the first set of bitcoins was successfully mined. Bitcoin is the first decentralised digital currency in the world that does not have issuer. In short, bitcoins are empowered by an emerging technology called the blockchain.
Part II What is blockchain?
The Chinese government has found a number of professional experts for drafting regulation and standards on a blockchain. One expert defines blockchain as “a growing list of distributed blocks that are linked using cryptography.” This is a rather academic description of blockchains. In this article, we will use simple language to explain what exactly blockchains are.
1. Blockchain ledgers
Blockchain technology’s function is to build a secured database. What sets databases built by blockchain technology apart from the crowd is the way they write to databases. To illustrate, you can imagine we are taking notes on some paper. Once we finish writing on one paper we will continue to the other. Then we take a picture of the first paper after we finish the second one. We then attach the picture of the first paper to the second paper. Then we move on to the third paper and continue to process again. Through this way, we will be able to notice whether the content on the first or second paper has been changed as we have previous records on the third paper. Let’s continue with this chain of logic. Once the note hit 10,000 pages, then the 10,000th paper will include the records of the previous 9,999 pages. Any change can then be immediately detected through an algorithm. This is what we call blockchain ledger.
As a matter of fact, it is incredibly hard to change the records on blockchain ledgers because you will have to copy all the blocks again and then repeat the process of taking records of previous blocks. What’s more, you need to do all these without being noticed. This is why it is almost impossible for you to change the records on blockchain ledgers. So far, there hasn’t been any case where records on blockchains are modified.
It is important to note that blockchains don’t take records by taking photos. It is only an analogy. Blockchain does not record every bit of information. What they record and then distribute is more of an information fingerprint. The fingerprint is a standard 256-bit file generated by an algorithm called HASH. In other words, the data on a blockchain is only data’s fingerprints. You can only access to full records in the database once you receive authorisation.
2. Asymmetric encryption
Asymmetric encryption is the backbone of cryptocurrency. However, it is not a new technology. You can see its application on the Internet everywhere. This is another example that shows blockchain technology is actually an integration of existing technologies.
Blockchain ledgers need to encrypt transactions that they record in order to ensure anonymity and increase security. It is done through a combination of encryption keys: the public key and private key. Public keys, as the name suggests, are public, while private keys are not. Different from symmetric encryption, asymmetric encryption does not use the same key for encryption and deciphering. On blockchains, when you are receiving a transaction, the recipient address (public key) is open. After the transaction is completed, only the private key can grant access to the database.
3. Distributed ledger
Traditionally, a ledger only has one original copy or a few copies and therefore the level of security is low. For instance, if a bank’s database is attacked by hackers and some transaction records are lost as a result, the bank’s client will then suffer from loss of asset. Or, the bank will go out of the business or has no choice but deduct money randomly from their clients’ accounts. The clients’ losses are untraceable. Blockchains fundamentally solve this problem as each block synchs all the records on the ledger. In other words, blockchain technology makes a copy of the ledger on every block.
The records on a distributed ledger’s blocks will be broadcasted on the Internet. Every change to the ledger will be tracked and is traceable. This will make asset transaction and capital flow so much more convenient.
4. Distributed consensus and cross validation
Since every block on a blockchain is communicating information and writing to the ledger, it is important to make sure that every block is writing to the same ledger. How does blockchain technology achieve this? Here we need to understand the consensus mechanism on blockchains, which is a significant solution from Satoshi Nakamoto.
Under the consensus mechanism, every block on a blockchain will verify information using its own records. It works like aggregating opinions from different people with different perspectives to prove or disprove a certain statement. The consensus that the blocks on blockchain have is called distributed consensus. The process of verifying new information translates information into facts. In simpler words, every block writes different information to the ledger but there will be only one validated consensus on the standard ledger.
In this case, blockchain technology has achieved a revolutionary breakthrough as it can create an authentic ledger with no error given the fact that all the blocks on the blockchain will have standard consensus all the time.
5. Incentive structure
Why users are willing to or even fight to become a validator or miner on blockchains? The answer lies in blockchain’s incentive structure, which is the core value of blockchains, reflected by a deep observation of human nature.
Who gets to write to a decentralised blockchain? Firstly, you need to prove you have contributed enough. This means that you need to provide a certain amount of computing power (CPU or graphics card) to a blockchain first before becoming eligible for writing to the blockchain. But of course, it doesn’t mean the more computing power you can provide the more likely for you to become a writer to a certain blockchain since there is also the problem of probability. So why would people want to participate in this writing process anyway? This is where the concept of token comes into play. A token is a statement of a digital asset with properties such as utility and profit. Once a token is validated by others, it can be used in transaction. The tokens on the blockchain designed by Satoshi Nakamoto for example are the famous bitcoins. Bitcoin is a form of digital asset that can be used in transaction. The blockchain is programmed to create a block every ten minutes. People who are lucky to get to write to the ledger will receive 50, 20, 12.5… (the number will decrease by half every four years) bitcoins as rewards. The lucky ones also get to receive the transaction fee from bitcoin transactions on the blockchain. The reward is very direct. Sometimes you can see the return immediately. This is what draws lots of people to blockchains.
6. Smart contract
In the real world, a contract is hard to execute if either side bails on it. This is something that smart contract on blockchains can solve. Smart contract is a special agreement. Once initiated, a smart contract will automatically provide, validate and execute the agreement. It allows deals to go on without the involvement of a third party. This is a very important reason why we say blockchains are decentralised. Smart contracts include all relevant information of a deal. The transactions on blockchains are also traceable and cannot be reversed. Even though users on blockchains are stranger to each other, blockchains’ digital agreements provide necessary constraints on people and boost mutual trust. Such trust is the foundation of a digital economy in the future. In 2015, The Economist even referred blockchain as the trust machine.
Part III The cultural industry on blockchains
Blockchain technology also revolutionises our existing concepts. It is integrating cloud computing, big data, artificial technology, etc., bringing forth great benefits in information sharing, innovating business models, optimising business operations and lowering operational cost. It can be argued that blockchain technology can bring revolutionary changes to every industry. The cultural industry is no exception.
1. Stimulating the IP sector
The cultural industry is known as the IP sector in some countries because cultural products, whether it is in the form of book, music, video, animation or game, they are intellectual property at nature. Driven by the development of blockchain technology, the IP industry is going to experience exponential growth.
First, there will be a large growth in IPs. With blockchains, countless art pieces or even amateur works will be able to go on blockchains given their potential to cash in. These works will become actual IPs after cross-validation on blockchains, thus encouraging more people to put their works on blockchains.
Second, the actual value of an IP will be unleashed. Before the application of blockchain, enterprises are the main actors in trading IPs. This didn’t change even after the cultural industry entered the digital era where IPs can be digitised. But on blockchains, IPs can be tokenised and traded like stocks, allowing IP sellers to sell IPs in shares that ordinary consumers can purchase. Tokenising IPs on blockchain is equivalent to securitising IPs. With more public participation in IP trading, the IP market will be completely revitalised, which paves ways for IPs’ true potential to be realised.
Moreover, blockchain technology also makes it easier to ensure legal protection of intellectual properties. All the information on blockchains, including production information, usage, the entire life cycle of an IP, will be recorded in a timeline and are traceable. This makes validating and protecting IPs extremely easy, saving lots of time and cost. IP owners can simply present evidence on blockchains to the relevant authority or to the court to support their case. For instance, Beijing Internet Court’s Tianpin Blockchain makes use of blockchain technology to process IP infringement lawsuits, which greatly boosts efficiency and lowers cost. Zhixin Chain co-developed by Tencent and Beiming Software and launched in July last year is also a typical example of how blockchain technology can be applied in the justice system.
What’s more, information stored on blockchains cannot be deleted. This means that behaviours such as IP infringement and fraud will leave a permanent record on blockchains once discovered. Such power can serve to deter the behaviours mentioned above and help build more trust in society.
2. From centralised companies to an ecosystem
The Internet was praised for its ability to make society more open and equal when it first emerged. But unfortunately, the Internet we have today is monopolised by giants and it is highly centralised. Many well-known Internet companies are collecting information from their users and exploit users’ data for their own gains. The users never benefit from their own data.
Blockchain technology will turn the tides in the Internet industry. Blockchain ledgers and blockchain’s incentive structure will allow enterprises, employees, clients and business partners to become stake-holding users who establish rules on cooperation and bring down walls built by monopolies. Each party will be a contributor to the business ecosystem and then benefited from it.
Blockchains’ special features such as being multi-block, multi-writer and smart contract can help improve traditional cultural industry’s processes. Blockchain technology can break the linear and closed-loop communication and information delay between consumer and companies who produce cultural products and distribute them. Blockchain technology can formulate agreements and close transactions at a fast speed, making sure that companies will roll out popular cultural products or improve their service.
3. Blockchain and new business opportunities
In theory, everything is connected. But discovering the linkage between things is no easy task. There are users from different walks of life on blockchains. When they are contributing to the operation of blockchains, the connection between different industries will gradually appear and so will new business opportunities. This will benefit blockchain users in terms of expanding their business.
A company in Beijing is trying to build a new form of a music club in China based on the sports club system in the west. The concept is to bring all the KTVs in China on a blockchain, which will then collect and sort out a mass amount of information and increase popularity. After that, the company can organise music contests (actual music contest similar to the soccer leagues in Europe instead of reality shows on TV) and other relevant activities to drive China’s music industry forward. This is indeed a very meaningful and feasible endeavour. Music contests can appeal to more users and thus expand the business chain, laying grounds for new business opportunities and a healthy business cycle.
4. Maximising fulfilment of individual’s creativity
The blockchain era is the best era for starting a business. Entrepreneurs only need to focus on their business and realise their creativity without having to worry about having their products validated by a centralised platform. Distributed platforms can also help with business development and make IP trading more accessible. This will provide people with the opportunity to cash in with their creativity.
When celebrities have built up their popularity and forged IP effect, everything related to them can be digitised and capitalised. After blockchain’s validation, relevant information will be sent to the fans through distributive encryption, maximising their value.
We can truly understand how blockchain can translate information network into value chain by looking at how it can help people cash in.
5. Small and medium-sized enterprises can find financing more easily
Finding financing has been a big issue for SMEs as it is very difficult and costly. It is difficult for SMEs to find financing because they generally lack credit in the initial stage and therefore investors cannot have a full picture of their status easily. Blockchains have a technological advantage in cross-validating and automatic activation. Besides, enterprise information on blockchains is transparent and authentic. The records on blockchains are also permanent and cannot be erased, which can prevent frauds, allowing financial institutions to quickly grasp the actual situations of companies and thus decide whether to make certain investments.
Part IV Blockchain technology’s limits
Experts have envisioned the potential use scenes of blockchain technology and industrial applications, including financial services, medical health, education, Internet of Things, sharing economy, communication, social administration, charity, entertainment, cultural industry, etc. However, blockchain technology is not yet well understood by the general public. In addition to that, stakeholders of the current centralised system are not willing to join the development of blockchains since it will harm their own interest. Besides, it is also quite difficult to generate tokens. All of these are obstacles to the development of blockchain technology. In reality, there aren’t a lot of applications of blockchain yet. But our experience in the past tells us that technological development cannot be stopped. State-level policy support and guidance also help accelerate the development of blockchain application. Different industries, including the cultural and creative industry, are paying close attention to the rise of blockchains. We believe that blockchain technology can bring about drastic changes to current business models, making them more democratic and diverse and helping to bring better products that can boost people’s life quality.
Wang holds a PhD degree. He is a professor and associate dean of the Faculty of Humanities and Social Sciences of the City University of Macao, and a PhD supervisor of cultural industry research. Wang’s main research interest includes cultural industries theory and philosophy, sociology of science, folklore culture and intangible culture heritage, sociological study of traditional skills, etc. He has published a total number of seven academic works as sole author and co-author and published over 40 academic papers. His research works were read and reviewed by high officials in the Central Government and reproduced by Xinhua Digest. Wang has also received the Teaching Excellence Award and the Research Excellence Award from the City University of Macao. In addition, Wang is the chairman of the Macao Cultural Creative Industries Association and consultant of the Youth Research Think Tank Guangdong Province.