Yixin | Supply Chain Finance+Block Chain Double Chain Combination

  block chain, financial, Supply chain

What is the block chain

Block chain is a chain data structure that combines data blocks in a specific sequence according to the time sequence. It stores records of all transactions since the system was born. The data on the block chain are jointly maintained and stored by all network nodes, and the block data are protected against tampering and forgery by cryptography. Therefore, the essence of block chain is a distributed shared database.
Block chain allows any number of nodes participating in the system to generate associated data blocks (i.e., blocks) through cryptographic methods. Each data block contains all the data exchanged by the system within a certain period of time, and the data blocks are combined into a chain data structure according to the time sequence.

Block chain is an innovative application mode of distributed data storage, point-to-point transmission, consensus mechanism, encryption algorithm and other computer technologies in the Internet era. It is an information technology scheme to solve trust problems and reduce trust costs. The application of block chain technology can ban the traditional trust intermediary, subvert the traditional centralized old model which has existed for thousands of years, solve the trust problem between strangers without centralized trust intermediary, and greatly reduce the trust cost.

Noun interpretation

  • DistributedCompared with centralization, distribution is one of the typical features of block chain. The corresponding English is Decentralized. The complete expression is a mode that does not rely on central server (cluster) and uses distributed computer resources for calculation.
  • Consensus mechanismA mathematical algorithm for building trust and obtaining rights and interests between different nodes in a block chain system.
  • distributed database: A database that can be shared in a network of multiple sites, different geographic locations, or multiple organizations.

Block+Chain = History+Verification

The block structure has two very important characteristics:

The header of each block contains the hash value of the transaction information of the previous block, thus forming a chain from the creation block to the current block;
Transaction records on each block body record all value exchange activities that occurred after the previous block was created and before the block was created;
In most cases, the creation of a new block is successfully added to the chain, and the data record of that block cannot be changed or changed.

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Characteristics of Block Chain

  • De-centralization

The distributed structure of the block chain makes the data not recorded and stored on the centralized computer or host, but let each node participating in the data transaction record and store all the data information. For this reason, the block chain system adopts an open source, decentralized protocol to ensure the complete recording and storage of data. The block chain constructs a set of protocol mechanisms, allowing each node in the whole network to participate in the recording of data and also participate in verifying the correctness of the recording results of other nodes. The data will only be written into the block when most nodes (even all nodes) of the whole network confirm the correctness of the record. In the network system with distributed structure of block chain, the network nodes participating in recording will update and store all data in the whole network system in real time. Therefore, even if some nodes are attacked or destroyed, the data update and storage of this system will not be affected.

  • Not to be forged

The block chain recording principle requires all nodes involved in recording to jointly verify the correctness of transaction records. Since all nodes are recording every transaction of the whole network, once the information recorded by one node does not match that of other nodes, other nodes will not recognize the record and the record will not be written into the block.

  • Not to be tampered with

It is almost impossible to change the transaction information within a certain block. If the block is changed, then every subsequent block will be changed. Therefore, those who try to tamper with the data must simultaneously invade at least 51% of the nodes participating in the global records and tamper with the data. Technically, this is almost impossible.

  • Mathematical encryption

Each transaction requires a valid signature to be stored in the block. Only a valid digital key can generate a valid signature. The key appears in pairs and consists of a private key and a public key. Among them, the public key is public, and the private key is only visible to the owner and used for transaction signature to prove the digital identity.

How to Solve Financial Pain Points of Supply Chain by Block Chain

Supply chain finance is a comprehensive financial product and service provided to upstream and downstream enterprises in the supply chain by relying on core customers, taking the real trade background as the premise, using the method of self-compensating trade finance, and closing the capital flow or controlling the real right through professional means such as the registration of pledge of accounts receivable, third-party supervision, etc.

The foundation of supply chain finance is also the supply chain. Supply chain involves information flow, capital flow, logistics and business flow, and is naturally a multi-agent and multi-cooperative business model. In this case, to carry out trade financing, we will first encounter many authenticity problems, such as the authenticity of the transaction and the authenticity of the documents, which need to be confirmed by many parties and consume a lot of manpower and material resources. Secondly, the multi-agent involved has the problem of difficult interconnection. For example, the supply chain management system, enterprise resource management system and even the financial system used by each agent are different, which leads to difficult connection. Even if it is connected, it will be difficult to share information due to the inconsistency of data format and data dictionary.

There are still some industry pains in supply chain finance:

  • First, as mentioned earlier, there are many isolated islands of information in the supply chain, and the lack of information exchange between enterprises restricts the verification of many financing information.
  • Second, the credit of the core enterprise cannot be effectively transferred. According to the Contract Law, the core enterprise signs contracts with the first-level suppliers, but the first-level suppliers and the second-level suppliers do not have the participation of the core enterprise and cannot transfer the credit of th e related core enterprise to the multi-level suppliers.
  • Third, banks lack credible data on SMEs. Under the existing bank risk control system, small and medium-sized enterprises cannot prove the existence of trade relations and cannot obtain bank funds. In contrast, the banking industry cannot penetrate into the supply chain to obtain customers and make loans.
  • Fourth, financing is difficult and expensive. Under the current prevailing market background of credit sales mode, suppliers in the upstream of the supply chain often have large funding gaps. However, without endorsement from core enterprises, they are difficult to obtain high-quality loans from banks.
  • Fifth, settlement cannot be completed automatically. At present, many agreed settlements have not been completed automatically. When multi-level suppliers are involved in settlement, there are more uncertain factors.

Therefore, supply chain finance needs data penetration and information sharing. By integrating capital flow, information flow, logistics and business flow, the authenticity of information, the transmission of credit and the high efficiency of financing can be improved.
In supply chain finance based on block chain, each related party is linked into a platform through block chain technology, and horizontal sharing of data is realized through multi-party bookkeeping and authorization data storage, thus realizing trust transmission of core enterprises. Based on the constraints of property law, electronic contract law and electronic signature law, with the help of the credit line of core enterprises, the financing efficiency of small and medium-sized enterprises is improved, the financing cost of small and micro enterprises is reduced, and the realization of inclusive finance is accelerated.

What are the advantages of introducing a block chain?

  • First, to solve the problem of isolated islands of information, multiple stakeholders can set rules in advance to accelerate data exchange and information sharing.
  • Second, according to the property law, the electronic contract law, the electronic signature law, etc., the accounts receivable vouchers of the core enterprises can be converted into negotiable and financing rights vouchers through the block chain, so that the credit of the core enterprises can be transmitted along the credible trade link. Based on mutual certainty, the entire voucher can be derived from various operations such as splitting and tracing.
  • Third, provide credible trade data, such as online basic contracts, documents, payments and other well-structured and complete records under the block chain framework, thus improving the transparency of information and realizing penetrable supervision.
  • Fourth, reduce capital cost and increase efficiency. After the credit transfer of core enterprises, small and medium-sized enterprises can use the credit line of core enterprises to reduce financing costs and improve financing efficiency.
  • Fifth, realize intelligent settlement of contracts. Automatic clearing and settlement based on intelligent contracts can reduce manual intervention, reduce operational risks and ensure the safety of payment collection.

To sum up, from the perspective of the whole information flow, from the former isolated information island to the information opening of the whole chain, from the traditional core enterprise covering only first-level suppliers to multi-level suppliers. Transaction confirmation based on encrypted data, transaction real proof based on deposit certificate, trust transmission based on shared account book and contract execution based on intelligent contract form a new ecology of closed and controllable payback, penetrating supervision and full-chain data access, which is mainly helpful for small and medium-sized micro-enterprises to solve the problem of “difficult financing and expensive financing”.

Application Case of Block Chain-A Solution for Buying Steel Mesh

The block worm baas (block chain as a service) platform built by yiqi cloud service is a cloud platform providing block chain services, which can help users to quickly build block chain infrastructure and chain business data.
Based on the data on the block chain, yiqi cloud service provides financial services to SMEs upstream and downstream of the supply chain.
The platform adopts a multi-chain structure of block chain. B2B platform, suppliers, purchasers, warehousing agencies and logistics agencies are used as data entry nodes to store information flow, business flow and logistics data in the supply chain on the block chain. First of all, the block chain opens up the information systems of each participant, provides a credible cooperation environment, and improves the efficiency of transaction cooperation. Secondly, many participants witnessed the process of the transaction based on the cooperation of the transaction itself, providing guarantee for the authenticity of the transaction. Finally, financial institutions, as credit providers and fund providers, based on credible data sources, use data analysis and other means to extend credit and loans to enterprises. It simplifies the financing process, improves the financing efficiency and reduces the financing cost.
The following is a case of steel B2B e-commerce company buying steel greatly using block chain to record business data on the Blockworm platform.
From the moment of order generation, all parties’ transactions, including key nodes in the storage and logistics processes, are recorded with data stored in the transaction chain. The whole transaction can be traced back to its source and cross-verified according to the information of all parties to prevent false transactions and ensure the authenticity of the transaction.

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Figure 1. Key nodes of the whole transaction process are recorded on the transaction chain

The specific process is as follows:

  1. Information on new orders for large steel net purchases is recorded on the block chain;
  2. Greatly purchased steel changes the order status to pending issue;
  3. The third-party warehouse finds the order to be issued on the chain, performs the issue operation on the goods, and marks the order status as issued;
  4. Third-party logistics companies that undertake the transportation of goods begin to transport goods and update the order status as in transit.
  5. The downstream buyer receives the goods and marks the order status as signed.

Accounts receivable and bills generated in all transactions can be used as financing targets and registered on the asset chain to form digital assets. This process is called asset digitalization. These digital assets are essentially the creditor’s rights of enterprises in the supply chain. The asset chain records the financing process of all assets. Part of the process can be automatically executed by intelligent contracts on the chain, thus saving labor costs.

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Figure 2. The financing chain records the process of generating financing assets

At the same time, in the transaction chain, digital assets can be split up and purchased from upstream suppliers as creditor’s rights (or capital), thus relying on the credit of core enterprises, they can be transmitted to the whole supply chain and increase the credit for small and medium-sized enterprises in the supply chain.

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Figure 3. Financing assets can be circulated on the chain.

The integration chart (1)-chart (3) will eventually evolve into a multi-chain model (chart (4)). First, each transaction chain provides asset authenticity traceability, with asset chain in the middle. Assets that need financing can be registered in the asset chain. Financial institutions can trace asset authenticity, assess risks and provide targeted financial services based on the asset chain.

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Figure 4. Multi-chain structure. Transaction chain increases trust for financing assets in asset chain

Yixin Institute of TechnologyAuthor: Ming Yang