To explain why, let us think about the transaction cost.
May be let us think about the transaction cost in the base of Coase Theorem.
“Coase Theorem is a legal and economic theory developed by economist Ronald Coase that affirms that where there are complete competitive markets with no transactions costs, an efficient set of inputs and outputs to and from production-optimal distribution will be selected, regardless of how property rights are divided. Further, the Coase Theorem asserts that if conflict arises over property rights under these assumptions, then parties will tend to settle on the efficient set of inputs and output.”
Hmm … “complete competitive markets with no transactions costs”. ..no transaction costs?? mission impossible, but at least we can lower the transactions costs. If so, can we product an incomplete competitive market or a more competitive market?? But what is the benefit at least in economic sense?? Let us discuss step by step.
As transaction Cost is so important to generate a competitive market, let us discuss about it.
“The transaction cost approach to the theory of the firm was created by Ronald Coase. Transaction cost refers to the cost of providing for some good or service through the market rather than having it provided from within the firm. Coase describes in his article “The Problem of Social Cost” the transaction costs he is concerned with: In order to carry out a market transaction it is necessary to discover who it is that one wishes to deal with, to conduct negotiations leading up to a bargain, to draw up the contract, to undertake the inspection needed to make sure that the terms of the contract are being observed, and so on.
More succinctly transaction costs are:
–search and information costs
–bargaining and decision costs
–policing and enforcement costs
Coase contends that without taking into account transaction costs it is impossible to understand properly the working of the economic system and have a sound basis for establishing economic policy.
Notes on: The Nature of the Firm (1937) by Ronald Coase”
According to Coase’s explanation, can we say most of the transaction cost is caused by market uncertainty or the risk of the market or the lack of “trust” to negotiate or run a “contract” in the market?
We can expect if the even the internal market has so much uncertainty, then how about the oversea market? We can expect the cross border trade faces a lot more uncertainty.
Can block chain help to decrease this kind of uncertainty?? Before that, let us ask one more question: What is the benefit of lower the transaction cost?
In economics abc, we all understand competitive market will lead to product or production upgrade, more options for customers etc.. It is good, right? It seems the buyers will feel happy as the price would be more stable and the quality of the product would be better. How about the producer or seller??
In cross border trade, we can not imagine an oversea market that can easily “go in and out”. We can not imagine a country is totally a buyer or a country is totally seller. Even a country may buy a part of material from country A and use the material to make a product to sell back to country A!! It seems the competitive market is too difficult for the cross border trade.
From a country’s point of view, the benefit of cross border trade is not let their people can buy what they want. The government of a country is more eager to sell their products in the oversea market so that they can earn the “foreign currency” and increase their internal “production” to solve the unemployment.
Until now we can not foresee the Pareto efficiency or Pareto optimality in cross border trade. What we heard is the complain from a country about unbalance trade, the leak of money, tariff, blah blah blah.
Is there no way to improve it? I just wrote “improve”, not “solve”!! At least “improve”…….
How about the Pareto efficiency or Pareto optimality
Pareto efficiency or Pareto optimality is a situation where no individual or preference criterion can be better off without making at least one individual or preference criterion worse off.
Let us assume the following scenario:
1. Most of the countries in the world still thinking cross border trade is good and work on it (although some countries nowadays do not think so)
2. There is still no one great power can control and manage all the resource in the world
So the cross border trade still exist and there is momentum and expectation to improve it.
The direction of improvement in cross border trade is the Pareto Optimality. That means goes for a win-win solution for the parties in the cross border trade.
And the way we proposed to reach Pareto Optimality is by lowering the Transaction Cost base on Coase Theorem.
Then the main point is how to lower transaction cost or vice verse, what make the transaction cost high in cross border trade? The answer is uncertainty.
The uncertainty to find the party to negotiate, the uncertainty to negotiate and negotiate the contract, the uncertainty of the quality of the product, the uncertainty of the payment, the uncertainty of how to enter or leave the market. As there are less people to join the cross border trade, the risk of market goes high and the transaction cost rise. It is a circle.
How to deal with the uncertainty or simplified speaking: how to build the trust in the oversea market??
Now comes the block chain and the platform. You can find online shopping platform everywhere nowadays. No need for me to explain. However, what is Block Chain and how can it build the “trust”?
by Kong Yuk Kan 20 August 2020 in Vancouver, B.C. Canada
What is block chain then??
There are many misunderstandings about block chain. The first misunderstanding is block chain equals to “Bitcoin”. So let me emphasis: Block Chain is not Bitcoin or even Crypto-currency!!
Here comes the most simplest explanation about the differences:
“To finish up, let’s recap why blockchain and Bitcoin are two completely separate things:
–Bitcoin is a cryptocurrency, while blockchain is a distributed database.
–Bitcoin is powered by blockchain technology, but blockchain has found many uses beyond Bitcoin.
–Bitcoin promotes anonymity, while blockchain is about transparency. To be applied in certain sectors (particularly banking), blockchain has to meet strict Know Your Customer rules.
–Bitcoin transfers currency between users, while block chain can be used to transfer all sorts of things, including information or property ownership rights.”
Block chain is a kind of data storage (database) with distributed technology. The word distributed includes ideas of openness and decentralization. Block chain want to keep transparency, not anonymity. It means the data in the block chain is ready for everyone to read and check!!
Bitcoin is an example of block chain. Bitcoin need block chain but block chain do not need bitcoin. It will make many people feel disappointed or stop reading this article as most of the people expect block chain can help them to earn much money like Bitcoin. However, we cannot neglect that the block chain technology may be, I said may be, can help other business to build successful case like Bitcoin!!
If block chain can be independent from bitcoin or other crypto-currency, that means that there is no need to concern about mining, PoW, PoS, Merkle tree or hash tree, transaction time, etc. The technology would become more easy to handle and flexible to merge with other business.
The original idea of block chain is for financial independence, so it create bitcoin. Bitcoin is the result. However, now the block chain separate with financial independence concept. It may not be the idea of the creators.
Block chain is block + chain??
Yes. It is a block.
In block chain the data is organized as a block. The block is a unit. There is no restriction in what the block should include but at least has sequential number, content, previous hash code, hash code and time stamp. The structure of each block or unit should be the same.
Yes. It is like a chain.
There are many blocks in the block chain and the blocks are linked like a chain. The link of the block is the hash code, sequential number and timestamp. They all confirm the order of the block and the order cannot be changed. The hash code also confirm the data in the block is immutable as each block includes the hash code of the block before. As the hash code is generated from the data in each block, so if the data in the block is changed, the hash code will also be changed and that block will disconnected with other block. Hash code is the magic to build up the chain:
“Hashing is generating a value or values from a string of text using a mathematical function. Hashing is one way to enable security during the process of message transmission when the message is intended for a particular recipient only. A formula generates the hash, which helps to protect the security of the transmission against tampering.”
No hashing, no block chain. We can say it affirmatively!
The length of the hashing code should be the same. In the case of SHA-256 (Secure Hashing Algorithm 256), no matter how big or small your input is, the output will always have a fixed 256-bits length. As the hash code has the same length even the input of the length is very long, it is hard to guess but easy to store. This make possible to treat the hash code as a key. Own the key is equal to own content inside.
“Blockchain technology is most simply defined as a decentralized, distributed ledger that records the provenance of a digital asset.”
What is decentralized, distributed ledger?
“A distributed ledger is a database that is consensually shared and synchronized across multiple sites, institutions, or geographies, accessible by multiple people. It allows transactions to have public “witnesses”. The participant at each node of the network can access the recordings shared across that network and can own an identical copy of it. Any changes or additions made to the ledger are reflected and copied to all participants in a matter of seconds or minutes”.
Ledger is a kind of record or database. Distributed ledger is the ledger that can be shared across multiple sites.
About decentralized, there are still some arguments as the decentralized is mostly related to the bitcoin or other crypto-currency, not block chain.
“ Instead, transactions made in bitcoin are verified by a network of computers. This is what is meant by the Bitcoin network and blockchain being ‘decentralized.’ ”
Decentralized does not mean there is no centre. Decentralized just means the centre is moving from one to another. Everyone has the right to fight for becoming the centre. That is what “mining” means in bitcoin or some crypto-currency. If bitcoin or crypto-currency is not a must in block chain technology, then decentralized is also not a must. Or at least fighting for becoming a centre (mining) is not a must. The system can develop other mechanism to ensure who can be the centre. So more then one centre and the centre can switch is decentralized.
How about smart contract?? When people talk about block chain, mostly they will expect there is smart contract. What is smart contract?
“Smart contracts were first proposed in the early 1990s by Nick Szabo, who coined the term, using it to refer to “a set of promises, specified in digital form, including protocols within which the parties perform on these promises”.
Smart contract concept proposed much earlier than block chain technology. Now many people try to combine the smart contract with block chain. Block chain can make the smart contract concept real.
“Smart contracts are lines of code that are stored on a blockchain and automatically execute when predetermined terms and conditions are met. At the most basic level, they are programs that run as they’ve been set up to run by the people who developed them. The benefits of smart contracts are most apparent in business collaborations, in which they are typically used to enforce some type of agreement so that all participants can be certain of the outcome without an intermediary’s involvement.”
The main target is make sure the smart contract can run automatically. The running is guaranteed and enforced by the system itself, not any 3rd party force. Now most of the smart contracts need the bitcoin or crypto-currency as starter or deposit and the transaction of crypto-currency itself is already a smart contract.
“With smart contracts, you simply drop a bitcoin into the vending machine (i.e. ledger), and your escrow, driver’s license, or whatever drops into your account. More so, smart contracts not only define the rules and penalties around an agreement in the same way that a traditional contract does, but also automatically enforce those obligations. ”
The technology is still evolving and more and more solution will be proposed about how to combine smart contract with block chain to provide a way to enforce an agreement running automatically.
By Kong Yuk Kan on 23 August 2020 in Vancouver, B.C. Canada
The applying of block chain in cross border trading online platform –reduce the uncertainty
Our target is to reduce the transaction cost in cross border trade and attract more people to join the market. To reduce the transaction cost means to reduce the risk or the uncertainty.
There are 2 major uncertainties in the cross-border trade online platform. The first is the uncertainty feeling from the buyer and the other is the uncertainty feeling from the seller (producer/provider).
From the buyers point of view, if they are going to buy something online, they will concern about the quality of the goods, when and how they can get the goods. This concern will become great when they buy something oversea as the manufacturer is not local and there is always the communication problem with the oversea manufacturer. Even nowadays there are so many fake goods, how can they guarantee what they get is genuine or to complain if there is any defect in the goods?
As block chain can guarantee the immutable of the data, some manufacturers has already used the technology to store the production data. Some logistic company has already used block chain to record the route of the goods and as the logistic data is immutable, some insurance companies accept the data and provide the service. So if we can combine the block chain in production and logistic, we can build a tracking system from the factory to the warehouse, shop and even to the buyer. Base on the block chain technology the data will share with other node and the data is opened to public to allow checking by anyone. So the buyers will feel safe as they know what they will get. Even the buyers can transfer the risk to the insurance companies easily.
The buyers has the purchasing power and they can push the market to develop. If the goods that monitored by the block chain can attract more buyers, then more producers or related parties will agree to put their production data in the block chain and there is a force that push them away from doing dirty tricks.
Good data attract more purchasing power and lead the market to go better and generate good behaviour. Low uncertainty will attract more buyer and seller and the market becomes more competitive and rational. Romans 8:28 KJV: “And we know that all things work together for good to them that love God, to them who are the called according to his purpose.”, Mencius：Gong Sun Chou (part two) “he who finds the proper course has many to assist him.”.
Will this force become the invisible hand that can make a harmonize market like the story in “I, Pencil”??*
“I, Pencil is written in the first person from the point of view of a pencil. The pencil details the complexity of its own creation, listing its components (cedar, lacquer, graphite, ferrule, factice, pumice, wax, glue) and the numerous people involved, down to the sweeper in the factory and the lighthouse keeper guiding the shipment into port.”
*”I, Pencil” is an essay by Leonard Read 1958 and it comes famous as Friedman, the 1976 winner of the Nobel Prize in Economics, quote it as an example of the power of invisible hand in free market.
About the uncertainty feeling comes from the seller (provider/producer), it is more complicate.
1. In the online shopping, mostly the buyer pay first and then the seller ship out the goods. So the risk of the seller should not be so high. However, in the cross border trade the seller may prefer ship the product to the warehouse in the oversea market to shorten the shipping time and clear the custom tax before the selling. It can give the buyer a better buying experience and save a lot of shipping cost.
2. In most cast, the online shopping platform receive the payment but can not transfer the payment immediately because of the bank transmit process and the transmit fee for small amount of money. The platform will prefer transmit the payment in a certain period of time or until accumulate a certain amount of payment. To the seller, this means lost of time and interest and slow cash flow. It makes many small business do not willing to join the cross border trade.
3. The last but the most important is the foreign currency exchange. Most of the buyers will pay the goods in their own local currency. To the seller, how can they change this foreign currency back to their own local currency?? (Although some governments prefer get the foreign currency then the local currency!)
Because of the transmit and foreign currency, the direct sales and negotiation between buyer and seller in cross border trade is nearly impossible especially to the small business. There should be a middle man to handle this payment problem. In our solution, the platform should take up this job. So if the seller can build up a strong relationship with the platform, the uncertainty will be reduced.
To solve the above difficulties, the platform may need to work with not only the payment gateway, but also some new technology like crypto-currency and smart contract technology. To be the middle man:
1. The platform need to has the ability to receive the payment.
2. The platform can transmit the payment to the seller.
3. The platform can solve the problem of foreign exchange.
To confirm receiving the payment, the platform should work with the local or international payment gateway or electronic payment. As there are strong congenital in the relationship between smart contract, crypto-currency and block chain technology, the block chain will become the clue between the payment gateway or electronic payment, smart contract and crypto-currency in the platform. Furthermore, as all the technologies are work with block chain, the process from receiving the payment to transmitting the payment to the seller can be checked by many parties and the operation would become more transparent than the older day.
If the platform works with payment gateway or electronic payment, block chain, smart contract and crypto-currency, the transaction can be finished in a short time. Here the transaction is just the transaction of payment, not include the logistic or the shipping of the real goods. According to the law of financial authority in many countries, the platform can only “work with” the crypto-currency or electronic payment, not to create or develop them.
by Kong Yuk Kan 24 August 2020 in Vancouver, B.C., Canada
The applying of block chain in cross border trading online platform — Build the Trust
To build up the trust, setup a credit system is a good way. Just like the KYC (know your client) in the financial section, KYP (know your producer/provider) will make the buyer feel comfortable to buy oversea goods in the online shopping platform.
The credit system can also help the buyers to search the products that meet their demand. In the cross border trade, the buyers can only relay on the information that provided by the seller. As there are so many sellers in oversea, the platform need to take up the job to select the information that as least is legal and meet their culture in their region. Halal product is an example.
Sometimes too much information is also a problem to make the buyers hard making the decision. It will increase the transaction cost and become an obstacle of developing the cross border trade market into a more competitive market.
Now the A.I. can help to solve this kind of happy problem. However, base on the GIGO concept, the A.I. need the trusted data:
“GIGO (garbage in, garbage out) is a concept common to computer science and mathematics: the quality of output is determined by the quality of the input. So, for example, if a mathematical equation is improperly stated, the answer is unlikely to be correct. Similarly, if incorrect data is input to a program, the output is unlikely to be informative…. In fact, GIGO is sometimes used to refer to situations in the analog world, such as a faulty decision made as a result of incomplete information.”
We can also use the technology to check the fake information:
“Businesses are beginning to respond to their customers’ demands for facts. The big data-driven, machine-learning tech that is rolling out gives customers the raw material needed to measure and quantify absolute, objective facts and then act based on those findings, rather than rely on opinions and gut instincts so common today…..(Such as) Checking Our Ads, Facebook Fact Checking, Transparency of Reds and Whites, Big Brother in Reverse”
Even we can now use the OSINT to check the background of the seller:
“Open-source intelligence (OSINT) is data collected from publicly available sources to be used in an intelligence context. In the intelligence community, the term “open” refers to overt, publicly available sources (as opposed to covert or clandestine sources). It is not related to open-source software or collective intelligence.”
Block Chain make the data immutable and this data can generate highly trusted result. Other than checking the seller’s information and background, tracking the production and record the process of the transaction will also help to generate the credit system. To make the record easy to understand, a marking system can be utilized. However, if the buyer need, they can also check the detail online. All the information in the block chain is open and hashed, the buyer can use 3rd party software to make sure the data is original.
The applying of block chain in cross border trading online platform — Good Middle Man
Everybody knows there are many conflicts in the cross border trade.
In the own opinion, one of the reason that cause the conflict is the cross border trade running in Macro Economy without a world wide leader.
“–Microeconomics studies individuals and business decisions, while macroeconomics analyzes the decisions made by countries and governments.
–Microeconomics focuses on supply and demand, and other forces that determine price levels, making it a bottom-up approach.
–Macroeconomics takes a top-down approach and looks at the economy as a whole, trying to determine its course and nature.
–Investors can use microeconomics in their investment decisions, while macroeconomics is an analytical tool mainly used to craft economic and fiscal policy.”
As the cost to run the cross border trade is so high and complicated, only big companies with strong background and even government background can run the cross border trade business. The government involved, then political also. We need a super-national organization to organize, to manage or even to judge the cross border trade. Once a time we give this responsibility to the World Trade organization. However, the result is obvious.
We all know globalization is good to the human being and the protectionism is bad to the world economy. However, the scene is obvious.
What can we do? Change! At least try to Change!
There are new concepts, new technologies. Use them to let more micro economy (competitive market) to involve.
The online trading platforms has already proved success in recent years, let them go out.
Make the online trading platform simplified the process of cross border trade.
Make the online trading platform easy to let more people to join the cross border trade.
Make the online trading platform cooperate with other oversea online trading platform.
Make the online trading platforms to build a competitive market.
Make the online trading platforms to build the micro-economy in cross border trade.
Make the online trading platforms to build the trust in the cross border trade.
So the platform need to become a centre to collect and hash the data and make it immutable.
So the platform need to become a block chain node to do the “consensus” with the other platform.
So the platform need to become a filter to filter the fake information.
So the platform need to become a bridge between the oversea buyers and sellers.
So the platform need to utilize the new technology and systems: block chain, smart contract, crypto-currency, payment gateway, A.I., IoT, etc.
So the platform will become a testing ground to change!
“Everybody knows that the boat is leaking
Everybody knows that the captain lied
Everybody got this broken feeling
Like their father or their dog just died
Everybody talking to their pockets
Everybody wants a box of chocolates
And a long-stem rose
The lyrics of “Everybody Knows” for Justice League
By Kong Yuk Kan 25 August 2020 in Vancouver, B.C., Canada