Why is virtual currency the only meaning of the existence of blockchain?

Blockchain is already a well-known term. Some people even assert that everything in human society will be in the future. With blockchain as the cornerstone. But if you ask what kind of technology blockchain is, the explanations of various "experts" are vague: some pile up terms that are incomprehensible to ordinary people, some talk about its potential applications, and some simply call it the "Fourth Industrial Revolution"—— As for the nature of blockchain, everyone still doesn’t know much about it.

The reason for the evasiveness is not difficult to guess. In terms of function, blockchain is nothing more than a public database encrypted in a special way. This unsexy concept cannot be used for hype. Of course, the blockchain is so eye-catching, but its connotation and denotation cannot be as devoid of nutrients as its functions. To make it clear, we need to understand a lot of information beyond the technical ontology, the most important of which is the virtual currency represented by Bitcoin.

The pain points of blockchain

Five years ago, not many people in the world knew what blockchain was. As the underlying technology of Bitcoin, this system transmits data in the form of blocks and connects the data blocks into a chain by appending them at the end, hence the name blockchain. From a technical perspective, there are no significant barriers between blockchain and previously existing IT technologies, and there is no revolutionary progress; but from a value perspective, they are fundamentally different - all previous technologies aimed at Improve efficiency, and blockchain does the opposite.

Given that Bitcoin is the iconic existence of blockchain, we might as well take it as a sample.

Every transaction accounting in the Bitcoin system is verified by countless users across the entire network. Only after the verification is passed, the transaction can be established. The first user who successfully records the account can get a certain amount of Bitcoin reward. This information processing process is commonly known as “mining”. Currently, the number of active users of the Bitcoin system is approximately 5 million, and the number of transactions processed throughout 2017 was approximately 30 million. What is the size of 30 million transactions? On November 11, 2017, Alipay completed 1.48 billion transactions, which is approximately 50 times the annual transaction volume of Bitcoin.

This gap does not indicate a big problem. After all, the number of Bitcoin users is far less than that of Alipay, and its application scenarios are far less than that of Alipay, so it is not surprising that the transaction volume is orders of magnitude different. What really illustrates the problem is the amount of electricity consumed to support these 30 million transactions: foreign media Digiconomist announced that the Bitcoin system consumed 30 billion kilowatt hours of electricity in 2017, accounting for 0.13% of global electricity consumption, exceeding that of dozens of countries. of national annual electricity consumption. In other words, to process a transaction, the Bitcoin system consumes an average of 1,000 kilowatt hours of electricity; based on my country's residential electricity prices, this is equivalent to an electricity bill of 3,000 yuan per active user. Such incredible power consumption means a huge computing power configuration, which is in sharp contrast to its small processing capabilities.

The inefficiency of "decentralization" is not only reflected in computing power, but also in data storage.

Continue to take Bitcoin as an example. As we all know, Bitcoin (blockchain technology) requires users to store public ledgers in a distributed manner. The logic behind it is very strange: the concept of "decentralization" believes that the administrator of the central ledger will falsify, so the storage of the ledger must be fair and standardized. At present, the size of the complete Bitcoin public ledger has exceeded 150GB, and is rapidly increasing at a rate of tens of GB per year - just to support 5 million users and 30 million transactions per year. If its processing capacity is one day comparable to that of Alipay, the size of the Bitcoin ledger will increase by more than 500TB per year. This is equivalent to backing up the Alipay server's storage data on all users' personal computers. The absurdity is obvious.

To solve this problem, the Bitcoin system now allows users to store incomplete public ledgers, known as "light wallets", but their transaction verification still relies on the complete ledgers of others on the network. Let’s imagine that when the public ledger is so large that most people cannot store it completely, won’t the remaining complete user nodes become the central ledger again?

Extending the vision to blockchain applications beyond virtual currencies (if they exist), the public ledger will need to record not only the purely digital transaction amount, but also each vehicle. Insurance information, each person's credit information, if these multi-dimensional data are to be "decentralized" and stored on each user's terminal, then what we need will be astronomical storage space. In the short term, this will be an impossible problem to solve.

From a philosophical perspective, the essence of science is doubt, and the essence of religion is belief. As a concept in the field of technology, how does blockchain make people ignore many paradoxes and become its believers? The answer is of course inseparable from Bitcoin, the miracle of wealth creation in this world.

Bitcoin’s Philosophy

I don’t know since when, the big guys began to deliberately separate Bitcoin and blockchain as two concepts. Everyone said that Bitcoin is just a separate concept. One of the applications of blockchain.

The motivations are diverse.

Anyone with a little knowledge of economics knows that Bitcoin cannot become a common currency in a normal economy.

It has deflationary attributes, ignores monetary policy, and is inconsistent with modern economic theory. The more important reason is that the credit currency it challenges is simply too powerful. Except for a few failed countries in the world, all issue currencies based on government credit. The reason why credit currency is also called legal currency is because most countries have clearly stipulated by law that their national currency is the general equivalent that "must be accepted" in domestic circulation. In this way, the state ensures that credit currency is not rejected and that the rights of currency holders are not infringed. In other words, credit currency is not issued out of thin air. It is backed by government credit and backed by state machinery.

The purpose of Bitcoin’s issuance mechanism (that is, mining) is to “decentralize” the government’s monetary centralization. Behind this is a questioning of the rationality of the government’s existence.

As mentioned before, the logical starting point of "decentralization" is distrust of centralized institutions. The fundamental reason why Bitcoin fundamentalists choose to use "machine consciousness" instead of "system consciousness" is that they believe that the government-led currency issuance system cannot reflect fairness and justice - inflation, inequality between rich and poor. —The problems that Bitcoin is trying to solve all point to the establishment. From this perspective, Bitcoin’s inefficient cognitive mechanism also has the philosophical meaning of “efficiency in exchange for fairness”.

If technological progress will eventually make the loss of efficiency negligible, does that mean that "untrustworthy" centralized institutions do not need to exist?

This is a dangerous question, but fortunately we don’t have to answer it for the time being – because Bitcoin’s attempt to “fairness” has basically failed.

The original intention of Bitcoin designers is to hope that Bitcoin participants will have roughly equal opportunities to obtain Bitcoins at the same time. For this purpose, a rather sophisticated and ideal blockchain algorithm was designed, which is the so-called PoW (Proof of Work) mechanism. By exhaustively enumerating random number variables, the first user to obtain a specific required hash function value (Hash) will have the right to record the transaction in this round and receive the corresponding Bitcoin reward. Based on the PoW mechanism, the probability of each user obtaining Bitcoin is directly determined by the computing power he contributes. The more investment, the greater the return, which seems reasonable.

Of course, things are not that simple.

On the one hand, Bitcoin’s PoW is extremely energy-consuming. The expected probability of obtaining a specific required hash value each time a random number is generated is 1/62^18 (less than one in a billion billion billion billion ), so the entire device requires a massive amount of exhaustive calculations to determine the accounting rights. Bitcoin’s high operating costs are largely due to this “fair” incentive mechanism.

On the other hand, Bitcoin designers made a serious misjudgment of the distribution of computing power. He originally thought that users would just use the CPU to run mining programs. However, due to the number and cost of CPU cores, it is unlikely that a single user will concentrate too much computing power. However, everyone already knows what happened later. From GPUs to mining machines to large mining pits, a system designed to be decentralized has become almost oligopolistic.

The reason why Bitcoin seriously deviates from its philosophy is not accidental.

Scale production has brought many benefits to the "mining giants": stronger electricity price bargaining power, higher fixed asset utilization efficiency, lower comprehensive labor costs, and thinner R&D amortization cost. Even for virtual products like Bitcoin, the production process still complies with the simple economic law of diminishing marginal cost. This is the inevitability of centralization. From the perspective of natural science, a similar conclusion is also true: a scattered individual is the state with the highest entropy value, and high entropy means incompetence.

Some people believe that PoW has distorted the concept of Bitcoin, reduced efficiency, and induced competition in computing power. If it is abolished, the problem will be solved. So they designed new incentive mechanisms such as PoS and DPoS. In my humble opinion, these efforts will be fruitless, because on the seesaw of "efficiency" and "fairness", you cannot satisfy everyone, or even the majority of people.

To put it more mysteriously: any virtual currency incentive mechanism is an economic system - a "dead system" cannot guarantee the stable operation of a dynamic economic system, only "living people" can .

The Dilemma of Decurrency

Due to various problems with Bitcoin, people of insight in the industry have realized that it is necessary to continue to bind the blockchain and Bitcoin together. It is urgent to cut off ties in the name of "technological innocence" in order to harm both. This is not only in line with the current situation, but also in line with people's wishes: Bitcoin's influence has been too far-reaching. If the blockchain is not liberated, the space for newcomers to get rich will be squeezed out.

However, is it really possible to de-monetize the blockchain?

Many ordinary people who do not know the truth, and even some well-known investors, feel that the "authentic, non-tamperable" blockchain has unlimited value based on the technology itself.

I would like to say that there is a huge misunderstanding.

For example, in inter-bank settlement, even if the blockchain system successfully completes the accounting operation, a rogue bank refuses to make external payments. Can the blockchain replace the law and ensure that the rights of the opponent bank are not infringed? Another example is product anti-counterfeiting. Even if the QR code is correct throughout the entire process, the seller immediately puts defective products in the box. Can the blockchain work its magic and allow customers to receive authentic products smoothly? In fact, the "real, non-tamperable" nature of blockchain can only act on virtual information at best, and its tentacles cannot reach the real world at all.

However, these concepts are now being abused, intentionally or unintentionally. Responsibly speaking, most of the blockchain applications that claim to have great prospects are completely based on the literal meaning of "real and cannot be tampered with." The people who proposed these applications do not understand the blockchain technology itself. What they found are just some... "Authenticity" is just an application scenario where the pain point is - and of course such scenarios are everywhere. However, in the end everyone will find that even if many problems such as inefficiency and redundant security are overcome, the imagined demand for blockchain will still not appear.

Because this is largely not a technical issue, but an economic issue.

The "decentralized" design of the blockchain means that the system operating costs will be allocated to each user, but the nature of rational people has never been to share and contribute, but to take advantage of it. car. Taking Bitcoin as an example, not to mention hardware investment such as mining machines, just the electricity bill alone, the average active user has to pay 3,000 yuan per year. If blockchain applications do not produce tangible individual benefits, there will be no spontaneous participants, and even if they reluctantly participate, their reliability will be questionable. Therefore, the commercial application of blockchain must not be decoupled from the incentive mechanism.

To put it more deeply, the knowledge of blockchain is not only the technical knowledge of public account books, but also the knowledge of the value medium of blockchain. *knowledge. For example, in the Bitcoin system, if there is no incentive mechanism, or Bitcoin is worthless, then no one will provide computing power, no one will provide storage space, and no one will preach - Bitcoin itself is a system. Values, ideas and technology are just beautiful stories.

The various blockchain applications currently reported in the media can be summed up in two types: either they are based on hype and the blockchain algorithm is forcibly applied in the transactions of centralized institutions; or they are pure "prospects" ”, regardless of the method and difficulty of implementation. For some reason, these media have reached a wonderful tacit understanding in the process of advocating blockchain and never mention virtual currencies. This has seriously misled everyone, thinking that blockchain is just a pure network technology. In fact, if there is indeed a blockchain ecosystem worthy of the name, then the last picture in the white paper must be virtual currency.

According to this, we might as well re-examine the relationship between virtual currency and blockchain.

There is a saying in the circle that "blockchain is the foundation and virtual currency is the utility." The authenticity of this statement is very difficult to distinguish.

To make it clear, the essence of blockchain is a specific algorithm created by virtual currency to establish a "fair incentive mechanism". The so-called "blockchain is the basis, virtual currency is for use" is tantamount to buying The casket returns the pearl. We can conclude here that once the soul of virtual currency is lost, the blockchain will have no value.

This argument may be difficult to accept for a while, but there is nothing wrong with its logic.

The so-called "generating value" is nothing more than three criteria: creating demand, reducing costs, and reshaping fairness. From a cost perspective, blockchain has no advantages over centralization; from a fairness perspective, the grand Bitcoin social experiment has already been revealed. Then the only thing that remains in suspense is whether the blockchain can "create demand."

At this time, people in the currency circle can jump out and say categorically, of course there is demand, look at this surging ICO!

ICO carnival

ICO, the full name is Initial CoinOffering, which is the initial coin offering. In short, it is a crowdfunding financing behavior in which specific virtual currencies of early projects are priced at general virtual currencies such as Bitcoin and sold to the public. How old are the so-called "early projects"? It’s enough to form a team and write a white paper. If you have some free time, you can consider yourself quite diligent by making a PPT. As for due diligence and financial analysis, they are completely unnecessary because most projects do not have a penny of operating income.

The name "specific virtual currency" is a bit unprofessional. The popular name in the currency circle should be token, and the more elegant translation is "token". In the white paper, the project team will draw various pie charts to tell you how much “value” your home token will have in the future. But if you want to know what a token is, sorry, there is a fine tradition in the blockchain circle called "unclear".

For some meaningful reasons, most ICO legal documents (LegalDocuments) are in pure English, and the true definition of the token is actually hidden in them. Almost all ICOs have provisions similar to the following in their legal documents: "The token does not grant any rights other than the returns specified in the white paper, and will only take effect when the project is successful. Crowdfunding investors have no control over project development and management." The token does not mean that investors have any form of ownership of the project, nor can they obtain future income and intellectual property rights related to the project.

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This jaw-dropping text, to put it bluntly: Although you have contributed money, you are nothing. ICO crowdfunding is not the crowdfunding we used to know. Investors spend money to buy What you get is not shares, but chips. When the banker stops playing, the chips will become empty - not to mention that most bankers can't play at all.

There is no underlying assets, no main body credit, and no. With no legal protection for the business model, can such a virtual currency be sold?

This all seems absurd, but the logic behind it is actually very simple: because many people use ICO. Make money.

Building a team to write a white paper is the first step in the ICO industry chain. Next, you need to build a big boss’s platform, issue coins at overseas “exchanges”, and manipulate the currency price after the virtual currency is online. Attract more speculators to enter the market, and finally cash out at the right time. Some people have achieved financial freedom directly in this game; some have not eaten meat, but they have also eaten soup.

Faced with the miracle of making wealth with such a low threshold, everyone should be tempted.

However, if the project itself cannot be profitable, no matter how it is packaged and beautified, ICO is still a zero-sum game - if someone makes money. If you get a lot of money, there must be someone who loses everything. This is like the pyramid scheme we are familiar with. Everyone knows that they will die if they take the last shot, but they all feel that they will not catch the last shot.

What role does blockchain play in the ICO boom?

As we all know, decentralization, de-creditation and fairness are the concepts that blockchain flaunts. Looking back at ICO: If you want to issue coins online, you must pay a huge "listing fee" to a centralized exchange. How "decentralized" is this? The project team is rampant in fraud, the currency circle media deliberately misleads, and the trading account is frequently damaged. Hackers, how "de-crediting" is this? How "fair and just" is this for bankers to drive up prices, make huge profits, and squeeze out leeks? Nothing. What’s more ironic is that many virtual coins issued by ICO are not even based on blockchain technology.

So, ICO is not the demand created by blockchain, but the demand for blockchain. Shame.

The future of chain and currency

Now that we know that virtual currency is the only value of blockchain, we have a rough analysis of the future of blockchain. Idea.

Now that legal currency is fully electronic, virtual currency based on blockchain technology does not have much practical value in normal social life. However, in special scenarios, virtual currency has an electronic legal currency. The advantage that cannot be copied is privacy.

Any transaction that uses a bank as a payment channel can be supervised. If the authorities are willing, they can know who you gave the money to and the transaction. The background, the time of occurrence, everything. So before the advent of Bitcoin, the vast majority of shady transactions were completed with cash. You've only seen gangster movies carrying a large box of cash to buy drugs, but you've never seen someone carrying a POS machine there.

The emergence of Bitcoin has revolutionized money laundering, drug trafficking and black market arms trading. With this completely anonymous currency, criminals no longer have to worry about boxes of cash or pay discounts for consecutive dollars—Bitcoin is portable gold, just as it was designed to be.

Therefore, it is impossible for Bitcoin and its alternatives to be completely eliminated, because the need to escape regulation will always exist.

As long as virtual currency does not die, the blockchain economy will definitely have room to survive, because the value represented by virtual currency must be realized through a way, and this way cannot always be legal currency.

I would like to add here that the recent compromise between blockchain and centralized ledgers, such as Raiden Network, is gradually coming to the fore. In principle, the central ledger can greatly improve processing efficiency and adapt to large-scale and high-frequency applications. However, if the main demand of core users of virtual currency is to escape supervision, then this function may not be popular. The result will be known soon.

Another question that everyone is concerned about is: Will the surging ICO lead to an explosion of virtual currencies? The answer is of course no.

Virtual currency is not subject to legal protection, so its public acceptance largely determines its value and future. When accepting payment in legal currency, we assume that the legal currency we receive will also be accepted by others. Its face value will not produce any discount during the circulation process and has 100% liquidity. The situation is different in the case of virtual currency. Due to the lack of quantitative indicators of liquidity, we can only decide whether to accept payment with this kind of virtual currency based on the general judgment of the public's acceptance. This method of judgment will create a powerful Matthew effect because the public's choices will quickly converge.

On the other hand, there is an upper limit to the types of currencies that the public can spontaneously accept. Let’s use the example of bicycle sharing. We will deposit deposits for Mobike, OFO, and if we are very generous, we will also deposit deposits for Bluegogo. I wonder if we have paid deposits for more than 4 types of bicycles at the same time. How many people are there? Under normal circumstances, the public's upper limit for accepting homogeneous functions is only "three." In the case of currency, the first position of fiat currency cannot be shaken, the second is probably Bitcoin, and the third is Ethereum - so unfortunately, not surprisingly, all other virtual currencies will not grow.

Some people will say that this is a judgment based on the public chain. We also have private chains and alliance chains.

Here, we need to take a clear stand: the private chain is just a central ledger and has nothing to do with the concept of blockchain. As for the alliance chain, there are more related misunderstandings. For example, many current alliance chain concepts do not include token components. This is the biggest misunderstanding. As analyzed before, if there is no incentive mechanism, high-frequency applications will become free-riding tools for low-frequency applications. In worse cases, even the medium for value transmission will be missing. In addition, if there are differences in the way token values ??are redeemed between different applications, arbitrage within the alliance will be inevitable. In short, compared with the public chain, in addition to slightly improved privacy, the alliance chain only has many more problems. The gap in Token’s versatility means that it can only survive in the shadow of the public chain and rely on the value of the underlying assets.

To sum up, we have a basic understanding of the future application scope of blockchain: most naturally growing blockchain economies will exist based on Bitcoin and Ethereum. The natural growth mentioned here specifically refers to the distinction from pseudo-blockchains that are forcibly attached to centralized institutions. Whether it is inter-bank settlement, product anti-counterfeiting or any other scenario, if the knowledge and trust among the participating entities already exist, then the so-called blockchain application is just a database at best, and it will not be an optimally designed database.

Last question: When will the craze of blockchain subside?

This is a difficult question to answer. But there is a saying that goes well: You can fool everyone some of the time, and you can fool some of the people all of the time, but you cannot fool all of the people all of the time.