The Significance Of Blockchain And Difficult Considerations In The Application Of Digital Currency

Text/Yu Ming, investment expert, well-known financial blogger on Weibo, financial writer, author of "Calendar Stock Trading Method" and "Lesson 1 of Cracking the Trap"

Many people are asking what exactly blockchain is, but not many people can really explain it clearly. First of all, blockchain is an Internet encrypted digital information technology, and its goal is to point to digital currency. In July 2019, the author wrote the article "Global Cryptocurrency Plan Triggers New Financial Change", analyzing the great significance of Libra and reminding everyone that this is a major change. Unexpectedly, three months later, we saw that blockchain has also received attention from central banks and countries. What is blockchain? How is it applied? Why is digital currency the most likely application direction of blockchain? What are the misunderstandings and technical difficulties with blockchain? Let’s discuss it and give some ideas.

What is blockchain?

Blockchain is a storage technology that combines cryptography, encryption algorithms, etc. to evenly distribute information in various blocks (no central node) and connect them in series through chains so that others cannot tamper with it. This is an open and transparent approach. So its purpose is to solve the trust problem. Therefore, Bitcoin is currently the most successful application of blockchain; and now the country attaches great importance to blockchain, and the purpose is also the central bank’s digital currency issuance.

When we calm down, we will understand that not all industries need blockchain, especially the stock market. Blockchain rice and blockchain artificial meat are obviously just concepts. This is somewhat similar to the quantum insoles and quantum massage of previous years. Very similar, very funny. Moreover, the cost of blockchain technology is now very high. At this stage, there is almost no profit model and it is only in the scientific research stage.

Today, blockchain companies have expanded from the original 89 to 150, and some data say that nearly 500 listed companies own blockchain. With “industrial hemp + artificial meat + blockchain”, Meiyingsen can do whatever it wants. Markets are not always rational. Sometimes, hot money takes advantage of people's "rush" and "get rich overnight" mentality to create such a prosperity trap, which ultimately leaves "naked swimmers" on the shore. Even if it happens many times, this phenomenon will not disappear because there is always a huge money-making effect in the local area. Therefore, hot money is a concept that can be speculated and then run away. For example, Wangsu Technology with edge computing concept, Great Wisdom of Internet Finance, Essence Trust, Century Tianhong with private education concept, Kangqiang Electronics with chip concept, and Zixin Pharmaceutical with industrial hemp concept are all popular concepts. This concept is enough to make people imagine, so after following the trend of speculation, it is natural for funds to retreat and run away after a wave of hype. Therefore, 5G, Internet of Things, edge computing, digital currency, Huawei concept, etc. are all hot concepts and related to policy, but most of them are just concepts.

It must be admitted that investors’ understanding is biased, just like the “Millennium Plan” of Xiongan New Area, but what ordinary people think of is “real estate speculation”! That's the difference. Therefore, there are many misunderstandings about blockchain now.

Advantages and application dilemmas of blockchain

Bitcoin is one of the most successful applications of blockchain: all transaction processes are recorded openly and transparently in chronological order. These records are permanent and cannot be tampered with. Therefore, blockchain information is distributed across a large number of nodes on the Internet. When two parties trade, the information is released to the entire network, and the authenticity needs to be verified by each node. Because the probability of deceiving all nodes at the same time is low, false information will spread immediately. Will be rejected, this is the biggest advantage of blockchain.

Taking the Bitcoin system as an example, it stores data in units of data blocks, and data blocks are blocks. New blocks are added approximately every 10 minutes. Each block records the detailed transaction process of Bitcoin and is timestamped. Different blocks are connected in chronological order through a certain algorithm to form a chain. The combination of the two is "blockchain" (). Since the blockchain only allows data to be written and not deleted or modified, this prevents data from being secretly tampered with.

The "distributed" nature of blockchain is different from centralized data storage. The information on the blockchain will be distributed to various nodes through point-to-point broadcasting, and all information can be "truthfully recorded" through "whole network witness". In the field of public services, blockchain can realize the joint maintenance and utilization of government data across departments and regions. Therefore, there is an assumption that when blockchain is widely used in various fields of society, it will become an important infrastructure in the information age. For example, in blockchain government affairs, since the information itself is reliable, there is no need to issue various certificates.

But there are also new risks. If there is a problem or error with the information I originally entered, how do I change it? Old ones cannot be deleted, and new ones cannot exist at the same time. This will produce a large number of redundant files, resulting in a waste of resources; after all, our country has a large population, with a large number coming from counties, towns, and villages. The environment and hardware equipment conditions are uneven, and the personnel levels are uneven. Not even. It's also different and requires a certain tolerance for error. Therefore, the application scenarios of blockchain actually have huge limitations. It can only be used on a small scale, and there are still certain obstacles to comprehensive data collection.

So, is the combination of blockchain and finance a good model? Here's an idea. For example, small and medium-sized enterprises have difficulty financing and high financing costs due to lack of credit. The biggest advantage of blockchain is that human trust can be built on the logic and mathematics invented by humans. Then through the blockchain, detachable electronic vouchers can realize fund flow, open up information flow, capital flow and logistics, and can solve the financing difficulties of multi-level suppliers.

This is true in theory, but problematic in practice because past credit reports are not indicative of the future. There are no plans for what this person or company will do in the future. The most typical one is how to solve the problem of so-called "lao Lai" breach of contract or entity failure? This is a game between people, not a purely technical ideal state.

Blockchain is still in its early stages of development and needs further development and improvement in terms of security, standards, supervision, etc. This requires time and investment, as well as healthy and orderly development. Today, it is necessary to avoid the chaos that occurred in the early stages of development of industries such as photovoltaics or new energy vehicles: driven by subsidies, all parties engaged in duplicative construction in order to win policy preferences, leading to the emergence of a large number of low-end projects. Ending ineffective production capacity has almost crushed the entire industry. , but hinders the development of the industry.

Digital currency is the most likely application object of blockchain

Digital currency can be considered as a virtual currency based on node network and digital encryption algorithm. The biggest application of blockchain technology is in digital currency. Today, digital currencies are mainly divided into three main categories. The first type is completely closed, has nothing to do with the real economy, and can only be used in specific virtual communities, such as the currency we often encounter in games. The second category is to use real currency to exchange and redeem at a certain ratio. You can purchase virtual goods and services, or you can purchase real goods and services, such as Bitcoin. The third category is purchased with real money but cannot be exchanged back to real money and can be used to purchase virtual goods and services.

One of the advantages of digital currencies over other electronic payment methods is the support for remote peer-to-peer payments. It does not require any trusted third party as an intermediary, does not require payment to a third party, and its transaction costs are low, especially related transactions. Compared with cross-border payments, high fees are charged to payment service providers. This is why central banks are rushing to issue digital currencies before entering this space.

Both parties to digital currency transactions can complete transactions without trusting each other (the reliability and tamper-proof security of blockchain technology can be applied), with higher anonymity and the ability to protect the privacy of traders. Some estimates show that blockchain applications can help participants in cross-border payment and settlement business save about 40% of transaction costs, of which about 30% is the payment network maintenance cost of intermediary banks, and 10% is compliance, error investigation and foreign exchange. Exchange fees. In this way, 24-hour real-time payment, real-time arrival, and no hidden costs will also help reduce cross-border e-commerce capital risks and meet the needs of cross-border e-commerce for timely and convenient payment and settlement services.

Of course, this will bring about two disadvantages: First, the anonymity and convenience of digital currencies also create convenience for cybercrime, and can easily be exploited by criminal activities such as money laundering. Secondly, if physical objects can be digitized, it will undoubtedly greatly reduce transaction costs and improve security. The thing is, though, when everything goes virtual, reliability and security are very important, otherwise everything we have could disappear in an instant. Therefore, supervision and security are crucial. This aspect is the biggest problem in the development of digital currency. But there is no doubt that blockchain technology is the most practical in the application of digital currency.

The main problems that digital currencies need to solve

Since digital currency is the most practical application object of blockchain, my country has also announced that it is expected to become the first country in the world to issue digital currency. So, what issues need to be overcome here?

First, what is the nature of money? Digital currencies issued by central banks are still legal tender based on national credit. Digital currencies are derived from certain open algorithms that can be used by the private sector to issue virtual tokens based on the consensus of participants. So, who is the issuing entity of digital currency? If the central bank issues it, new problems will arise. Traditional currencies can be controlled (based on comprehensive considerations such as economic situation, political environment, inflation factors, etc.), while digital currencies are fixed and cannot be controlled. Obviously, the two cannot interact. Alternatives need to coexist.

If institutions and businesses issue digital currencies, there will be fewer factors to consider and greater innovation. There are currently three mechanisms for the private sector to issue digital currency: the first is algorithm + workload, that is, computing power. Bitcoin is a very typical example. Representative; the second is issuance based on protocols, and there are many cases of issuance through protocols, such as the current Ripple coins, Morgan coins, etc.; the third is Libra, which I define as a currency system based on the Internet ecosystem. An issuance model supported by liquid assets. But the more prominent problem is, how to regulate? What if something goes wrong with the institution or company itself (after all, corporate credit will be much lower than national credit)? Who is responsible if something goes wrong? The state bears unlimited liability, while enterprises bear limited liability.

Secondly, there is a deeper level of thinking. If digital currency is widely used by the public as currency, it will have a huge impact on the effectiveness of monetary policy, financial infrastructure, financial markets, financial stability, etc. Digital currency issuers are typically unregulated third parties. Currency is created outside of the banking system. The amount of issuance depends entirely on the will of the issuer, resulting in an unstable money supply. Furthermore, authorities cannot monitor digital currencies. The issuance and circulation of funds make it impossible to accurately judge economic performance, causing problems in policy formulation and weakening the effectiveness of policy transmission and implementation. The most typical principle is that the central bank can release or withdraw liquidity by controlling the supply of issued currency, but the supply of digital currency is fixed and cannot be adjusted; and once controlled by a few people, prices will rise and fall sharply. Forming a "banker" can easily be exploited by malicious actors. This is a very typical example in Bitcoin.

Although pure blockchain technology seems reliable, as digital currencies become more recognized by the public, their usage has increased significantly and has replaced fiat currencies to a certain extent. Then, if the user terminal is subject to negative events such as cyber attacks, the currency value will fluctuate abnormally (then, due to the non-tamperable and fixed-quantity characteristics of digital currency, management cannot intervene), thus affecting the financial order and financial order. real economy.

This is very similar to autonomous driving. The biggest problem with autonomous driving is its inability to respond to emergencies. Artificial intelligence cannot learn how to handle emergencies. However, in daily life, it is normal for various emergencies to occur. Although artificial intelligence can avoid making small mistakes, if it does, it will be a big mistake. Therefore artificial intelligence can only be used within a specific scope and environment. For example, "Alpha Go" can defeat humans because Go, chess, etc. are complete information games, and the moves of chess can be exhausted; but human games similar to our daily lives, such as poker, mahjong, etc., are not complete. Information games require a lot of calculations, and artificial intelligence cannot complete them quickly; and for daily emergencies, artificial intelligence cannot deal with them because they cannot be planned in advance.

Finally, there are still many unsolvable problems in technology: the first is blockchain technology, there is great uncertainty about whether to use public chain, alliance chain, private chain or other technologies; the second is security and supervision, because of the The wider the scope of application and the greater the involvement, the more difficult the risk factors and supervision will be. Once a problem occurs, it may be unimaginable and it will inevitably take a long time to verify. Therefore, digital currency is the direction of blockchain research, but it requires a long-term process.

标签： #Blocks #Currencies #Applications #Numbers #Bits