Can encrypted digital assets such as Bitcoin really achieve decentralized trading?

This article was originally written by Gao Chengshi . Please indicate the source when reprinting.

Can encrypted digital assets such as Bitcoin really achieve decentralized trading?

——Response to some recent self-media opinions

On March 8, a whistleblower claimed that Coinbase, one of the world's largest cryptocurrency trading platforms, had seized the wallets of 25,000 Russian users in response to the US government's sanctions against Russia. As a result, some self-media outside the blockchain circle began to publish a large number of articles, giving simple and crude conclusions such as "the Utopia of Bitcoin has been destroyed."

1. Bitcoin’s Utopia has already existed in fact

Since Satoshi Nakamoto published that landmark paper in 2008, blockchain technology, represented by Bitcoin, has made rapid progress. Based on the basic characteristics of decentralized operation, collective system maintenance, open and transparent data that is difficult to tamper with, and traceable transactions, the blockchain system has developed extremely rich business logic and technical logic, and has invented more decentralized technical methods and safeguards. Even if we ignore the subsequent developments of the Bitcoin system, the decentralized operation of the Bitcoin system based on asymmetric cryptography, hash functions, P2P peer-to-peer networks, and consensus mechanisms is far from being negated by the US government's sanctions against anyone, and it is not something that can be easily denied by some layman's self-media who do not respect the facts of technological development and business logic.

2. How to understand Coinbase’s seizure of 25,000 Russian users’ wallets?

Bitcoin and blockchain are decentralized, but Coinbase is centralized. Centralized exchanges can only block some users' transaction applications based on their KYC information and IP addresses, but cannot freeze or even plunder the encrypted digital assets in users' decentralized wallets. No organization can freeze or plunder the digital assets of users in decentralized wallets.

The centralized exchanges in the field of encrypted digital assets have the same trading methods as traditional centralized exchanges, both of which are order matching models. Users need to transfer the digital assets in their wallet addresses to the wallet addresses specified by the exchange. In this case, the exchange may freeze or even plunder the user's digital assets. For compliance requirements, the exchange may also conduct KYC verification on users before the user trades. The verification content also includes the wallet address and user identity of the user participating in the centralized exchange transaction. However, users can also transfer the digital assets in the blocked wallet A to the wallet address B through on-chain transfer, so as to participate in the centralized exchange transaction with a new identity. As long as the user's assets are not transferred to the account specified by the exchange, the exchange has no way to freeze or plunder the assets in the user's wallet.

3. Why are blockchain and Bitcoin decentralized, but are there still centralized exchanges?

First of all, blockchain can only process fully digitized content so far, but at the current stage, most legal tender has not been digitized, so the transaction between legal tender and encrypted digital assets can only be implemented through a centralized system, and there is no way to implement it through a decentralized system. The root cause lies in the non-digitalization of legal tender. After legal tender is digitized, the transaction between legal tender and encrypted digital assets can also be realized through decentralized exchanges.

Secondly, there are currently two options for transactions between encrypted digital assets: centralized exchanges and decentralized exchanges. The transaction volume of decentralized exchanges continues to rise and is about to surpass centralized exchanges. This is also an important part of decentralized finance, or DEFI, based on the public blockchain.

Thirdly, whether it is a centralized exchange or a decentralized exchange, they are all at the computer network application level, and they can block specific wallet addresses and specific ranges of IP addresses through the front-end entrance. The former can be circumvented by changing the wallet address through on-chain asset transfer, and the latter is a function of the computer network IP layer, which can also be circumvented by forging IP addresses. As for whether decentralized control can be achieved at the IP layer in the future, it depends on whether there is business demand in this regard and the further development of technology.

Author: Gao Chengshi, PhD in Cryptography, blockchain expert, and executive member of the Blockchain Professional Committee of the China Computer Society.