Unraveling the Chia Network puzzle: What are the highlights of the public chain project initiated by the founder of BitTorrent?

PuzzleMaster is the world's largest puzzle toy sales website. You can buy a toy called Galaxy on it for $13. It looks like the shape of the Milky Way, small and delicate, made up of many components, requiring some skills to disassemble and more skills to put back together. There are several similar toys on PuzzleMaster, all designed by the same person, Bram Cohen.

Designing puzzle toys is just Bram Cohen's hobby. Before 2001, his main job was a programmer, and he was in charge of a project called MojoNation. In his resume at that time, he commented on MojoNation: This is an ambitious project that incorporates a lot of encryption technology. Unfortunately, it didn't work very well. But I learned a lot of interesting lessons in the process.

Bram is better known as the inventor of the BitTorrent protocol. He created the BitTorrent protocol in 2001 and later open-sourced it. Bram is very good at splitting and reassembling puzzle toys, and the core logic of BitTorrent is to divide the file into many small pieces, allowing downloaders to connect to each other and finally reassemble them. I don’t know if this design was also influenced by puzzle games. This is an epoch-making product. The BitTorrent protocol once dominated more than 50% of Internet traffic.

Bram is very good at cross-border, his expertise also includes juggling 5 balls at the same time, origami model design, and serving as a consultant for an environmentally friendly nuclear reactor company. Bram's latest identity is the founder of the popular Chia Network.

The hot Chia mining has driven the global storage market in the past few weeks. In addition to the hot mining ecosystem, Chia has a more distinctive operation and business development model. These models are unique and bold, and are intended to cross boundaries and break the circle. It is difficult to judge whether it will succeed at present, but these explorations will undoubtedly become a precious sample on the road to public chain expansion.

My name is Chia

Chia is a public chain with a strong flavor of the early crypto community. It hopes to create a green digital currency suitable for the digital society in the most energy-efficient way possible. The space + time proof mechanism adopted by Chia allows ordinary computers to use the remaining space on the hard disk to mine and participate in block production. It also supports smart contracts. A smart contract language called Chialisp allows users to issue their own assets and design corresponding contract logic. Bram calls these tokens colored coins, a historical term familiar to Crypto veterans.

In Bram's opinion, the concept of the Bitcoin consensus mechanism built by Satoshi Nakamoto is correct, but Satoshi Nakamoto did not foresee the emergence of ASIC mining machines. Now the giants control most of the computing power, which has violated the original desire of 1 CPU 1 Vote. It not only reduces the degree of decentralization to a considerable extent, but also causes a huge waste of resources. Chia hopes to reconstruct this original intention through an innovative time-space proof consensus mechanism. Chia calls this consensus the improved Nakamoto consensus.

Bitcoin itself does not support smart contracts. Therefore, institutions that need more complex business logic can only choose Ethereum. Chia's evaluation of Ethereum is that the design is flawed and the security is worrying. This greatly restricts enterprises, especially financial institutions, from expanding large-scale on-chain applications. Chia has provided its own solutions to these problems. Judging from the various functions that Chialisp already supports natively (multi-signature, transaction withdrawal, payment address restrictions, identity wallets, etc.), these logics are indeed very suitable for financial institutions to use, and greatly enhance the security and reliability of business logic. Relying on Chialisp for financial business development, especially financial business development that is more compliant, should be a good choice.

Mining and circulation

Chia's mainnet was launched at 10 pm on March 19, 2021. In the first six weeks of the launch, only mining was allowed but no transfers were allowed. This was to complete the initial token distribution. The transfer function was enabled around May 1, Beijing time. Chia's native token is called XCH. When the mainnet transfer was enabled, the actual circulation in the market was only 387,000, and the total mining release in the first year was only more than 3 million. The mining output is halved every 3 years. However, before the launch, Chia Network had pre-mined 21 million XCH as a strategic reserve. This is a huge number, so large that it would take a full 21 years for miners across the entire network to mine this amount.

98% of the initial circulation is pre-mined coins. How can this be played? The management and use of the strategic reserve will inevitably become the most concerned issue in the market, and will also determine the development of Chia and the price of XCH to a considerable extent.

Let me first state the conclusion. The reserve fund will not be used to dump the market. At the same time, there is reason to believe that the reserve fund account will not be passive for at least a few months after the mainnet is launched. The subsequent use of the reserve fund will also be very cautious and will not bring a large selling pressure to the market.

Listed companies and strategic reserves

Behind Chia is a company called Chia Network, which may be listed in a few months at the earliest. Its main asset is the 21 million pre-mined XCH, and the company is positioned as a software service company, earning income by providing software services and technical support. Just like Red Hat, which developed Redhat Linux, the company's operating system products are open source and free, and anyone can use them, but if complex commercial deployment is carried out for industry users, service and support fees will be charged.

There are three main purposes of going public:

1. This stock will play a role similar to an ETF fund, fluctuating with the rise and fall of the Chia token price, and buying this stock is to a certain extent buying a certain share of XCH tokens. This undoubtedly provides an extremely convenient entry channel, allowing ordinary users to purchase stocks equivalent to XCH in a familiar way, which can well expand the number of users holding coins (stocks).

2. Improve credibility. Listing can effectively enhance the confidence of B-side customers and promote the application of Chia in the traditional world. The traditional corporate governance method is used to manage and use strategic reserves with the characteristics of financial transparency. When a company uses a strategic reserve account, it is not only restricted by the company's articles of association, but also by relevant restrictions of the regulatory authorities, and any use and changes of the reserve will be disclosed in a timely manner. This will undoubtedly give XCH secondary market participants greater confidence.

3. Price stabilizer. Chia expects that there will be two prices in the future: the XCH price in digital exchanges and the stock price of listed companies. Since the stock price of listed companies largely represents the XCH share, these two prices will be correlated. When they deviate, arbitrageurs will use routines to reduce price fluctuations.

Regarding strategic reserves, the latest business white paper mentions the following key information.

1. The company will not sell reserves.

2. Chia investors invest in equity and do not hold XCH tokens, and Chia team members will not receive any XCH tokens as work rewards. However, if the company fails to complete the listing within 3 years after the mainnet is launched, or the total market value after listing is less than 65% of the actual value of the number of XCH held within 30 days, investors have the right to exchange their equity for XCH, but the exchange amount is the original investment amount, and no income will be obtained.

3. The use of the strategic reserve fund is decided by a vote of the board of directors. It requires the consent of the majority of directors and the consent of the majority of independent directors. The current board of directors has three members, including one external independent director. The board of directors is seeking to introduce two other external independent directors. This means that the use of the reserve fund in the future will require the consent of two external independent directors.

4. Any changes to the rules for the use of the Strategic Reserve will be announced to the public at least 90 days in advance.

5. Before the company submits its listing application, it will not use the Chia it holds for stock repurchases, dividends, external investments, etc.

Based on the above information, the reserve fund will not be released in any way for a long period of time. This will ensure that the reserve fund will not be moved during the non-transparent period before the listing application is submitted, and will also meet the Hinman Test, a recommended standard for the degree of decentralization of tokens by the SEC. After the listing application is submitted, everything will be open to the world, and any use will be carried out in a transparent manner.

To put it more simply, in the first few months or even one or two years after the mainnet is launched, only miners will have coins on the market. In the future, listed companies will control the use of strategic reserves, but the reserves will not be used by the company to dump the market. They will be used in a very transparent, very restrained, and somewhat decentralized way - lending to companies or government users in need, ecological support, investment, stock buybacks, and increasing mining rewards.

Although the description in the white paper is not directly legally binding, based on the past reputation of the team and independent directors and the information presented in various channels, the key information in the white paper will most likely be implemented.

Go-To-Market

Unlike other public chains led by foundations, Chia is backed by a company that operates in a traditional mode. This company created the open source Chia blockchain software and launched the network based on this software. The company's product is an open source software, but the network is not controlled by the company, but operates in a decentralized manner. The company subsequently uses its technical capabilities to expand the B-side of the platform, promote applications based on Chia, and also obtain service income.

This story was actually told a few years ago. Well, you guessed it, it was Block.one, which developed the EOSIO software. With good technology and strong funds, the subsequent development of EOS is very disappointing. Despite such an unpleasant precedent, I still regard Chia as a brand new exploration model, because the technical model and actual operation model of the two are quite different. And the core of Block.one’s criticism is not whether it has been done or not, but whether it has been done or not. Block.one may not have really taken this step, and now it’s Chia’s turn.

This is a very important direction. In the entire application development field, the market for enterprise-level applications is much larger than that for applications directly facing the C-end. Currently, infrastructure applications and enterprise-level applications support the normal operation of this information world through the information Internet, and in the future our lives must be supported by various enterprise-level applications through public chains. Chia obviously thinks so and has made preparations for this. On the other end of the barbell, Chia will also actively attract, invest in and support the native power of the Crypto community, hoping to generate innovation and more possibilities.

The soul of Chia is undoubtedly Bram Cohen. The team later introduced several high-level executives, including Gene Hoffman, who was the CEO of a Nasdaq-listed company, and Chuck Stoops, who was in charge of legal affairs at several technology companies such as Paypal and Netfilx. But anyone who has worked in the 2B industry should be able to see the problem with this combination at a glance. This is a team that lacks market and commercialization experience. Bram is a technical genius rather than a business genius. Executive Gene Hoffman is a senior business person, but he is a lone commander. At present, there is no established team responsible for business implementation. What's more, even Gene used to manage and excel in 2C-type businesses. This team probably has never stepped on the various pitfalls of B-side business. This also explains why the Go-To-Market part of the business white paper released by Chia only shouted some slogans and basic concepts, and was written very thinly.

At present, Gene's main work should be around the company's listing, governance, and subsequent Wall Street relations, while Bram's main work should be managing R&D and finding people. The part that is really responsible for market implementation will most likely be led by new executives who are good at this field. There has been no public information disclosed on this progress, but if this step is too slow, it will directly affect the development of the project. The story must eventually become a reality. If it cannot form a real large-scale application and has no value capture capability, the ecosystem will eventually become silent.

Bram has transformed from a puzzle designer to a puzzle solver. Encryption technology, consensus mechanism, smart contracts, reserve fund management, public listing, ecological promotion, GTM, all of these seem to have become different components in the puzzle game. He once created a large-scale P2P application of the information Internet 20 years ago, and this time the large-scale application of the value Internet is his goal.

A user who bought a Bram toy in PuzzleMaster left this comment: Even if you know what you are trying to do it's very difficult to actually maneuver the pieces how you want them.

Even if you know what you want to do, it can be difficult to actually manipulate these components the way you want.

Good Luck Chia.