Blockchain Credit: The Second Law of Thermodynamics of Transactions

Author's note: This article is excerpted from the third section of Chapter 1 of "Blockchain: From Digital Currency to Credit Society" (CITIC Press). This article explains the connection between blockchain credit and coin destruction. Coin destruction is a very important parameter of blockchain, which can be used for proof of equity and liquidity disclosure. The trading behavior of the Kula Circle in the Trobriand Islands in the western Pacific Ocean gives us inspiration. If coin destruction is introduced into credit evaluation, it may change our understanding of transactions and credit.

Kula Circle

After visiting the Trobriand Islands in the western Pacific, sociologist Malinowski was angry about an assumption in classical economics. Economists used to regard humans as "rational economic people", assuming that they always seek to maximize material benefits or utility when trading or exchanging with others in a free and competitive market. But this is not the case for the residents of the Trobriand Islands. In their trading behavior, maximizing benefits does not seem to be the primary premise they consider.

Among these ocean island tribes, there is a closed exchange relationship circle called Kula Ring, and all aspects of the lives of local residents are closely related to Kula. The core of Kula is the exchange of arm bracelets carved from white shells and necklaces made from red shells. This transaction is directional, and people can only exchange arm bracelets in a counterclockwise direction and necklaces in a clockwise direction (Figure 2).

Figure 2

The Kula trade circle roughly covers the entire Trobriand Islands. Men on each island travel long distances across the high seas to transport necklaces in a clockwise direction; others transport bracelets in a counterclockwise direction. Depending on one's status, a person may have one to dozens of Kula partners. Kula partners are natives of different tribes with Kula relationships. This is a relatively stable relationship. Once established, it will basically not be broken. Once a Kula trade is carried out, it will continue to be carried out. The more trading partners he has, the higher his tribal status.

When a person gets an arm bracelet from a Kula partner in the south, he will exchange it with a Kula partner in the north. Conversely, when he gets a collar from a Kula partner in the north, he will exchange it with a Kula partner in the south, thus forming two Kula circles flowing in opposite directions: the arm bracelet flows in a counterclockwise direction, and the collar flows in a clockwise direction. The natives in different parts of the Kula circle basically perform Kula in this way.

Malinowski discovered that Kula transactions are not equal transactions, nor do they occur at the same time, but are more like a gift. A person exchanges an arm bracelet with a downstream Kula partner, and the upstream Kula partner returns a collar after a period of time. The value of the arm bracelet and the collar are not equal. If the arm bracelet is of high value and people are selfish, then he should not exchange the arm bracelet. But in fact, every Kula trader in the archipelago is very happy to exchange Kula rings, not for the purpose of possession.

As Malinowski pointed out, "there is not even a hint of profit in the Trobriand Islanders' form of Kula exchange, and there is no reason to view it from a purely utilitarian and economic point of view, since they do not exploit each other by exchanging."

Rational Economic Man

Seeing this, readers may think that these lovely islanders are angels who are kind and indifferent to money, but you will not think so if you understand their strange hobby of growing sweet potatoes. The Trobriands like to grow sweet potatoes but they do not eat them, because the island is full of wild tropical exotic fruits, which are both delicious and filling. Here, agriculture is more like an entertainment activity. The only purpose of growing sweet potatoes is to pile them in the yard to show off, to compete with each other to see whose sweet potato pile is bigger, and then store them to rot. It seems that the Trobriands, like the local tycoons in the civilized world, like to show off their wealth and interpret waste in an unromantic way by growing sweet potatoes. But in the Kula trade, they are not proud of having many arm bracelets and necklaces. On the contrary, they are proud of frequent trades. This kind of trade requires the hardships of sailing and cannot bring any wealth. This seems to be contradictory.

According to the concept of "rational economic man" in classical economics, all the actions of the island's indigenous people are based on rational considerations of self-interest, and they live a "calculated, cold, egocentric, and utility-conscious life." Malinowski severely criticized these views, pointing out that "the Kula transaction is by no means a purely commercial transaction, and it is not based on a simple calculation of actual utility and profit gains and losses."

There are many explanations for the rationality of Kula transactions. One explanation is that this is a gift-giving, because Kula transactions imply a reciprocal logic: after giving a ceremonial gift, no matter how long it takes, a gift of almost equal value must be returned. Mauss, the uncle of the structuralist master Levi-Strauss, also wrote a famous book "The Gift" based on this sociological case. Some people also believe that this is a religious ceremony, because some Kula transactions are accompanied by sophisticated witchcraft rituals and public ceremonies.

However, neither of the above two explanations can answer the following questions: 1. Why does the Kula transaction have to specify the direction? 2. Why does the trader's status increase with more trading objects? 3. Why does the trader's status increase with more trading times?

Equivalent Transaction

Today's electronic payments are so fast and efficient that people may wonder: since PayPal and Alipay are so easy to use, do we still need blockchain-based digital currency payments?

The answer is yes. In a transaction processed by Alipay, one person's expenditure is equal to another person's income, which is an equivalent transaction. The question is, what happens if the expenditure and income are two accounts of the same person? Since the marginal cost of each transaction is close to zero for Alipay, if a person has two accounts at the same time, he will repeatedly transfer money between the two accounts, which will create countless credit-swiping behaviors that Alipay regards as a scourge at a very low cost.

Taobao has very wisely introduced reviews into transactions, but no matter how sophisticated the machine algorithms and human intervention are, they cannot prevent the existence of two professions: brushers and bad review writers. The former pretend to be buyers and make fake transactions to give sellers good reviews of their products in order to earn commissions from the sellers; the latter maliciously give bad reviews to online sellers in order to blackmail the sellers to provide corresponding "compensation" in order to make a profit.

Taobao uses very complex means to curb credit fraud: on the one hand, it uses machine algorithms to check stores and report stores with abnormal situations (such as too frequent transactions); on the other hand, it has a team of more than 2,000 people to check stores suspected of credit fraud and positive reviews. However, the effect of curbing credit fraud is very limited. This is not only a problem for Taobao, but also the Achilles heel of all e-commerce platforms. This is because they all handle transaction behavior in the same way, that is, equivalent transactions.

The concept of equal exchange was deeply rooted and was widely accepted with the use of cuttable molten metal coins. In the seventh century BC, the Lydians used metal bars or lentil-shaped metal blocks for payment, which could accurately measure the value of goods. The ruler of the kingdom, King Croesus, became incredibly rich because of the developed coinage industry, and therefore there was a saying that he was "as rich as Croesus".

The way Internet electronic payment processes transactions is no different from that of the Lydians, except that PayPal and Alipay no longer use metals of different particle sizes, but instead use carefully stored data in the server. Equivalent transactions do not require precise weighing, but only require a single database operation. A user uses electronic payment account A to transfer an amount of m to account B, and vice versa, transfers an amount of m from account B to account A. The values ​​of account A and account B in the electronic payment database are restored to the starting point, and this is repeated countless times, which is a typical credit-swiping behavior. Kula circle transactions are also a cycle (Kula means cycle), but the difference is that Kula transactions are directional and cannot be exchanged.

Imagine that in the Kula Circle trade in the Trobriand Islands, if a person gets an arm bracelet from a Kula partner in the south, and instead of exchanging the arm bracelet with a Kula partner in the north (counterclockwise), or giving his own necklace back to a Kula partner in the south (clockwise), what would it mean? Yes, this is a typical credit-swiping dead cycle. The arm bracelet will always circulate between these two Kula partners and become their permanent private collection. The two will also "swipe out" a very prominent position in the tribe. Obviously, if everyone does this opportunistically, then all the arm bracelets and necklaces will be out of circulation and become private property that is hidden and not revealed, and the Kula trade circle will no longer exist. This is why the Kula trade has to stipulate the direction of the transaction. Once the transaction is started, the Kula will continue to flow clockwise or counterclockwise like a relay game.

The revelation that Kula Circle brings to us is that if the direction of transactions is specified, credit fraud can be avoided. However, this is unrealistic in the real economy. We cannot stipulate that e-commerce is only allowed to trade with a fixed group of people. People do have the freedom to trade with themselves.

Introducing coin destruction into credit evaluation

CoinDays destruction is a very important concept in blockchain. As the name suggests, CoinDays destruction is equal to the amount of each transaction (coin) multiplied by the time (days) the coin of this transaction lies on the account. For example, if you spend 10 bitcoins received 100 days ago, the CoinDays destruction of this transaction is 1000 CoinDays.

At first, blockchain researchers did not notice the significance of coin-day destruction, because it does not have a clear role in the blockchain like timestamp, difficulty, random number and other fields. Only a few people who are sensitive to the price of coins pay attention to this indicator. They believe that the cumulative changes in the coin-day destruction of the blockchain can reveal the market trend. When the market is in a downward channel, the peak of coin-day destruction means weak hands in the market, because it means that big players may want to sell coins. When the market is in an upward channel, the peak of coin-day destruction means strong hands in the market, indicating that the market may strengthen. Unlike the traditional stock market, in the digital currency trading market such as Bitcoin, coin-day destruction can more accurately reveal the flow of funds in the market than the daily trading volume indicator, because if a person opens two accounts (bitcoin addresses) and transfers 100 bitcoins back and forth, the trading volume can be very large, but the coin-day destruction remains almost unchanged.

The second time that coin-day destruction was taken seriously was in the proof-of-stake (PoS). To avoid the waste of computing power in the proof-of-work (PoW) mechanism, Sunny King, the founder of Peercoin, designed a consensus scheme for proof-of-stake: when creating a block of proof-of-stake, miners need to create a "coin-right" transaction, which will send some coins to the miners themselves according to a set ratio. The principle is similar to the 25 new coins produced by Bitcoin blocks, but the difference is that its difficulty is inversely proportional to the "coin-days" of the transaction input, and has nothing to do with hash computing power. Since the hash operation of proof-of-stake is only based on time and known data, it is impossible to speed up its operation by improving chip performance. Every second, each Peercoin transaction output has a certain probability of generating a workload proportional to its coin-day, which does not increase or decrease. Obviously, the original intention of introducing Coinday in Proof of Stake is to prevent miners from reusing their own coins, because if the mining difficulty is only related to the miner's equity (coins owned), then each coin can become a "simulated mining machine", and those who have a large number of coins can make money (mining) without doing anything, while users with fewer coins can only drink northwest wind, which is exactly why Proof of Stake is criticized. However, if the mining difficulty is a function of Coinday, although the computing power of this "simulated mining machine" will increase linearly over time, its computing power will return to zero with the destruction of Coinday every time a new block is discovered, so Coinday can ensure the fairness of all miners in the Proof of Stake mechanism.

Although the above two application examples solve different problems, in essence, they both use the irreversible nature of coin-day destruction in the transaction process, so that users cannot repeatedly use the same money between two accounts to obtain a certain return. In the market, large users cannot use the same Bitcoin to create a large number of coin-day destruction to fictitious currency flows. In PoS mining, users cannot use the same Bitcoin to repeatedly mine new coins in the block. Correspondingly, what if coin-day destruction is introduced into the credit evaluation of transactions? If the application of coin-day destruction in market prediction and proof of equity is a small test, then its role in credit evaluation is very clear. Let's see why brushers and bad reviewers can't survive in the credit system of blockchain.
If it is stipulated that Coin Days destruction is used as a credit rating factor, the more Coin Days destroyed in a transaction, the higher the credit rating weight. When a brusher tries to give a good review by repeatedly trading with two accounts, the review of the first transaction is valid, but the historically accumulated Coin Days have been destroyed when the transaction is completed. When the second transaction is made, since it occurs shortly after the first transaction, the accumulated Coin Days are very small, and accordingly, the contribution to the credit rating is negligible. The sum of Coin Days destroyed in all subsequent transactions is also very small. Users use the same money to repeatedly give themselves good reviews. No matter how many times, the final effect is almost the same as the credit rating brought by the first transaction. Similarly, when a bad reviewer tries to maliciously bad review a user through a large number of small transactions, since the credit rating is proportional to the Coin Days destroyed, and the transaction amount is too small, it can hardly affect the user's credit.

Perhaps in the near future, the fraudsters and bad reviewers who are rampant on e-commerce platforms such as Taobao and JD.com will be unemployed. It should be pointed out that people have always regarded credit as a moral issue in the past, trying to restrain trading behavior from a moral level. Taobao's extremely complex credit system attempts to distinguish between real trading behaviors and cheating trading behaviors, and evaluates a person's credit through big data analysis, combined with the user's social relationships, occupations, income and even public utility bills. However, in the credit evaluation of blockchain, credit is actually a mathematical problem. In the example just now, we can see that the user's trading behavior is no longer divided into cheating transactions and real transactions. All trading behaviors are treated equally. By giving transactions a cost (coin day destruction) through mathematics, the credit evaluation results can accurately reflect the user's real credit. Cheating is allowed, and there is no centralized authority that can jump out and announce the freezing of your account, but even if you cheat, it will not affect anyone's credit.

The Second Law of Thermodynamics in Trading

Currently, third-party payment systems treat transactions as equivalent transactions, which is not wrong in itself, but it is not enough (Formula 1). In the transaction process, it is also necessary to introduce the arrow of time to distinguish a transaction from account A to account B from a transaction from account B to account A. Although the amount is the same, the number of coin days destroyed in the two processes is different.

V=Va+Vb (V is the total wealth of the system, Va and Vb are the wealth values ​​of A and B, the principle of equivalent exchange)...1

Equivalent transaction is an equation, while credit evaluation is an inequality. In the transaction process, it includes both the transfer of transaction amount and the mutual evaluation of both parties. If equivalent transaction is like the first law of thermodynamics of transaction (Formula 2), then credit evaluation based on coin destruction is like discovering the second law of thermodynamics of transaction (Formula 3).

Q=△U + W (the first law of thermodynamics, Q is the heat exchanged with the environment, W is the work exchanged with the environment, △U is the change in internal energy of the system)...2

Sf > Si (Second Law of Thermodynamics, Sf is the final entropy of the system, Si is the initial entropy of the system)...3

The second law of thermodynamics states that in an irreversible process within an isolated system, the entropy of the system always increases. This is also called the entropy increase principle. The Clausius expression of this principle is that it is impossible to transfer heat from a low-temperature object to a high-temperature object without causing other changes. Similarly, we can get a transactional expression of the second law of thermodynamics: in the transaction process, the system's coin days are always destroyed, and it is impossible not to destroy any coin days in a transaction.

The essence of coin-day destruction is the arrow of time. Just as the residents of the Trobriand Islands stipulated the spatial direction of the Kula transaction, transactions on the blockchain use coin-day destruction to mark the time direction of the transaction. Equivalent transactions understand transactions as scalars, while credit evaluation understands transactions as vectors. Equivalent transactions plus credit evaluation are all about transactions.

So the strange Kula trading behavior can be explained. It turns out that the islanders are not doing ordinary equivalent transactions, but engaging in a transaction similar to credit evaluation. A person's trading partners and the number of transactions determine his credit level, which is indeed in line with the logic of credit. Credit does not depend on the value of the transaction token. Possessing Kula cannot increase personal wealth. On the contrary, it may damage personal credit. The value of the transaction token is very small. The transaction behavior itself is valuable. Kula can only show a person's credit in the flow. Then, it is completely in the interests of the islanders to travel thousands of miles to trade with their Kula partners. Although the behavior of drying sweet potato piles in the yard looks stupid, they are absolutely shrewd people when trading Kula. Kula trading is indeed not an equivalent transaction. Malinowski is right on this point. But whether the islanders are rational economic people, he really blamed the classical economists wrongly.

Finally, the question is: Who designed the CoinSky? As mentioned before, CoinSky is not a necessary variable in the blockchain, it is optional. If the blockchain is a machine, then removing the CoinSky component from the machine will not affect the operation of the entire machine. But in fact, CoinSky has existed since the genesis block. Why did Satoshi Nakamoto add a field like CoinSky? We can only attribute this to coincidence like Vitalik.