Analysis of digital currency based on blockchain technology

Since the birth of Bitcoin in 2009 , digital currencies based on blockchain technology have been booming, impacting people's perception of the modern financial system based on traditional currency as a new thing. However, the author believes that non-sovereign currencies based on blockchain technology such as Bitcoin are not suitable for the issuance of digital currencies in China, and cannot replace the current traditional currencies based on national credit.

The meaning and characteristics of blockchain technology

Blockchain technology is also known as distributed ledger technology. It is essentially a decentralized distributed database. Each block is a data unit in the entire block chain, equivalent to a record in the database. From the data structure, the blockchain is a typical reverse one-way data linked list. Each node is divided into two parts: one is a pointer (corresponding to chain ), pointing to the previous node; the other is data, including header information and all transaction records of the entire network over a period of time.

The main feature of blockchain technology is first of all "decentralization". From the perspective of model design, it is separated from the centralized storage and control of the client or server model, and uses distributed storage, grid computing and other methods to complete the processing mode of business processes. Blockchain technology is based on a peer-to-peer computer network ( P2P network), allowing a single node to directly share resources with other nodes, each user can directly trade with other users, and each block maintains the integrity and consistency of the entire blockchain. After a transaction is completed, the transaction information needs to be broadcast to the entire network, and the generated several new blocks must jointly record this information, and finally complete a transaction after confirmation.

Secondly, the quantity is constant and the types are numerous. The issuance of virtual currencies based on blockchain technology is fixed and is regulated by the open source code running on each peer client. Taking Bitcoin as an example, the smallest unit of its currency unit BTC is one trillionth, so in theory, more than 51% of the nodes in the entire network can change its total issuance by modifying the source code at the same time. At present, there are more than 600 blockchain virtual currency systems running on the network , which were created by modifying the key fields of the client open source code in the initial stage when there were fewer peer clients.

The second is the "mining mechanism". Virtual currencies based on blockchain technology are generated through "mining". "Mining" is the process in which "miners" use "mining machines" or "mining pools" to run specific client codes, compete for the right to record transactions on the entire network within a period of time, and package these transaction records into blocks and add them to the blockchain according to specific rules. Virtual currencies are rewards for participants who provide energy and computing power to generate new blocks in order to maintain the integrity and consistency of the entire blockchain. As the difficulty of mining increases and the number of rewards decreases, more energy and computing power are consumed to obtain virtual currencies.

Disadvantages of blockchain technology applied to digital currency

First, "decentralization" has no circulation management agency. Blockchain technology is essentially a distributed database system with a one-way linked list as its logical structure and a design model based on a P2P network. This determines that virtual currencies based on blockchain technology do not have a unified central control system. For sovereign currency countries, intervention and regulation of economic development are achieved through the control of currency. Even the non-sovereign currency, the Euro, has the European Central Bank to formulate and implement monetary policy and actively coordinate with Eurozone countries to implement relevant fiscal policies. Therefore, if "decentralized" blockchain virtual currencies replace current currencies, it is easy to bring about severe turbulence in economic development.

Second, it is difficult to effectively regulate the supply of quantity. The issuance of virtual currency based on blockchain technology is fixed. According to the Fisher equation, the total transaction volume of the whole society at a certain price level in a certain period of time has a certain proportional relationship with the required nominal currency volume, and the constant currency volume obviously cannot meet the growing total price requirements of social commodities. Although the openness of blockchain technology allows the generation of new virtual currency systems based on P2P networks, people's understanding of currency is "a commodity that can serve as a general equivalent". The unlimited expansion of virtual currency types cannot meet the basic conditions of currency, nor can its supply be effectively regulated.

Third, the "mining mechanism" is difficult to create recognized value. Bitcoin itself has no value, nor is it backed by national credit. Some people believe that "value is injected into virtual currency by constantly consuming computing power and energy", but consuming trillions of calculations to find a hash value that meets the requirements is obviously not the most efficient option. If virtual currency circulates at the same time as current currency, then when the holder believes that the current currency is more valuable, virtual currency will not become the mainstream currency. When the holder believes that virtual currency is more valuable, according to the law that bad money drives out good money, virtual currency will be collected in large quantities and withdraw from circulation.

Fourth, producers and early holders are prone to high "coinage tax". Any virtual currency based on blockchain technology is held by a few people in the initial stage of its development. Take Bitcoin as an example. Initially , Bitcoin was just a product of a few people's game. The first Bitcoin purchase in May 2010 was 10,000 BTC to buy a $ 25 pizza. The first Bitcoin transaction completed in July of the same year was $ 0.04 /BTC . By the end of 2013 , the price of each Bitcoin had risen to $ 1,200 in more than three years . Early Bitcoin producers and holders imposed high coinage tax on later Bitcoin holders.

Enlightenment on the issuance of digital currency in my country

At present, all kinds of popular virtual currencies based on blockchain technology are limited by unique technical constraints and do not meet the conditions for becoming circulating currencies in China. As legal tender, the issuance and circulation of digital currency must be led by the central bank and follow the same principles as traditional currency in management. On January 20 , 2016 , the People's Bank of China held a seminar on digital currency and proposed the basic principles for issuing digital currency in China: first, to provide convenience and security; second, to strike a balance between protecting privacy and maintaining social order and combating illegal and criminal activities; third, to facilitate the effective operation and transmission of monetary policy; fourth, to retain control over monetary sovereignty.

In view of the characteristics and drawbacks of blockchain technology, there are still many difficult-to-overcome problems in the issuance of digital currency in my country if blockchain technology is adopted. It is not only not conducive to the formulation and implementation of monetary policy, but also cannot adapt to the needs of contemporary economic and financial development. Compared with blockchain technology, account-based digital currency is a queue structure. The identification and header information determine its legal status of RMB, and the functional field reserves space for the realization of various functions in the circulation of RMB digital currency. Therefore, my country can choose a technical route based on the digital currency system based on the account system based on full reference to blockchain technology. In terms of generation method, it should not be generated in the way that ordinary users run open source code on computers, but should be uniformly generated by the People's Bank of China using a specific encryption algorithm.

Although it is also based on the current binary system of "central bank-commercial banking institutions", the way of currency transportation has changed from physical transportation to electronic transmission, and the way of storage has changed from the central bank's issuance library and the banking institution's business library to the cloud computing space for storing digital currency. Therefore, it is necessary to establish and improve supporting measures that are compatible with the issuance of digital currency, maintain the circulation order of digital currency by legal means, and achieve seamless connection from digital currency to physical currency. In addition, in order to enhance the usability and security of digital currency, the People's Bank of China can use personal ID card information and basic account information of enterprises and institutions as the only credentials for opening a RMB digital currency account. The carrier can be an internationally used chip card, and continuously complete the replacement of digital currency, focusing on mobile payment, cryptographic algorithms and security chip technology, and effectively respond to and resolve various possible risks.