Xiao Feng: Various types of digital currencies and new application scenarios

On April 13, the sixth Tsinghua Financial Review forum themed “Digital Currency and Blockchain Technology: Prospects, Challenges and Impacts” was held at Tsinghua University’s PBC School of Finance.

Xiao Feng, Vice Chairman of Wanxiang Holdings Co., Ltd. and initiator of Wanxiang Blockchain Lab, said at the forum that each digital currency has different issuance methods and credit establishment methods. In fact, its functions are also different. Digital legal tender is the traditional definition of currency. Algorithmic currency So far, Bitcoin is the most important algorithmic currency. The most important thing is that it is a medium of exchange, that is, it cannot be a means of value storage, because the currency value fluctuates too much, reaching more than 1,000 US dollars, then more than 1,000 RMB, and now it has returned to nearly 3,000 RMB. It can only be used as a medium of exchange. In Bitcoin transactions, more than 60% to 70% of the volume is RMB to buy Bitcoin, because everyone uses it as a means of remittance overseas. So as such a medium of exchange, it has its value, but as a means of price storage, so far, it is not perfect and mature enough.

The following is the transcript of Xiao Feng’s speech:

In November 2014, President Wu talked about digital currency at the Sanya International Forum of Caijing Magazine and gave a special speech. Currency is divided into two categories:

First, legal tender.

Second, private currency.

Private currencies have always existed and are legal, such as Tencent's Q coins or shopping cards issued by our shopping malls, which actually also include Alipay wallets and WeChat wallets. The money in WeChat wallets is not in the financial system. It is written into your wallet by Tencent. Basically, it is also considered private currency.

Digital currencies such as Bitcoin have emerged. Digital currency is another type of private currency. In his speech, Governor Wu called it algorithmic currency. Algorithmic currency is one of the new forms of digital currency. Some time ago, not only the People's Bank of China, but also the US Central Bank said it would issue its own digital currency. That is the digitization of the law, so I finally converged it into digital currency. In the future, it is possible that private currency will be composed of algorithmic currency, cryptocurrency or digital currency, and legal currency will also have digital currency in the future.

This is inspired by Wu Yeye's speech. Secondly, I want to talk about the many ways to issue digital currency:

Method 1: Digital currency. The premise for the issuance of central bank digital currency is national authorization and legal authorization. Legal authorization will also become a way of issuing digital currency in the future.

Method 2: Bitcoin. Bitcoin is an algorithmic currency, based on a set of data algorithms, and then made public. After anyone in the world repeatedly calculates this algorithm, you will find that there will be 21 million coins before a certain point in time, first buried in the mathematical model, but in the end it will be slowly dug out because of everyone's mining.

Method 3: Crowdfunding. A typical example is Ethereum. Ethereum released a technical white paper, hoping to develop a universal protocol on the blockchain, but it needed money, so it issued its own Ethereum to raise funds for the development of smart contracts. At that time, many people accepted donations of Bitcoin and US dollars. It issued tens of millions of Ethereum at that time. What was this Ethereum used for? It was used to organize a developer community to develop a universal protocol smart contract based on the blockchain. This thing was issued to raise money for blockchain applications.

Method 4: Asset anchoring. This is the many tokens we know now. You can register this asset on the blockchain and use this asset as an anchor to issue various digital currencies. There are more.

I think there are basically four ways to issue digital currency. Now, we may all focus on the central bank's digital currency, which is only one of them, which is the digital currency issuance authorized by law. I think there are at least three remaining that are in the category of private currency issuance.

The second is the credit establishment of digital currency. The first one is of course that digital legal currency is a national credit. We know that the reason why the central bank is recognized by others before it is issued is that the national credit is behind it. However, there are also three ways to establish the credit of private currency issuance:

Method 1: The general private currency on the blockchain relies on an algorithm to establish credit. This algorithm is made public, and everyone has calculated it and knows that over a long period of time, we have issued 25 every ten minutes so far, and in two or three months this will be reduced to 12.5. Relying on such an algorithm, everyone can believe that this currency will not be issued indiscriminately, and that there are very strict issuance and financial disciplines. I think this is credit established by an algorithm.

Method 2: Ethereum. Of course, it is also an algorithmic currency, and its issuance is also constrained by the algorithm. But what is different is that it has a specific use. It is different from Bitcoin. Bitcoin has no specific use, but Ethereum has a specific use. In the future, if we want to run smart contracts, we need to use Ethereum as a fee, so it has use value. You can see the rise and fall of the value of Ethereum. When it releases a new version, the currency will rise, because everyone is looking forward to it. As its technology becomes more and more mature, everyone is looking forward to its use value will become higher and higher. When the use value of smart contracts on the Ethereum list becomes higher and higher, you have to use its currency to start the machine anyway, so its currency value begins to rise.

Its credit is established because it has such use value. Everyone believes that all financial transactions need to use smart contracts, so everyone is optimistic about the value of its technology.

Method 3: Tokens are collateralized by assets. For example, if we register our house ownership on the blockchain, we can use our house as collateral to issue your personal currency. What is this credit? Your house is used as collateral.

Each digital currency has different issuance methods and credit establishment methods. In fact, its functions are also different. We know that digital legal tender is the traditional definition of currency. Algorithmic currency Bitcoin is the most important algorithmic currency so far. The most important thing is that it is a medium of exchange, that is, it cannot be a means of value storage because its currency value fluctuates too much. It has reached more than 1,000 US dollars, then more than 1,000 RMB, and now it has returned to nearly 3,000 RMB. It can only be used as a medium of exchange. Now in our Bitcoin transactions, a large part of the volume, more than 60% to 70% of the volume is RMB buying Bitcoin, because people use it as a means of remittance overseas.

Therefore, as a medium of exchange, it has its value, but as a means of price storage, it is not perfect or mature enough so far.

What is the purpose of crowdfunding currency? It is to help you run and use various common protocols on the blockchain. We just talked about Ethereum. You can use Ethereum to use smart contracts on the blockchain. You will also use other currencies, such as another common protocol on the blockchain called zero-knowledge proof. Such a protocol also has its own currency. What is zero-knowledge proof used for? It is used to solve the problem that our banks are most worried about now, because on the Bitcoin blockchain, the account balance is open to the entire network, but the bank wants to use blockchain technology, and it does not want its depositor account balance to be open to others, so it issued such a privacy protection protocol, which allows third parties to continue to use third-party accounting without publishing the account balance.

That is to say, if you want to use the universal protocol on the blockchain, you have to use its currency. So its function is to help you run these protocols better.

The last anchored currency is the asset registered on the blockchain. We all call the asset that can be traded autonomously using smart contracts smart assets. In the recent news, we saw that Nasdaq, UBS, Deutsche Bank and Citibank have all tried to issue their smart bonds on the blockchain. They are issued on the blockchain, traded and settled autonomously, so these are called smart assets. The previous version of smart assets is smartphones. We call any mobile phone that is connected to the Internet a smartphone. The next step forward for smartphones is smart assets. All assets that are connected to the blockchain and can be traded autonomously are called smart assets.

Another is the basis for the operation of digital currency. Different digital currencies have different technical bases. The biggest possibility for digital legal currency is to operate in two aspects. One is to operate in the alliance chain. So when we talk about blockchain, its decentralization, its public accounts, or scalability, slow transaction speed, we are talking about the shortcomings of the public chain. In fact, blockchain technology has made great progress in the past year. The transaction speed and scalability of private chains and alliance chains are completely different, so their accounting methods are also very different.

Digital currency may be based on a consortium chain, or it may not be called a blockchain, but a distributed ledger system, and it runs on such a technology, but algorithmic currency is basically based on a public chain. And I think that for a currency that is purely used as a medium of exchange on the blockchain, one Bitcoin is enough, and I don’t think other currencies have any value as a medium of exchange.

However, crowdfunding currency is used to assist the operation of many general protocols on the blockchain. There will be many more in the future. In addition to the current Ethereum, there must be other general protocols. The blockchain cannot store too many things. For example, intellectual property rights. When you want to use the blockchain to protect the property rights of a movie, it actually only puts its property rights information and copyright information on the blockchain. Such a large content of this movie, novel, and TV series is stored in a general protocol on the blockchain, a distributed storage protocol.

Finally, asset-anchored currencies are mostly used in commercial applications on blockchain. I divide blockchain into several layers:

First, the network layer.

Second, the data layer.

Third, general protocol layer.

Fourth, application layer.

At the application layer, there will be many currencies anchored to a certain type of assets and created. Thank you everyone.