Talk about the impossible triangle between the world of digital currency and the world of traditional finance

In fact, this article is mainly inspired by Tim Swanson (2015), who mentioned in his blog that more and more blockchain applications choose to anchor their application layers to the Bitcoin blockchain, and one of the motivations is that most holders hope to stabilize or even push up the price of Bitcoin in this way. So inspired by the word "anchoring" that often appears in the foreign exchange market, I opened my mind and sorted out the similarities between the digital currency world and the traditional financial world.

Bitcoin

From the moment Bitcoin was defined as a coin, it began to be endowed with financial attributes. "Coin" was actually defined as a currency. The word currency in English comes from curraunt in Middle English and currens in Latin. Both words have the meaning of "in circulation" and "in circulation". It can be seen that the function of "coin" as a currency is to circulate as a medium of exchange (Bernsterin, 1965).

Let's talk about the origin of currency. Since primitive society, people have taken survival as their first goal, so women picked wild fruits and men hunted. It was good enough to be self-sufficient. Gradually, people began to form settlements, resources began to be abundant, and the need for exchange between people arose, so bartering came into being. Perhaps it was exchanging the same amount of wild fruits and meat that could fill the stomach, or exchanging gathering tools and hunting tools that could obtain the same weight of wild fruits and meat. This was the most primitive bartering.

Later, as the creation of tools became more advanced, agricultural civilization began to emerge. In addition to feeding themselves, people in a settlement finally had more things, or so-called means of production, to exchange with people in other settlements. Lao Wang from Tribe A had extra seeds and wanted to exchange them for Lao Li’s sickle from Tribe C, but Lao Li from Tribe C wanted to exchange his sickle for the fruit grown by Lao Zhao from Tribe B. So Lao Wang exchanged his seeds for Lao Zhao’s fruit, and then used the fruit to exchange for Lao Li’s sickle. As the diversity of needs increased further, such barter became too troublesome, so people used things that everyone liked as a medium of exchange, and thus there was a general equivalent.

To be a general equivalent, it must have some characteristics that everyone likes, the typical one being rarity. So when the original shells and later precious metals were used as general equivalents and as currency as a medium of exchange, everyone was happy to accept it because everyone recognized its value. Currency as a medium actually solves the trust problem between the two parties in the transaction. It is equivalent to adding currency to the original barter exchange relationship. In other words, in order to obtain Lao Li's sickle, Lao Wang first gave his seeds to Lao Zhao who happened to pass by, and asked Lao Zhao for silver instead of fruit. Lao Wang took the time to rush to Tribe C and asked Lao Li to exchange the sickle with silver. Lao Wang did not have to worry that Lao Li would no longer have a sickle by then, because even if Lao Li did not sell Lao Wang a sickle, Lao Wang could still take the silver and ask others to buy a sickle.

The introduction of currency makes transactions very convenient, and the role of currency is a credit intermediary, that is, even if Lao Li has no sickles to sell, Lao Wang can still use the silver to buy from other people. The blockchain architecture of Bitcoin actually plays the role of a credit intermediary, a trust mechanism that does not require trust (The Economist, 2015). Because the blockchain architecture of Bitcoin guarantees that Lao Wang can definitely buy a sickle, and Lao Zhao can definitely buy fruit. It is precisely because the technical architecture of Bitcoin and currency have the same function that Bitcoin is called a "coin".

In fact, the so-called decentralized feature of Bitcoin, which is now being strongly promoted, is not aimed at the original precious metal currency, but at the currency after the original precious metals and other currencies are replaced by legal tender. Because compared to precious metal currency, legal tender needs the endorsement of central credit to gain everyone's love and trust.

PoW vs PoS

As two verification methods, they can both ensure that the Bitcoin blockchain maintains a trust mechanism and prevent double spending problems.

PoW (Proof-of-Work) is proof of workload. All nodes participating in the transaction network compete for the right to record by calculating the SHA256 random value, that is, one computing power equals one voting right. It is the mechanism used by the Bitcoin blockchain. The nodes competing for the right to record in Bitcoin are called "miners", and the analogy of miners is a particularly vivid name. Because in the design of Bitcoin's blockchain, the competition for the right to record by each node is accompanied by the verification of transaction requests from other nodes. In order to motivate everyone to compete for the right to record and incentivize verification behavior, Bitcoin is randomly distributed to participants as a token as a reward, which is why the behavior of participating in the calculation of SHA256 values ​​is described as "mining".

In fact, the person who proposed the concept of Bitcoin mining must have referred to the example of actual mining. In order to ensure that they can obtain gold, miners in the gold rush must work hard day and night to swing the pickaxe, hoping to find gold mines when the pickaxe is swung down next time. This is just like being randomly distributed to Bitcoin, which is a probabilistic event. As a precious metal hard currency, gold is equivalent to obtaining a medium of transaction and obtaining a part of the rights to price the transaction behavior. At the same time, people who are keen on gold panning must also prove that their gold panning behavior is meaningful by constantly helping others identify the value of gold, so as to ensure that the mineral deposits they dig in the future can also be recognized by others.

On the other hand, PoS (Proof-of-Stake) is a proof of holding, where each network node proves its right to record by showing the amount of digital currency it holds. It can be understood as one digital asset, one voting right. The famous Ethereum combines this proof mechanism. The original intention of PoS was to save the power and resources consumed by the computing power generated by PoW mining machines, which are similar to GPUs, but it inadvertently created the prototype of a virtual capital world.

PoS requires participants in the network to compete for the next accounting right by showing the digital tokens they have obtained, which is just like the development of the modern capitalist market. Through the hard work of PoS mining, some people have accumulated original capital, so they gain the right to decide on future trading mechanisms by showing their assets to people, and use the capital advantage in the next cycle to further gather their market influence, and eventually move towards a large consortium-style monopoly. However, this final result is also what Bitcoin enthusiasts have always criticized, because monopoly ultimately represents centralization, which violates the decentralized vision of Bitcoin advocates.

Therefore, PoS, which was created to save resources and protect the environment, faces the problem of centralization. Therefore, there is the impossible triangle of security, environmental protection, and decentralization in digital currency proposed by Chang Jian (2014). However, the world is definitely not perfect. We might as well refer to the real world and admit the possibility of coexistence of PoW and PoS. Just like the stability of real society requires both the labor of workers and the influence of capitalists.

AppCoin and Foreign Exchange

The impossible triangle or trilemma mentioned above refers to the three problems of fixed exchange rate, independent monetary policy and free capital flow in international finance. This reminds me of the exchange relationship between application currency and Bitcoin in the digital currency world, which is similar to foreign exchange.

The application coins here are also called meta-coins (Swanson, 2015), which refer to the tokens used in blockchain applications. These blockchains have independent consensus mechanisms, data storage, verification and other designed blockchain architectures, but ultimately the data will be anchored to the Bitcoin blockchain in the form of hashes in the form of OP_RETURN, thereby obtaining security support from the huge Bitcoin blockchain computing power.

As mentioned at the beginning of the article, people who promote blockchain applications anchored to the Bitcoin blockchain may have economic motivations to stabilize and push up the price of Bitcoin. But in addition, because the PoW mechanism of the Bitcoin blockchain has obtained the security guarantee of nearly 900P computing power, people are more inclined to trust the Bitcoin blockchain rather than the newly developed independent blockchain.

Although not exactly the same, it is somewhat like the global currency in the gold standard era. In the previous article, Bitcoin has been compared to precious metal currency, like gold, and various application coins are like legal tender in various countries. Although legal tender is centrally issued, and most application coins are still distributed, the behavior of blockchain applications anchoring Bitcoin to enhance their own security is similar to the way sovereign countries once linked exchange rates to their own gold reserves in order to reflect the credit endorsement of legal tender.

Similarly, just as the demand for a sovereign nation's related resources affects the foreign exchange rate of its currency, the prices of various application coins also change according to people's changes in demand for such application scenarios.

As shown in the above picture, the left picture gives an example of real finance. The market demand for iron ore will affect the price of the produced ore in Brazilian real and Australian dollar to a certain extent; conversely, the market demand for notarization applications in the right picture will affect the price of the currency constructed by Counterparty and Factom.
There are already many trading markets for application coins in the current market. For example, the trading volume of Factoids in 24 hours is basically around 3,600 bitcoins (Coinmarketcap.com, 2016). As the application of blockchain increases further, the trading of application coins may also increase in the foreseeable future.
From the perspective of Bitcoin’s market performance, the number of transactions on the Bitcoin chain has not increased significantly in the past year, and most Bitcoin holders prefer to choose to conduct off-chain transactions through other application media (Swanson, 2016). This phenomenon is just like the fact that few people in reality use gold or other precious metals for transactions, but choose various currencies for payment.

The real world of digital currency

With the development of blockchain application scenarios and the continuous development of blockchain infrastructure services (BaaS-block chain as a service), the economic system composed of blockchain and digital currency will be closer to the real economic system. This is just like more and more sensors are making people's behavior data-based, and more and more augmented reality and virtual reality technologies are merging the digital world with the real world. The virtual economic market composed of blockchain and digital currency will also be more closely connected with the real economic world, and the virtual world itself will be closer to reality as the number of participants increases.

After all, whether it is the real world or the virtual reality, the ultimate controllers involved are humans. We have reason to believe that even if the world is ruled by AI, the AI ​​at that time will have similar behaviors to humans today. As Kevin Kelly mentioned, the future of the mechanical world is biological and anthropomorphic. So we may not need to be afraid of the virtual world or the digital currency world, because its operating rules must be a reflection of reality.