What Is Blockchain Thinking?
February 3 2018 Shanhai-Chang Jia, founder of 8btc and bytom, believes that the operation mechanism and business mechanism of blockchain and internet are completely different. They could be mirroring each other. In the “2017-2018 China Blockchain Billboard Ceremony” held yesterday, Chang Jia delivered a speech titled “What Is Blockchain Thinking?” In his speech, he mentioned that there are three stages in the development of blockchain-based assets. In 2009, Bitcoin represented the blockchain 1.0 phase. 2017 is the second stage of digital asset based on smart contract, which is represented by Ethereum, In 2020, the third stage is coming, featuring real-world real assets being registered, issued and trade via smart contracts. Bytom is designed to fit in the third stage. In light of the trending of blockchain development, Bytom blockchain aims to connect the byte world and the atomic world so that the blockchain could be utilized in the real economy.
By answering the following 4 questions, Chang Jia shared his insights that blockchain thinking and internet thinking are mirrors to each other.
1. Whether bitcoin will be replaced by competitors;
2. Why bottom-layer blockchain protocols are more valuable;
3. Why mining is needed;
4. What is the difference between blockchain and Alipay?
Below is the transcript of Chang Jia’s speech.
The three stages of blockchain-based assets
The first part I briefly introduce the development trend of blockchain. The first chart shows bitcoin’s position in the world’s asset classes. A few months ago, bitcoin’s asset size climbed a lot in this rankings, which is now 140 billion U.S. dollars. Although Bitcoin’s assets are on the rise, does its share of the total blockchain assets continue to decline? Why is that? Digital assets issued through the blockchain are growing.
The development phase of blockchain assets can also be divided into three phases. 2009 can be considered as a typical era of Bitcoin. In 2017, it can be considered as a phase in which digital assets are distributed through smart contracts on block chains represented by Ethereum. We think the blockchain may reach the third stage by 2020. That is through the blockchain smart contract to register, real assets in circulation. Than the original chain is also the third stage of the thing, we think the blockchain ultimately to serve the real economy, to improve the real economy operating efficiency.
Fig 1: the development of blockchain assets
From the perspective of asset evolution, I think the evolution of blockchain-based assets can be divided into three stages. The first stage is the verification of assets. The asset can be transferred as a whole after being registered and authenticated. We can describe this as the solid state of the assets. The second stage is asset securitization. Assets can be split and transferred in parts after securitization. It can be understood as the liquid phase of asset evolution. However, the liquid state also has its limitations. Liquid needs a container, which is the asset platform. Securitized assets cannot be traded across platforms. In the third stage the entire space is filled with blockchain-based assets, a bit like a gas state. Everyone can manage their own assets through their own private key. People are no longer limited by the platform. Assets can flow freely between platforms. So the blockchain of assets can be compared to the gasification of assets. We will soon enter this stage.
Fig 2: the 3 stages of blockchain asset evolution
Blockchain and Internet Are Mirrors to Each Other
I want to elaborate why blockchain is like the parallel world of internet through several typical questions.
The first one is whether bitcoin will be replaced by competitors? Five years ago, I often saw friends on my Weibo and WeChat asking such question, which represents a typical Internet thinking. In the early age of Internet, browser was later replaced by new competitors. But my point of view is that if you are competing in the same dimension as bitcoin does, there is little chance that other blockchain will replace bitcoin. Emerging protocols like Ethereum and EOS are all doing things in another dimension.
What is Internet thinking? Internet thinking tends to regard blockchain as one kind of software. Normally software needs to be patented to create their own moat. But in fact blockchain is a protocol and protocol doesn’t need patent as defense. Instead, blockchain is happy to see more clones.
Development of software is centered around a company while the development of blockchain is based on foundation or community with loose connections. Software needs continuous iteration while blockchain protocol is very stable. It ‘s very difficult to upgrade the protocol as a consensus needs to be accepted by the the entire network. That’s why we had so many hardforks. Software could cease operation if the company no longer maintains the software. Blockchain is a trust machine that once initiated then cannot be stopped.
Second, why building underlying blockchain protocol is more valuable? In accordance with the Internet thinking, the underlying protocol is often without commercial value. Many open source projects are being maintained through donation. In the world of blockchain, the business value of developing protocol and business is reversed. Why is that? Traditional business models tend to profit from raising productivity. In the area of blockchain, the native token provide incentives for community developers, miners and usersetc. Developers often have the power to distribute tokens and therefore grasp the core value of the ecology.
Third, why do we need hashing? Why do we need mining? Deng Di (founder of Yuanbao Exchange) mentioned the impossible triangle theory. I also put forward a similar theory in 2014. Security, efficiency and decentralization are the impossible triangle. That is to say, the three aspects cannot coexist and maybe two will coexist. Why do we need hashing? The answer to problem could be split into two sides. If you choose safety and efficiency, actually you do not need hashing. You can choose PoS or DPoS, which does not require mining or virtual mining. But if you choose to be secure and decentralized, you have to choose hashing. Why decentralization is so important? Because decentralization assure the irrevocability of transactions. We believe that decentralization is an indivisible part of blockchain, which is why Bytom choose PoW. If you abandon the decentralized (irreversible nature of the transaction) property, what you are doing can only be described as a distributed ledger.
Why do we need to computing? I suggest that friends with a technical background should read the article “Minimum viable blockchain ” written by Google engineer Grigorik. He is using the pushback method to explain why the bitcoin solution is already the minimum viable blockchain solution. I have another simplest logic to explain why we need hashing. This table uses a dichotomous way to compare the mirroring of the real world with the digital world. In real world everything is random while in digital world everything is pseudo-random. In the real world, there are not two identical leaves under the sun while everything is replicable in the digital world. Entropy increases in the real world while entropy decrease in digital world with the big bang of information. Everything in the real world is normal distribution, in the digital world is a power law distribution. The stronger becomes the stronger with enormous header dragging a long tail. Everything in the real world is a competitive resource, an exclusive resource. In the digital world, the opposite is true. Everything is a non-competitive resource. Just as I transfer one document to another, I cannot guarantee that the document has been destroyed. The document is still on my computer and there may be numerous copies.
Fig 3: the difference between real world and digital world
So why do we need hashing? In the real world, it is very difficult to copy a certain thing. The problem can be rephrased that in the real world it is very difficult for you to make a perfect crystal because the third law of thermodynamics determines that you need to approach absolute zero temperature to make a perfect crystal, In order to approach absolute zero temperature, you need to consume a huge amount of energy. In turn, it is very difficult for us to want to achieve competitive resources in the digital world, that is, things that cannot be duplicated. That is why the pioneers of digital money failed in the 1990s. Bitcoin made the first breakthrough in technology because it found a way to defend double spending (51% attack) based on energy consumption. The higher your energy expenditure, the more difficult you are to achieve double spending.
What’s the difference of transaction between blockchain and Alipay? This is a typical problem. We used to promote blockchain payment by zero transaction fee and now this advantage is gone. Instead, Alipay service is more efficient at lower costs. Then why we still need blockchain payments? In fact, this issue involves a concept called coindays destroyed (CDD), which is a very important concept and present in all blockchains. As the name suggests, CDD refers to
“Coindays destroyed for any given transaction is calculated by taking the number of Bitcoins in a transaction and multiplying it by the number of days it has been since those coins were last spent.” https://en.bitcoin.it/wiki/Bitcoin_Days_Destroyed
This picture shows a typical blockchain transaction. In addition to changes to the amount, the 8.89 CDD also occurred. If 100 coins is lying in your wallet for a month, then the transaction was destroyed 100 × 30 days CDD. CDD is actually a timestamp.
The traditional credit rating system is a cumulative model. Take Taobao for instance, if you get a bad rating, one point is deducted from your credit, medium rating is null and good rating adds one point to your score. What is the disadvantage of this model? The biggest flaw of the system is that it is not against professional raters. Raters can give good or bad ratings to meet market demand. Why the system has such flaw? It is because its payment costs are almost zero, which means that one person can issue an infinite amount of rating between two accounts. However, blockchain transactions are not the same, blockchain transactions are time-stamped, which means that the infinite rating doesn’t work.
Why? For example, if I transfer 100 btc between two of my accounts. The first transaction happened after 100 coins lying in my wallet for one month. Then the first transaction destroyed 100 times 30 days of coindays. When I transfer 100 btc back to my other accounts, although the amount of bitcoin is still the same, the CDD is no longer 100 times 30 days. If the interval between the first and the second transaction is one second, then the CDD destroyed is 30 days times 1 second. Therefore no matter how many times you trade between two accounts, the number of CDD is limited. So the credit rating based on CDD is limited. Similarly, it is not viable to give others a bad rating. Bad rating requires trading with dealers. Professional raters obtain the right to rate the deal with a very small amount of transaction. But if the amount is too small, the accumulated CDD is also very small. Therefore, such rating cannot affect each other’s credit through malicious rating. This is why we can build a cheating-proof credit rating system based on CDD. The block chain transaction carries the arrow of time. It is like the discovery of the second law of thermodynamics of the transaction.
Finally, what is the difference between the blockchain credit and traditional Alipay credit? Blockchain credit data sources may come directly from the on-chain transaction data and big data is no longer needed. Alipay often requires a variety of big data analysis to judge a person from different perspectives. Blockchain does not judge a person and does not care whether a person is honest and trustworthy or whether you are a good consumer or a bad consumer. No one can stop you from spamming credit rating. The CDD design would make all credit spamming attempt futile. The third point, Alipay credit rating does not belong to the user himself while user is absolute command of the blockchain-based credit. The word “Absolute” means: users control their own private key, which leads to assets, transactions and credit. You can sign message with private key to prove ownership of the address to the bank etc. This means you can prove your credit to any financial institution with your own private key in the future.
The second layer of meaning, the block chain credit belongs to the user only. In the traditional Internet credit system, a crowned shop on Taobao and JD could be sold to others via changing password, identity information, This is actually a credit fraud, Such credit can be traded . But blockchain credit is not tradable because it is private key based. Private key is readily available and therefore is not a non-competitive resource. Non-competitive resources are not traded because it is replicable and there can be copies. I have a blockchain address with high credit ratings but others cannot buy this address from me and why? Because the private key is always in my mind, or in other storage medium. Therefore, once the private key is generated, it belongs to the user for a lifetime and is not tradable.
The fourth is the scope of application. Traditional credit system is not cross-platform compatible. If blockchain transactions and payment is popular in the future, everyone can log on to any platform through their own private key, whether it is e-commerce platform, taxi platform or your credit can be brought over.
The fifth is space-time dimension. Traditional credit rating depends on time. The default rating is good rating if you don’t rate in time. Or when you gave good rating at first but later found goods in poor quality, you can only add negative feedback but cannot directly modify the rating itself. Blockchain is a private key-based credit system that you can log on to your credit rating platform at any time to update your review of the transaction because the private key is always in your hand and you can modify the transaction history ten years ago or fifty years ago, So it is a lifelong credit rating system, which is no longer restricted by time and space.
This is my personal understanding of blockchain and I am open to discussion.