Author: Xiao Feng
Source: Shanghai Securities News
■ Blockchain is not only an integrated technology, but also a new organizational form of decentralization, information sharing, and consensus. Its rule design is designed to achieve greater scope by relying on the game between multiple nodes in the network structure. And deeper complex transactions, and presented in the form of computer applications and algorithms.
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■ Blockchain is an information decentralized decision-making mechanism that can achieve the goals of a given society. Compared with the centralization mechanism, the blockchain mechanism has two advantages: one is the Pareto validity of resource allocation; the other is the incentive compatibility, which better solves the opportunistic behavior caused by asymmetric information.
■ Blockchain is more important to use economic theory to design and create “rules” or algorithms that produce a certain equilibrium result. The organic combination of economic mechanism design theory and network theory, cryptography, computer technology and artificial intelligence will greatly promote the subversive innovation of blockchain in the new era and new economy.
The ins and outs of blockchain thinking and technology
Since the publication of Bitcoin White Paper: A Peer-to-Peer Electronic Cash System in 2008, the research and application of bitcoin and blockchain technology has gradually increased. But for a long period of time, the blockchain was only a topic discussed by technicians and entrepreneurs on a small scale.
Since 2017, the attention of the community on blockchain, cryptocurrency and smart contracts has rapidly increased, and blockchain has become a hot topic of discussion among the public. An optimistic view even believes that blockchain technology is the fifth subversive innovation of the computing paradigm after the mainframe, personal computer, Internet, mobile Internet, and social network. It is the blood-related credit and precious metal credit in the history of human credit evolution. The fourth milestone after the central bank's banknote credit.
Tracing back to the source, the design idea of blockchain technology comes from the Byzantine general in the Eastern Roman Empire. In essence, blockchain is to design a dynamic game mechanism or algorithm for decentralized decision-making, which solves the concerted action of multiple agents in asymmetric information through information transfer.
From the perspective of the underlying technology, the blockchain is a new technology that integrates mature technologies such as point-to-point transmission technology, distributed technology, cryptography, and network theory. In 2011, Vitalik first discovered blockchain and cryptocurrency technology through Bitcoin, and in November 2013 published the Ethereum White Paper.
From a functional point of view, the core advantage of the blockchain is decentralization. By using data encryption, time stamping, distributed consensus, and economic incentives, decentralized credit is realized in distributed systems where nodes do not need to trust each other. Peer-to-peer transactions, coordination and collaboration provide solutions to the high cost, inefficiency and insecure data storage that are common to centralized organizations.
From the evolution of thought, Kevin. Kelly pointed out in the book "Out of Control" in 2016 that distributed systems have four salient features, namely, no mandatory central control, sub-units with autonomous traits, high-level links between sub-units, and point-to-point The influence forms a nonlinear causal relationship through the network. Kevin. Kelly further pointed out that rather than saying that a distributed, decentralized network is an object, it is better to say that it is a process.
From the application point of view, Internet companies such as BATJ (Baidu, Ali, Tencent, JD) are actively deploying in the blockchain field to promote the development of the blockchain industry. In May 2018, the Information Center of the Ministry of Industry and Information Technology launched the White Paper on China's Blockchain Industry in 2018. Local governments are also actively developing and improving the blockchain technology, policy system and regulatory framework from the industry. Ma Yun said in 2018 that Ali is currently focusing on three core technologies, one based on big data artificial intelligence and the other two are blockchain technology and Internet of Things technology. Blockchain technology coupled with Internet finance will make it possible to build financial systems and standards in the data age and information age in the 21st century.
From the perspective of researchers, the blockchain has gradually entered the field of mainstream researchers. The University of Chicago Professor Lin and Professor He Zhiguo in the work paper "Block Chain Subversion and Smart Contract" published by NBER in March 2018 proved that the decentralized system design of blockchain helps to increase social welfare and enhance Consumer Surplus. Professor Fang Hanming of the University of Pennsylvania said in June 2018 that professors from the Department of Economics of the University of Pennsylvania spontaneously organized a study group. What to learn? Blockchain and bitcoin. We take turns reading literature to discuss the mechanisms of blockchain, study their cryptography and economics, and what kind of groundbreaking applications might be.
Blockchain is a decentralized decision mechanism
In our view, blockchain is a way to construct the relationship between nodes and nodes by using distributed technology. The purpose is to rely on the game between multiple nodes in the network structure to achieve more complex and deeper complex transactions. From the perspective of the history of economics, the blockchain directly challenges the central and decentralized mechanisms that have been debated for centuries in economic theory and practice, namely centralized centralization mechanisms and decentralized market decisions. Mechanism; Secondly, the fundamental characteristics of the blockchain also challenge the traditional micro-organizational structure, which is a completely new organization completely independent of the enterprise.
The blockchain is not only a new technology applied to the real economy, but also an organizational or institutional design that competes with traditional economic mechanisms. The advantage of the blockchain is that it solves the problem of Pareto validity and incentive compatibility of resource allocation. The disadvantage is that the information cost of the mechanism is very high, and it needs to rely on cryptography, network structure, cloud computing, big data, deep learning, Technical means and algorithms such as artificial intelligence are implemented.
Traditionally, central centralization means that individuals with private information report their type information directly to a central planner, such as marginal cost, marginal utility, marginal benefit, consumer demand, etc., and then the central planner reports according to the individual. Information, develop each individual's production vector, such as production level, investment level, etc., as well as consumption vectors and money transfer payments, and give them to each individual. Among them, the central planner needs to solve the input-output table including millions of simultaneous equations.
■ In the history of economic theory development, the central centralization mechanism is the most important institutional arrangement in the design of mechanism. The theoretical basis is based on the display principle proposed by scholars such as Gibard and Meyerson. The meaning of the display principle means that in the economic environment of asymmetric information, the equilibrium result of any indirect mechanism can be replicated by a direct display mechanism with a unique mathematical structure. The introduction of the display principle greatly simplifies the mechanism design work, so that the mechanism design work can focus on designing a direct display mechanism with good properties. From the perspective of game rules and information transfer methods, the central centralized mechanism is a direct display mechanism.
The technical foundation of the blockchain is a distributed network architecture with decentralized, sub-centered and information sharing, consensus, and shared organizational structures. From the perspective of mechanism design, information sharing and consensus are expressed as the mutual transfer of information between participants.
■ Blockchain is not only a new technology, but also an organizational or institutional design that competes with traditional economic mechanisms, helping traditional physical economic transactions to exit from centralized organizations and return to decentralized decision-making markets. Based on this understanding, its importance in the process of social development is self-evident. Of course, it should be pointed out that the blockchain mechanism expands the dimension of the information space and also imposes more complex computational tasks on each individual.
Blockchain mechanism satisfies incentive compatibility and Pareto optimality
In the practice of social development in the past 100 years, the center and the center are two completely different institutional arrangements, which are expressed as a centralized centralization mechanism and a decentralized market decision-making mechanism. In the early days, such as the "economic calculation problem" that Hayek, the Nobel laureate in economics in 1974, questioned the planned economy. According to Hayek, the close interrelationship between various economic phenomena makes it difficult for us to stop the plan within the limits we want, and the obstacles to the free movement of the market have exceeded the level. The person is forced to expand the scope of control until it becomes all-encompassing. In recent years, such as the 2007 Nobel Prize in Economics, Hewitz, keenly found that the most important task of mechanism design is to build a standard that evaluates the merits of an economic system and can be recognized by most economists. The effectiveness of information, incentive compatibility, and Pareto effectiveness of resource allocation are three criteria generally accepted by the economics community.
The information cost of the blockchain mechanism is high
An important reason for Hayek’s criticism of the planned economy is that “the planned economy takes too long to collect information and calculate equations”. If expressed in mathematical language, it is because in the high-dimensional parameter space, each individual needs to verify many equations, so the information space is also very large. Therefore, Hewitz, the father of mechanism design, pointed out that information cost is one of the basic criteria that mechanism designers must consider. Among them, information validity is an important criterion for judging the merits of an economic mechanism. Among the various methods for measuring the validity of information, the dimension of information space is one of them. The larger the dimension of information space, the higher the information cost of the mechanism.
The information cost of running this distributed mechanism of blockchain is very high. In fact, in order to avoid the prevalence of collusion, it is necessary to have cross-confirmation, which will also increase the cost of information processing. Fortunately, with the in-depth development of big data, intelligent computers, cloud computing technology and Internet technology, the computational efficiency has been greatly improved, which will help to reduce the high information cost of distributed mechanism operation. At present, the premise that some distributed business model applications can successfully land is the rapid development of computing technology and information storage technology.
Blockchain mechanism satisfies incentive compatibility
A common problem in social choice and mechanism design is that some individuals with private information will adopt opportunistic behaviors that “conceal preferences, distort facts or deliberately confuse”. The opportunistic behavior of individual pursuit of self-interest often violates the collective interest or influences the implementation of social goals, resulting in the Pareto invalidity of resource allocation. A good economic system can only coordinate the consistency of individual interests and collective interests of participants with asymmetric information only if they satisfy the incentive compatibility. Therefore, incentive compatibility is an indispensable criterion for measuring the strengths and weaknesses of economic systems. The fundamental problem to be solved by mechanism design theory is the incentive problem under asymmetric information.
The blockchain mechanism satisfies the incentive compatibility, and the centralization mechanism does not necessarily satisfy the incentive compatibility. The reason is that, first of all, in the blockchain mechanism, for trust, each transaction link is cross-validated, and the probability of individual fraud is almost zero. Therefore, the probability that the blockchain mechanism information is true is 1. Second, in the centralization mechanism, the information reported by participants is not necessarily their true type. The probability that the blockchain mechanism information is true is higher than the probability that the central centralized mechanism information is true.
Blockchain mechanism leads to Pareto optimal configuration
The evaluation of the system should be based on Pareto effectiveness. The reason is that Pareto effectiveness is one of the most basic evaluation criteria for efficiency in neoclassical economics. Whether it is a direct display mechanism or a blockchain mechanism, the configuration of resources is ultimately involved. As far as resource allocation is concerned, the blockchain mechanism leads to the optimal configuration of Pareto, and the central centralization mechanism will have a certain degree of efficiency or welfare loss. The reason is that the blockchain mechanism solves the problem of information asymmetry better, and the central centralization mechanism has the problem of asymmetric information.
It is well known that asymmetric information can cause Pareto inefficiency in resource allocation, which is a core issue that plagues all organizational and institutional designs. Designers can design a set of incentives to reduce or avoid loss of efficiency. From a mathematical point of view, the designer designs a set of mechanisms to maximize social welfare under incentive compatibility constraints and participation constraints. The conflict of incentive compatibility constraint and participation constraint is commonly called entrustment-agent contradiction, which constitutes the fundamental contradiction of the mechanism design under information asymmetry. When the designer reaches a balance between the dilemma, the incentive mechanism designed is the optimal mechanism. Obviously, the resource allocation result obtained by the optimal centralization mechanism designed by the designer is the constraint Pareto optimal, which is certain compared with the Pareto optimal configuration achieved by the blockchain mechanism without trust. The degree of efficiency or welfare loss.
Immeasurable impact on human society
Kevin. In the book New Rules of the New Economy, Kelly pointed out that in the next decade or so, the huge benefits brought about by the new economy will largely come from the development and utilization of distributed and autonomous networks. As a brand-new decentralized decision-making system design of resource allocation, the blockchain mechanism has sprung up in the era of Internet economy, and its impact on human society is immeasurable.
(Xiao Feng is the vice chairman of China Wanxiang Holdings Co., Ltd., the founder of Wanxiang Blockchain Laboratory; Tian Cunzhi is a professor and doctoral supervisor of the Finance Department of Jinan University School of Economics; Xiao Xinrong is a professor and doctoral student of the School of Finance, University of International Business and Economics. Tutor; Yang Rui is the chief economist of Beijing Zhongke Jingshang Technology Co., Ltd.)