Financial bundling may be the underlying cause of the collapse of the arbitration mechanism on the EOS chain

INTRODUCTION: The failure of the EOS arbitration mechanism was shocking and was expected to be high. The failure of the arbitration mechanism allowed people to rethink the effectiveness of this mechanism in the field of encryption.

First of all, I have a question here: Why is your transfer fee so expensive?

For every dollar transaction, Visa charges a fee of 3% + $0.30. The charge is too high for reorganizing numbers in some databases. After all, everything in the credit card transaction has been digitized – from the online payment gateway to the credit card company's system, to your bank's database, to your bank's reserve Fed account. Its packets and bytes are still getting smaller.

So where does the high cost come from?

The answer is hidden behind the layers of mediation. But in essence, the two most easily named cost centers are compliance and fraud prevention.

People want a payment with a refund protection feature. They want to pursue it in case they are hacked, or their identity is stolen, or the bank's staff is mistaken. They want Federal Deposit Insurance Corporation (FDIC) insurance to prevent financial instability.

If you don't choose these, you can't pay others in reality.

But cryptocurrencies split the currency out of these functions. I believe, (not intuitively speaking), this is an important part of the cryptocurrency value proposition.

1. Bundle theory

Bundling is a classic concept in pricing theory. In bundled services, many products are packaged in one package for aggregation and sale. Some classic examples include cable TV (more than 80 channels, $30 a month) and Netflix (more than 7,000 shows and movies, about $10 a month).

Unbundling is the opposite process. It sells traditional bundled products in a “free-to-order” way. For example, iTunes splits the singles from their respective albums and sells them for 99 cents.

Repackaging the market in any direction is an eternal and disruptive business model. For example, the newspaper industry has experienced extensive splits over the past 20 years.

(As shown in the original newspaper, the various layouts [left]: A1 news, A2 comments, A3 ads, B1 personal, B2 classification, C1 recruitment… now split into different platforms and brands [right])

According to experience, for commercialized goods, bundling tends to favor sellers, and splitting is often beneficial to customers. In bundled products, sellers can hide expensive line items and convince customers to buy more than they need. And for a split product suite, customers are free to pay for what they value, and each service can better amplify their core value proposition. (For non-commoditized goods, bundling can bring more benefits, which is why sellers may continue to waver between bundling and splitting.)

Of course, all of the above are textbook economics. But how do these theories work on money?

2, split refund

When I was at Airbnb, I worked on payment fraud, so I spent a lot of time thinking about refunds. A refund is when a bank cancels a credit card transaction after a payment—perhaps because of fraud, such as a stolen credit card, or simply because the customer feels they are being treated unfairly. Refunds are the bane of any business – when online transactions are revoked, the company suffers in both product and money. This is a double blow to finance.

There is no concept of returning orders in the field of encryption. Every payment is final. If our Airbnb only accepts cryptocurrency payments, we can avoid our refunds. Will this improve the status quo?

Hard to say.

In the world of encryption, the lack of returns has led to many hackers lacking possible remedies. Therefore, for every cryptocurrence robbery, escape can be guaranteed. This pushes the security responsibility to the user or their wallet provider. But in the realm of credit cards, businesses are responsible for detecting and preventing fraud.

The credit card network defends this setup by looking at it, and the merchant is in the best position to detect fraud. (Because) they are people who understand customer behavior and can detect abnormal situations; they already have data, so they need to do anti-fraud work; they have no reason to let customers take on this responsibility.

This is a reasonable argument. However, this setup is not just a matter of responsibility, it is: it requires merchants to monitor their customers. Merchants are motivated to obtain data files for each customer so they can accurately simulate good behavior and bad behavior. This also means that merchants and their models ultimately decide whether you have access to their platform. This will lead us to the “surveillance capitalism” that Shoshana Zuboff condemned.

Of course, this also means that fraud will occur less frequently. Customers can swipe their cards more confidently without having to conduct due diligence on the business. But what is the cost we pay for this guarantee?

There is another idea here: the ability to withdraw a ticket is essentially your payment insurance policy. The underwriters of this policy are businessmen – they are forced to decide if you are worthy of underwriting. If there is any problem, you complain to the bank and force the merchant to pay the policy.

This huge insurance system accounts for a large portion of the cost of 3% + $0.30. And, you can't choose to quit it. This is the built-in fee for any modern payment system, just as anyone is required to purchase travel insurance on any flight.

Forcing everyone to do this is a strange thing.

Now, I am not saying that you should not ask for reversible payments. My point is simple: not everyone wants this service all the time. However, this reversibility has now been tied to the payment process.

The cryptocurrency removes this bundle.

That's why: cryptocurrency is a better way to pay when a compulsory insurance policy is only a tax on goods. That's why: the cost of sending $10 million in an encryption system is the same as the cost of sending $0.10.

3. What is tied to the currency?

Let's calculate, now, what is bundled with money:

1. Price guarantee for sovereign support

2. Reversibility (returnable / refund)

3.FDIC insurance (in some accounts)

4. Extensive anti-money laundering AML / KYC requirements (BSA)

5. Financial Supervision (Foreign Account Tax Compliance Act FATCA, SAR Report)

6. The court ban can rewrite the balance

7. Very slow solution

8. Some types of payment costs are high

9. Low integration system (payroll vs. checking account, credit card vs. micropayment software Venmo)

If you want to use fiat money today, you must register the entire bundle and it is difficult to quit any single component.

Critics will correctly point out: If you don't like all of these features, why not use cash? But cash is not digital. The role of digital payments in the global interconnected economy is crucial. Even systems like the US ACH (Automated Clearing) offer individuals a 60-day refund window.

What if I only want to open an account at the Fed? Just a digital dollar, and without any banking system pushing my bells and whistles? This is really bad luck. The Fed strongly maintains its financial bundling because it is theoretically believed that failure to do so would create “systemic pressure” on the financial system.

In classical economics, a persistent bundling that refuses to split is usually a sign of monopoly.

The Microsoft Antitrust case is a classic example.

Split products allow a single service to compete in a free market. And it continues to escalate in case of increasing accidental complexity and regulation. Although the state-controlled monetary system continues to accumulate legal and regulatory scum, cryptocurrencies have ruined these.

This is the core of Friedrich Hayek's argument in "The Denationalization of Money." Hayek said:

“There is no answer to the question in the question of why the government monopoly money supply is generally considered indispensable.” It has all the disadvantages of monopoly: even if it is not satisfied, it must use their products, and most importantly, It prevents people from finding better ways to meet the needs of monopolists."

Money should be like a free market, like any other market, allowing funds to compete. Bitcoin is the existing evidence: Bitcoin is the first major currency to prove demand for unsecured non-sovereign currencies.

Bitcoin says: Don't mind the currency that the state supports. There is only pure value here. (You can) send it as you like and send it as much as possible. Our only guarantee is that the ledger is safe – in essence, it is a property right guarantee. For a given transaction, if you need anything else — if you want — you are free to build on it.

This is not just an abstract point of view. Let me give you an example to help you understand.

4, chain arbitration, is a form of binding

The EOS Core Arbitration Forum (ECAF) is a governance system for EOS, a well-known smart contract platform with top 10 currencies. If the victim files a claim with ECAF, any chain transaction can be resumed. Instead of directly controlling the underlying blockchain, ECAF imposes power on the block nodes to enable the block nodes to perform their judgment.

Unsurprisingly, all of this broke down a few weeks ago and the ECAF has been removed from the EOS Convention.

Therefore, ECAF does not exist, and now it has been recognized as a bad institution. But I want to go one step further: it's not just a bad organization, it's a bad idea about the organization. This is an important point of view because there are many similar systems, such as DFINITY's "blockchain nervous system." We can refer to such systems as "chain-based arbitration systems."

My core objection to the chain arbitration system is that it is financial bundling. The whole cause of cryptocurrency is to invent a new currency that is not subject to the sovereign interest of the traditional financial system.

Vitalik Buterin has a deep understanding of this: systems such as ECAF can now be built on Ethereum (although high gas costs are required). You can set the transaction between ETH and ERC-20 tokens to be reversible within 90 days through a decentralized arbitration process. He called this hypothetical system RETH the reversible ETH.

So what is the problem with RETH? Nothing at all! If people want it, it’s good. So we provide it, but let it compete with ETH in the market. Let people choose whether they need unbundled currency, or whether they are reversible. It's only possible when the base layer is split – you can't build irreversible funds on top of the reversible base, but you can build reversible funds on an irreversible basis.

This is the whole premise behind the split: it allows consumers to choose the products that suit their needs, thus benefiting consumers.

Of course, the cryptocurrency is still in its infancy. It also does not address issues such as scalability, user experience, or the development of compelling products. But if you realize this split mode, you can understand the potential value of the glacier that the encryption field is trying to capture.

Finally, if you want to trade without the “traditional financial system enforcement content”, the cryptocurrency will give you an option to “opt out”. It gives you the freedom to adjust property rights, monetary policy, and the trade-offs between throughput and security you want for financial applications.

In a diversified market economy, more choices are a good thing.


Translator's profile: Aile Bull , a special author of the Blockchain Learning Society.

Disclaimer: This article has been authorized by the author to translate, please contact the Blockchain Learning Society.

This article is the author's independent point of view, does not represent the position of the blockchain study society, and does not constitute any investment advice or advice.