True and false stable coins! Blockchain needs to be regulated

This article authorizes reprinting from DeepTech (ID: deeptechchina)

Introduction / Lin Jiayi Facebook to issue stable currency through the blockchain is one of the most important major events in the blockchain industry. Last week's latest news is that the British BBC reported that Zuckerberg has met with Bank of England Governor Carney and is expected to launch in more than a dozen countries in the first quarter of 2020. Including technology giants such as Facebook and more and more startups have launched stable and stable currency, which is not only expected to push cryptocurrency into the daily consumption scene , but also to bring a real and stable currency dispute. There are a large number of unconformity stable currencies that are currently on the market. Cai Weide, director of the Digital Society and Blockchain Laboratory at Beijing University of Aeronautics and Astronautics, conducted an in-depth analysis of this week's DeepHash column.

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(Source: Flickr | FlyerDiaries.com)

Text / Cai Weide (Professor Beihang, founder of Tiande Chain)

The emergence of the blockchain took place in the 2008 world financial crisis, which was recognized by the financial community in 2015, and Wall Street began to invest and was named "trust machine" by The Economist magazine. But along the way, the "trust machine" has always been hypocritical. Air coins, counterfeit coins, pseudo-chains, empty chains, and non-chains have all happened. In the past 40 years of academic career, the author has not encountered so many authentic events in a new technology. However, in 2018, the US government regulatory agencies took the lead in guiding the regular army in the financial sector into the blockchain, so that the history of the blockchain was determined to change direction, and the previously hypocritical events would be slowly replaced.

1. Is there a practical application scenario for the blockchain?

After the soaring and plunging of digital tokens in 2018, there have been many doubts and discussions abroad, some of which are very serious and mainly discuss whether the blockchain is really useful. For example, from 2015 to 2017, the British "Economist" magazine repeatedly promoted and promoted the advantages of blockchain technology, but in 2018 it published an article suspected blockchain. First of all, they think Bitcoin has no value, but it is still unclear whether they use the blockchain.

From the beginning of 2018 to the beginning of 2019, the United States is still openly discussing the use of blockchains. The author discussed these debates in several other places. Most of the theories that the blockchain is useless are based on the aversion to the public chain and the lack of understanding of the blockchain. The views of those debates are not discussed in this article.

But this article will answer the blockchain is not useful, the answer is: useful. But why is it useful?

2. Important financial units issued stable coins

In fact, while the Economist magazine published a skeptical point of view, there was a big event, and then there were many major events. Now list three historic financial events from 2018 to 2019:

  1. In July 2018, IBM and the start-up company Stronghold announced a partnership to issue stable currency, which is a digital dollar, and launched a cross-border support system;
  2. In February 2019, JPMorgan Chase Bank announced the launch of a stable currency and launched a cross-border payment system;
  3. Facebook must issue stable coins.

These three things are related to the stable currency and represent the arrival of a new financial era. IBM's stable currency is supported by the government unit FDIC, which represents the US government's support for the issuance of stable currency; JPMorgan Chase Bank is the world's first large bank to issue stable currency. These two events are events that have changed history, shaking the ecological circle of not only the blockchain, but also shaking the formal financial sector and shaking the world's multinational central banks [1]. These authors have written articles for a very short time after the incident. I remember that when the incident occurred, some people thought that these were not important events, and the market price of Bitcoin was important. In fact, these things are historical events, and the financial history will certainly record the impact of these things on the world.

Facebook's stable currency is not as good as the previous two in the history of currency, but it is very important in business. The author has said before that the financial industry will use blockchain technology in the future, but conduct transactions in a legal and compliant environment. Unlike before, it was in an unlawful environment (but it did not mean that it was illegal).

The attitude of the US regulatory agency SEC is very clear. Those who do not have legal digital tokens are solved by the market. They do not support or encourage them. As long as they do not break the law, they will not care, but once they are punished immediately, the US market is restricted. IBM, JPMorgan Chase and Facebook are on a regular route, legally compliant, US regulators support, encourage and protect investors, and the US market is open to these financial products.

Facebook has 2 billion customers worldwide (if more than 3 billion customers are added to related companies), and if 10% of customers use Facebook's stable currency, this becomes a huge cross-border payment system, more than now The market for many cross-border payment companies. It will also challenge the traditional cross-border payment market structure .

And the face of the Facebook currency has been shaken when it has not released its details. Some people have previously suspected that stable coins can make money. In fact, abroad, they have estimated that Facebook will increase its market value by issuing stable coins. Many people suspect that the stable currency is because the price of the stable currency is constant and cannot be profited by price fluctuations. But the stable currency is not a stock, it is a currency in the UK, and the currency is controlled by the “currency law”. Money is profitable by circulation and trading, so the more people participate, the more money they make. Because Facebook uses a lot of people, analysts think that this will be a big deal, see the picture below.

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Figure | Foreign analysis believes that Facebook will gain huge benefits in stable currency (Source: I Know First)

Some people think that Facebook's stable currency will replace the US dollar, and the author cannot agree with this view. The United States will not agree to the status of the dollar in any country or unit. The stable currency of Facebook is to assist the US dollar at most, instead of replacing the US dollar. The appearance of Facebook coins will hit other digital tokens, especially other fake “stabilized coins”. This is the regular military challenge digital token.

3. Fake stable coins are found to be fraudulent

In the past, the author explained that there are two types of stable currency: 1) The real stable currency is supported by government regulatory units , such as IBM's stable currency; 2) The other is a fake stable currency, without government support or supervision . In the past few years, foreign media reported that funds behind some stable currencies are likely to be fake (because the project side did not provide evidence to confirm the existence of these funds), and the price of “stabilized coins” was unstable.

In addition, many analysts believe that the soaring number of digital tokens in 2018 is because these fake stable coins are deliberately multi-issue, making money for the purchase of digital tokens, without the actual dollar behind. At that time, some analysts believed that one of the reasons behind the collapse of the stable currency was that the project party cashed in and made the holder of the stable currency suffer. If so, this means that the project party and the investor have a conflict of interest. But at the time the judicial unit did not intervene, and now the US judicial unit began investigating similar incidents and believed that there was a possibility of fraud.

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Figure | “Stable Dollars” Nubits has experienced a price crash and currently has only 8 cents, a drop of 92% (Source: CoinMarketCap)

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Figure | "Stabilized Coin" Tether prices have repeatedly fallen (Source: CoinMarketCap)

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Figure | May 2019 fake currency was found fraud by US judicial authorities (Source: Network)

The author has always believed that stable currency is an important innovation in world finance, but this must be a true stable currency, not a fake stable currency. Fake stable coins will be eliminated in history. A stable coin generated by a "trust machine" cannot be used for fraud. This is an insult to the trust machine. The trust machine is used to maintain fairness, not to engage in fraud. The blockchain community should be self-disciplined and will not allow this to happen again.

4. Major financial institutions engaged in large-scale experiments In 2017-2018, the Bank of Canada, the European Central Bank, the Bank of Japan, and many important banks or financial institutions in the world began experimenting with blockchains, and in early 2017 until the beginning of 2018, Most of the experimental results are negative or failed experiences. This does not mean that the blockchain will fail in the future. This only means that the blockchain technology was not mature at the time, because these banks continued to experiment, and they also thought that there was The future, and later the experiment also announced success.

For example, the Bank of Canada issued a very negative report in the first period, but the subsequent report is more and more positive. Any new technology must go through a period of learning, running-in, experimentation, or failure period, so it is normal to fail in early experiments [2]. Edison failed to give up and failed to give up, and thought that these experiments were successful because they brought important information and would not follow the same route in the future.

5. The financial center began the digital currency experiment

Another major status quo is that the world's two most important financial institutions, the World Bank and the International Monetary Fund (IMF) began to issue "Learning Coin" (Learning Coin), this is not a digital token, just learning, Researching and experimenting with related technologies, and publicly saying that this is actually the predecessor of the "digital legal currency."

This represents the two most important financial institutions in the world and has begun to seriously think about digital currency . The IMF's speech at the Bank of England on September 30, 2017 was amazing. In that speech, the IMF changed their perception of the blockchain and digital tokens, arguing that blockchain technology and digital currency are the future.

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Figure | World Bank and International Monetary Funding "Learning Currency" (Source: Network)

6. Non-technical powers are also beginning to research and deploy blockchain financial applications

Today, not only leading countries such as the United States, the United Kingdom, and the European Union are engaged in blockchain research and deployment. Many central banks or banks in third world countries are also engaged in blockchain experiments, or have begun to tender blockchain systems. This is very amazing, which indicates that the blockchain boom has spread from developed countries in Europe and America to emerging countries, and these emerging countries are experiencing blockchain speeds, sometimes more radical than Europe and the United States.

7. The blockchain era is coming, it can't turn

From the most important bank in the world, JP Morgan Chase, the most important foreign technology companies Facebook, Google, IBM, the most important financial institutions abroad (World Bank, International Monetary Fund) are doing legal compliance digital currency, or large Financial blockchain experiments, it is imperative to represent this blockchain trend.

Applying a foreigner's words, "handwriting on the wall", indicates that this trend is obvious and everyone can know. In 2019, I can read what I thought was amazing news almost every day. These news will be discussed in the blockchain world before 2018, but now everyone is used to it, it is not strange.

So now you should not ask "Is useless", but ask "how to use, how to deploy."

This is not just the author's point of view, Deloitte is the same point of view. Its Global Blockchain Survey industry report in 2019 mentioned that this year the blockchain has reached an important turning point, with 53% of company leaders considering the blockchain as one of the five major directions, and 27% of the five important but not the most important Direction, indicating that 80% of leaders believe it is important. The following picture is part of the report from Deloitte. Deloitte also believes that it is not asking "whether it is useful or not" but asking "how to use it."

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Figure | Deloitte's 2019 Blockchain Report (Source: Deloitte)

8. Financial technology needs to follow uniform regulatory rules

On May 12, 2019, Guo Shuqing, secretary of the Party Committee of the People's Bank of China and chairman of the China Banking Regulatory Commission, said that financial technology such as blockchain must follow unified regulatory rules and risk prevention and control standards. In addition to talking about the blockchain, Guo Shuji mentioned that because of the changes in the operating modes of these new technologies, consumer protection and network system security, these are closely related to the blockchain. It can be seen that the blockchain has become important in China, especially in financial applications.

The author has been talking about the past year, the blockchain itself has to be changed, rather than hoping to change the unified supervision or evaluation principles , as shown below.

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Figure | Guo Shuqing believes that financial technology must follow a unified regulatory rules (source: network)

Many blockchain evaluation criteria are now tailored to blockchain systems (such as the speed of consensus mechanisms), not from financial systems and regulatory requirements. According to such standards, it is possible that the blockchain system will meet the standards in terms of function and performance, but it still does not meet the needs of the financial system.

9. Blockchain needs to change to change the world

In the past, many people suggested that blockchain would change the world or subvert the world, and some even said that bitcoin changed the world. In fact, the Bank of Canada's 2017 experimental report said that it is impossible to use the current blockchain system, because the current blockchain system does not meet the regulatory rules. If it is impossible to use, how to subvert Now the financial world?

The Bank of Canada took the lead in using the PFMI to evaluate the blockchain system in 2017. The European Central Bank and the Bank of Japan also followed suit, and the PFMI is the standard supported by central banks in the world, including the People's Bank of China, the Federal Reserve, the Bank of France, and the European Central Bank. The Bank of England and other central banks [3, 4, 5].

The Bank of Canada, the European Central Bank, and the Bank of Japan evaluated the blockchain system and concluded that the blockchain system cannot meet the needs of PFMI, including reliability and security. Both of these features have always been blockchain strengths, which brings an important message: Many people have always believed that blockchains are reliable and safe, but the three central banks believe that the blockchain system is now unreliable and unsafe.

So the idea of ​​"because I use the blockchain, I changed the world" has never been established, and this is the wonderful ideal of the blockchain enthusiasts. The ideal is good, but in fact the blockchain technology still has a way to go to change the world. The blockchain will change the world, but it is not the “block chain that has not changed”.

So don't feel free to believe that any unit sells its blockchain, you need to actually evaluate it, you may find that the actual gap is very far . Tiande has tested many blockchain systems using the Taishan Sandbox. The test results of many blockchains and the white papers are very different.

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Figure | The author gave a 2018 presentation to the Unified Standard (PFMI) Evaluation Blockchain System (Source: Network)

10. Blockchain needs to be rollable and regulatable

Where do the blockchain systems need to be changed now? The rollback and manageability of transactions are two important functions that must be changed . Nowadays, after the digital token transaction is completed, it cannot be rolled back, and the supervision is very poor. Now digital tokens such as Bitcoin and Ethereum are evading supervision, and deliberately designing systems makes supervision difficult. At the time of regulation, the regulator must quickly find the relevant account and find relevant information, but the data structure of the Bitcoin account makes the search time consuming. These system designs must be changed or replaced.

Transaction retractability is a necessary mechanism for modern trading systems. If the blockchain cannot support transaction rollback, it means that supervision cannot be in place. And if only another anti-transaction is laid out and the problem cannot be solved, the factual problem is more complicated than this solution.

11. The risk of pseudo-chain is huge.

British regulators have said that 78% of ICOs are completely scams, and others may be partial scams. This represents a very serious phenomenon. A "trust machine" is now being turned into a "false machine". This phenomenon must be changed, or the blockchain industry cannot develop normally [6]. It is no longer possible to push the blockchain industry with "empty chain", centralized "pseudo-chain", or "non-chain" [7]. These are "false machines", not the "Economist" magazine. Trust the machine."

In 2017-2018, many Chinese teams went to the sea to issue coins, but now they are facing risks. Not only are the currency prices no longer, but some are accused of going overseas to court, and they cannot return to China. These are the risks of illegal currency.

In addition to the risk of illegal currency, there is another major risk, that is, the use of centralized pseudo-chains in finance, government, and public security. These are serious applications that do not allow the system to go wrong. Today's well-known foreign chains have been proven to be centralized pseudo-chains, using the Kafka consensus mechanism (Kafka consensus), not the Byzantine general consensus.

However, some units continue to use it in finance, government affairs, and public security laws. The centralized pseudo-chain is unsafe and unreliable because there is a “dead hole” in the system (the central control node of the Kafka mechanism). Once the dead hole is controlled, the whole system is completely controlled by outsiders, and it can be lurked for a while. It is found that because the information can be controlled by the central node, other nodes will receive the same false information. Fake transaction information, fake government documents, and fake electronic evidence can cause great harm to the parties. For example, in court, a false evidence is considered to be true evidence, and black and white is immediately reversed.

Who is responsible for the incident? Production of pseudo-chain organization? They have open source code and openly acknowledge the use of a centralized Kafka consensus rather than a distributed Byzantine protocol. This information is true and open, and the user may be responsible for it. Who is responsible for legal responsibility once the electronic evidence has been changed? Who is responsible once the government documents have been changed? It can only be clearly understood that this is a high-risk pseudo-chain and still used by the development team.

In addition, if the competitor does not use the centralized pseudo-chain, then the use of the pseudo-chain has already lost in the momentum. Today, many units have taken the propaganda of the pseudo-chain, which is to worry about the negative effects.

The use of traditional centralized systems or blockchains depends on the scenario, but if it is clearly a centralized “pseudo-chain”, it is declared to be a distributed blockchain, which will leave a huge risk openness in the matching of matching systems. Mouth, there is suspicion of false disclosure. Today customers should ask the blockchain supplier, "Dear, you will not provide fake chains for me to use?"

If you provide a pseudo-chain, you can ask "If the center of the chain you provide is controlled by an outsider, so that the lawsuit is lost, will you be responsible for the loss?"

12. Distributed consensus is blockchain competitiveness

Today, the distributed blockchain system can not use the Kafka system, and some units have been completed, and the Tiande Mountain chain is the representative. If a chain does not use Kafka, the core system design is much more difficult, because the transactions sent by the time need to be time-stamped, but the order in which the distributed nodes receive the information may be different. This makes the consensus mechanism complicated. An important reason for using Kafka is that centralized management can greatly simplify system design.

But once the centralized mechanism is used, is this still a blockchain? This is not a blockchain, but a pseudo-chain, because there is a center that all nodes must trust to control the entire chain, which violates the definition of the blockchain and the "trust machine" principle. The "trust machine" is a node that trusts each other without trust to be a trusted machine (so that you can find which node is lying). The origin of this blockchain wave is precisely because the Wall Street Journal pointed out in January 2015 that in the future, it will no longer use a centralized mechanism to maintain trust. But the pseudo-chain is exactly the opposite of this principle.

The distributed consensus mechanism is the core competitiveness of the blockchain system. Units that have been made abroad do not even apply for patents, because the application means open technology, let alone open source. This function has been completed. (This article first appeared on the DeepTech platform on Tuesday's DeepHash column)

WeChat picture_20190530111853 Cai Weide National Distinguished Expert, Beihang University, Bachelor of Science, MIT, Ph.D. in Computer Science, University of California at Berkeley, 30 years of education research at the University of Minnesota and Arizona State University. Scientific Consultant, Blockchain Research Center, University College London, UK, Chief Scientist of Tiande Technology, Director of Blockchain Internet Lab, National Big Data (Guizhou) Comprehensive Experimental Zone, Honorary Dean of CCID (Qingdao) Blockchain Research Institute, Ren Duo Government and company consultants. There are 600+ papers and 6 books, and the papers have been quoted over 10,000 times.

 

References: [1]. Cai Weide et al., "The dollar digital law currency was born, are you ready?", https://mp.weixin.qq.com/s/n3olvAeCt9SB55sPD5ENhQ [2]. Cai Weide, "Cai Weide: The feasibility of the application of blockchain in the financial sector", https://mp.weixin.qq.com/s/hcQQ0uxultYQ5PAjaUYwYQ [3]. Cai Weide et al., "Application of distributed ledger technology in payment, clearing, and settlement services" ", https://mp.weixin.qq.com/s/kR4qQHbMwfJiVRERGNNTAg [4]. Cai Weide et al., "Application of distributed ledger technology in bank payment, clearing and settlement business" Interpretation One of the blocks from PFMI Chain "letter" PFMI series of articles (1)", https://mp.weixin.qq.com/s/FyioNdaGOLDWnmRBY7SHuA [5]. Cai Weide, Jiang Xiaofang, "PFMI Series 2: Clearing Chain "Design Road"" , https://mp.weixin.qq.com/s/rsAzxu5WZci6y_B6XsnKKQ [6]. Cai Weide, "'Trust Machine' can't be 'fraud machine'", https://mp.weixin.qq.com/s/wv7GhpwJ5tCsdgFVjzXmWA [7]. Cai Weide et al., “Pro, what chain is your chain?”, https://mp.weixin.qq.com/s/aD8eJQ9 IIBcvv9_OI_9HLw [8]. Cai Weide, “Regulatory Sandbox 2.0 and Industrial Sandbox Economics”, https://mp.weixin.qq.com/s/mGZdnh9QarIqjL317nLgzw [9]. Cai Weide, Jiang Xiaofang, “The rise of the blockchain industry, This time is true, but is there any preparation for supervision?|DeepHash column", https://mp.weixin.qq.com/s/gduYj-YLRKT8rLIciBJ3-w [10]. Cai Weide, Jiang Xiaofang, "The rise of the blockchain industry This time is true, but is there any preparation for supervision? (Bottom)|DeepHash column", https://mp.weixin.qq.com/s/7wskLKHNOSiZcTBfYU6Hzw [11]. "Global Project on Technology Evaluation and Analysis of Public Link Projects" Http://www.tdchain.cn/tdchain/report201902 [12]. "Facebook Story Forecast: Why Facebook Stablecoin can be a Massive Catalyst," March 2019, https://iknowfirst.com/facebook-stock- Forecast-why-facebook-stablecoin-can-be-a-massive-catalyst [13].Linda Pawczuk, Rob Massey, Jonathan Holdowsky, "Deloitte's 2019 Global Blockchain Survey", May 6, 2019, https://www2.deloitte .com/insights/us/en/topics/understanding-blockchain-potential/global-blockcha In-survey.html?id=us:2el:3pr:4di5041:5awa:6di:050719:&pkid=1006070 [14].Xu Yongsheng, "Shock! The world's largest stable currency is accused of fraud involving 850 million US dollars. May 1, 2019, https://www.wdzj.com/news/hydongtai/4280713.html