Pareto optimal solution of blockchain

Yesterday afternoon, Facebook released its own white paper on Libra tokens. According to official sources, the emergence of Libra Stabilization Coin will serve as a simple global monetary and financial infrastructure that benefits billions of people. That is to say, the goal of Libra Stabilizing Coin is to do inclusive finance.

Because there are currently 1.7 billion people in the world who do not have bank accounts. The traditional cross-border transfer efficiency is very low and it takes several working days to complete. At the same time, people who do not have a bank account in the United States will have to pay a fee of more than $4 per month in order to participate in social finance. Using blockchain to improve the lives of these people is the vision of Libra's stable currency.

This made me suddenly realize that at this time last year, it was considered to be the most stringent data privacy law in history, the General Data Protection Regulations (GDPR) came into effect in the EU. According to foreign media CNET, on the first day of the law's entry into force, giants such as Google, Facebook, WhatsApp and Instagram were complained that they received a total of up to $9.3 billion in fines.

Until the first two days, Helen Dickson, head of the Irish data protection committee (DPC), the EU regulator, also said that it remains to be seen whether Facebook is seriously considering privacy issues. Currently, DPC is conducting more than a dozen surveys on Facebook. Some were launched after receiving complaints from individuals or businesses, and some were initiated by DPC. The most common issues include the legal basis for processing personal data, the lack of transparency in the way companies collect personal data, and the right people have access to their data.

And Facebook's founder, Zuckerberg, accepted questions about user data at the US hearing, and in the face of the judge, his expression knew that he had been professionally trained.

Regarding data, there is only one core question, who is the ownership of data privacy?

Have you thought about whether you as a user will be willing to sell your privacy to the platform company? Two years ago, Facebook launched an event that would allow you to pay for membership and privacy, and would not be used by Facebook. When the event was launched, it was immediately resisted. what? Did you take my data to do something I didn't know? When the public is angry, they will get up. As a result, this matter was launched in less than a month and suddenly stopped.

Then the question is coming. If you really choose to sell, what price will you sell to be willing? Is it 10 yuan or 100 yuan or 1000 dollars? This data is put in a state of arrogance in the mind of any ordinary person, and it cannot be calculated. And it also depends on how the platform uses the user's data after the sale. Can the platform company guarantee that your information will not be abused? This is a very difficult question to answer.

In the end, such data transactions are difficult to achieve. So many times, the platform company simply does not buy from you, but directly owns your data, you simply have no chance to choose.

This leads to a solution called the Pareto optimal solution. It is also known as Pareto efficiency and refers to an ideal state of resource allocation. Assume that an intrinsic group of people and assignable resources, from one state of distribution to another, makes at least one person better without making anyone's situation worse. Pareto optimal state is no longer possible for more Pareto improvement; in other words, Pareto improvement is the path and method to achieve Pareto optimality. Pareto optimality is the "ideal kingdom" of fairness and efficiency.

In general, resources are ultimately assigned to the people who really want to use it.

For example, roads, thousands of years ago, when humans could not control animals, mainly all kinds of animals were leaving. In the 11th century BC, a horse-drawn carriage appeared, and the road gave way to the carriage. People had to stand by. In the early 19th century, after the bicycle appeared, the road was occupied by bicycles. When the world's first mechanical car landed in 1886, the road was gradually occupied by mechanical cars. Today, we will find more and more Tesla on the road, more and more electric cars, which shows that the future of the road is more efficient and lower cost electric vehicles, until completely unmanned.

As a social public resource, the road is constantly being allocated to more efficient and lower-cost travel tools. This means that regardless of the initial arrangement of rights, the market mechanism will automatically make the resource allocation Pareto optimal.

So back to Facebook's data privacy issue, we say that the ultimate problem will be that it will have ownership of our personal privacy data, which is determined by the Internet's mechanism. We are still returning to the Pareto optimal solution. Every single user has actually owned its own data ownership 30 years before the development of the Internet.

What does this mean? In the traditional offline business 30 years ago, I wanted to go to a restaurant to eat. This is very random. The possible situation depends mainly on whether the restaurant is close to where I live. Or is this restaurant a place where I decided to go together with my friends? Then I go to eat this behavior data can not be effectively used by the restaurant or can not be effectively used by me. Because although I want to go to dinner, I don't know that there is a restaurant in the neighborhood that is suitable for me. I might choose a restaurant with a very low price/performance ratio and not get the corresponding enjoyment.

At this time, my personal privacy data is personally owned by me and is perceived by the restaurant, but neither party can effectively obtain higher returns.

In the era of the Internet, this matter has become simpler, and the centralization organization has assumed the responsibility of the data control platform. For example, public comment, US group takeaways have our behavior data privacy.

Internet companies will use our privacy data to improve their own algorithms, and finally hope to achieve the maximum efficiency of social resources.

This means that when the user surrenders his or her privacy, the Internet agency can use the algorithm to recommend the restaurant he might like or give the user more effective choices. Users who understand more discount information also promote their ads to more applicable people.

What is the actual situation? As a company, Internet companies help shareholders earn higher profits is their primary goal, so the capital market will eventually allow Internet companies to use user privacy data to make more profitable products. At this time, there was a problem of resource allocation imbalance. In the end, it also leads to the ownership of user data at the beginning of this article.

Why do companies need to use user data to achieve social resource optimization, is there any way for the market to solve this problem?

Here we have to derive the source of the Pareto optimal solution, Coase's law. The Coase Theorem is a view put forward by Ronald Coase that under certain conditions, the externalities or inefficiencies of the economy can be corrected through negotiation by the parties, thus maximizing social benefits. The more straightforward explanation is:

In the case of clear property rights, if the transaction cost is zero or small, then no matter who the property rights are given at the beginning, the market will eventually lead to higher efficiency and realize the Pareto optimal solution of resource allocation.

Before Coase, when the information asymmetry and externality were often considered, the market failed. At this time, it was necessary to intervene in the market to realize the Pareto optimal solution. However, Coase's theorem believes that even if information is asymmetric, the fundamental cause of market failure is property rights. The definition is not clear. Once the definition of property rights is clear, both parties can achieve efficiency through market mechanisms, namely Pareto optimality.

Therefore, the true meaning of the Coase Theorem is that because of the transaction costs, many transactions in real life are difficult to occur, so it is very important to clearly define who the property belongs to. If the data belongs to the platform company, they can use the data to obtain economic benefits, and the privacy of that person may be violated. If the data belongs to us personally, we will not sell the data for privacy protection, or ask for a price that cannot be marketized, which makes it very difficult to use the data, and finally the resources cannot be effectively used.

In the Internet age, assuming that data belongs to individuals, but platform companies use them well, platform companies can purchase personal data, mine data resources, and maximize profits. Therefore, although the data belongs to individuals, it does not affect the use of data by platform companies, nor does it affect everyone's maximum economic benefits from data resources. At the same time, individuals will get better user experience and cost reduction through selling data.

However, the benefits of enterprises in the Internet are far greater than the sum of users' benefits. This is not the Pareto optimal solution for market resource allocation.

Coase's article "The Nature of Business" published in 1937 became an important milestone in entrepreneurial theory, and one of the two papers that won the 1991 Nobel Prize in Economics, and the other was "Social Cost Issues." In this short article, Coase answers two basic questions: 1 Why does the enterprise exist, and 2 what determines the size of the enterprise.

As far as the first question is concerned, Coase believes that the enterprise replaces the role of the market, and the essence of the enterprise is the replacement of the price mechanism. The operation of the price mechanism is costly, and there are costs in the operation of the market. The reason for the existence of the enterprise is to replace the market coordination and reduce the inevitable result through management coordination. Therefore, the market and the enterprise are means of arranging resources that can be replaced by each other. The difference is that the resource allocation in the market is adjusted by the price mechanism, and in the enterprise through the management mechanism.

In fact, the economist Zhang Wuchang's analysis of the contract economy in the book Economic Interpretation argues that the market only needs contracts, and that enterprises are a special form of contracts. In his own words, “the enterprise is a form of contractual arrangement”, and the enterprise replaces the market, but “a contract replaces another contract”.

This answer just throws the answer to the blockchain.

In the blockchain, the type of the enterprise is eventually replaced by a smart contract, and the smart contract becomes the representative of the market. The final result of the decentralization of the blockchain encryption is that each user individual participates in the network as a node, exchanges value through digital currency, and uses the smart contract to make the market most efficient. This means that the marginal cost of the network tends to zero indefinitely, while the marginal benefit is maximized.

So in the blockchain, when the user has his own privacy behavior data, the market will form a Pareto optimal solution.

On the other hand, with regard to the second question, Coase's answer is that “transaction costs determine the boundaries of the size of the firm” . What does it mean? Coase believes that the cost of organizing a transaction within the enterprise is equal to the cost of conducting the transaction through the market. Therefore, companies have a tendency to expand until they reach this boundary. On the other hand, the advancement of technology and management helps to reduce transaction costs, which is to expand the boundaries of enterprises.

In the blockchain, because each user participates in the network as a node, it is both the behavioral data contributor of the network and the owner of the network resource maximization. The more users the network participates, the more transaction costs will eventually go to zero. So in turn , the size of a blockchain project itself is infinitely tending to be minimized, and the market size is ultimately infinitely tending to be maximized. The Pareto optimal solution was also achieved.

That's why the blockchain may eventually reach a user base of 7 billion or even 10 billion. Therefore, only the blockchain can make a true "sharing economy". After all, every participant in the network is the owner of the maximum benefit. Then you can understand Coase's law in the blockchain:

Resources will eventually be directed to a network where marginal cost is infinitely zero, while marginal benefits are maximized, a completely decentralized network.

How is this logic verified?

In fact, this question is well answered. We can see that Tencent’s current market value is about HK$3.2 trillion. According to the January 19th WeChat active data, the user base is about 1.1 billion, which means that when we give our privacy data to At Tencent, the value of each user's private data is 2,900 Hong Kong dollars, which is equivalent to about 370 US dollars. Similarly, Google's current market capitalization is $750 billion, serving 2 billion people worldwide, which means that each user's private data value is equal to $375.

Apple's current market value is about $910 billion. By the end of 18, more than 1.4 billion Apple products have been activated globally. If it is calculated according to its previous valuation limit of $1 trillion, it means that the value of each user's private data is equal to 714. The dollar is close to twice that of Tencent and Google. This is already the limit of the value of the Internet.

Let us look at the blockchain. Take Ethereum as an example. In June 19, the number of wallets was calculated to reach 67 million. Then we calculate the private data value of 375 US dollars per user, which is equivalent to a valuation of about 25.1 billion US dollars, and the total number of Ethereum is 100 million, so we can know that the minimum value of an Ethereum should be equal to 251 US dollars. It happens to be the price of the Ethereum last weekend.

However, please note that there may be a lot of empty addresses in the 67 million wallet accounts, but not in Ethereum. This means that in Ethereum, the privacy price of each user who owns Ethereum will be much higher than $251, not to mention the price of Ethereum once reached $2,000.

The same is true for switching to Bitcoin, assuming that 7 billion people in the world will eventually have an infinite amount of bitcoin cut to achieve Coase's law. Then the final price of Bitcoin will be much higher than the current price, unless there is a better market deployment solution.

It turns out that when privacy returns to the user's own possession, the mechanism of replacing the Internet with a blockchain will eventually form a Pareto optimal solution.

Then go back to Facebook on the issue of Libra stable currency. In the white paper, it is explicitly mentioned that only institutions can qualify, and each institution that wants to participate needs to pay a $10 million membership fee to Facebook to become a node. There are already more than 100 companies that are already willing to participate. In other words, the current profit method of Libra Stabilizer is to collect the network participation fee of the node. After that, the big probability is the transfer fee.

Currently participating companies include investment institutions, blockchains, social media, communications companies, e-commerce, shared travel, non-profit organizations, music, travel, and payment. Each node enterprise can obtain 1 vote of the board of directors, and a single founding member can only get 1 vote or 1% of the total votes. To effectively prevent the monopoly of the consortium. The consensus mechanism used is Bft, which is exactly LiBraBft. In fact, it is also an innovative version of the consensus mechanism that existed in the early days, but it is not familiar to everyone.

According to the existing data, users can buy Libra stable currency through various types of corporate institutional currency that become nodes, and then spend money on various corporate channels that become nodes. It can be used for shopping, investment, telephone bills or taxis. cost.

This means that the Libra stable currency is a semi-decentralized alliance chain that takes the B2B2C model. It is a blockchain type under the "Internet Alliance" architecture with a total of 2.7 billion potential users. There are 100 "enterprise supers". "Enode" is a class-like EOS stable currency.

It is undoubted that the Libra stable currency will bring a large number of users, which will cause huge repercussions. But these users will eventually stay in the blockchain under the "Internet Alliance" architecture? In such a coalition chain, the ownership of private data still belongs to the enterprise and not to the user. Unless eventually it goes to complete decentralization.

That is to say, if the Libra stable currency is now a step-by-step state, from the semi-decentralization to the completely decentralized consensus mechanism, then it is likely to become a strong competitor of USDT. Conversely, if the structure under the “current legal framework” is left because of policies and regulations and other factors, it may eventually be replaced by a fully decentralized stable currency.

Data ownership means that it is not a Pareto optimal solution. According to Coase's law, when the transaction cost is infinitely close to zero, the resource will eventually lead to the person who is suitable for it.

The most likely scenario is that Libra Stabilizer has done blockchain education for 2.7 billion Internet users worldwide, but all those who understand it will eventually lead to a real blockchain public chain, such as Bitcoin or Ethereum.

Libra stable currency may not be short-lived, it will eventually become a strong history of blockchain, but unfortunately just a turning point, not a long-term dash. When these Internet users understand the blockchain through Libra stable coins, the final market will guide users to a completely decentralized privacy-protected system to achieve a Pareto optimal solution.

According to the white paper of Libra Stabilizing Coin, it depicts a basket of currencies, which means that the competitor of Libra Stabilizing Coin is the US dollar. Of course, there will be huge difficulties in the future. After all, China has already made the United States a headache. The current dollar contender in Trump's view is simply a tech company riot. There are other GUSDs and USDCs that have been approved by the US government, as well as a stable currency such as the USDT that is completely decentralized.

The most valuable place for Libra to stabilize the future of the currency may not be inclusive finance, but rather a delineated transaction pair for its semi-decentralized exchange.

In fact, according to the white paper, the Libra stable currency in each wallet can be used to invest and consume in 100 “super node companies”. It is not difficult to add the function of trading bitcoin on this basis. After all, the issuer is in Switzerland, and it is not difficult to get an exchange license. But what does this mean? This means that the world has increased the potential users of 2.7 billion bitcoins in a flash.

This will lead the global Internet users to migrate to the blockchain on a large scale. It may be possible for Libra Stabilizers to truly form value and exist longer in the world of blockchains.

If I want to subvert the consensus of Bitcoin, I think this is basically impossible. In any case, the market will lead resources to a network where the marginal cost is infinitely close to zero and the marginal benefit is maximized.

Source: Kelvin Story

Author: Luo Kai