Two Evolution Directions and Value Analysis of Public Chain

1 blockchain value

A blockchain is a multi-copy redundant computer system that needs to store and calculate data on every full node. Therefore, no matter how the blockchain system is designed, its IT cost must be higher than that of the centralized system. There is data showing that the average cost of a 2 Bitcoin transaction is millions of times the average cost of an AWS cloud service. Even EOS, a relatively less decentralized blockchain system, has an equivalent transaction cost (taking into account the cost of renting) more than 10,000 times the cost of cloud services. Therefore, the blockchain must provide a high enough premium with other services to retain users.

Decentralization of blockchain transaction costs versus cloud service fees is the most representative feature of blockchain. However, what is the value of decentralization, from Bitcoin, which holds the banner of currency non-nationalization, to Libra, which actively embraces regulation, different public chains have submitted different answers.

2 decentralized issuance and custody of assets

Bitcoin is the first time humans have not relied on any central party to issue assets, which has led to deep thinking about asset ownership and distribution rights. Its impact will be no less than the collapse of the 1933 gold standard.

Blockchain is the only known technology to decentralize distribution and hosting. It provides people with asset record, transfer and contract functions without any license. Anyone can arbitrarily dispose of the blockchain assets they hold at any time. This made the privatization of property 100% for the first time.

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In such a chain, users don't have to worry that the transactions they send will be deliberately ignored by the biller. They don't have to worry about their assets being uniformly frozen by the biller. They don't have to worry about finding nodes to help them broadcast their own transactions, and they don't have to worry about the power intervention system. normal operation. Therefore, technically such a blockchain must make the entry threshold of the bookkeeping as low as possible, and make the bookkeeping advantage more competing as much as possible, giving the full node the power to reject the wrong block as much as possible. It is possible to reduce the configuration requirements of the entire node so that more users can build services themselves. Therefore, all blockchains with asset decentralized issuance and hosting at the core of value must be strongly decentralized.

Only PoW can meet all of the above requirements. Any form of PoS will solidify the biller, which in the long run will compromise the decentralization of the system. PoW Although there are centralization factors such as mining machine manufacturers and mining pools, its competition is completely open, and no one can maintain technical and operational advantages forever. PoW is still the only way to ensure that the blockchain is strongly decentralized.

In such a blockchain, the system charges a much higher usage fee than the centralized system and does not hinder the influx of users. Because every transaction in the chain pays for the IT infrastructure fee, it also pays the security cost of protecting the private ownership of the asset. This part of the cost is the service premium offered by this type of blockchain.

3 assets decentralized transactions

In addition to natural resources, most of the assets of the real world are centralized and centralized. Considering a real-world asset, after an exporter is chained, the absolute ownership of the asset on the chain is meaningless to the user, because the final redemption still depends on the centralized gateway. But the blockchain serves this type of asset and still has its unique value.

There is a huge cost of trust between asset issuers and transaction service providers in the traditional financial world. The transaction service provider needs to provide the asset issuer and the asset owner with no proof of evil, which is not available in most scenarios. For example, P2P online loan service, users can not know whether the money they borrowed really used the borrower, whether the platform really has so many reputable borrowers. Regulation is an attempt by the government to reduce the cost of high trust, but regulation in the traditional financial world sets the industry's entry barriers, increases the audit process, and has the potential to abuse public power risks, all of which increase the ultimate cost of implementation.

The blockchain serves the traditional financial services with great value in reducing the cost of trust. After the asset issuer has chained the asset, the transaction service provider can use the smart contract to manage the asset transaction. In the blockchain, the flow of assets is trustworthy. People don't need to trust a DeFi service provider to be safe. If there is a 100% reserve, it will definitely execute according to the code written in the smart contract. For example, a chain fund manager can generate an index fund that automatically purchases a predefined package of assets to spread the investment risk. In the past, such services could only rely on relatively expensive regulatory services to regulate the behavior of fund managers. After real-world assets enter the blockchain world, fully open, transparent, and auditable DeFi services can replace traditional high-threshold, closed, and unaudited centralized financial services. In addition, asset transactions must exist on the counterparty. People are more willing to trade in a place with higher fees but more counterparties and more product types, rather than a transaction where the handling fee is low but the counterparty and products are insufficient. At this level, the special value offered by such blockchains is the trust premium and liquidity premium.

4 public chain evolution

We refer to the public chain of decentralized issuance and custody services of assets as the first type of public chain, and the public chain that locates the decentralized transactions of assets is called the second type of public chain. The competition between the first type of public chain is to maximize the level of security and decentralization, and to achieve business flexibility on this basis. The competition between the second type of public chain is to provide the most business scenarios, increase system throughput and reduce latency.

The result of the continued evolution of the first type of public chain will be the storage pool of assets, which guarantees the absolute inviolability of private property rights through strong security and decentralization. Considering that blockchain scalability is unlikely to be triangular, the performance of the first class of public chains does not meet the asset holder's need for asset flows (for example, Bitcoin can only process 7 transactions per second). Another result of the evolution of the first type of public chain will be to become the infrastructure for docking Layer 2, that is, a large number of trading transactions will be folded into Layer 2. The first type of public chain will compete fiercely on how to better decentralize and better serve Layer2.

In the second type of public chain, appropriate decentralization and openness can satisfy people's open and auditable trust requirements for business, and there is no need to achieve the degree of centralization of the first type of public chain. It should be pointed out that centralization is the inevitable result of efficiency optimization. Therefore, whether it is the first type of public chain or the second type of public chain, the infrastructure has a tendency to concentrate centrally. For example, PoW/PoS mines are relatively central facilities. However, the difference between PoW and PoS is that the centralization advantage of the former is not easy to accumulate. The technological progress, operational advantages and power advantages are external factors, and it is difficult for a specific mining pool to continue to monopolize its advantages.

In fact, the changes in Bitcoin's mining pool rankings and mining machine rankings over the past few years have also confirmed this. PoS is not the case, its centralization advantage is almost independent of external factors, it is easy to accumulate monopoly advantages. This phenomenon is also confirmed by the fact that EOS's BP ranking is almost unchanged. Since the accounting nodes are relatively fixed, although some decentralization is lost, it is easy to optimize performance, so the second type of public chain often chooses PoS. In addition, the amount of money held by ordinary users is not large enough. The way of participating in bookkeeping generally uses the proxy accounting mode, that is, the pledge voting or DPoS mode.

Considering that the total amount of PoW mining power is fixed for a period of time (considering the different computing power standards of different PoW chains, the more general power consumption is used as the miner participation index), the first type of public chain must be Fierce competition was launched in the looting of miners. DPoS is not, there is no competition between its book maintainers. Therefore, the competition between the second type of public chains is mainly at the business level. The key to truly determining the success or failure of the second type of public chain is whether it can provide sufficient liquidity and financial products.

Therefore, the second type of public chain will compete in the future in how to attract more assets and how to provide more financial services.

5 public chain choice

The strong decentralization characteristics of the first type of public chain and the compatibility of the second type of public chain with real world assets are all needed by society. However, there are obvious differences in the positioning of the two types of public chains, targeting different asset types and business types.

A public chain must choose a road with a clear and clear path, and swinging left and right will lose users on both sides. The two can be connected in a cross-chain manner, and users can transfer assets on two types of public chains according to their own needs. This is also the inevitable trend of future public chain development.

Author: Nervos co-founder of Cipher

Source: Orange Book

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