Bitcoin ( Bitcoin ) and Block Chaining ( blockchain ) two words sometimes used interchangeably, but there are some really innovative about this misunderstanding. In this column, a Wharton professor Kevin Werbach • ( Kevin Werbach ) explained the three components of this technology: the difference between the monetary encryption, and encryption block chain assets ( cryptocurrency, blockchain and cryptoassets ).
The following is the full text of the column:
Now we will inevitably see some cryptocurrencies and blockchains that change everything or create a lot of wealth . But there are also sounds that match the blockchain with the labels of “ stunning scams ,” “useless,” and “dangerous.” At the same time, many people simply don’t understand what happened. A big reason for this confusion is that we are not talking about the same thing.
These three concepts have the same basic design principles and technical foundations, but the people, goals and visions are almost completely different. Those who participate in it constantly attack each other and argue which one is “orthodox”, which does not help to solve the confusion. So let me try to clarify these concepts.
The first is the encryption currency ( cryptocurrency ) : It is the concept of the network can safely transfer value and there is no central point of control. Followed by the block chain ( blockchain ) : It is the concept of the network can build trust between the different nodes, information reaching consensus. Finally, encryption assets ( cryptoassets ) : It is the concept of virtual currency can “financialization” has become a tradable asset. The first is indeed a revolutionary concept, but the ultimate success of this revolution is inconclusive. The second and third concepts are two innovations that change the rules of the game on the road to the broad implementation of the concept, and they are also gradually evolving in nature.
Cryptographic currency ( ” trust structure is minimized ” )
The cryptocurrency is probably the most you hear, starting with bitcoin. The easiest way to understand it is to not over-tangle the details of currency mining or digital cash. Instead, focus on the decentralization of trust, which I elaborated in a forthcoming book.
Many activities require the participation of trust. Without trust, a $20 bill is nothing more than a piece of green paper. The vote cast in the election is nothing but a meaningless ritual. The stranger who took the initiative to let me ride may have dangerous intentions. Trust in the traditional sense means relying on partners, institutions or intermediaries. These centralized trust architectures are powerful; apart from others, it brings us modern industrial civilization. But trust also has a downside. Trust implies vulnerability. The people, governments, and companies we trust may not be trustworthy for a variety of reasons. Bitcoin shows us something of value, such as money that can be traded with confidence without trusting someone to verify the transaction.
Although there is great doubt about the possibility of this concept being fully mature, this kind of thinking will change our society if it becomes a reality. We will have transparent enterprises that truly reflect the will of stakeholders , a government that truly reflects the wishes of the people , a truly free Internet, no corrupt gatekeepers to extract value , no fake news , and our daily life will be automated on a large scale. Will progress. Or at least we can get some solutions that greatly improve the status quo. The valuable value of decentralization can be reflected in all aspects.
But the price always exists. For Bitcoin, the price is that a very slow network will limit its functionality, waste a lot of power, and make a small number of miners profit. Maybe these costs are worth it. Perhaps with the advancement of technology, the new blockchain and blockchain upgrades will emerge, and its cost will be reduced. But we are not sure now.
Yes, the current circulating bitcoin is theoretically worth $100 billion, but that is the thinking of crypto assets. In addition to becoming rich, showing off wealth and avoiding regulation, has anyone done anything other with Bitcoin? When we go to see the nearly 2,000 cryptocurrencies that currently exist , the situation is getting worse.
Bitcoin also has traps, and traps always exist. Things that are useful for a few people, limited applications, and special users don’t necessarily climb into the mainstream. Even if it can, it usually becomes something completely different. Before the advent of Facebook, we didn’t know whether people could make money on social networks. What it looked like was a boring trick for young people. Although Facebook did appear later, it does not prove that it is an inevitable trend.
Some bets on the cryptocurrency revolution may prove to be correct. This is an exciting gamble that may bring all the benefits, but it is still a gamble. The real revolution does not happen often, for a reason. When they do happen, they are often accompanied by severe collateral damage.
Blockchain ( ” tracking ” )
The blockchain* (see note by the author at the end of the article) is the same as the origin of cryptocurrency, the predecessor of Bitcoin White Paper and Bitcoin in 2008, but the blockchain pursues something very different. The blockchain is not trying to eliminate trust. Its premise is that our trust is limited. We can only trust ourselves or our organization. But no one or business is an island. Even an island government is not an island because it has to trade and communicate across waters.
The world is full of processes, especially in large enterprises and governments, everything must be traceable from one trusted area to another. Global companies spend $10 trillion a year on “logistics,” simply putting items in someone else’s transportation system. Manufacturers, distributors, and retailers independently record the direction of the same item in the supply chain. When you walk into a new hospital or doctor’s office, your medical records will not accompany you to the hospital. When you walk out of the hospital, your new medical record is less likely to follow you out. The splitting of all these streams of information can lead to huge transaction costs. According to the current mainstream economics school, reducing transaction costs is the fundamental driving force in the economic system .
A large part of the transaction costs between enterprises or within the enterprise stems from limited trust flexibility. If each party to the transaction trusts the information contained in the transaction, even if they do not trust each other, the cost of the transaction will decrease and the performance will increase significantly. This is the core of the blockchain.
Trusting your own blockchain records is the same as trusting other people’s blockchain records, because these are the same record. Repeated settlement, repeated reconciliation, repeated audits, and audited repetitive regulatory reports can be converted into the original transaction. The world’s most important companies are participating in a variety of blockchain experiments and alliances because they see the huge potential of this technology. Decentralization is one of several design goals that is not a basic requirement like cryptocurrency. So these systems basically have “permissions” restrictions, and the basic functions are only used by identified participants.
Just like cryptocurrencies, some aspects of the blockchain are still tentative. Because blockchain theory does not assume any major changes in the market or business model, it is only a matter of degree. Cryptographic currency advocates often complain that you don’t need a blockchain to do any of these activities. Of course you have to create a digital currency and don’t need a blockchain. It’s just that you want to increase these conditions, banks can’t act as intermediaries, the government can’t block transactions, and no one can influence Bitcoin’s useful money supply. Similarly, blockchain theory is directed at a specific type of context. Traditional database solutions cannot solve these problems because the people and companies involved can’t agree in practice, not because of the theory.
Encrypted assets ( ” transactions ” )
Encrypting assets means turning cryptocurrency tokens into trading instruments and extracting more complex financial instruments from the clues they generate. Its potential scale is endless, and it is not uncommon in the trillion-dollar market in modern finance. The difference between cryptographic assets and cryptocurrency is that it does not consider cryptocurrency as a way to speed up decentralized trust activities, but rather as a new type of investment asset.
Because encrypted assets are inherently digital assets, they are theoretically more efficient than existing tools. They are inherently flexible and global. Almost all major Wall Street participants are keen to participate, as are institutional investors who provide capital for them. Some regulatory concerns that have prevented them from participating are gradually being resolved.
If the basic value of a digital token operating on a decentralized network has been determined, why not use it to make money? (呃, use it to “ engage in socially optimal capital formation”) Encrypted assets depend on the existence of cryptocurrencies, because there must be something valuable to trade. Securities must be safe. But crypto assets ignore or exclude cryptocurrencies from the idea of trust decentralization, which they believe is “almost a shameless statement” (quoting what the person who made the initial security audit of Bitcoin). For crypto-equity traders, it doesn’t matter if there is trust. They believe that trust is only a means to achieve the goal – that is, liquidity.
The blockchain with permissions will also support symbolized assets in the future, and will eventually include sovereign currency. The difference is that its goal is to track effectively, not for profit trading.
Think another way, encrypting assets separates the exchange function of cryptocurrency from its useful functions. If you want to use Bitcoin to pay merchants, use Taiyuan’s Ethereum to purchase distributed application computing cycles, use Filecoin to purchase cloud file storage, or use Augur Rep to verify market forecast results, you get from the application. Value sets a value for these tokens. In theory, the higher the demand for tokens for these applications, the less money available, and the higher the price of the currency. But in reality, these applications do not have a climate, so the value of tokens is still highly speculative. Speculation is not necessarily a bad thing. It is the desire to take risks to promote the development of financial markets. But sometimes speculation will push the market down the cliff. The key issue in encrypting assets is whether the nature of speculation can be controlled and controlled.
If the crypto-asset market continues to evolve, using a variety of physical engineering and analytical tools developed by Wall Street over the years, a variety of physical or digital items may be “symbolicized”, such as commodities, real estate, intellectual products, and other interests. The necessary foundation has already been established.
Do not cross concept
In essence, these three concepts are not mutually exclusive. The success or failure of any one concept does not predict the fate of other concepts. The cryptocurrency has the greatest potential for disruption because it promises to decentralize power. But this also creates the biggest obstacle to success. Blockchain systems and cryptographic assets reduce decentralization, but bring other benefits. They differ in their intended use, so there is no competition between them to determine who is dominant. The intersection of the three concepts can create very important opportunities, but they need to be placed on their own tracks for evaluation. For example, the initial coin offerings (ICOs) are the fusion of cryptocurrency and secret assets. Should they be seen as a new type of crowdfunding or a way to start a decentralized economy? The answer to this question determines how to be successful and how to fail.
Deciding which of these three concepts to become “real” into a climate is like an interesting guessing game, but in the end there is no revelation. Any judgment regarding the success or failure of the blockchain-related technology needs to consider the relevant sub-categories. When reviewers used the high price of enterprise applications and encrypted asset transactions as the basis for the feasibility of cryptocurrency, they crossed the concept. The widespread fraud and theft of the first token issue does not tell you what action the government will take around the distributed ledger . Bet for a blockchain, whether it is a good business or not, does not predict the future of decentralized automated organizations .
The sooner we stop seeing this as a holistic phenomenon, the more accurately we can assess its development.
* I use the term ” blockchain ” here because it emphasizes the value of the books, not currency or decentralization. But to be precise, most cryptocurrencies and encrypted assets use blockchains. At the same time, not every ” blockchain ” system uses the # chain-linked blockchain data structure.
This article first appeared in Medium .