In, On and Off the Blockchain; Technology, Motivation and Governance

This article was the speech that delivered by Dr.Xiao Feng at Babbitt Summit. Dr.Xiao Feng is Wanxiang Blockchain’s President and CEO.

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Dr.Xiao Feng

Thanks for Babbitt’s invitation, and I am also very honored to have this opportunity to share with you some of my personal latest experiences on blockchain.

Our theme today is very clear, which is “embrace the commercial age”. As an entrepreneur who has started three times, I will talk about the blockchain from the perspective of business practice. My title is In, On and Off the Blockchain; Technology, Motivation and Governance. I want to express if blockchains are to adapt to large-scale commercial applications, technology alone is not enough, motivation and governance are also necessary. Motivation and governance will eventually be transformed into technology which is a kind of institutional, economic and mechanism design, implemented at the level of code. Therefore, first of all, some institutional design should be made to supplement the technical deficiencies, which is my opinion.

Secrets of Blockchain Governance? Talking about the Centennial Development of Global Economy.

Before formally entering the topic, let’s review some phenomena of global economic development and the history of human society in the past 100 years. Between 1978 and 1982, there were three outstanding leaders around the world: Deng Xiaoping, Thatcher and Reagan. The three people have done the same thing, that is, to implement a free-market economy. In fact, China’s reform and opening up is actually a kind of free-market economy.

Mrs Thatcher’s reform in Britain — selling all state-owned enterprises and deregulation, is also a reflect of the market economy. Reagan did something similar in the United States. When Reagan came to power in the 1980s, what was the situation in the United States? The U.S. economy is very tightly regulated. In the 1980s and 1970s, there was a saying called “Eurodollar”. At that time, Eurodollar interest rates were certainly mentioned in the foreign exchange market. Why Eurodollar appeared? Because interest rates are regulated in the United States. The regulated interest rates eventually form a complete dollar market interest rate in Europe. In the 1970s, the United States created a currency market fund, which came from interest rate regulation. After the interest rate of deposit is regulated, people turn deposit into an investment tool. Monetary asset fund came into being. The interest rate is not regulated in the investment tool.

Why did this happen around 1979? It can be traced back to the 1930s. The first “five-year plan” of the Soviet Union began in 1928. What does “five-year plan” mean? It means that for the first time in human history, a country intervenes in the economy and plan the development of the economy compulsorily by the government. From 1930 to 1934, Roosevelt implemented Roosevelt’s New Deal in the United States, targetting to use the visible hand of the government to remedy the Great Depression caused by the invisible hand and to control the economy.

How did the Great Depression in the 1930s come about? This can be traced back to around 1900 when a variety of new technologies emerged, such as large-scale power supply network, radio, Ford’s assembly line, which greatly improved production efficiency. Then came the phenomenon of “Coolidge prosperity”. Coolidge was the president of the United States around 1920s. At that time, the presidents believed the economy was developing freely without the control of government. This excessive pursuit of efficiency eventually led to the Great Depression. After the Great Depression, people began to reflect, “We can’t pursue efficiency too much”, and then the government began to control the economy. However, once the pursuit of fairness reaches its peak, the efficiency will become extremely low, which led to the situation of China, the Soviet Union, the United States and the United Kingdom in 1979 and 1998. Therefore, people began to reflect again, “We should pursue efficiency under the fairness”. So after the implementation of Reagan Economics, the U.S. market was very prosperous until 2008. The root cause of the 2008 financial crisis in the United States also lies in the excessive pursuit of efficiency, resulting in a huge gap between the rich and the poor. Financial institutions, with the sole goal of pursuing profits, lent money to people who were totally unqualified for loans, which eventually triggered the financial crisis.

Why should we look back at history? Because we can understand blockchain well from it.

Consensus algorithm is an interval concept. We emphasize on decentralization, which in a sense underline fairness. Decentralization emphasizes fairness while centralization stress on efficiency to some extent. The issue of fairness and efficiency is not unique to the blockchain. Over the past one or two hundred years, the whole human society has been wavering between the two irreconcilable issue. Therefore, we need to understand different business application scenarios have different requirements on fairness and efficiency when blockchain is really applied to different business application scenarios. If this scenario requires extreme fairness, then we can help him achieve it in an extreme decentralized way; if it is an extreme pursuit of efficiency, then we must help him achieve it in a centralized way, which is just a commercial purpose.

What kind of technical means to be adopted is not decisive, but the realization of commercial purposes is the key point. So when you want to pursue TPS at 300 thousand per second, please use a transaction confirmation mechanism like Alipay.

Evolution of Consensus Algorithms: Blockchain application drive demand changes

From PoW to PoS, it is a change driven by blockchain applications demand. If there is more emphasis on fairness, PoW will be chosen. From a business perspective, it is important to choose the right mechanism. Consensus algorithm is nothing more than a concept of interval. The pursuit of extreme efficiency and extreme fairness is to find different points between extreme decentralization and extreme centralization and among different business models to seek fairness. Take PoS as an example, if you are looking for efficiency, you can find one node. If the technology is developed well enough, you can also choose 101 nodes, which is my view from the perspective of business applications. How does PoS come into being? Because we need to do more and more things on the public blockchain. However, PoW cannot support it and many things need a balance instead of extreme fairness, so PoS emerged.

You can think of PoW as our pursuit of solving the problem of efficiency and fairness with a set of mathematical methods. PoS contains mathematical elements, but also includes a lot of system design which is formulated and implemented by people. Even if you are a non-specific verifier selected at random, you still vote and make decisions in the end. In fact, what we pursue on the blockchain is the same as what human society has pursued in the past 100 years. That’s law. When the invisible hand fails, we need the visible hand to remedy it. When the visible hand fails, the invisible hand is needed and vice versa.

The bottom-up, decentralized decision-making mechanism of the blockchain is more like the “market” in economics. There are two ways of economic activities, one is organized by the way of the market, while the other is organized by the way of the enterprise. Blockchain brings a lot of change, and the value of the business is not so important. The market sometimes fails. Therefore, if you are purely from a technical and mathematical point of view, the blockchain will also fail. PoS technology plus system design, coupled with the design of rules, may be the most appropriate way to solve all our commercial application problems.

In, On and Off the Blockchain: Understand Blockchain from a Business Application Perspective

From the perspective of application, blockchain is no longer a blockchain, and not only the public blockchain can solve the problem, so I understand it as in, on and off the blockchain. “In the blockchain” is a world of technology composed of consensus algorithms, cryptography and game theory, which is at the bottom of decentralized technology. The Internet is a decentralized information machine, and the blockchain is a decentralized trust machine, which is the difference between them — the decentralized mechanism is used in the business trust mechanism.

“On the blockchain” is the application of Dapp, which is called the distributed business world, but it is not necessarily completely decentralized. There must be stakeholders in any business. If you say that all businesses in the blockchain will not have a stakeholder, which is anti-human and in the end, it can not develop well. Blockchain can make it more convenient for everyone to achieve their own business purposes on it.

What’s “off the blockchain”? As we all know, there are many blockchains in the real market. Does the real asset blockchain need a centralized endorsement mechanism? Off the blockchain, you don’t need Hangzhou Real Estate Bureau to prove your property rights, while on the blockchain, you often need a centralized endorsement mechanism, which can’t escape centralization.

If you look at the world from a business application instead of the blockchain, the Internet is a decentralized technology, and the underlying technology of the Internet is decentralized. Does anyone still need permission to disseminate information? Do you need permission to post on weibo, WeChat and other websites? When you want to express your opinion, no one can stop you. This is a decentralized information machine. Blockchain is a decentralized trust machine, so the Internet does not exclude the appearance of BAT on the basis of a decentralized mechanism. BAT is a monopoly business without which the value of Internet is uncertain. Can we only express its value by complaining?

It takes more than technology to really adapt blockchain to business applications. It does need technology, because new technology brings a lot of things, but it also needs things other than technology, such as economic incentives mechanism and community governance mechanism. Algorithm game theory is more popular in the community. A number of methods, such as algorithmic game theory, are used to design a set of rules so that everyone can make unorganized and decentralized action according to this set of rules. Therefore, these three (technology, economic incentive mechanism and community governance mechanism) should be invisible, algorithmic and coded. Only when these three are improved at the same time, large-scale commercial application can be possible.

Last July, I participated in the launch of a new public blockchain project called PlatON. PlatON plans to develop following the idea I just mentioned. We released a technical white paper in July last year. In the next month, we will release our economic blue paper, and then we will release a governance red paper within this year. All three of them need to be clarified and well designed so that the blockchain can operate on the commercial level.

This is my share today. Thanks for your listening!

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Wanxiang Blockchain is dedicated to building an open platform and offering resources to develop blockchain and promote its application in different industries.

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