Primer

Primer

In the 10 years since its official release on January 3, 2009 to the present, Bitcoin has developed from a fancy term known only to American cypherpunks to a global hotspot that even young people in China's fifth- and sixth-tier cities and towns are eager to try and gamble their luck. From the perspective of conceptual marketing, this is undoubtedly a huge success, but the problems and challenges that Bitcoin is facing now are far from making people equate it with success, and the overall feeling is that it is not even an "adult".

Especially since 2018, the price of BTC has continued to fall, and there are roughly two voices that can be heard endlessly: 1) the collapse of faith; 2) the bursting of the bubble. In fact, these two voices are untenable at a deep level.

1) For the vast majority of ordinary workers, faith cannot be eaten as food, but an act of voluntary spiritual consumption after satisfying material needs; you believe in God not because God has given you benefits, on the contrary, Sometimes a great material loss will bring you closer to God.

2) The concept of bubbles was not invented by Bitcoin. The modern economy and bubbles are the relationship between objects and their shadows in the sun (so many times they are invisible). There are a lot of bubbles in core assets such as currency, stock market, and real estate, and they will go crazy and decline periodically.

Moreover, the reason why the "cycle" (cutting leeks) and "circulation" (blowing bubbles) in virtual assets can become time-tested golden rules is precisely based on human greed. It is in response to the classic line: "I know it will be shattered eventually, but as long as it is not now, as long as it is not in my hands".

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Three major issues remain unresolved

The three core indicators of the Bitcoin network are: system security, ecological health, and currency value. The corresponding three key issues are: whether decentralization is reasonable and feasible, how to establish a healthy economic model, and when will killer applications appear.

How to Build a Healthy Economic Model

Question 1) If you are a miner who just bought a mining machine, would you choose to mine alone or join a mining pool?

Data source: btc.com

Data source: btc.com

Question 2) If you run a mining pool, how will you assign tasks and distribute rewards to miners?

The mining pool is to connect thousands of miners through the network for joint mining. The principle can be simply understood as: the mine pool administrator splits the calculation of the current block target Hash into simpler target values ​​for the miners. For example, the block target value requires 70 zeros in front of the Hash value, and the mine pool management The staff will let the miners find a Hash value that satisfies the preceding 50 0s; in this way, among the Hash fingers submitted by the miners with 50 beginning 0s, it is possible to find 70 Hash values ​​beginning with 0 to win the block Packaging rights and rewards on the web. The workload statistics of the miners can be calculated by the number of times the miners submit the Hash value that meets the target of the mining pool. The distribution of specific rewards can be divided into methods such as purely based on the workload or based on the actual rewards of the mining pool.

The role of the mining pool is to reduce the income uncertainty of individual miners, so that miners can mine a fixed income with relatively small fluctuations. But mining pool administrators will also face very challenging issues: how to reasonably design mining pool reward strategies, how to face competition from other mining pools, and how to face the upgrading of hardware equipment, etc. Even if these problems are solved well, the profit of the mining pool still depends on the assumption that the price of BTC will rise; if investing in mining is not as good as buying BTC directly, then who is willing to mine? Woolen cloth. This is the phenomenon known as the "death spiral" that may occur in Bitcoin: the falling BTC price makes mining unprofitable, and miners quit mining as a result, resulting in a decline in the computing power of the entire network, which in turn leads to a further decline in prices.

Therefore, the economic model and incentive mechanism in the Bitcoin network are far from perfect, which is also a hot research topic among scholars.

Is decentralization reasonable and feasible?

Question 3) When you run a mining pool with more than 50% computing power, how can you get a higher return?

I believe that the first thing you think of is fork attack and double payment, but which one is greater, the illegitimate income brought by double payment or the loss caused by the collapse of BTC price caused by the attack? Different mining pools have different answers. If the mining pool is built with general-purpose hardware such as CPU or GPU (although this is rarely the case in reality), the loss is only the currency price; but if it is built with a dedicated ASIC mining machine (existing mines machines are basically ASIC type), then the sunk cost of these devices becomes a key factor, so it is not cost-effective to double pay BTC in reality. However, mining pools with high computing power can still make themselves more likely to profit through similar "selfish mining" (by wasting the computing power of other miners). And if the Bitcoin mining pool accounts for 50% of the computing power of other virtual currencies, the situation is completely different; the possibility of launching a fork attack when the income is irrelevant is more likely to be unpredictable.

Question 4) If a virtual currency has a very decentralized and fair computing power market, how can a capital side quickly gain profits in the computing power market?

If the mining algorithm of this virtual currency is consistent with Bitcoin, the quick way to make a profit is to mine two kinds of coins with one mining machine. Moreover, a "coin jumping attack" can be launched to cause the computing power of the virtual currency to fluctuate violently, thus making it easier for large mining pools to profit. So now there is basically no security for small coins based on mining.

Through the above two questions, the following two more complicated questions are derived: Question 5) Is anti-ASIC a reasonable behavior? Question 6) Is decentralization necessary?

In a capitalist society, being poor is the greatest sin; in the world of Bitcoin, being rich is the greatest original sin. How to lock the "computing power" in a cage is the core of solving the problem, but there is no particularly good solution yet.

When will the killer app appear?

Three challenges have come

Why does the above question refer to Bitcoin instead of blockchain, because the scope of blockchain has far exceeded Bitcoin, and it is not within the scope of several issues to discuss. Let's list a few future challenges facing the blockchain, most of which will not have answers now.

1. The combination of biotechnology and information technology will bring about industrial and social revolutions. What role can blockchain play in it?

2. When data becomes the most important means of production, who should own the data, and what role can the blockchain play in the battle for data ownership?

3. In the face of irreversible trends and problems faced by Internet of things and AI, can blockchain become a bridge and catalyst in the middle?

Bitcoin is actually an experiment

Bitcoin and blockchain are not experiments to study future finance and currency, future data sharing and network collaboration, future organizational structure and cooperation mechanism. But before he really matures, he is doomed to face lingering doubts and unforgettable failures.

Von Neumann once said: The long-term survival of humanity depends on whether we can come up with better ways to promote more cooperation than already exists.

references

references

Bitcoin Technical Books - Connotation: "Mastering Bitcoin" (Mastering Bitcoin)
Bitcoin technology book-extension: "Bitcoin and cryptocurrency technologies: a comprehensive introduction" (Blockchain technology drives finance)
Fee Mechanism Research: "An Incentive Analysis of some Bitcoin Fee Designs"
Research on Transaction Propagation Rewards: "Transaction Propagation on Permissionless Blockchains"
Security Research: "Majority is not Enough: Bitcoin Mining is Vulnerable"
Decentralization Research: "Decentralization in Bitcoin and Ethereum Networks"