What is the essence of blockchain? Is it decentralization or distributed ledger? Is it asymmetric encryption or a peer-to-peer trust mechanism? In fact, none of these; they are merely means, not ends, and certainly not the essence. The essence of blockchain is artificial market intelligence, a win-win in the digital age.
Blockchain is a public ledger of all transactions, composed of a chain of data blocks that record transactions in chronological order. Broadly speaking, blockchain is an artificial market based on computer algorithms, serving as the central nervous system that coordinates all transactions and achieves win-win outcomes. In the future, all transactions, including commodity transactions, employment transactions, and financial transactions, will take place on the blockchain, not just the issuance and payment of digital currencies. This will better facilitate the transformation and upgrading of the economy, creating smarter and stronger enterprises and forming a fairer and more efficient market.
Distributed ledgers are ubiquitous in the material world. Without a distributed ledger to record energy exchanges, the conservation of energy would be impossible. Distributed ledgers are not a new phenomenon; they are a common method of accounting found in physical fields, markets, and living organisms: physical fields account for energy, while markets account for currency. Similarly, in living organisms composed of matter, DNA (Deoxyribonucleic Acid) acts like a genetic ledger, recording genetic changes in each cell while being stored in every normal cell, forming a distributed ledger. Imagine the infinite extension of DNA as akin to how blockchain connects individual blocks into a chain. The human body is essentially a community made up of individual cells. When copies of DNA in certain normal cells are altered, cancer cells form, similar to malicious nodes in a blockchain. Cancer cells can replicate continuously and destroy normal cell tissue, just as a series of malicious nodes can damage the blockchain.
Traditional distributed databases implement centralized control and assume that each node is honest, primarily addressing issues of node crashes or unreliable communication between nodes. This clearly does not align with the fact that transactions between nodes in a market require trust. Blockchain does not have centralized control nodes; instead, multiple nodes jointly maintain a distributed ledger. Blockchain assumes that any single node may be unreliable, but because honest nodes constitute the majority within the system, a trust system can be built with the help of the distributed ledger, forming the basis for an artificial market.
The blockchain network is a free network based on voluntary participation, where each node can leave and rejoin the network at any time. Transactions between nodes are the most typical form of cooperation, and there are also three types of transactions: commodity transactions, employment transactions, and financial transactions. As an artificial market based on computer algorithms, blockchain requires a source of motivation to achieve spontaneous, mesh-like real-time cooperation among nodes. This source of motivation is described in the following section as market gravity.
The motivation for human transactions is the pursuit of maximum utility; the pursuit of profit generates motivation and drives human behavior. There should be an attraction for any two buyers and sellers of a particular commodity regarding the exchange. The magnitude of this attraction should also be related to some economic measure and some distance measure between the buyer and seller, with the market vividly described as the "invisible hand." The following section will mathematically formalize this "invisible hand" based on quantitative measures.
From an economic perspective, observing the development of blockchain, one first discovers that its birth did not come from the government or financial giants, but originated within the community of the internet.
Blockchain emerged from digital currencies like Bitcoin, and the emergence of digital currencies is community-based, which is a significant reason why Bitcoin and other digital currencies have developed globally.
The emergence of blockchain from the community is a double-edged sword. Community-based digital currencies have been market-oriented since their inception. How should this be understood? If we view all currencies in the world as a competitive market, then digital currencies can participate in this global market with a low threshold, but once they take that step, they also face competition from all other currencies globally.
The low threshold is reflected in the fact that the trading circulation of digital currencies is more convenient compared to existing currency markets (foreign exchange markets). Theoretically, as long as any grassroots multi-currency digital currency exchange anywhere in the world accepts a particular digital currency, it has effectively entered the global trading market. Of course, entering the global trading market is not entirely a good thing, as doing so means that the competitive targets for that digital currency already include hundreds of other digital currencies, including Bitcoin. If it lacks sufficient uniqueness and vitality, capital will quickly shift away from the digital currency, rendering it illegitimate; the so-called global trading market is merely a grassroots multi-currency exchange, which is minuscule compared to the foreign exchange market—what grounds does it have for comparison?
Indeed, from the perspective of trading volume, even if we consider all existing digital currencies and various blockchain application tokens, only Bitcoin can be considered a "foreign exchange trading variety." The other various types of digital currencies, blockchain application tokens, and even digital assets differ greatly from the world-class influence embodied by the term "foreign exchange." However, they possess the most crucial condition for evolution: free competition.
Let us observe what competition and evolution have brought from the perspective of Bitcoin, which represents digital currency, and the development of blockchain. First, let's look at Bitcoin. The development path of Bitcoin faces two main challenges: first, it constantly confronts competition and challenges from subsequent new digital currencies; second, it encounters various forces of game theory and checks and balances in its own upgrades and optimizations; third, as it gradually gains acceptance as a new type of foreign exchange, it also faces competition and challenges from other mainstream currencies worldwide. Regarding the first point, other digital currencies often propose their own improvements based on Bitcoin, thereby possessing more features. This technological improvement and challenge have always been a pressure for Bitcoin and a motivation and reference for its continuous improvement. Regarding the second point, recent issues surrounding Bitcoin's scalability upgrades demonstrate this, as the emergence of various BIPs and the division between Core and Classic are concrete manifestations of endogenous evolution. Regarding the third point, Bitcoin has gradually transitioned from a controversial virtual token, through years of development, from a niche group of geeks to a process of initial acceptance and recognition worldwide, which is also the evolutionary path of Bitcoin as a new type of foreign exchange.
From the above three points, it can be seen that the evolutionary path of Bitcoin, both endogenous and externally related, is complex and tortuous. On the surface, it benefits from the sudden explosion of the open-source and decentralized ideology accumulated over decades on the blockchain, but delving into the underlying reasons reveals that the motivation comes from free competition and the market.
The community culture of Bitcoin can be said to be a microcosm of the open-source, free, and borderless internet culture; the intrinsic value of Bitcoin is also reflected in the need for a low-rent currency in a borderless internet.
**Finally, through sufficient competition in the market, Bitcoin has been able to continuously refine, enrich, perfect, and enhance itself throughout its evolutionary process. There is a viewpoint in the theory of evolution regarding the birth of life that suggests the earliest organic matter emerged from inorganic matter, and one of the key elements in the leap from inorganic to organic matter is a favorable "primordial soup" environment. Viewed in this light, the emergence and growth of Bitcoin in the "primordial soup" environment of free competition and the market is both a coincidence and a necessity. The coincidence lies in the fact that Bitcoin has survived to this day without being submerged by countless crises; the necessity lies in the fact that, just like the evolution from inorganic to organic matter, currency will inevitably evolve towards digital currency as a more economical direction.
The development of blockchain has covered multiple aspects, from ledgers and currencies to digital assets and smart contracts. This continuous cycle of blooming—resulting—evolving is the panorama and derivation of the aforementioned Bitcoin development journey.
In the process of blockchain development, we often see how its applications are diverse and colorful. Interestingly, beyond applications and functions, its developmental soil—its internal organizational structure—is also undergoing changes. Next, let us explore this further.
① Community-based: Bitcoin, digital currency, from 2009 to present.
② Community + Foundation: Ethereum, smart contracts, from 2014 to present.
③ Foundation + Company-based: Factom, anti-counterfeiting proof, from 2015 to present.
④ Company-based: Various consortium chains and private chains, from 2015 to present.
From the above four forms, the number of community-based organizations gradually decreased alongside the price trough of Bitcoin in 2014-2015. However, the community form, due to its low cost and low threshold, has maintained considerable vitality and was able to develop in another form through the success of TheDAO's massive crowdfunding in 2016.
As a well-known project in the current blockchain field, Ethereum's foundation has received mixed reviews. Supporters believe it makes Ethereum purer and non-commercialized, while skeptics argue that its financial management is poor; had it not been for the surge in Ether (the token of the Ethereum blockchain), the project might have even "died" midway. The advantage of the foundation + company form lies in the stability of the operating team, but it also raises questions about team and funding ownership.
The last type of complete company system generally corresponds to consortium chains and private chains, with few public chain projects. The reason may lie in the fact that the consensus mechanism of public chains requires economic incentives for independent third parties, making tokens indispensable. The diffusion and investment of tokens are often associated with community behaviors such as mining (PoW) and crowdfunding (PoS). Coupled with the default characteristics of open-source, community behavior and the more popular organizational structure is the foundation rather than the company. Company-based blockchain organizations are stable but not open enough. The stability arises from the fact that their team incentives are more derived from traditional salaries and equity, reflecting the characteristics of economic man—profit-seeking; the lack of openness actually refers to the uniformity of incentives—imagine whether someone would join a company-based blockchain team or a community-based one for the sake of fairness in the world? The general understanding would be the latter. Therefore, in my view, the distinction between company-based and community-based blockchains lies more in the differences in incentives.
The above four forms are arranged in chronological order according to the emergence of their typical cases. It can be observed that community-based blockchain applications appeared first, gradually transitioning to company forms thereafter.
Is blockchain emerging from the community or the market? Why does it seem that as time goes on, blockchain is moving further away from the community?
It is generally believed that the community form is the most free and loosely organized; the company form is the most regulated and has the clearest goals (i.e., profit) among the four organizational forms.
The foundation lies somewhere in between. One can understand the above information this way: to better adapt to the external environment, participants in blockchain have gradually shifted from a weak organizational form to a strong organization; at the same time, they are increasingly inclined to find a stable, long-term profitable model.
From the perspective of rational individuals, this transformation is easily understandable: the birth of any new technology may be coincidental, but its development and expansion must meet the criteria of bringing lower costs and higher utility to both itself and the overall operation of society, achieving Pareto optimization.
So does this mean that the future result will definitely be the decline of community-based blockchain organizations and the rise of company-based blockchain organizations?
Not necessarily. Pareto optimization means that at least one person becomes better off without making anyone else worse off. It is important to note that the meaning of "better" differs for everyone. A situation may arise where for Person A, obtaining a higher salary is better; while for Person B, fairness in the world is better. For Person A, joining a company-based organization may be better, while for Person B, joining a community-based organization may be better. Thus, it can be inferred that the simultaneous existence of both company-based and community-based organizations is a form of Pareto optimization for both Person A and Person B.
Delving deeper, we find this involves fundamental questions in economics: is it the assumption of economic man or the assumption of social man? Are people economically rational or socially rational? Are people selfish or altruistic? To be or not to be? The eternal question.
From the perspective of the history of commercial development, the future will increasingly lean towards community-based structures, with the scale of technological productivity and the number of participants continuously increasing exponentially, while the utility of economic incentives will relatively decrease.
Blockchain is free and low-cost; ② Blockchain is expensive and wasteful.
Who is right and who is wrong? Both are half right.
First, let’s look at the first statement: "Blockchain is free and low-cost." This statement is made from the user's perspective. For users, when using a blockchain application (such as Bitcoin) for transactions, they do not need to consider the operational and maintenance costs of Bitcoin. According to the Bitcoin protocol, users theoretically only need to pay a minimal transaction fee to make payments. From this perspective, this assertion is correct.
Now let’s examine the second statement: "Blockchain is expensive and wasteful." This statement is made from the perspective of blockchain designers or investors. Designers are well aware of the principle that "there is no free lunch." In blockchain design, whether it is PoW (Proof of Work) or PoS (Proof of Stake), there must be corresponding resource expenditures to obtain consensus and ensure the smooth operation of the entire system. In PoW, the resource is the workload of miners; in PoS, the resource is the money spent to purchase stakes.
This is the operational mechanism of the blockchain under Bitcoin's PoW mechanism. As a distributed ledger, the left line represents the foundation for the system's operation, which is that the distributed ledger incentivizes miners to maintain system operation through the mining mechanism. The right line represents the conditions under which the system can continuously expand, which is that the distributed ledger indeed meets the needs of users who require value exchange, meaning that at some point, someone will use it. The price speculation below serves as the bridge connecting miners and users, as the ledger's tokens generate prices due to the needs of users on the right, while miners realize token incentives through valuable tokens, and price speculators solidify the price liquidity for both sides.
In the operational mechanism described above, every link is indispensable. Without mining, the system would lack record-keepers and could not operate; without users, the system's tokens would not generate prices; without price speculators, the token prices would lack liquidity, and miners would be insufficiently incentivized. Conversely, if each link performs its role, theoretically, a closed loop can be formed, which is a Nash equilibrium.
Nash equilibrium has a very important characteristic: consistency between beliefs and choices. In other words, choices based on beliefs are rational, and the beliefs supporting those choices are also correct. Therefore, Nash equilibrium has the self-enforcing characteristic of prediction: if everyone believes that a certain outcome will occur, that outcome will indeed occur. Satoshi Nakamoto had a similar viewpoint, stating that Bitcoin is a self-fulfilling prophecy.
Theoretically, the self-fulfilling characteristic of consistency between beliefs and choices allows blockchain to operate stably like a perpetual motion machine. However, does a perpetual motion machine really operate perpetually?
It turns out that this perpetual motion machine still requires fuel, and the fuel primarily consists of the users' ongoing demand for the ledger and the demand for price speculation.
In reality, due to the strong trading characteristics of blockchain tokens, the price speculation and genuine user needs often become intertwined and difficult to distinguish (not to mention that miners themselves are also frequent participants in price speculation). Setting Bitcoin aside, it can be observed that the proportion of blockchain tokens that have survived for more than two years is quite low. This fact indicates that relying solely on the demand for price speculation to achieve a Nash equilibrium in blockchain operations is nearly impossible. The operation of blockchain still requires the ability to meet genuine user needs and enhance the utility of user demands.
Relying solely on intrinsic value can also generate prices, but Bitcoin, as a commodity, is inherently a trading product (for buyers, it is merely a purchase of Bitcoin, but for sellers on Silk Road, Assange, and robbers, they will eventually sell it, and the key lies in the words "eventually"), so its price has inherently included both intrinsic consumption needs and external price speculation since its inception, making them inseparable. Due to the speculative funds that constitute its price, which occupy a larger proportion, this composition leads to Bitcoin's price being highly volatile in the long run.
Additionally, it should be noted that a Ponzi structure does not equate to a Ponzi scheme. Ponzi structures appear in all trading products, including stocks, commodities, gold, foreign exchange, and even real estate prices. The prices of trading products are like sailboats sailing in the sea, where people on board are occasionally influenced or even caught up in various whirlpools—Ponzi structures.
What is trust? Trust is a bridge covered in fog, with an invisible surface, connecting both parties in cooperation. Want to cooperate? Sure, walk across the bridge. What if you can't see the surface? What if you don't know what the other party is thinking? Choose: believe or not believe. People continuously exchange information and engage in repeated games before, during, and after their choices for this cooperation and future cooperation.
What is trust? Trust is an expectation and anticipation. Through the collection of information and independent judgment, people assess the probability of an event occurring (especially cooperation). Is it 100%, 50%, or 10%? The earlier bridge represents incomplete information in the game, while the inability to fathom the inner thoughts of the person on the other side represents imperfect information in the game. However, people must still make judgments and choose to trust; otherwise, human society would lack cooperation and development.
This machine called blockchain makes past records immutable and even unbreakable through mathematics, code, and economics. This is one aspect. It also writes the agreements of cooperation into smart contracts on the blockchain, which cannot be changed on one hand, and on the other hand, the blockchain will automatically execute them when conditions are triggered in the future. This is the second aspect.
One can understand the first characteristic of blockchain, "immutability," as meaning the credibility of information. If Party B voluntarily offers to provide Party A with data from the blockchain, then under unchanged conditions, Party A will at least trust Party B and Party B's data more. Perhaps Party A initially trusts Party B's non-blockchain data at 50%. When Party A sees that Party B is willing to provide blockchain data, Party A may believe that the difficulty of fabricating this data is higher, meaning that although there is still a possibility of forgery, the blockchain has increased Party B's opportunity cost of forgery, leading Party A to potentially raise their trust in Party B's data to 60%. Another characteristic of blockchain data is that the longer the history, the higher the cost of forgery. This is because blockchain data can be easily traced back to any previous point in time. On the other hand, like general data, the more historical interactions a piece of data has, the higher the cost of forgery. Therefore, if Party A sees that the blockchain data provided by Party B has a history of 10 years and has left digital signatures from multiple uses, Party A may increase their trust in Party B's data to 80%. This is the first characteristic of "immutability."
To understand the second characteristic of blockchain, "smart contracts," one must first grasp the most fundamental and intriguing concept in game theory: the "prisoner's dilemma." The prisoner's dilemma illustrates the divergence between individual rationality and collective rationality in certain cooperative situations. This is considered a paradox of human cooperation development: since the optimal choice from individual rationality and nature is always non-cooperation, why do humans always seek cooperation? Prisoners can achieve the best outcome for all (release without charges) through mutual cooperation, but in the absence of communication, the temptation to betray a partner for personal gain (shortening the sentence) leads to mutual betrayal, which, while violating the best collective interest, serves individual interests best. However, law enforcement cannot create such a scenario to compel all prisoners to confess, as prisoners must consider factors beyond the sentence (such as the risk of retaliation for betrayal) and cannot fully evaluate the benefits set by law enforcement (the sentence). The common understandings of solving the prisoner's dilemma are generally threefold:
First, establish binding contracts or agreements;
Second, engage in repeated games;
Third, education.
What smart contracts aim to achieve is to resolve the prisoner's dilemma through binding contracts or agreements.
At first glance, smart contracts seem excellent and without issues, but upon deeper reflection, many questions arise.
On one hand, binding contracts and agreements seem to already exist widely in society; on the other hand, can smart contracts truly achieve enforcement without existing machinery?
Blockchain is an idea, a collection of many open-source projects, and a "ledger" of countless brainstorming sessions. Technologies may be eliminated, inventions may become outdated, companies may go bankrupt, but the distributed idea will not. Just as the invention of the printing press shattered the medieval guilds and churches' monopoly on knowledge and reshaped the social power structure, blockchain technology will fundamentally change our understanding of resources and transactions today, altering the ways governments, companies, and individuals engage in economic activities. Tocqueville said in "Democracy in America": "The invention of firearms allowed slaves and nobles to confront each other equally on the battlefield; the printing press opened the door to information for people of all classes, with the postman delivering knowledge equally to cottages and palaces." Now, the era can add a new footnote to this statement: blockchain has activated the credit machine for us, allowing governments, companies, institutions, and individuals to present themselves as equal nodes in a distributed network, each managing their identity and credit while sharing an immutable transaction ledger.
Although blockchain technology itself is still imperfect, like a crude toy, we must not forget how people evaluated the invention of the telephone in 1876. In a memo from Western Union, it was written: "The telephone has too many flaws and is not a communication method worth considering; it has basically no value to us."
A quote from Paul Graham introduced by Y Combinator in "Hackers and Painters."
The protocol-based foundation emphasizes the irreversible nature of blockchain transactions and the immutability of data. It should be noted that credit here has two implications: the first layer is trust, addressing the honesty of transactional behavior. The invention of consensus mechanisms like proof of work eliminates reliance on trusted third parties, ensuring the authenticity and reliability of transactions through a distributed network, thus preventing double spending and transaction rollbacks. The second layer is credit, addressing the honesty of the transaction parties. The authenticity and reliability of blockchain credit allow two strangers to transact with each other or complete complex smart contract behaviors like lending and guarantees, fundamentally utilizing the blockchain timestamp to distinguish genuine transactional behavior from credit manipulation in terms of probability distribution.
The value internet emphasizes the way blockchain processes non-competitive resources by treating competitive resources. Some say blockchain is the second great epoch of the internet world after the World Wide Web. If the World Wide Web realized the information internet, moving competitive resources into the digital world and making the marginal cost of replication equal to zero, then blockchain realizes the value internet, allowing competitive resources to be processed in the digital world, making it difficult for attackers to bear the cost of a 51% attack or to alter transaction records.
Some also understand blockchain as a shared ledger. Both the European Central Bank and the UK government have released reports on shared ledgers, emphasizing blockchain as a distributed accounting method, aiming to improve their business processes and the quality of services to citizens and users from the perspectives of government functions and different interest groups, enhancing efficiency in financial markets, supply chains, e-commerce, and the registration of listed companies. However, viewing blockchain merely as a distributed accounting system is a misunderstanding akin to buying the box and discarding the jewel. The distributed accounting function is just one of many characteristics of blockchain. The shared ledger only sees the innovation of blockchain at the database level, neglecting the innovation of blockchain at the internet protocol level in establishing credit.
In the era of digital assets, the economy and wealth increasingly rely on a vast and effective network of collaborative relationships. For example, Airbnb is a newly created artificial market that relies on a large number of networked collaborative relationships within the Airbnb system platform. These collaborative relationships apply not only to consumer relationships but also to employment relationships (such as the Pig Eight platform) and investment relationships (such as crowdfunding platforms). These collaborative relationships are driven by algorithmic programs and ultimately manifest as a multitude of transactional relationships, i.e., various contractual relationships between nodes. Communication and network technologies enable sufficient, efficient, and real-time connections between accounts and users. Massive, automated, and intelligent transactions will greatly enhance the quantity and quality of collaboration and will directly reflect as economic wealth in society.
Cainiao Network can connect a large number of logistics companies, couriers, and warehouses, achieving massive value circulation. This is a distributed structure where information can be synchronized and shared, allowing all business information to interact and communicate among participants in a timely, multi-party, and multi-dimensional manner, without needing a central agency to plan and arrange in between. Alibaba, behind Cainiao Network, is merely a platform and guarantee organization. This is the greatest advantage of networked collaboration compared to traditional closed supply chains.
If blockchain technology is applied to improve these artificial markets and enhance regulatory and security capabilities, then these artificial markets will form a fully open network structure, building sufficient credit and generating a collaborative explosion and transaction explosion driven by market gravity, achieving massive transactions and rapid circulation of value.
In summary, networked real-time collaboration needs to be based on interests. Market gravity describes this interest-driven mechanism and measures the degree of win-win cooperation required. As the driving mechanism of the market, market gravity is the fundamental driving force behind the derivation and development of the market. Similarly, market gravity will also be the fundamental driving force of this artificial market called blockchain.
Transaction cost theory was proposed by Nobel laureate Ronald Coase in 1937. In his article "The Nature of the Firm," he stated that transaction costs are "the most obvious costs of organizing production through the price mechanism, which are the costs of discovering relative prices" and "the costs of negotiating and signing each transaction."
Transaction costs are a vague but indispensable concept. Transaction costs refer to the time, energy, and expenses required for a transaction. Clearly, any transaction activity incurs transaction costs. In the transaction process, costs can be divided into three categories: search costs, which are the costs of gathering information about goods and transaction parties; information transmission costs, which are the costs of obtaining information about transaction parties and exchanging information with them; and costs during the transaction process, which include costs of negotiation and bargaining, decision-making and signing, post-monitoring, and default costs.
Traditional transaction costs are defined from the perspective of information. However, in actual commodity exchanges, there are not only information costs but also costs to overcome the physical distance between buyers and sellers. Therefore, transaction distance can be defined as the expected transaction costs between sellers and buyers, denoted as r. Clearly, any r is greater than zero. If we distinguish between information distance and physical distance, transaction costs can be divided into the costs of overcoming information distance (d1) and the costs of overcoming physical distance (d2).
If we do not consider information distance and only consider the costs incurred in overcoming physical distance, it constitutes a special case of transaction distance—space of material entities. If we do not consider physical distance and only consider the costs incurred in overcoming information distance, it constitutes another special case of transaction distance—the exchange of information products. The genes of living organisms also possess a similar dual attribute, namely materiality (reflecting the mode of existence) and informationality (reflecting fundamental attributes).
The transaction process can be decomposed into three subprocesses. First is the consumer's search and evaluation process: after generating consumption demand, if there is no definite purchasing plan, they must search for relevant goods and producers. Second is the producer's pricing and information transmission process: this process mainly occurs through the price mechanism. Lastly is the negotiation and signing process between buyers and sellers: the buying and selling transactions of goods, the hiring transactions of labor, and the lending transactions of funds all involve bargaining and signing contracts between buyers and sellers.
Peer-to-Peer Transaction Scenarios#
Arranging all sellers along the real axis based on their physical distance to buyers, the vertical axis represents information distance. Both physical distance and information distance are measured by the monetary costs required to overcome that distance. Some sellers, although physically distant from buyers, can reduce search costs through more eye-catching advertisements, thus significantly reducing information distance and total transaction distance.
Specific scenarios (such as the seller's inventory, bargaining space, merchant reputation, and product matching degree) are constantly changing, so the difficulty of obtaining information varies, and costs differ. For over two hundred years since the invention of the complex plane, it has been challenging to assign practical meaning to it. This book argues that defining this complex plane from the perspective of commercial activities is reasonable, and historically, commercial activities have often given mathematics practical significance: for instance, negative numbers initially found practical meaning in representing losses or debts, while the constant e initially found practical meaning in calculating compound interest, all related to commercial activities.
In the information and e-commerce era, local physical stores often cannot compete with distant physical stores, nor can they compete with online stores without physical locations. This is because certain physical stores and online stores transmit information more timely and at lower costs, while the physical distance is compensated by the convenience of delivery. The delivery costs for logistics spanning an entire country often amount to less than the transportation costs for shopping within the same city (such as taxi fares).
In the process of searching for transaction parties, each buyer or seller draws a circle with a radius of r centered on their position in the complex plane, and the disk contains all sellers or buyers whose transaction distances are less than r.
Mathematical Expression of Transactions#
For every buyer or seller, the set of sellers or buyers they can consider within the transaction distance r is finite. If a buyer or seller wants to consider more sellers or buyers, they must increase their transaction cost expenditure. The interpretation of the imaginary part of the complex number is that the increase in information can reduce the expected physical distance and may improve overall efficiency (i.e., reduce r) (see Figure 2.6). For example, among multiple alternative sellers, if a buyer knows that a particular seller can always offer the best price, they do not need to compare prices, thus reducing physical distance. Moreover, sellers and buyers are constantly moving relative to each other; if a buyer happens to move close to a seller, timely knowledge of that information will aid in sales. For instance, the reason Didi Chuxing can create a new market is that it allows drivers to timely learn about passengers' demand and location information. Additionally, while the increase in information can reduce the expected physical distance, it does not necessarily reduce the total transaction distance, and whether it effectively reduces r depends on the market environment.
For each buyer or seller, the lines of equal transaction distance form a series of concentric circles. Each concentric circle contains a corresponding set of sellers or buyers, and their numbers are often uneven, exhibiting density differences. This difference largely determines the likelihood of successful transactions.
Mathematically, the origin of the complex plane can be understood as the location of the market transaction point, and the vector obtained by subtracting two vectors represents the transaction vector. The essence of market exchange is to make two points coincide through information transmission and physical location movement, generating the seller's monetary income and the buyer's monetary expenditure (similar to energy transfer), as well as the transfer of goods or services.
Information displacement refers to the information search by the buyer and the information transmission by the seller, while physical displacement refers to the physical movement of oneself and the counterpart. Among them, the exchange of information products does not require physical displacement, while the exchange of material products requires both physical displacement and information displacement. Therefore, for a given pair of buyers and sellers, the total displacement required to complete the transaction is .
Transactions are ubiquitous; they are the foundation and smallest unit of market operations. The market system continuously cycles through the process of "tending towards equilibrium" to "equilibrium," then experiencing "equilibrium state being disrupted and moving away from equilibrium," and then transitioning back to "tending towards equilibrium."
Decision Space of the Market#
Matter, information, and energy are the three basic elements that make up the material world. Among these, matter is fundamental, while energy and information derive from matter. Similar to physical space, this section defines the decision space of the market. This space is composed of three axes: physical distance, information distance, and monetary income and expenditure, and is formed by transactions that generate monetary income or expenditure for both buyers and sellers. At the same time, due to characteristics such as timestamp marking and data immutability, a fourth axis of decision space is formed in the blockchain, which is the time axis.
Consider a simple commodity market with only one seller and one buyer, which represents a bilateral monopoly scenario (see Figure 2.10), and only considers a single transaction of the commodity. u and v represent the value of possessing a certain commodity for the seller and buyer, respectively. For this transaction to be meaningful, the value the buyer places on purchasing the commodity must exceed the value the seller places on retaining it, i.e., u < v.
When no transaction occurs, assume the seller's initial utility is u, and the buyer's initial utility is 0. Both the seller and buyer can choose whether to complete the exchange. If either party chooses not to exchange, their utilities remain unchanged at u and 0. If the seller chooses to exchange, they must offer a price p to the buyer; if the buyer accepts, the utilities received by the seller and buyer will be p and v - p respectively (the product has already been produced before the transaction, and u is a sunk cost that cannot be recovered, thus not considered in the decision-making process, and the seller has already ensured that p > u when pricing). Generally, the outcome of this game is that the price p will fall between the seller's and buyer's values, i.e., u < p ≤ v.
Thus, the initial utilities are 0 (buyer) and u (seller), while the expected utilities after the transaction are v - p (buyer) and p (seller). If both parties are willing to complete the exchange, the total utility of both parties v will be greater than the initial u, meaning the expected total utility after the transaction is greater than the initial total utility: v > u.
Consider a more complex scenario: with two sellers, a buyer chooses to transact with one of them. Assume the buyer only considers the seller's price p and transaction distance r (see Figure 2.11(a)). When prices are the same, the buyer typically chooses the seller who is closest in transaction distance; however, sellers who are farther away will choose lower prices to gain a competitive advantage, leading to uncertainty. Therefore, transaction distance and price cannot independently determine the buyer's choice; these two variables jointly determine the seller's attractiveness to the buyer and the buyer's final decision.
Further consider a more complex real-world scenario: suppose the buyer considers not only the seller's price and transaction distance but also their preferences and the quality of the seller's goods (see Figure 2.11(b)). When preferences and transaction distances are equal, the buyer typically chooses the seller with the lowest price; however, sellers with higher prices will seek to enhance the quality of their goods to gain a competitive advantage, leading to uncertainty. Additionally, if buyers have different abilities to discern product quality and preferences, their evaluations of the value of product quality will also differ. Thus, transaction distance r, price p, quality q, and preference θ cannot independently determine the buyer's choice; these four variables collectively determine the seller's attractiveness to the buyer and the buyer's final decision.
For example, JD.com claims that its platform has fewer counterfeit goods and higher quality to compete with Taobao, which focuses on product quality q. However, Taobao claims to have a wider variety of products that better meet consumers' diverse needs, which focuses on product preferences θ. Convenience stores downstairs compete with online stores by claiming they are closer to consumers, which focuses on transaction distance r. JD.com, Taobao, and convenience stores all engage in price wars, which focus on product prices p. However, a seller's advantage in any single aspect is insufficient to sway consumer purchasing decisions; the final market certainty must be determined by the comprehensive consideration of these four aspects. This is why business models like JD.com, Taobao, and convenience stores can coexist in the market, reflecting the diversity of commercial species.
If a seller can simultaneously achieve the shortest transaction distance, the highest satisfaction of product preferences, the lowest price, and the best quality, they will gain an absolute advantage and remain undefeated. However, there is an inherent contradiction between product preferences and transaction distance: preferences are closely related to the diversity of products, and once the variety of products increases, the difficulty of selection will lead to an increase in transaction distance. Similarly, there is an inherent contradiction between product quality and price: higher quality typically requires more costs, leading to higher prices. Therefore, it is challenging for sellers to optimize across all four aspects unless they possess more advanced technological means or extraordinary innovation.
Pareto optimality refers to an ideal state of resource allocation, where no adjustment can make one party better off without making another worse off. In other words, when the market operates at high efficiency, improving the situation for one party must come at the expense of another's situation.
Economic theory posits that in a free-choice market mechanism, various groups in society can achieve the most rational allocation of economic resources through the continuous pursuit of maximizing their own interests. The market mechanism is essentially an "invisible hand" that drives people to achieve mutually beneficial economic outcomes through various transactional relationships and various competitive and cooperative relationships based on self-interested motives. Since free trading can benefit both parties, a market based on transactions can enable everyone to reach the best state of win-win.
Win-win in transactions reflects the principle of efficiency. In a market where both sellers and buyers can freely choose their trading partners, if the exchange of goods allows sellers and buyers to achieve a relatively high degree of win-win, it reflects the efficiency of the market.
Each market contains its own price signals and generates its own micro-gravity. Based on this micro-gravity, economic displacements arise from cooperation and transactions between buyers and sellers, forming economic work. When the market is in equilibrium, it should adhere to the conservation of money, meaning that no new money should be issued; instead, transaction fees should reward transactions. However, when product innovation or marketing innovation causes the market to deviate from equilibrium, new money should be issued to reward innovation.
The degree of win-win in the market can measure the inclination of both parties to trade, generally referred to as market gravity. The satisfaction level of sellers is proportional to the utility p they receive after the transaction and inversely proportional to the transaction costs r they need to overcome; while the satisfaction level of buyers is proportional to the utility v - p they receive after the transaction and also inversely proportional to the transaction costs r they need to overcome.
Therefore, defining the measurement of win-win as the product of the satisfaction levels of both buyers and sellers, it is proportional to the product of the amounts p and v - p obtained by both parties after the transaction, and inversely proportional to the square of the transaction costs that both parties need to overcome. Here, price is a double-edged sword: increasing the price increases the seller's utility but decreases the buyer's utility, reducing the likelihood of a transaction.
Market gravity also measures the stability of transactional behavior: the higher the degree of win-win, the lower the likelihood that either party will abandon the transaction. According to the Pareto efficiency principle, the measurement of win-win is defined as being proportional to the product of the utilities p and v - p obtained by both parties after the transaction and inversely proportional to the square of the transaction costs that both parties need to overcome. Referring to methods from physics, market gravity based on the degree of win-win can be defined as
Compared to the universal gravitation formula, the above market gravity formula has the following characteristics:
(1) The law of universal gravitation states that there is a gravitational force between any two mass points in the universe, while the market gravity formula indicates that there is no gravity between buyers and sellers who have not obtained price information (v - p < r).
(2) The law of universal gravitation does not provide a detailed explanation of why gravity occurs, while the market gravity model explains it from the perspective of win-win between buyers and sellers.
(3) Universal gravitation is proportional to the masses of the two objects, while in the market formula, gravity is proportional to the monetary utilities of buyers and sellers after the transaction. The higher the monetary utilities of both parties after the transaction, the greater the gravity.
(4) The transaction distance between buyers and sellers is the transaction cost, not merely the physical distance. In the information society, this is relatively easy to understand: with the internet, many buyers and sellers who are physically far apart can complete transactions at very low transaction costs.
(5) Newton believed that gravity is transmitted at infinite speed, while Einstein posited that no physical speed can exceed the speed of light, and gravity is no exception. In the market gravity model, both parties need to transmit and perceive information about product prices and quality, and the market's "invisible hand" is based on the transmission of information. Therefore, the speed of market gravity's effect will be less than or close to the speed of light.
(6) Universal gravitation is a relatively static model, while the market gravity model is dynamic. Not only can r change, but the quality q of goods and the price information p transmitted between them can also change.
(7) Universal gravitation primarily targets macroscopic objects such as celestial bodies or objects, while market gravity targets individuals in transactions, akin to fundamental particles like electrons in physics.
Overall, universal gravitation is the macroscopic form of gravity, while the formula in this section is the microscopic form of market gravity. In subsequent sections, the macroscopic form of market gravity will be derived and further compared with universal gravitation.
Additionally, the microscopic gravity in the commodity market encompasses the well-known 4P marketing theory, which consists of the combination of four basic strategies: Product, Price, Place, and Promotion. In 1953, Neil Borden coined the term "marketing mix" in his inaugural speech at the American Marketing Association, meaning that the amount of market demand is influenced to some extent by this strategy combination. As a representative of modern marketing theory, it has swept the world, influencing and shaping the marketing strategies of countless companies, becoming the core idea in the marketing field for nearly half a century.
In the 4P theory, product strategy emphasizes product functionality and highlights unique selling points; price strategy refers to formulating different pricing strategies based on different market positioning; channel strategy focuses on cultivating distributors and building sales networks; promotion strategy refers to stimulating consumers through changes in sales behavior, promoting demand and sales growth through short-term actions (such as advertising, discounts, buy one get one free, etc.). Market gravity encompasses the evaluation of product functionality and quality v, price p, and transaction distance r, corresponding to the three strategies of product, price, and channel. Promotion strategy acts as an external force, adjusting prices through discounts, transaction distances through advertising, and adjusting evaluations by enhancing product functionality and quality, thereby influencing market gravity and increasing market demand. Therefore, market gravity encompasses the combination of 4P marketing strategies. From the formula, it can be seen that when r is smaller, or the product of p and v - p is larger, the gravitational pull of the transaction F becomes greater.
In the commodity market, transactional behavior occurs between consumers and producers, manifesting as the buying and selling of goods, while in the labor market, transactional behavior occurs between legal entities and wage laborers, manifesting as labor hiring transactions. Once labor is commodified, the essence of labor exchange is the exchange relationship between legal entities and wage laborers, where economic organizations hire laborers and pay wages.
From the formula, it can be seen that the generation of gravity must first transmit the wage level information of the labor commodity from the legal entity to potential laborers directly or indirectly. During the transmission process, laborers need to receive information about job demands and wage levels. From the formula, it can be seen that when r is smaller, or the product of w and v - w is larger, the hiring gravity F becomes greater.
Suppliers and demanders of funds transact through credit instruments, reflecting the separation of ownership and usage rights of funds, making funds a special commodity that is exchanged through lending. The trading of ordinary commodities follows the principle of equivalent exchange, concluding transactions through bargaining, payment, and delivery, after which no further relationship exists between the parties; however, transactions in financial markets involve the establishment and transfer of credit and investment relationships, and even after the transaction is completed, the credit and investment relationships do not end, as there are still behaviors such as repayment of principal and interest and distribution of returns. In financial market transactions, the seller obtains the right to use funds, while the buyer acquires rights such as interest and control over investments.
The degree of win-win between fund demanders and suppliers in the financial market reflects the attraction of both parties to complete transactions. Borrowing gravity based on the degree of win-win can be defined using methods from physics, as shown in the figure.
In the financial market, funds become a special commodity that needs to be traded through financial intermediaries. There are at least two types of transaction intermediaries in the financial market: banks and stock exchanges. Clearly, banks act as intermediaries between savers and borrowers. The stock exchange is an invisible intermediary, functioning similarly to banks: its clients' funds are all held in banks, and the funds required for participating in trading activities must be transferred into the margin account of the exchange through "bank transfers," with banks acting as third-party custodians for the exchange's margin accounts. Therefore, the stock exchange is backed by banks. Banks serve as intermediaries for simple capital commodities, while stock exchanges serve as intermediaries for complex capital commodities. From the formula, it can be seen that the generation of gravity requires that the interest rate information of the financial commodity be transmitted directly or indirectly from the fund suppliers to the fund demanders. From the formula, it can be seen that when r is smaller, or the product of τ and v - τ is larger, the borrowing gravity F becomes greater. Similarly, when r is smaller, or the product of γ and v - γ is larger, the saving gravity F becomes greater.
Microscopic Economic Work and "Decentralized" Currency Issuance#
Satoshi Nakamoto proposed in his original paper: "The first transaction of each block is treated specially, creating a new electronic currency owned by the creator of that block. This increases the incentive for nodes to support the network and provides a way to distribute electronic currency into circulation without a central authority issuing currency."
At the same time, "another source of incentive is transaction fees. If the output value of a transaction is less than the input value, the difference is the transaction fee, which will be added to the incentives of that block. As long as a fixed amount of electronic currency has entered circulation, the incentive mechanism can gradually shift to rely entirely on transaction fees, allowing this currency system to avoid inflation."
The mechanism proposed by Satoshi Nakamoto can be proven rational through the market gravity model. For the commodity market, after the buyer makes a choice, market gravity does work in the direction of movement, i.e., "force * displacement = work." When the market is in equilibrium, for the buyer, v - p = r, and for the seller, F • r = p, meaning the work done by market gravity equals the transaction amount. For the buyer's participation incentive, it is sufficient to obtain the transaction fee r; if the incentive exceeds r, it will lead to inflation.
When the market deviates from equilibrium, for the buyer, v - p > r, and for the seller, F • r > p, meaning the work done by market gravity exceeds the transaction amount. Deviations from equilibrium are usually caused by product innovation or marketing innovation, so product innovation and marketing innovation can lead to a decrease in entropy. At the same time, the magnitude of gravity also increases, represented as , rather than . Thus, the buyer's participation and innovation incentives will exceed the transaction fee r, necessitating the issuance of new currency.
In other words, when innovation occurs, the economic work done by market gravity can exceed the monetary amount of the transaction, necessitating the issuance of new currency to represent the excess portion to meet the need for this "energy" conservation. In the absence of innovation, "energy" conservation should be maintained: if currency is issued arbitrarily, it will violate energy conservation and lead to inflation. The English word for work is "work," which means labor, and meaningful work can be divided into repetitive work and innovative work, with innovative work typically being more important.
Based on blockchain, Bitcoin does not have a specific issuing authority but relies on a decentralized issuance mechanism, where anyone can potentially participate in creating Bitcoin and gradually issuing it.
The Bitcoin system acts as a decentralized ledger, with each block representing a page in this ledger, and the system automatically generates Bitcoin as a reward to incentivize miners to participate in bookkeeping. In this process, the blocks are not only linked in chronological order but also reflect increasing difficulty. The system contains a mechanism for dynamically increasing mining difficulty, which simulates innovation and its difficulty. The further into the future innovation goes, the higher the difficulty, requiring more laborers to utilize more capital to achieve the next generation of innovation. In reality, the first person to achieve innovation should also automatically receive a certain amount of newly created currency as part of the currency issuance process, which can both incentivize innovation and increase overall social welfare while avoiding inflation caused by one economic entity flooding the market.
Similarly, in employment transactions and lending transactions, the emergence of skill innovation and financial innovation also causes the economic work done by market gravity to exceed the monetary amount of transactions, necessitating the issuance of new currency to represent the excess portion. This aligns with Satoshi Nakamoto's thoughts on currency issuance.
While capital conservation can be maintained, when innovation causes the human market to deviate from equilibrium, it can generate a decrease in entropy and lead to capital non-conservation. The innovation of business models reflects the innovation of the human market and manifests as a decrease in entropy, moving from lower levels to higher levels, from simplicity to complexity.
Macroscopic Gravity of the Market: An Identity Equation#
The economy is initiated to obtain expected income, so the GDP calculated here is the expected total (output) income, not the income that has already been realized. This expected GDP corresponds to Keynes's concept of effective demand. Suppose a certain industrial chain's production process consists of m enterprises, and each enterprise is arranged in the order of intermediate products: the starting end of the industrial chain is the enterprise producing the final product, and each enterprise sequentially purchases intermediate products or raw materials from the next enterprise.
In this industrial blockchain, the expected sales revenue of the enterprise 1 producing the final product is R1, and to obtain this sales revenue, the expected cost of purchasing intermediate products from enterprise 2 in the production process is R2; thus, the expected sales revenue of enterprise 2 is R2, and to obtain this sales revenue, the expected cost of purchasing from enterprise 3 is R3; and so on, leading to the total expected (output) income of all enterprises in this industrial chain being (R1 - R2) + (R2 - R3) + (R3 - R4) + ... + (Rm - 0) = R1. The end of the industrial chain only requires input of labor and natural raw materials, thus not needing monetary capital input, meaning the expected cost is 0. Therefore, the total sales revenue of the expected final product equals the total expected revenue of all enterprises in this industrial chain, i.e.
**.** In the GDP calculation by the production method, the total product value minus the value of intermediate products consumed in the production process results in the value-added.
After inputting labor and capital, the final product is produced and the expected output value is realized through sales, then the actual output value of the commodity market is this value-added. Therefore, the production method is calculated from the perspective of the commodity market.
In the GDP calculation by the income method, wages + profits + interest + rent + taxes + depreciation = total income of laborers and legal entities. Production begins with the input of labor, and the input of labor generates value-added; profits, interest, rent, taxes, and depreciation all stem from this value-added, thus the hiring of labor is the foundation for obtaining these expected incomes. In the labor market, the total monetary income of laborers and legal entities is
where N is the total number of laborers, V Ej is the marginal output (income) of a certain laborer j, and V Ej - w j is the marginal profit created by a certain laborer j, and from the definition of V Ej, it can be seen that . Therefore, the income method is calculated from the perspective of the labor market.
Thus, the income method is calculated from the perspective of the labor market.
In the GDP calculation by the expenditure method, enterprise investment expenditure + household consumption expenditure + government purchase expenditure + (exports - imports) = total income of fund providers and demanders. Production also begins with capital input, and capital input also generates value-added. Based on the consumption chain of intermediate products, enterprise investment expenditure generates output value based on the investment multiplier, i.e., value-added; household consumption expenditure, government purchase expenditure, and (exports - imports) all stem from this value-added, thus enterprise investment expenditure is the foundation for obtaining these expected incomes. In the financial market, the total monetary income of fund providers and demanders is
where M is the total number of capital expenditures, V Fk is the marginal output (income) of a certain capital expenditure k, and V Fk - τ k is the marginal profit created by that capital expenditure, and from the definition of V Fk, it can be seen that . Therefore, the expenditure method is calculated from the perspective of the financial market.
The typical production function Q = f (L, K) indicates that a company's output is a function of two input variables: labor input and capital input. Capital demanders obtain funds from capital providers and make enterprise investment expenditures. The investment expenditure of enterprises reflects the capital owner's expenses to maintain and develop the enterprise, corresponding to the wages spent by the legal entity to maintain and develop workers. In this sense, the income method and expenditure method correspond to the two factors in the production function—labor input and capital input, while the production method corresponds to the output in the production function.
In other words, in the labor market, the monetary input of labor hiring is reflected in the wages of laborers, and the expected total output value income brought by labor input is , represented as: wages + profits + interest + rent + indirect taxes + depreciation (GDP income method). In the financial market, the monetary input of enterprise investment is reflected in the enterprise's investment expenditure, and the expected total output value income brought by capital input is , represented as: household consumption + enterprise investment + government purchases + net exports (GDP expenditure method). In the commodity market, it is reflected after production ends, as the total sales revenue of final goods (GDP production method).
Thus, from the three calculation perspectives of GDP, the following macro identity can be derived:
GDP production method = GDP income method = GDP expenditure method
Ultimately,
The former formula reflects the concept of surplus value in Marxist economics, while the latter formula reflects the consistency of the three accounting methods for GDP. If we convert the above formulas using averages, we have GDP = P • T = S • N = E • M, where P refers to the average price of all transactions, T refers to the total number of transactions, E refers to the average output (income) of all capital expenditures, and M refers to the total number of capital transactions (measured by the total number of capital expenditures). Since this is applied at the macro level of the economic total, all seven variables mentioned above are total variables and are defined from the perspective of exchange. Therefore, we can derive
In the above formula, P • T = E • M is mathematically similar to the famous Fisher equation, but differs in the definition of variables in Fisher's equation: in Fisher's equation, M refers to the total money supply, V refers to the velocity of money circulation, while we have not examined from this perspective. Marxist economics posits that labor is a special commodity, and the author agrees with this view, while also believing that capital is a special commodity. Both labor and capital are sources of value; they not only create value that can compensate for their own value but also generate new surplus value. Goods, labor, and capital embody the value-added, exchange, and connection of the three markets.
Macroscopic Economic Work and "Decentralized" Currency Issuance#
At the macroscopic level, the work done by market gravity is "work = force × displacement." When the market is in equilibrium, then ΔGDP2 = r, so . In other words, the work done by market gravity equals ΔGDP1. When the market deviates from equilibrium, then ΔGDP2 ≥ r, so . In other words, the work done by market gravity exceeds ΔGDP1.
In other words, the work done by market gravity exceeds ΔGDP1.
Like microscopic economic work, when the work done by market gravity exceeds the monetary measurement of GDP, since this arises from innovations in transaction costs, product quality, labor quality, and capital quality, new currency issuance should be incentivized. The English word for work is "work," which means labor, and meaningful work can be divided into repetitive labor and innovative labor, with innovative labor typically being more important.
When these innovations occur, the economic work done by market gravity can exceed the monetary amount of transactions, necessitating the issuance of new currency to represent the excess portion to meet the need for this "energy" conservation. In the absence of innovation, "energy" conservation should be maintained: if currency is issued arbitrarily, it will violate energy conservation and lead to inflation.
Based on blockchain, digital currencies will not have specific issuing authorities but will rely on a decentralized issuance mechanism, where any economic entity or individual can potentially participate in creating digital currencies and gradually issuing them. Like the newly added blocks in the Bitcoin system, the difficulty of technological innovation and marketing innovation will also increase over time. The process of innovation resembles mining, where the difficulty gradually increases, requiring more economic entities to engage in close collaboration, concentrating more labor and capital to achieve the next generation of innovation. In reality, the first economic entity to achieve innovation should also automatically receive a certain amount of newly created currency as part of the currency issuance process, which can both incentivize innovation and increase overall social welfare while avoiding inflation caused by one economic entity flooding the market.
In equilibrium, while human markets can maintain capital conservation, when innovation causes human markets to deviate from equilibrium, it can generate a decrease in entropy and lead to capital non-conservation. The innovation of business models reflects the innovation of the human market and manifests as a decrease in entropy, moving from lower levels to higher levels, from simplicity to complexity.