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V God of Ethereum Founder

  • Someone saw this limitation, and that person is Vitalik Buterin, the founder of Ethereum.

  • During the research process of Bitcoin, Vitalik gradually realized that the blockchain technology behind Bitcoin could not only be used in cryptocurrency but also had more possibilities. However, the architecture of Bitcoin hindered the development of the technology. Therefore, he hoped to expand Bitcoin's scripting capabilities to make it smarter. If patches were directly applied to Bitcoin, its scalability would be extremely limited. Thus, Vitalik focused his energy on how to create an alternative solution to Bitcoin and soon published the Ethereum white paper.

In the white paper, Vitalik articulated the vision for Ethereum's architecture: to add smart contract functionality on top of cryptocurrency, allowing developers to programmatically anchor all valuable objective/subjective things to Ethereum for transactions, thus achieving the transfer of value. This is also the origin of the argument that the ultimate form of blockchain development is a value network. How do smart contracts actually work? I will explain using the previous example of property rights registration. With the digital proof from the relevant departments, property owners can convert property certificates and other information into tradable digital assets through smart contracts. Of course, this process is long-term and can only be implemented after blockchain is applied in social governance.

  • On July 30, 2015, the Ethereum mainnet was officially launched, marking Ethereum's entry onto the historical stage. The core of Ethereum can be considered as the empowerment of smart contracts. Smart contracts are program codes independently written by software engineers based on the Ethereum protocol. However, we all know that there are almost no software systems without bugs, and since Ethereum smart contracts are open-source, anyone can view the source code of the smart contracts deployed on Ethereum at any time and from anywhere, which leaves room for hackers to exploit vulnerabilities.

  • The most famous hacking incident occurred in April 2016, when hackers stole about $60 million worth of Ether locked in The DAO contract, which was valued at approximately $150 million, and immediately sold it on exchanges, causing irreparable losses to the entire cryptocurrency market. After the hacking incident, there was intense discussion within the Ethereum community. Some advocated rolling back the Ethereum mainnet to before the hack; others believed in non-intervention, arguing that one should not rely on external forces to intervene in established facts. This can be seen as a significant test of blockchain faith. However, after community discussions, on July 20, 2016, Ethereum underwent a hard fork, splitting the Ethereum mainnet into two networks: ETH and ETC. ETH erased all traces of the hack and returned the stolen Ether to the original owners. What we now refer to as Ethereum refers to this rolled-back branch. ETC, on the other hand, retained all transactions, including the hack, to maintain the basic principles of decentralization and immutability that underpin blockchain.

Cognition and Impact of Blockchain: From Niche to Mass Adoption At the end of 2008, Satoshi Nakamoto published an article about Bitcoin. In early 2009, Bitcoin, based on blockchain technology, was born. At that time, almost no one foresaw that the "spark" of blockchain, digital currency, and the digital economy would, in just ten years, form a "raging fire." This is mainly manifested in the following five major transformations:

First, the transition from niche awareness to mass participation has been completed. Bitcoin originated in a very niche cryptopunk circle; the first and only article written by the Bitcoin team was published on a highly specialized cryptography website. As for Bitcoin's initial value, it was not recognized by the public or even by financial elites.

The participants in blockchain, digital currency, and digital assets have shifted from a few to many, including not only professionals and elites but also grassroots individuals. Worldwide, hundreds of thousands, even millions, have emerged. Compared to the total human population, this number is relatively small, but its growth rate is strong. The group that is completely unaware of what Bitcoin is continues to shrink.

This is a field where "heroes do not ask about their origins." Among the participants, young people are the main body. However, there are still differences between China and Western countries: in the U.S., the average age of kids involved in the crypto space is around 20, primarily from the middle class and elite strata. In China, the age group is slightly older, and besides major cities like Beijing, Shanghai, and Shenzhen, a considerable number of young people come from second- and third-tier cities, presenting a very grassroots state. Whether abroad or domestically, urban youth share some common traits: they are idealistic, have strong learning abilities, dare to try new things, and even possess a spirit of adventure.

Second, the transition from a small number of enterprises participating to an increasing number of enterprises getting involved, as well as stimulating the emergence of new types of enterprises based on blockchain technology, has been completed. In the past decade, on one hand, industries centered on blockchain technology have emerged, or new industries have formed by combining blockchain with sectors like big data; on the other hand, blockchain has entered traditional industries, and traditional capital has continuously increased its investment in blockchain and digital currency, thus forming cross-industries. In summary, under the promotion of blockchain and digital currency, a new industrial cluster is forming.

Third, the transition of most national governments from a "laissez-faire" approach to strict institutional rules and regulatory implementation has been completed. Around 2010, the vast majority of national governments did not pay attention to blockchain, especially digital currency, allowing it to grow freely. However, after Bitcoin prices continued to rise and a series of incidents occurred on Bitcoin trading platforms, some countries began to pay attention, establish regulations, and implement oversight. The 2017 "ICO" craze swept the globe, leading to so-called "scams," harming public interests and prompting governments to take it seriously. Regardless, from developed market economies to emerging market economies, more and more governments have abandoned their "laissez-faire" approach to digital currency and adopted a proactive stance.

Fourth, the transition of the impact on the world economy from negligible to increasingly significant has been completed. From the start of Bitcoin mining in 2009 to the successful ICO of Ethereum in 2014, blockchain and digital currency did not have a substantial impact on the macroeconomy of any country or the world economy. However, in the past three to four years, the situation has changed. With the rapid development and increasing influence of blockchain, digital currency, and digital assets, they have begun to change existing economic operating models, industrial structures, division of labor patterns, and employment trends, even affecting business cycle mechanisms.

Fifth, the transition from attention only from financial and technical professionals to interest from other social fields has been completed. It is said that the number of people who now know and pay attention to blockchain and Bitcoin has spread from financial and technical professionals to almost all social fields, becoming a social hotspot. At the same time, with the help of blockchain media, a large number of white papers published by related funds and enterprises, and numerous conferences have created an information shock, especially the "wealth myth" of Bitcoin has accelerated this process. Most notably, blockchain and digital currency have disrupted many traditional thoughts and concepts, driving a new, quiet social movement.

In summary, blockchain and digital currency have evolved from a spark to a raging fire. Taking digital currency as an example, almost every day new digital currencies are born. According to statistics, by the end of 2017, the number of global digital currencies had increased to 1,334, an increase of 980 from 2016. The five most mainstream ones are Bitcoin, Bitcoin Cash (BCH), Ethereum, Ripple, and Litecoin. Blockchain and digital currency have formed an irreversible pattern. In this pattern, an unprecedented combination of science and technology, capital, and power is taking shape. In previous human history, there has never been a time when government power, various capital resources, and scientific technology all focused on a single issue. In this pattern, the traditional wealth system is undergoing changes and transformations.

The development of blockchain can be roughly divided into two stages: blockchain 1.0, characterized by decentralized digital currency; and blockchain 2.0, characterized by smart contracts.

Currently, there is no consensus on the form of blockchain 3.0. In general, the "chain circle" believes that blockchain has the characteristics of being real, traceable, trustworthy, and fair, and can establish credit relationships through consensus mechanism algorithms, ensuring that contracts and agreements are executed automatically, thereby reducing social transaction costs.

Second, the "coin circle." The main body of the "coin circle" includes so-called "Bitcoin fundamentalists" who regard Bitcoin as a belief, believing that global currency will eventually achieve non-statehood; groups that obtained Bitcoin through "mining" in the early days; investors from traditional capital entering the digital currency space; and some related media. In the "coin circle," there are indeed individuals and institutions that have made considerable wealth through ICOs or digital currency trading. The "coin circle" also includes the general public, who, due to the high learning costs and barriers to entry of digital currency and blockchain technology, understand "trading coins" through their experiences in "stock trading" or "trading treasury bonds." After September 2017, many players in the "coin circle" have cashed out and exited.

Third, the "mining circle." The "mining circle" includes mining machine manufacturers, such as Bitmain and Canaan Creative; "mining pools" located in areas with very low electricity costs; and miners. Mining is a resource-intensive activity, and storage is closely related to mining. However, Bitcoin mining should not be categorized as a general economic activity's energy consumption; it is considered energy waste. This is because Bitcoin is a high-value wealth form achieved through proof of work.

The ecosystem formed by these three "circles" has the following characteristics:

  • (1) The degree of interdependence is continuously increasing;

  • (2) A regional division of labor has formed globally;

  • (3) There is strong internal innovation momentum;

  • (4) The scale of capital entry is continuously expanding;

  • (5) It promotes the upgrading of the digital economy. Supporting this ecosystem are both profit factors and the commitment to achieving decentralization and maintaining distributed accounting principles. As for governments around the world, there are no separate policies for the three "circles"; mainly, in terms of understanding the relationship between "chain" and "coin," some believe they are inseparable, while others believe they can be separated, leading to different policies.

Blockchain is a comprehensive technology built on the foundations of mathematics and physics, deeply connected and interacting with Internet+, big data, cloud computing, and artificial intelligence. In the era of the IT revolution, most technological resources, human resources, and financial resources supporting technological research and development were concentrated in Silicon Valley, USA. However, this revolution is global, with a wide geographical distribution of technological, human, and financial resources.

Second, this revolution touches the core of human economic interaction, namely digital currency. The greatest significance of Bitcoin lies not in creating a payment tool or generating a new vehicle for wealth but in opening the "Pandora's box" of monetary system reform. Since then, not only has there been a "Great Leap Forward" development of non-governmental and private digital currencies, but it has also promoted the development of legal digital currencies or central bank digital currencies. Thus, the original monetary system has begun to deconstruct. Furthermore, if digital currency forms a climate, it will ultimately affect the base currencies of countries around the world, impacting the structure and quantity of M0 and M2.

Third, this revolution has led to the emergence of the "token economy." In network technology, Token originally referred to a "token," representing a proof of rights or interests, translated into Chinese as "通证." Tokens can represent all proofs of rights, or in other words, all proofs of people's rights can be represented by tokens. Of course, this is an ideal state. The so-called token economy does not have a standardized definition; it refers to an economic ecosystem based on tokens. It includes three elements: proof of rights, encryption, and circulation. As for the models of the token economy, they are quite diverse, with the most representative being: currency model, points model, asset model, and data model. In the long run, the token economy shares considerable commonality with the sharing economy.

Fourth, this revolution is changing the organizational forms of traditional enterprises. Blockchain technology has brought about the feasibility of new economic combinations and new value combinations. Based on blockchain, "co-governance enterprises by all employees" or "distributed autonomous operating enterprises" are beginning to emerge. For example, ConsenSys runs on the Ethereum platform. The core feature of such new enterprises is decentralization, where ownership, structure, operation, rewards, and governance are integrated into a distributed management model, forming a new mechanism that encourages innovation, employee motivation, and collective action, creating a more inclusive and sustainable economic entity. This new type of economic organization based on blockchain changes the traditional hierarchical structure—where power and wealth are highly concentrated, and most activities occur within the company.

Fifth, this revolution provides governments with new governance tools.

  • The essence of governance is the systematic development and management of government data. The consensus mechanisms, encryption algorithms, smart contracts, immutability, traceability, and security trustworthiness contained in blockchain technology help in the exploration, storage, analysis, and confirmation of government data resources, effectively avoiding data distortion caused by excessive hierarchies, ensuring that government systems can quickly and efficiently collect real and complete big data, providing quality data support for government decision-making, and facilitating the achievement of the goal of building a "digital" society.

  • Regarding trends: This revolution, represented by blockchain, digital currency, and the digital economy, is global, merging technology, industry, and finance, and has formed an irreversible trend. This revolution has also triggered changes in global geopolitics. Such large economies do not need to look far; in the next year or two, or even a little longer, blockchain and encrypted digital currencies will reach new historical peaks in development.

"Digitalization" of traditional assets. These two types of "assets" are interpenetrating and mutually influencing. Because there are digital assets, logically, there are digital asset investments, digital capital, and digital wealth. There exists a connecting mechanism among these concepts, forming market characteristics different from traditional assets. For example, the digital asset exchange that NASDAQ aims to establish is an important experiment regarding the education of digital assets. It is particularly important to emphasize that digital assets are based on blockchain and are highly technical assets, thus differing from traditional assets such as real estate, minerals, and machinery. Blockchain involves a considerable number of scientific disciplines. Therefore, research institutes have begun to discuss cooperation with the Mathematics Institute of the Academy of Sciences and some universities regarding measuring digital asset indices. One idea is to select more than five cryptocurrencies to establish a composite index system. The volatility of cryptocurrencies is quite complex, including endogenous and exogenous factors. Just like earthquakes and tsunamis, earthquakes are determined by changes in internal geological structures, but earthquakes can also lead to tsunamis, which in turn affect earthquakes.

In the research and practice of digital assets, CIDA possesses four resource advantages:

(1) Intellectual resource advantage. The research institute has intellectual resources that understand both traditional and digital economies. Currently, those who only understand traditional economics but not digital economics, or only understand digital economics without knowledge of traditional economics and its operations, are insufficient to face the new economic and technological mixed era.

(2) Strategic partnership resources. The background, positioning, and philosophy of the research institute's establishment, especially the original domestic and international relationships of the founding members, help the research institute form a global strategic partnership network.

(3) Interdisciplinary research resources. Blockchain is a comprehensive technology still in its early stages, and its development requires the introduction and development of basic and applied sciences. For example, it requires the participation of mathematicians and computer scientists, while its application in economics and finance requires economists, monetary theorists, and even financiers and bankers. Moreover, the foundational technology of blockchain may change due to advancements in quantum computing and quantum computers.

  • The research institute has the resources and capabilities to organize interdisciplinary research, for which it has designed and established a "Technology and Academic Committee."

(4) Blockchain implementation resources. The future development of blockchain largely depends on its application, industrialization, and commercialization.

  • Including information systems that encompass academic and technological frontiers, talent, distribution of economic entities, and local government planning; (2) proposing a one-year plan and a three-year plan;

  • (3) Internal organizational structure design.

  • Mainly based on three concepts. First, Node. Each team member is a node, performing their functions on the node. Second, Matrix. Blockchain is a matrix, so the team industry needs to adapt to a multidimensional working style. Third, Cluster. CIDA adopts a collective model for external cooperation.

One is the traditional physical and material world. In this world, traditional agricultural production, farmers, and rural areas have not completely disappeared; they continue to exist around us. At the same time, industrial society continues to expand, with industrial products ubiquitous, from machinery and machines to automobiles and household appliances. The Chinese people have experienced a process from almost no cars on the streets to cars being everywhere. Additionally, rural areas are gradually disappearing while cities are experiencing explosive growth. Even globally, the era of material scarcity and poverty is fading away. Therefore, people have to discuss issues such as whether production is excessive or whether capacity is excessive.

The other is the information society, a new world built on the internet, mobile internet, and so on. In this world, the production factors are entirely different. The production factors in the traditional world are labor, capital, land, etc., while in the information world, the main production factors are data, information, and knowledge. The entire society is ultimately transitioning to a digital economy and digital currency, with the most important sign being "digitalization." In the digital currency or digital world, it is necessary to understand digital science, computer science, or the basic principles of algorithms. Now, a digital society based on the digital economy and digital currency has arrived and is beginning to permeate people's daily lives, changing their lifestyles.

However, for the vast majority of people, there is no way to understand the essence of the digital economy era that has begun to dominate us, just as they understand and experience the material world. The arrival of the digital economy or digital society does not depend on whether we understand and comprehend the digital economy and digital society. This situation is not the first time in history. When the industrial revolution occurred, the vast majority of people also did not understand or comprehend industrial society.

Blockchain is infrastructure. Blockchain is a new type of economy. Just as our traditional economy needs roads, railways, aviation, and docks, these are all infrastructures; only blockchain infrastructure has not been presented to people in physical form. Blockchain is an economic form. This is easy to understand. Blockchain itself grows rapidly, giving rise to a new economic form, such as various cryptocurrencies. Currently, the economy connected to blockchain is limited in absolute quantity, only a few hundred billion dollars, but its development potential is enormous. It is an economic form and economic entity. Blockchain is an experiment. Chain reform is an experiment. Blockchain will also produce various emerging economic models, giving rise to countless new types of scientific and social uses. Blockchain is a value system, including people's expectations and understandings of decentralization or non-centralization.

Blockchain is primarily scientific. It is recognized that blockchain requires at least six layers; if blockchain supports smart contracts, more layers are needed. The bottom layer consists of some general foundational modules, such as basic encryption algorithms, network communication libraries, stream processing, thread encapsulation, message encapsulation and decoding, system time, etc.; the middle layer is the core module of the blockchain, generally containing the main logic of the blockchain, such as P2P network protocols, consensus modules, transaction processing modules, transaction pool modules, simple contracts or smart contract modules, embedded database processing modules, wallet modules, etc.; the top layer is often based on JSON-RPC interaction modules, which can also create better UI interfaces or be a web service. Supporting smart contracts requires adding more layers, such as adding a BaaS layer to provide autonomous services for smart contracts on the blockchain.

According to the above technical description of blockchain, the support for blockchain comes from cryptography. The real perfection and success of cryptography occurred after the 1970s. This is only mathematics and cryptography; if we talk about computer science and algorithm languages, it goes back even further to scientific issues. Cryptography is also linked to the prime number theorem, which describes the relationship between prime numbers (which can only be divided by 1 and themselves) and all natural numbers. From the time Gauss proposed this theorem to its eventual proof, each step has pushed the development of cryptography forward. Without these developments, blockchain would not have been possible.

The "blockchain social movement" has gathered a wide range of social classes and institutions. The extraordinary thoughts and technologies supporting blockchain have attracted technology elites, knowledge elites, business elites, media elites, and a considerable number of ordinary people, gradually drawing attention and participation from enterprises to governments. Notably, blockchain is a "cross-generational" movement led by young people. Because of blockchain's "cross-border" structure, it not only changes the traditional connotations and forms of currency, finance, investment, property rights, and wealth but also alters traditional enterprise, organizational, and non-organizational models, quickly entering the realm of "governance."

The "blockchain social movement" is a typical globalization movement. Blockchain technology and principles, as well as the internet that serves as the foundational structure of blockchain, are not constrained by sovereignty, ideology, culture, or language. Therefore, it is easy to form a global "consensus" on blockchain. This is a "consensus" that originates from entirely new ideas, based on reason, science, and technology, far exceeding the so-called "Washington Consensus" or other types of "consensus" in history. Keynes once said, "I believe that the power of vested interests is vastly exaggerated compared with the ability of ideas to erode them." The continuously expanding influence and application scenarios of blockchain worldwide prove that Keynes's statement is correct. Furthermore, due to the correlation between blockchain and globalization, it will sooner or later lead to adjustments and changes in the international division of labor system and ecology, providing a solid foundation for global sustainable development.

Blockchain applications or landing scenarios require consideration of several relationships:

(1) The relationship between short-term and long-term. Blockchain currently faces challenges in application or landing scenarios and is still in its early stages. This is because blockchain technology is not mature enough, and the level of knowledge dissemination is insufficient. However, in the medium to long term, opportunities are continuously increasing.

(2) The relationship between traditional industries and non-traditional industries. Blockchain requires digitization as a prerequisite. Industries with inherent digital genes, primarily those that have grown and developed on the internet, are more likely to be blockchainized; while traditional primary and secondary industries face greater challenges in blockchainization.

(3) The relationship between rigid demand and elastic demand. The current application or landing scenarios of blockchain require a rigid demand as a prerequisite. At this stage, the industries and sectors with rigid demand for blockchain are limited.

(4) The relationship between macro effects and micro effects. The macro effects of blockchain technology are easier to prove and manifest compared to micro effects; however, the macro requires a combination of micro. Therefore, the application or landing scenarios of blockchain are best when they have overlapping macro and micro benefits.

The conceptual changes triggered by blockchain involve several aspects:

(1) Believing in and pursuing a balance of fairness and efficiency based on blockchain technology.

(2) Maintaining the inherent data rights of individuals through blockchain, including various privacy rights. Opposing the uncompensated deprivation of public big data.

(3) Supporting and participating in community-based, socially-oriented enterprises and other self-organizations based on blockchain, establishing cross-temporal and spatial combinations based on blockchain.

(4) Upholding the values of blockchain, where the new rules for distributing new wealth need to meet the moral standards of the new era.

(5) Establishing a trust system based on blockchain infrastructure and through blockchain business relationships.

The seven major future trends of blockchain:

  • (1) Industrial blockchain becomes the main battlefield for the development of the blockchain industry, with consortium chains and private chains becoming mainstream directions.

  • (2) Blockchain promotes changes in economic and social governance.

  • (3) An increasing number of large traditional enterprises are introducing blockchain.

  • (4) The integration of blockchain with the digital economy and society is becoming increasingly close, with "cloud chain usage" becoming a new indicator for measuring digital economic development.

  • (5) The formation of multinational blockchain industry alliances promotes blockchain applications in vertical fields.

  • (6) Blockchain combines with multi-party computing, secure computing, and federated learning to solve data privacy protection and sharing issues.

  • (7) Distributed commerce will continue to experiment and explore scalable business models.

Correctly understanding Bitcoin ICO is the abbreviation for Initial Coin Offering. The "coin" in ICO refers to Bitcoin's coin. However, ICO financing includes not only Bitcoin but also Ether. Both Bitcoin and Ether essentially belong to the category of encrypted digital currencies. Therefore, reflecting on ICO needs to start with a correct understanding of Bitcoin.

First, the necessary conditions for Bitcoin's birth. At the end of 2008, the Bitcoin paper was published, and in early 2009, Bitcoin was born. This was not a coincidence; it required three necessary conditions: (1) The combination of cryptography and other branches of mathematics. Bitcoin is a man-made currency; the idea of blockchain came first, leading to Bitcoin, not the other way around. Therefore, Bitcoin is a product of the full utilization of cryptography by cryptopunks, combined with other relevant mathematical achievements. (2) Infrastructure represented by the internet.

Second, the basic characteristics of Bitcoin. Bitcoin is a new species of currency and should not be measured by the "ruler" of traditional currency.

  • The basic characteristics of Bitcoin are: (1) The existence form of Bitcoin is a source code without any traditional material as a carrier.

  • (2) Bitcoin has no central issuing unit. Each Bitcoin has no parents and is independently generated through "mining."

  • (3) The entire transaction process of Bitcoin is recorded on a super ledger and is traceable.

  • (4) The total issuance of Bitcoin has a final upper limit, which is 21 million coins. In fact, if Bitcoin can last until 2141, the Bitcoin stock at that time will be less than 21 million coins because a considerable number of Bitcoins will be lost over a hundred years. (5) The core design concept of Bitcoin is to cut off the mechanism that leads to devaluation due to unlimited issuance. Thus, it fundamentally solves the mechanism problem of inflation caused by so-called credit currency. As for whether Bitcoin can be defined as "deflationary currency," further discussion is needed.

  • The community ecology of Bitcoin. The emergence of Bitcoin has stimulated the formation of the so-called "coin circle," "chain circle," "mining circle," and "media circle."

  • In each circle, different factions have emerged. For example, the reasonable splits caused by Bitcoin forks. At the same time, due to the entry of traditional capital and the establishment and operation of numerous exchanges, an industrial chain and value chain have formed around Bitcoin, thus creating a community ecology. In this digital currency community without traditional geographical boundaries, there are natives, pioneers, new immigrants from capital, and the proletariat. It is particularly noteworthy that in this ecology, there is a group of "code farmers" who have undergone professional training and understand at least one to two algorithm languages such as C++, Java, or Go.

  • Sixth, the ideology of Bitcoin. We do not know who Satoshi Nakamoto is, nor is it necessary to know. History has proven that the team that created Bitcoin published their plans anonymously and disappeared after completing the early experiments of Bitcoin, which was the right decision. It must be affirmed that although the only paper on Bitcoin hardly mentions its ideology, the team had specific ideologies when designing Bitcoin, driven by a sense of social responsibility, likely containing idealistic elements critical of capitalism. Therefore, the basic principles upheld by Bitcoin "fundamentalists" are commendable. In practical economic life, Bitcoin has been helpful for Mexican immigrants in the U.S.: they previously used Western Union to transfer money home, incurring a 6% fee and taking three days; now, with Bitcoin, it only takes seven minutes at a very low cost.

  • Sixth, the limitations of Bitcoin. Bitcoin has a short history and many limitations. The recent so-called Bitcoin forks were precisely to address Bitcoin's specific limitations. In addition, there are rising costs associated with the labor, electricity, and machinery of Bitcoin mining; the speculative issues arising from Bitcoin's price volatility; and the problems of wealth being used for tax evasion due to Bitcoin's anonymity.

Blockchain provides "confirmation of rights" technology. Currently, the widely recognized blockchain is divided into public chains, private chains, and consortium chains. Regardless of the type of blockchain, the micro-foundation is the "confirmation of rights" of data and information. Blockchain technology has a natural means of "confirmation of rights," storing users' data and information in the form of hash values, and through the decentralization and distributed accounting of blockchain, effectively ensuring that stored electronic data is not tampered with, thus guaranteeing the authenticity and originality of the data, forming the premise of "confirmation of rights." In particular, the blockchain system will inevitably realize the combination of "code is law," which will eventually become a reality, thus obtaining legal protection through blockchain's "confirmation of rights."

Fifth, blockchain has enormous potential for industrialization. Currently, blockchain industrialization includes two directions: (1) directly creating new industries based on blockchain, such as finance and concept industries; (2) implementing chain reform or blockchainization in traditional industries, such as the arts and culture industry, food industry, and transportation industry. As it stands, blockchain industrialization is just beginning, and truly successful cases are still very limited. The biggest bottleneck is the mismatch and shortage of talent. Entrepreneurs who understand the industry do not have enough knowledge of blockchain, while technical talents who are relatively familiar with blockchain lack industry experience. Therefore, blockchain training is an urgent task. Unfortunately, most so-called blockchain training courses currently offered are mostly conceptual, linking blockchain with speculation.

Sixth, blockchain helps change existing economic organizational forms. Blockchain provides the technical foundation for achieving "self-organization," which will sooner or later change the organizational forms of traditional enterprises, primarily the structure of companies. People will achieve division of labor and cooperation based on blockchain through "nodes." Furthermore, blockchain contributes to the development of the "token economy."

FinTech. FinTech can be defined as the combination of traditional financial institutions, including traditional banks and non-bank financial institutions, with science and technology. The following is a list of some banks and financial institutions worldwide that use blockchain technology.

Social, market, and consumer forces are becoming the most important driving forces for the technological transformation of the banking industry and the promotion of the integration of finance and technology. The focus of the traditional financial system's transformation is concentrated on the technological transformation of payment systems. The payment system is the most direct functional embodiment from banks to users, including institutional users and individual users.

Blockchain and smart contracts have brought significant innovations to the double-entry bookkeeping system, which has been the core support of traditional financial activities for hundreds of years.

The market value of physical products depends on the balance of "recognition" of product value by both supply and demand sides. The market value realization of conceptual products is more influenced by the scale of consumer "recognition." The "recognition" of the supply side can only transform the potential value of its products into actual market prices if it receives the "recognition" of consumers. For example, the commercial value of artists like Faye Wong and Madonna comes from the "recognition" of their audience. Even if some singers sing better than them, if they are not recognized by the public or not sufficiently recognized, their products will have no price or insufficiently high prices.

"Recognition" is a subjective phenomenon. People's "recognition" of the value of conceptual products is multifactorial, diverse, and multi-attribute, which can lead to different value recognitions due to different times, environments, systems, countries, cultures, moods, and ages. "Recognition" includes both active and passive recognition. For example, people's recognition of colors is often active; while recognition triggered by advertisements is passive recognition.

In practical economic life, the value "recognition" of conceptual products is mainly achieved through two pathways: "attention" and "experience." The so-called "attention" is the interest and attention that consumers develop towards specific products under psychological, learning, and informational stimuli. The so-called "experience" is the process of consumers consuming specific products through specific parts of their bodies. "Attention" and "experience" interact and are prerequisites for each other.

The theory of "increasing marginal utility" vs. "decreasing marginal utility": According to traditional marginal value theory, the marginal utility of consumption decreases, thus constructing the supply and demand curve. The marginal utility theory is based on human physiological experiences with physical products. However, human psychological experiences with conceptual products do not decrease in utility but increase. "Fans" are groups formed by repeated consumption. Each consumption by "fans" has higher utility than the initial consumption utility. The principle of "fans" formation lies in the fact that people's consumption of a conceptual product requires a process of cultivation, learning, and development, which includes continuously deepening understanding, resonance, reinforcement, and recognition. Therefore, the process presented is not "decreasing marginal utility" but a repeated use and consumption process of "increasing marginal utility."

The theory of "marginal cost approaching zero" vs. "increasing marginal cost": The theory of "increasing marginal cost" is an important cornerstone of traditional economics, especially microeconomics. However, in the conceptual economy, the marginal cost of producing conceptual products can theoretically be zero. This is because conceptual products do not get consumed in use; rather, they can be reused, and one use does not damage the value of the next use. In many cases, the more times conceptual products are used, the higher their value becomes. For example, QQ and WeChat. The production and consumption of conceptual products demonstrate the limitations of the "increasing marginal cost" theory and the necessity of transforming and replacing traditional manufacturer theories based on material production.

The theory of "interval pricing" vs. "unique equilibrium pricing": Equilibrium theory is the core theory of traditional economics. The intersection of the supply curve and demand curve is the "perfect" equilibrium price, considered unique and capable of maximizing the interests of producers and consumers. The supply and demand curves present a typical equilibrium situation for physical products. In other words, according to traditional economics, one product has one price; price comes first, followed by production, and any product entering the market has a predetermined price as a reference. Supply is a function of price; when the price rises, supply increases. Traditional physical products exhibit price convergence. For conceptual economic products, there is no unique equilibrium price. The price of typical conceptual products is not a unique equilibrium price. Conceptual products can be supplied infinitely at zero cost; thus, the supply quantity cannot depend on price. The price of conceptual products is a function of the degree of recognition of the concept and the surplus of the group that recognizes the concept. In other words, the higher the degree of recognition, the higher the price of that conceptual product, and the more surplus there is among the group that holds the recognition, the higher the price of that conceptual product is likely to be.

Barbaric Growth Period#

Soft Forks and Hard Forks#

Why did The DAO incident directly promote the subsequent barbaric development of blockchain? Let me explain slowly. All software systems will have bugs. Generally, we modify the source code based on the previous software version; the new version differs only slightly in logic from the old version, and the basic rules of the program do not change much. The two versions of the program can be simply adapted to recognize each other, and it can be said to be seamlessly compatible. We call this situation iteration. However, sometimes, due to architectural adjustments and rule changes, the two versions of the program can no longer be compatible. At this point, we cannot call it iteration; instead, we refer to this change as reconstruction. Typically, the result of multiple iterations is reconstruction, which can be understood as a qualitative change caused by quantitative changes. In blockchain, the network is composed of multiple interconnected nodes, and nodes must be able to communicate with each other. A few small version software iterations do not affect the operation of the blockchain network; some nodes upgrade while others continue to use the original version, which will not cause a split in the blockchain network. This situation is known as a soft fork, which is essentially a compatible program version update.

Once the community decides to reconstruct the blockchain protocol, it must coordinate the upgrade of all network nodes. You can imagine that if half of the nodes continue to use the original version while another part of the nodes upgrades to the new version, in this case, a blockchain network will be split into two. Although their data belongs to a common ancestor, at a certain point, they independently derive different data paths. This is the logic of a hard fork, which is essentially an incompatible program version update.

This explains why every upgrade of the blockchain network is a significant event that requires the community to coordinate from which block to enable the new version and discard the old version. Returning to The DAO incident itself, Ethereum split into ETH and ETC through a hard fork, with both networks operating independently. Logically, there is no problem; it makes sense. But the issue lies in the fact that its certificates are valuable. Before the hard fork, I owned 1 ETH, and after the hard fork, I had 1 ETH and also 1 ETC. It is equivalent to having an additional valuable certificate out of thin air without any operation, although its value may be relatively lower compared to the original ETH.

  • "Pandora's box" has been opened. Some people's thoughts have been liberated. If I have reasons to describe the shortcomings of Bitcoin/Ethereum, propose solutions, write a white paper, and elaborate on my viewpoints and implementation paths, can I also create my own blockchain through hard forks?

At the same time, if I can pull people to stand on my platform and let them vote for me, will more people recognize my viewpoint? Through such operations, will there gradually be people willing to pay for my ideals, and once someone pays for me, I have created a "wealth" bubble out of thin air? A grand chain creation movement begins, with various side networks based on hard forks branching out. The happiest and most driving force behind this movement is not the creator but the retail investors who held BTC/ETH before the hard fork; they received countless side certificates and, of course, hope their value will be higher. So they keep encouraging those around them to enter the market, thus continuously driving this false prosperity.

Indescribable Driving Force#

  • Besides hard forks, there are indescribable driving forces behind the barbarism, which for certain well-known reasons are not suitable for extensive discussion. Since this indescribable driving force emerged, it has been as natural as fish meeting water. The market welcomed a new round of madness. Anyone with a slightly blockchain-related idea can immediately write a white paper, gather a group of people to operate a community, promote their ideals, and attract the attention of investors, enticing them to spend real money on their "ideals." It cannot be denied that many teams initially did serious work relying on this financing method, but the market will not reward your seriousness proportionally; instead, those who boast excessively make a lot of money and disrupt the market. There is nothing they cannot do. The madness did not last long, and the bubble was ruthlessly punctured. Since then, the market has gradually cooled down. Time has come to a new stage of blockchain development, which is now. In the next lecture, I will detail the current state of blockchain technology.

Summary#

In this lecture, I elaborated on my understanding of the three historical stages of blockchain technology from its inception to its barbaric development. Bitcoin and Ethereum are phenomena, while blockchain technology is its essence.

  • Blockchain technology originated from Bitcoin, was born in Ethereum, and has gone through a chaotic explosion, but it is precisely because of those crazy years that countless people like you and me have come to know and understand blockchain technology.

  • History has no right or wrong, only results. I hope that through my explanation, you can understand the historical development process of blockchain technology and be filled with imagination and expectations for the future of blockchain technology.

  • You might try reading the Bitcoin white paper and the Ethereum white paper; they can be considered the bibles of the blockchain field. You can also take the opportunity to learn about Satoshi Nakamoto and Vitalik Buterin, both of whom are quite legendary figures.

Reflecting on the three stages of blockchain technology from its birth to its barbaric growth, after government intervention, the entire market has been sluggish due to the halving of Bitcoin prices, and speculators eager to make quick money have gradually exited, leaving behind a mess.

Against this backdrop, the development of blockchain has gradually shifted from price-driven to technology-driven. The exit of speculators means that those remaining are active individuals who have confidence in blockchain technology, pushing it forward and shaping blockchain technology into its current form. In this lecture, we will focus on the current state of blockchain technology.

![Developing applications is the same. Another group of people realizes that as long as digital currencies like Bitcoin/Ethereum exist, market manipulation of their prices can never stop, and in the short term, there is no possibility of stable exchange rates with sovereign currencies. National policies also show a trend of suppressing blockchain with coins. Rather than this, it is better to jump out of this circle and focus on researching blockchain technology in the enterprise field, which we call the consortium chain circle, with an emphasis on how to customize consortium blockchains based on the enterprises' own business, just like various mobile phone manufacturers develop customized systems based on the Android open-source system.
Different layers of circles have thus been established, and blockchain technology has since split like a hard fork into the public chain circle and the consortium chain circle, driving blockchain technology to develop in different directions.
Innovation in the Public Chain Circle
The development of the public chain circle is inseparable from investment incentives; all technological application innovations revolve around how to prosper the trading market. Why do I say this? By summarizing, we can roughly divide the innovations in the public chain circle into two categories: one is application-level, mainly including decentralized finance and decentralized storage; the other is technological innovation-level, with the most prominent being cross-chain, let's take a look at each.
Decentralized Finance
Decentralized finance, commonly referred to as DeFi, is the abbreviation for Decentralised Finance, and it is the most direct driving force for the development of the public chain circle. DeFi refers to financial services running on blockchain networks.
To understand it, we must first clarify what finance is. From the perspective of a finance novice, finance is a channel for asset appreciation through the redistribution of assets, and its essence lies in credit, risk, and leverage. The premise of finance is to control uncertain risks, but traditional finance and blockchain control risks through different means.
If you have experience applying for a mortgage at a bank, you will definitely find the process cumbersome and frustrating. Have you ever wondered why so many proofs are required for a loan, and why it must go through layers of review before getting the loan? This question can be understood from the perspective of risk control. Traditional financial services primarily control risk by examining the borrower's historical credit record and the market value of the collateral. If the borrower's credit is poor or the collateral's value is low, they may not be able to secure a loan. Traditional financial institutions like banks not only have to strictly vet before lending but also bear the risk of bad debts.
However, DeFi is different; it can control risks through smart contracts, with the advantage being that everything is automatically controlled by program code. If the initial agreed conditions are not met, the contract will force liquidation and seize the collateral. Moreover, DeFi has another significant advantage: there are no bad debts, and it requires almost no risk control, thus allowing for over-collateralization, which is leverage.
In fact, the contracts in digital currency exchanges are essentially DeFi, using a small amount of spot as margin to gain additional profits from the price fluctuations of digital currencies. However, in markets with sharp price fluctuations, almost no one is a winner, except for the market makers.
Although DeFi is a very novel financial innovation, its future development is still uncertain, especially domestically. The main battlefield of DeFi is Ethereum, which is an anonymous public blockchain network. Anonymity means it cannot be regulated or scrutinized by financial departments. Traditional financial industries often experience various financial scandals under heavy regulation, let alone unregulated DeFi.
For investors, the risks are enormous; the risks here differ from the bad debt risks mentioned above, and one must be wary of artificially created speculative bubbles and opaque transactions.
IPFS (InterPlanetary File System) is a new type of distributed hypermedia transmission protocol based on content addressing. IPFS supports the creation of fully distributed applications. It aims to make the web faster, safer, and more open. IPFS is a distributed file system that aims to connect all computing devices to the same file system, thus becoming a globally unified storage system. In a sense, this is very similar to the original goal of the Web, but it achieves this goal by using the BitTorrent protocol for the exchange of Git data objects. IPFS is becoming a subsystem of the current internet. IPFS has a more ambitious and crazy goal: to supplement and improve the existing internet, and even ultimately replace it, becoming the next generation of the internet. This sounds incredible, even a crazy goal, but it is indeed what IPFS is doing.
The IPFS project integrates existing technologies (BitTorrent, DHT, Git, and SFS) to create a peer-to-peer hypermedia protocol, attempting to build a faster, safer, and more open next-generation internet. It aims to create a global file storage system where data is permanently available and can be permanently preserved, while the protocol has content addressing and versioning features, attempting to supplement or even ultimately replace the hypertext transfer protocol (HTTP) that has accompanied us for over 20 years. IPFS is a protocol and also a P2P network, similar to the current BT network, but with more powerful functions, enabling IPFS to have the capability to replace HTTP and create a better Web for us. Filecoin, which runs on IPFS, is an incentive layer, a distributed storage network based on blockchain that turns cloud storage into an algorithmic market, where tokens (FIL) play a crucial role. Tokens serve as a bridge between users of resources (IPFS users) and providers of resources (Filecoin miners), with the Filecoin protocol having two trading markets: data retrieval and data storage. Both parties submit their demands in the market to reach transactions, and IPFS and Filecoin promote and grow together. This solves the data storage and distribution issues of the internet, especially for countless blockchain projects, where IPFS/Filecoin will exist as infrastructure. This is why we see more and more blockchain projects adopting IPFS as a storage solution, as it provides a cheaper, safer, and more stable storage solution.

In 1980, Martin Hell's student, Ralf Merkle, proposed the Merkle Trees data structure and generation algorithm. The Merkle Tree was initially intended to establish a public directory of digital signature certificates, ensuring that the data blocks transmitted in a peer-to-peer network are complete and have not been tampered with. As mentioned earlier, in the Bitcoin network, each block contains the hash value of transaction information. This hash value is not directly calculated by connecting the transaction order and then computing their hash; it is generated through the Merkle tree. The Merkle tree generation algorithm hashes each transaction once, then hashes the computed hash values in pairs until it calculates the Merkle root. This Merkle root contains all transaction information. This greatly saves wallet space. For example, in a light wallet, we only need to download the transaction information corresponding to our wallet; when verification is needed, we only need to find a hash path from the leaf node of the transaction information to the root node without downloading all the data of the blockchain.

In 1980, Martin Hell's student, Ralf Merkle, proposed the Merkle Trees data structure and generation algorithm. The Merkle Tree was initially intended to establish a public directory of digital signature certificates, ensuring that the data blocks transmitted in a peer-to-peer network are complete and have not been tampered with. As mentioned earlier, in the Bitcoin network, each block contains the hash value of transaction information. This hash value is not directly calculated by connecting the transaction order and then computing their hash; it is generated through the Merkle tree. The Merkle tree generation algorithm hashes each transaction once, then hashes the computed hash values in pairs until it calculates the Merkle root. This Merkle root contains all transaction information. This greatly saves wallet space. For example, in a light wallet, we only need to download the transaction information corresponding to our wallet; when verification is needed, we only need to find a hash path from the leaf node of the transaction information to the root node without downloading all the data of the blockchain.

Two other outstanding digital punks are Hal Finney and Nick Szabo, who reconsidered and integrated technologies. Nick Szabo is not only a computer scientist but also well-versed in law. Inspired by David Chaum, Szabo proposed the concept of digital contracts, aiming to utilize cryptographic protocols and security mechanisms to execute contracts on the network without third-party assistance. Compared to traditional contracts, digital contracts are safer and reduce related costs. This has had a significant impact on subsequent designs of encrypted digital currencies. The Bitcoin network can provide a non-Turing complete scripting language to realize some smart contract functions; Ethereum further runs the Solidity language on the EVM, providing a Turing-complete smart contract environment, which also lays the foundation for subsequent distributed apps.

Nick's contributions extend beyond inventing smart contracts; in 2008, Nick Szabo initiated the Bit Gold project. In the project plan, Nick described the architecture of Bit Gold, which is now identical to Bitcoin, featuring a proof-of-work mechanism, a chain-like network structure, and new blocks containing the digital fingerprints of old blocks, timestamps, and many other characteristics. However, the Bit Gold project ultimately did not successfully complete its engineering. Currently, the only traceable source of Bit Gold is a post on the Bitcoin Talk forum, with very few subsequent verifiable materials. Some Bitcoin enthusiasts once believed Szabo was Satoshi Nakamoto himself, not only because of the similarities between Bit Gold and Bitcoin but also due to the lexical and syntactical similarities between Nakamoto's Bitcoin paper and the Bit Gold paper. Additionally, there was a Japanese person named Satoshi Nakamoto living near Nick, leading people to speculate that Nick was deliberately hiding his identity. Nick himself denied this and found it a funny rumor, but it has become one of the greatest mysteries in digital currency: who exactly is Satoshi Nakamoto?

The advantages of IPFS lie in its strong technical accumulation, sophisticated architectural design, and robust developer ecosystem.

  1. Technical advantages:

The IPFS technology can be divided into a seven-layer sub-protocol stack, from top to bottom: identity, network, routing, exchange, object, file, naming, with each protocol stack performing its own duties while complementing each other.

  1. Identity layer and routing layer: The generation of peer node identity information and routing rules is established through the Kademlia protocol. The KAD protocol essentially constructs a distributed loose hash table, abbreviated as DHT. Each participant joining this DHT network must generate their identity information to be responsible for storing resource information within the network and contact information of other members. This is similar to sharing a WeChat contact card; if you cannot directly search for someone's WeChat number, you can establish contact through a friend who has that person's contact information.

(2) Network layer: The core layer, using LibP2P, can support any transport layer protocol. NAT technology allows devices within a local network to share the same external IP address; the home router we all experience operates on this principle.

(3) Exchange layer: IPFS draws on BitTorrent technology and innovates on top of it, self-developing the Bitswap module, which is used for data distribution and exchange. Users who share data will increase their credit score; the more they share, the higher their credit score. Conversely, if users only download data without sharing, their credit score will decrease until they are ignored by other nodes. This design can solve witch attacks, as credit scores cannot be artificially inflated by machines; continuously spamming retrieval requests will only lower the credit score. There is a clever algorithm between the variables of request frequency and storage amount, similar to a parabola, where some "free-riding" situations can be tolerated in the early stages, but after reaching a certain number of requests, trust will no longer be granted.

(4) Object layer and file layer: These two layers are suitable to be discussed together, as they manage 80% of the data structures on IPFS. Most data objects exist in a Merkle DAG structure, facilitating content addressing and deduplication. The file layer is a new data structure, parallel to DAG, using a Git-like data structure to support version snapshots.

(5) Naming layer: It has self-verifying characteristics (when other users obtain the object, they use the fingerprint public key for verification, i.e., verifying whether the public key used matches the NodeId, which verifies the authenticity of the user publishing the object while also obtaining a mutable state), and it incorporates the clever design of IPNS to define the names of encrypted DAG objects, enhancing readability.

The replacement of old and new technologies boils down to two points: first, improving system efficiency; second, reducing system costs. IPFS achieves both.

This is a mapping relationship diagram of the IPFS technology modules and functions, as well as a vertical data flow diagram. The eight layers of protocols mentioned earlier are actually bound to the corresponding modules, presented in an intuitive chart design.

Multiformats is a collection of hash encryption algorithms and self-describing methods (from the value, one can know how the value is generated), which includes six mainstream encryption methods such as SHA12565123B for encrypting and describing the generation of nodeID and fingerprint data.

LibP2P is the core of IPFS, helping developers quickly establish a usable P2P network layer in the face of various transport layer protocols and complex network devices, enabling rapid and cost-effective development. This is why IPFS technology is favored by many blockchain projects.

IPLD is actually a conversion middleware that unifies existing heterogeneous data structures into a single format, facilitating data exchange and interoperability between different systems. Currently, the data structures supported by IPLD include the block data of Bitcoin and Ethereum. This is also the second reason why IPFS is welcomed by blockchain systems; its IPLD middleware can unify different block structures into a standard for transmission, providing developers with a higher success rate standard without worrying about performance, stability, and bugs.

IPFS applies the functions of these several modules, integrating them into a containerized application that runs on independent nodes in the form of web services for everyone to use and access.

Finally, Filecoin, announced only last July, has kept its development progress confidential. Filecoin monetizes the data value of these applications through incentive policies and economic models similar to Bitcoin, encouraging more people to create nodes and use IPFS.

This section only provides a brief overview of the technical characteristics of IPFS, with a systematic and detailed explanation of each technical detail to be covered in the principles section.

  1. Community advantages:

Protocol Labs was initiated by Juan Benet in May 2014. Juan Benet graduated from Stanford University, and before creating the IPFS project, his first company was acquired by Yahoo. In 2015, the IPFS project he initiated received substantial investment in the Y Combinator incubation competition, and he established Protocol Labs. By the end of August 2017, he completed the global crowdfunding for the Filecoin project, raising a total of $257 million on Coinlist (a blockchain financing crowdfunding platform independently developed by Protocol Labs that strictly adheres to the SAFT protocol), boasting a strong investor and developer community.

To build a rough concept and framework of IPFS for readers, only a small amount of technical description is involved. We know that IPFS is a content-retrieval-based, decentralized, peer-to-peer distributed file system. Currently, this open-source project is maintained by Protocol Labs, and its founder is Juan Benet. The IPFS project integrates existing distributed storage methods and the achievements of cryptography to realize a global storage system where data is permanently available and can be permanently preserved on the internet. It integrates the advantages of distributed hash tables, BitTorrent, Git, and self-verifying file systems. It uses DHT for content retrieval; draws on BitTorrent for chunk storage, chunk transmission, and reward mechanisms; applies Merkle DAG from Git to make sharing and modifying large files simple and efficient; and ensures that data always belongs to users through self-verifying file systems. We reviewed the basic knowledge of blockchain and important research history, understanding the historical process of blockchain from cryptographic algorithms to Bitcoin and Ethereum. At the same time, we pointed out the current problems that blockchain and the internet find difficult to solve, as well as the potential changes that IPFS may bring to both. Filecoin is the economic model of IPFS, which draws on Bitcoin to issue token rewards to miners for contributing network resources, making the network more stable. The advantages of IPFS include the technical accumulation of the team, the developer community, and sophisticated design. We mentioned the eight-layer protocol stack of IPFS, from top to bottom: identity, network, routing, exchange, object, file, naming, and application; as well as the three components of IPLD, LibP2P, and Multiformats. We also explained the differences and comparisons between IPFS and three types of blockchain network cloud storage projects: Burst, Storj, and Sia. The fourth section mainly introduces several typical examples in the application field, including the distributed social creation platform Akasha, the decentralized video platform Dtube based on Steemit; as well as the current public chain cases combining blockchain with IPFS; and the distributed caching model IPFS-GEO currently under development.

On the other hand, DAG (Directed Acyclic Graph) is an exploration of another form of data structure. In general blockchain projects, all nodes store the same information; however, projects using DAG technology allow each node to store different information. In DAG, blocks can be generated at any time, and a block connects with multiple parent blocks (Figure 3-4). This way, everyone can keep accounts at any time, significantly increasing the speed of recording transaction information.

However, since multiple blocks can be generated simultaneously and all are valid, DAG cannot ensure consistency through a "unique longest chain." In this regard, some projects ensure the consistency of the ledger on DAG through "temporal" means. Specifically, in DAG, a new block randomly selects two newer blocks to connect, while validating transaction information for all blocks connected to it. Blocks that have undergone multiple validations have a low probability of conflicting transaction content and can be considered confirmed transaction information. In this scheme, the verification of consistency relies on the extension and growth of the block network. Other projects ensure ledger consistency through "full connectivity," where each new block connects to all previous blocks and validates all prior transaction information. Some projects ensure consistency through "ordering," where blocks recursively vote to confirm new blocks, etc. DAG increases throughput, but "consistency" remains a complex problem that needs to be solved. Currently, solving these problems incurs some costs: it may delay the exact verification time of transaction information; or it may require extensive network communication between nodes, making the actual transaction speed still to be observed.

The Boundaries of Technology#

When designing a new product, people must understand the current boundaries of technology: which technologies are fully usable and which need to wait for a while. For technologies that need to wait, people have to consider them later. Of course, science and technology are somewhat different; scientific research can provide theoretical limits, while engineering design focuses more on how to achieve the best overall performance within the approximate boundaries that are likely to occur. This is similar to an optimization problem, requiring knowledge of the given constraints to solve correctly.

Regarding consensus mechanisms, previous research has provided two important boundaries:

● The Fischer-Lynch-Paterson theorem: It proves that in a multiprocess asynchronous system, as long as one process is unreliable, there is no protocol that can guarantee that all processes reach consensus within a limited time;

● The CAP principle: A distributed computing system cannot simultaneously ensure consistency, availability, and partition tolerance; design often requires weakening the guarantee of one of these properties.

Among them, consistency refers to the agreement among service nodes on processing results; availability refers to the ability of any non-failed node to respond to requests within a limited time; partition tolerance refers to the possibility of network partitioning, making communication between nodes unguaranteed.

Scientists believe that achieving complete consistency in distributed scenarios is impossible. However, many engineering problems can be solved by making reasonable trade-offs, sacrificing some costs to achieve consistency in distributed scenarios. Currently, the differences in various consensus mechanisms designed based on blockchain mainly stem from the following two aspects:

First, different algorithmic assumptions. For example, algorithms like Paxos and Raft assume that nodes will not deliberately send erroneous messages, which is a relatively strong condition. The PoW consensus mechanism used by Bitcoin does not pre-know how many accounting nodes are in the system, while protocols like PBFT commonly used in consortium chains assume that nodes require permission.

Second, sacrificing some costs to achieve a certain degree of consistency. For example, according to the CAP principle, availability is weakened, refusing service during system failures. Algorithms like Paxos and Raft weaken availability to ensure consistency of results. Similarly, Bitcoin sacrifices some fault tolerance (which may lead to forks) but guarantees consistency of the entire blockchain system after a certain time limit.

Algorithms are certainly not omnipotent; their boundaries dictate that some other incentives and constraints must be introduced to ensure the normal operation of the entire system. In blockchain projects based on PoS (Proof of Stake), creating new blocks does not require consuming computational power, and there are no penalties for malicious nodes. For a node, the profit-maximizing choice is to mine on multiple chains simultaneously, which can lead to severe fork phenomena. Generally, additional rules need to be introduced for such situations, such as adding penalty protocols.

4.2 Common Consensus Mechanisms in Public Chains Currently, the design of consensus mechanisms in public chains mainly revolves around decentralization and enhanced incentives. Many new blockchain systems support pluggable consensus mechanism modules that can switch between different consensus mechanisms based on application scenarios and needs.

Maintaining the "uniqueness" of the main chain is crucial for public chains, as this is key to solving the "double spending" problem: to avoid double spending, one must be aware of all historical transaction information to ensure that a transaction does not conflict with previous history. How to ensure that transactions can proceed smoothly in an environment where information is asymmetric and uncertain is the "Byzantine Generals Problem."

Bitcoin's PoW (Proof of Work) mechanism solves the Byzantine Generals Problem through the following means:

● Maintaining periodic cycles to ensure nodes are synchronized: Adjusting difficulty to ensure that the network always spends 10 minutes to find a solution to a mathematical problem and generate a new block. During these 10 minutes, participants in the network send transaction information and complete transactions, and only then will the block information be broadcast, thus eliminating the state of nodes sending commands without limits or regularity.

● Ensuring that a new block is generated by a single node through computational competition: Bitcoin uses timestamps and electronic signatures to ensure that within a certain time period, only one (or a few, which belongs to the fork phenomenon) node can mine a new block.

● Using a common ledger through blockchain: Each node in the Bitcoin network synchronizes information within each cycle.

Regardless of the method adopted, as long as time is unified, steps are synchronized, single-point broadcasting occurs, and a single chain is maintained, the Byzantine Generals Problem of distributed systems for cryptocurrencies can be solved.

PoS, as another consensus mechanism, gives miners the probability of creating new blocks equal to the proportion of cryptocurrency they hold. This can lead to the wealthiest accounts having greater power, potentially controlling accounting rights, and may cause increasing centralization of rights. However, PoS significantly reduces the energy costs of mining. In the long run, more cryptocurrencies may develop towards PoS.

In addition to the two more common basic mainstream consensus mechanisms mentioned above, the innovation of consensus mechanisms in current public chains lies in the hybridization of the two, thereby improving data processing efficiency while retaining decentralized characteristics. For example, Decred represents a PoW/PoS hybrid consensus: the mining process is similar to Bitcoin, requiring a certain amount of proof of work, but the consensus process differs; unlike Bitcoin, which requires all network nodes to validate blocks, the hybrid mechanism introduces PoS voting to determine whether the newly mined block is valid, greatly increasing the speed of verification. Additionally, there is Hcash, which represents a PoW/PoS hybrid consensus, combining a dual-layer chain structure. It divides the PoW difficulty into two levels, published on two chains, allowing both PoW miners and PoS miners to participate in system consensus and play a role.

4.3 Common Consensus Mechanisms in Consortium Chains Consortium chains place greater emphasis on privacy, security, and regulation, thus incorporating more control elements, adopting consensus mechanisms similar to traditional Byzantine family consensus mechanisms. Compared to public chains, consortium chains weaken the emphasis on decentralization, and due to the permissioned nature of nodes, they inherently grant a certain level of trust to nodes.

In the DPoS (Delegated Proof-of-Stake) mechanism, those with stock rights are elected and replaced, rather than being generated based on the quantity of coins like in PoS. It selects a small group of nodes through different strategies at irregular intervals, allowing this small group of nodes to create, validate, sign, and supervise new blocks, significantly reducing the time and computational costs required for block creation and confirmation. DPoS does not require much trust; the selected delegates cannot change transaction details. If a node attempts to act maliciously, provides unstable computational power, or experiences a computer crash, the public community can quickly vote to expel them.

If PoW and PoS primarily solve consensus issues through economic models, then PBFT (Practical Byzantine Fault Tolerance) solves consensus through algorithmic models, without a token distribution mechanism and with very low energy consumption. The process can be summarized as everyone voting to elect a leader, who records transactions, and others vote to approve. In the PBFT algorithm, it can be proven that as long as the number of faulty Byzantine nodes is less than one-third of the total number of nodes in the system, the entire system can operate normally. Currently, the improvement direction of algorithms includes using P2P networks, dynamically adjusting the number of nodes, and reducing the number of messages used in the protocol.

The innovation of consensus mechanism algorithms in consortium chains also includes the hybridization of DPoS and PBFT, applying the authorization mechanism of DPoS to PBFT to achieve dynamic authorization. Existing research has proven that such algorithms can achieve a TPS of 10,000-12,000 with an optimal block time interval of 20 seconds, with latency controlled between 100-200ms. It is precisely because consortium chains retain some degree of "centralization" that they gain the benefits of increased transaction speed and significantly reduced transaction costs.

4.4 The Cost of Consensus It is evident that consensus comes at a cost. Public chains like PoW incur substantial computational costs, hardware wear and tear, and natural resource consumption to solve a mathematically meaningless problem to compete for accounting rights. In contrast, achieving consensus on consortium chains requires rounds of negotiation and opinion exchange, similar to democratic voting. How to reduce the cost of democracy and reach consensus with the fewest negotiation rounds and minimal communication costs is the goal pursued by algorithms and is also a crucial factor determining whether the blockchain machine runs fast enough.

Ultimately, we should focus on the balance between the costs and effects of consensus mechanisms. After all, blockchain technology must eventually be implemented. For enterprises, they should carefully consider their input-output ratio to decide whether to use blockchain technology or if there are lower-cost alternative solutions. For example, using distributed databases to solve information asymmetry between enterprises, setting viewing permissions and encryption levels for data to achieve immutability, and combining a series of management measures, along with the fact that in most scenarios, leading enterprises may have little motivation to achieve data tampering and sufficient motivation to maintain the database, in such cases, even the most complex consensus mechanisms may not be as effective as a good business model.

Zero-Knowledge Proof#

Zero-knowledge proof is a probabilistic verification method, with the verification content including "factual statements" and "statements about personal knowledge." The verifier asks the prover questions based on certain randomness, and if the prover can provide correct answers, it indicates that the prover likely possesses the "knowledge" they claim. Zerocoin applies zero-knowledge verification in the process of minting and redeeming zerocoins to hide the sender and receiver information corresponding to a transaction. Zerocash adopts the newer zkSNARKs technology, converting the content of transactions that need verification into proving that the products of two polynomials are equal, while using homomorphic encryption and other technologies to protect hidden transaction amounts during verification. The downside is that if the network is attacked and excessive zerocoins are issued, people cannot detect this situation or take measures; both Zerocoin and Zerocash require prior "trust setups," failing to achieve true "trustlessness." New technologies like Intel SGX and zkSTARKs may solve these issues, but they still require practical verification.

6.1 Principles of Zero-Knowledge Proof Zero-knowledge proof is a cryptographic scheme initially proposed in the 1980s by MIT researchers in a paper: "A zero-knowledge protocol is a method by which one party (the prover) can prove to another party (the verifier) that something is true without revealing any additional information beyond the fact that this specific statement is true. For example, for logging into a website, if the server stores the hashed value of the customer's password, to verify that the customer actually knows the password, most websites currently use the method of the server hashing the password input by the customer and comparing it with the stored result. However, this method has the flaw that the server can know the customer's original password during the computation, and if the server is attacked, the user's password will be leaked. If zero-knowledge proof can be realized, then customer login verification can be conducted without knowing the customer's password; even if the server is attacked, the user's account remains secure as the plaintext password is not stored.

The basic zero-knowledge proof protocol is interactive, requiring the verifier to continuously ask the prover a series of questions about the "knowledge" they possess. If the prover can provide correct answers, it statistically indicates that the prover likely knows the "knowledge" they claim. For example, if someone claims to know the answer to a Sudoku puzzle, one way to prove this through zero-knowledge proof is for the verifier to randomly specify whether to check by row, column, or grid. Each time, the verifier does not need to see the specific positions of the numbers but only needs to check whether the numbers 1-9 are included. As long as the number of checks is sufficient, it can be statistically believed that the prover knows the solution to the Sudoku puzzle. However, this simple method does not guarantee that both the prover and verifier are not colluding; in the Sudoku case, both could have prearranged to ensure that the prover passes verification without knowing the answer.

Since it is difficult for third-party observers to verify the results of interactive zero-knowledge proofs, when proving certain content to multiple people, additional effort and costs are required. Non-interactive zero-knowledge proofs, as the name suggests, do not require an interactive process, avoiding the possibility of collusion, but may require additional machines and programs to determine the sequence of experiments: for example, in the Sudoku case, the sequence of checks must be kept secret; otherwise, if the verifier knows the sequence in advance, they may use this information to prepare in advance and pass verification without knowing the actual "knowledge."

The content of zero-knowledge proofs can be summarized into two categories: "factual" statements, such as proving "a specific graph can be three-colored," or "a number N is composite"; and statements about personal knowledge, such as "I know the coloring scheme for this specific graph" or "I know the factorization of N."

However, not all problems have zero-knowledge proof cryptographic schemes. Goldreich, Micali, and Wigderson have provided the theoretical boundaries for the existence of zero-knowledge proof solutions. They found that for decision problems with polynomial complexity (where the answer is simply yes/no), there are known zero-knowledge proof schemes. One only needs to find the statement to be proven within such NP problems and transform it into an instance of the three-coloring problem to utilize existing protocols to achieve zero-knowledge proof. Since the three-coloring problem is an NPC problem, any other NP problem can be transformed into an instance of this problem.

6.2 Applications of Zero-Knowledge Proof in Blockchain In blockchain transactions, such as those on Bitcoin and Ethereum networks, in addition to using addresses to replace the real identities of the transaction parties, making transactions partially anonymous, the sending and receiving addresses and amounts are all known. Others may potentially correlate Bitcoin addresses with real identities through various information on the network and interactions occurring in the real world, thus exposing privacy risks. Zerocoin designs a brand-new approach that prevents users' real identities from being obtained through transaction history analysis. In Zerocoin, a certain value of the currency to be transacted is consumed to generate a zerocoin with a unique serial number. Zero-knowledge proof can verify that you indeed spent this amount without revealing which specific currency was spent. To transfer this amount to someone else, logically, it must ensure that this zerocoin cannot be spent again by others. The method for zerocoins is to maintain a common list of invalidated serial numbers for all zerocoins that have been spent. When miners verify this spending transaction, they use zero-knowledge proof methods to verify whether the serial number of the zerocoin is on the invalidated list without needing to know which specific zerocoin was spent. Since the spending transaction does not include address and signature information, miners do not know the source of this zerocoin during the entire transaction process, making it difficult to analyze transaction history and obtain user identities.

In Zerocoin, the transaction amount can be known, while the Zerocash using zkSNARKs technology can conceal even the transaction amount, with the only publicly recorded content in the ledger being the existence of the transaction. It can be proven that zkSNARKs exist for all problems in NP. It introduces multiple innovative technologies that allow them to be used in blockchain.

Most importantly, zkSNARKs reduce the size of proofs and the computational effort required to verify them. Its process can be summarized as follows.

(1) Decomposing the program to be verified into logical verification steps, breaking these logical steps down into arithmetic circuits composed of addition, subtraction, multiplication, and division.

(2) Through a series of transformations, the program that needs verification is converted into proving that the products of two polynomials are equal, such as proving t(x)h(x)=w(x)v(x).

(3) To make the proof more concise, the verifier randomly selects several checkpoints s in advance to check whether the equations hold at these points.

(4) By using homomorphic encoding/encryption, the verifier can compute the equations without knowing the actual input values while still being able to verify.

(5) By multiplying both sides of the equation by a non-zero secret value k, when verifying t(s)h(s)k equals w(s)v(s)k, the specific values of t(s), h(s), w(s), and v(s) cannot be known, thus protecting information security.

Unlike the cryptographic primitives of Zerocoin, which use RSA accumulators, zkSNARKs technology is newer and has not been widely validated, posing risks. Additionally, due to its stronger anonymity, vulnerabilities in Zerocash are harder to detect. Compared to Zerocoin, Zerocash, with unknown transaction amount information, makes it impossible to detect if an attacker issues an unlimited number of zerocoins.

Moreover, both Zerocoin and Zerocash require pre-built parameters; users must trust that these parameters have not been leaked when using these networks. However, once these parameters are leaked, the entire network will face catastrophic consequences. The complex trust setup makes Zerocash controversial, even though they designed a "ceremony" (for example, recording the process of destroying the computer that holds the key) to prove their security.

Possible solutions include utilizing modern "trusted execution environments" like Intel SGX and ARM TrustZone. In the case of Intel's SGX technology, even if applications, operating systems, BIOS, or VMM are compromised, the private keys remain secure. Additionally, the newly proposed zkSTARKs technology does not require trust setups.

According to the zkSTARKs white paper, zkSTARKs is the first to achieve blockchain verification without relying on any trust setups, while the computational speed increases exponentially with the amount of computational data. It does not depend on public key cryptosystems, and its simpler assumptions make it theoretically more secure, as its only cryptographic assumption is that hash functions (like SHA2) are unpredictable (this assumption is also the basis for the stability of Bitcoin mining), thus providing quantum resistance. As a novel technology, like zkSTARKs, it also needs to be tested over time.

  • Transaction Example Taking a fictional transaction as an example. Suppose 1 Bitcoin is equivalent to 10 Ether, and the sender (Sender) has 1.1 Bitcoins and
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