Origin: On September 4, 2017, seven ministries and commissions including the central bank issued the "Announcement on Preventing the Risk of Token Issuance and Financing", and ICO was classified as illegal fund-raising and was suspended. On September 14, Bitcoin China, the third largest digital currency exchange in China, announced that it would stop all transactions before September 30, and other exchanges also announced that they would be shut down one after another. Further, there is news that the national Internet outlet will intercept Bitcoin transaction broadcast packets, so that all domestic mining pools will not be able to operate. For a while, there was a lot of discussion about how Bitcoin should be characterized and whether it should exist. Traditional financial experts and mainstream economists who have the right to speak in the media almost overwhelmingly attack Bitcoin, believing that Bitcoin has no value, calling it a bubble or even a scam. Bitcoin has been controversial since its birth, and was declared dead many times, but it has been officially recognized by many countries until today, especially the Japanese government issued the first Bitcoin exchange to coincheck on September 19. License, and more than 300,000 offline stores support bitcoin payment. In the end where the value of Bitcoin comes from, this article attempts to answer.
1. About credit currency
Currency is recognized as having three functions: value scale, payment method, and value storage tool. The form of currency has gone through four stages of development: physical currency, precious metal currency, paper currency, electronic currency, and paper currency is just a token of precious metal currency at the beginning, 1971 After the decoupling of the U.S. dollar and gold, the world has entered a period of pure paper money. This kind of paper money is credit currency, that is, currency is issued with credit endorsement instead of precious metals as support. Electronic money is the electronic form of paper money, which is fundamentally different from the digital currency we are talking about now. The credit currency must first solve the problem of whose credit. Currently, various currencies in circulation in the world are currencies endorsed by the credit of sovereign countries, or more precisely, they are endorsed and issued by the government credit of each sovereign country, and issued by the country. The authority guarantees the circulation, and the issuer is usually the central bank. How does the state authority ensure circulation? First, through legislation, commodities must be priced in sovereign currency, and it is illegal not to accept payment in sovereign currency. The second is through taxation. After the transition from physical tax to currency tax in the Ming Dynasty, the state stipulated tax payment. Only the sovereign currency is accepted, and finally the financial system, and only the sovereign currency can be used for settlement. The three measures correspond to the three roles of the currency.
2. Where does credit come from
If sovereign currency (paper money) is all government credit currency, then where does the government's credit come from? Simply put, government credit comes from the power of the state, and the government is the executive agency of state power that provides public services. We continue to trace back to where the power of the state comes from. The concept of the modern "state" comes from Rousseau's "The Social Contract Theory". Rousseau believed that any state power is premised on the transfer of people's rights and public recognition. So why the government can issue currency is because of the authorization and recognition of the people. The generation of sovereign currency is shown in the following figure:
3. Credit Sources of Bitcoin
The bottom layer of Bitcoin is based on a peer-to-peer network without a central server. Each participating computer on the network is installed with the same node software. The node software already contains the established operating rules, and unilateral modification by any party is invalid. Transactions that occur in the network are published to the entire network in the form of broadcasting without fixed objects. Each participating node packages the transactions received within a certain period of time into a block (BlockChain), and calculates the puzzle of the block. The node that succeeds in the calculation gets the accounting right, and can initiate a transaction on the blockchain to give itself a certain amount of bitcoin as a reward. The calculation puzzle is mining, and the reward is the issuance of bitcoin. The generated block will point to the previous block, forming a transaction record ledger in the form of a chain of blocks. All nodes in the entire network keep all the complete ledger. Calculating puzzles requires a lot of computing power, and the calculation difficulty will vary with the entire network. The increase in computing power increases accordingly. Since the computing power of any party cannot reach 51%, unilateral modification of the data cannot affect other nodes. The stronger the computing power of the entire network, the safer the transactions and ledgers. This is the characteristics of decentralization, anonymity, distributed accounting, irreversibility or tampering that constitute the Bitcoin system based on the blockchain.
People transfer their rights to the Bitcoin network (Bitcoin public chain) by participating in mining or buying Bitcoin, and the Bitcoin network uses algorithms (encryption, mathematical formulas) to create Bitcoin, and computing power is the security guarantee of Bitcoin.
From this point of view, the source of credit of bitcoin and sovereign currency is the same, and they are both pure credit currency in essence, but the transferee of people's rights and the issuer of currency are different. Bitcoin is completely different from the "commercial currency" or "community currency" that traditional financial experts say is only the symbol of the RMB token.
By the standard of Bitcoin, in order to form a valuable digital currency, the following elements are required:
1. A sufficient number of people make their own choices.
2. There is extensive deployment, multi-node participation, and there is no public chain controlled by a centralized organization.
3. The algorithm and rules are set reasonably, and the consensus mechanism is effective and feasible.
4. There is a large computing power as a security guarantee.
Judging by this standard, there are currently many altcoins, especially many coins that have undergone ICO recently, which are not prepared according to the above conditions, and become tools for illegal fund-raising.
4. The source of value of Bitcoin
After solving the credit problem, let's take a look at the source of value of Bitcoin. Before discussing this issue, let's take a look at the source of value of gold. The value of gold is reflected in several aspects:
1. Gold is a metal that has a use value other than currency and can be used in industrial products and handicrafts.
2. Gold is scarce, the production of gold on earth is limited, and the mining cost is high.
3. Gold has been the official legal sovereign currency for a long time and is highly recognized by the public.
If starting from these three points, the same holds true for Bitcoin:
1. Bitcoin does not have an entity, but it also has use value other than currency, such as as a source of public random numbers, and as a stadium ticket through dyeing.
2. Bitcoin is scarce, with a total of 21 million, all of which will be mined in 2140. Currently, the average cost (site, mining machine, electricity, labor) to mine one Bitcoin is about $1,200.
3. There are more than 1 million Bitcoin participating nodes, and the incomplete statistics of transaction users exceed 10 million, which are distributed in more than 100 countries and regions around the world.
People who think Bitcoin has no value usually have two counterarguments, which are clarified here.
1. The first point of view, from Ma Zhe’s point of view, believes that value is indiscriminate human labor condensed in commodities, and Bitcoin is created by solving puzzles and mining, and solving puzzles consumes a lot of electricity, but the answer to the puzzle is There is no other function except to seize the right of bookkeeping, so it is invalid labor and does not generate value, so Bitcoin has no value. The logic of those who hold this view is confusing, but it is because of the consequences. Whether labor is invalid labor is not determined by labor itself, but is judged by whether the output of labor has value. If gold has no value, then whether the process of mining gold is Ineffective labor? Are miners producing gold more ineffective? If Bitcoin has value, then computing power has value. Computing power is the security guarantee of Bitcoin. What a huge system we have created to ensure the security of sovereign currency, laws and regulations and corresponding enforcement organizations, various financial systems and corresponding It would be a huge investment to build a global credit currency system in a traditional way, and it would be economical and efficient to compare Bitcoin's computing power investment model.
2. The second point of view is that Bitcoin is completely a digital symbol generated in the network environment, without entity, and all the rules are artificially set to imitate gold. Those who hold this point of view need to open their minds, but they do not know that the cornerstone of human society development is based on human-designed rules. From the Code of Hammurabi, to the concept of modern companies, to Internet thinking, we all create a concept first. Let everyone believe in this concept, and finally become a law recognized by everyone. Human-created rules are the norm in social practice, but some rules are relatively old and deeply ingrained, and people take it for granted that they should be turned a blind eye.
5. Reasons for Bitcoin’s Dilemma
Any financial innovation revolves around these three basic elements: one is the inter-temporal transfer of value; the other is to reach a contract on future accidental results (or having rights is the main reason for financial innovation); the third is to exchange value Easier transferability (rights of investors to transfer financial contracts).
The digital currency represented by Bitcoin is an important part of the human digital society. For the first time, the transfer of people's rights can not rely on a centralized human organization. Bitcoin and smart contract technology based on blockchain technology have brought A new way of human collaboration, Bitcoin makes value exchange more convenient, especially cross-regional value exchange, and smart contracts have changed the way "contracts are reached by accidental results in the future". Therefore, Bitcoin is a huge financial innovation, so big that it is incompatible with the current legal and regulatory system, and the dilemma of Bitcoin also comes from this.
Due to the incompatibility with the existing legal and regulatory system, the development and circulation of Bitcoin have produced many problems, such as licensing issues, money laundering issues, darknet transaction issues, market manipulation issues and security issues, which are concentrated on exchanges. The point of view of the state's suspension of exchanges is full of practical considerations. But at the root, these are not problems of Bitcoin, nor of the blockchain, but how the existing legal and regulatory system can quickly adapt to new technologies and trends.
Reference reading:
Wang Yongli "Bitcoin does not have the essence of currency and has no real value support" Sina Opinion Leader Column 2017-9-16
Xiao Feng "The Value Origin of Digital Currency" Tsinghua Financial Review 2017-5-20
Rousseau's The Social Contract