The Bitcoin system designed by Satoshi Nakamoto is automatic; everything depends on automatic adjustment without human intervention and management. The name of the Bitcoin white paper in August 2008 was “A Cash System Without a Third Party,” it was officially published in January 2009 with a “Peer-to-Peer Cash System.” It is the most challenging concept of the Bitcoin system to understand, and no one has explained it convincingly.
After research, “no third party” is more in line with Satoshi Nakamoto’s point of view of Bitcoin’s Debut Notes, that is, the idea of breaking and challenging the modern financial order. There is no need for a third party, which means no need for a central bank, banks, or modern monetary system. The credibility and efficiency of the automatic system are far more advanced than the current financial system. I read the article by Yao Qian, Former Director of the Digital Currency Research Institute of the People’s Bank of China. He saw that Satoshi Nakamoto wanted to abolish the central bank and vehemently opposed Satoshi Nakamoto’s attempt to abolish the central bank. In the eyes of experts, “I know it even if you don’t tell it.” Satoshi Nakamoto heard such feedback, put away the show off of young people, and chose the term peer-to-peer cash system, but he still couldn’t help expressing his contempt for the traditional financial system in his debut notes. The peer-to-peer cash system describes the physical form, which is more rigorous.
Computers can replace people’s jobs. If a set of rules is designed for the computer to run, it will run automatically without error as long as the rules are well-designed. Can the financial system run autonomously? First, it cannot have an intermediary party, a peer-to-peer system. The concept of peer-to-peer has long been recognized in their cypherpunk circles, and currency issuance has been discussed since the 1990s. Three technical problems need to be solved to realize the currency issuance of the peer-to-peer system.
1. The bookkeeping right is the automatic gaming bookkeeping. It’s important, but not Satoshi’s creation. (See Citation 6 of the Bitcoin White Paper).
2. How to prevent dual payment? That is the Byzantine general’s problem and the double payment problem, about how to get the correct result under chaotic conditions. Satoshi Nakamoto used the longest chain principle to realize automatic bookkeeping.
3. The person who keeps the bookkeeping is the random entry of computing power. How to ensure stable bookkeeping? Satoshi Nakamoto used the negative feedback principle of automatic control to achieve stable bookkeeping with 10 minutes as the bookkeeping interval.
Since the 1980s, a generation of cryptographic elites has emerged, and Satoshi Nakamoto stepped on their shoulders to reach the top, realizing the peer-to-peer cash system “under automatic mechanism.” For “automatic”, Satoshi Nakamoto didn’t say it, but it was what he thought.
There are three words in the peer-to-peer cash system. “Peer-to-peer” can be understood literally. Peer-to-peer must not have the concept of layers, which is very important.
What does “cash” mean in a peer-to-peer cash system? Its financial meaning is M0. Financial majors classify currencies. M0 and M1 are the currencies of the central bank, called base currencies, and M2 and M3 are called derived currencies, which are commercial bank currencies. The peer-to-peer cash system can be explained in layperson’s terms as A trading system with only M0 currency. M1, M2, and M3 do not exist in the Bitcoin system. Most of the central bank functions have been removed, and the roles of commercial banks have disappeared. In the eyes of Satoshi Nakamoto, the Bitcoin system is called the Bitcoin central bank because it has the central bank’s right to issue cash. Many people think that Bitcoin is a clearing and settlement system, but strictly speaking, the Bitcoin system is not a clearing and settlement system. There is no concept of clearing and settlement in a peer-to-peer system. Clearing and settlement is the concept of layers, and the essence of the peer-to-peer system is to disintermediate with the characteristics of the Internet, and there is no concept of layers.
The revolution of Internet disintermediation has swept away all areas of Internet access except the financial field. The financial field is different from all fields. It has its system, and finance only uses the Internet as a tool. According to Fisher’s formula, finance is as big as industry, so this Internet revolution is not half done yet.
Imagine that point-to-point use of the Internet is called flattening, and the financial system is hierarchical. Each layer has horizontal and vertical connections; how to use one plane to realize the functions of the entire layer? Can a transparent flat automatic system do everything? Bitcoin doesn’t work. Because it is a single currency and balance ledger system, the functions are too weak, and the goals to be achieved are too large. Satoshi Nakamoto is a brilliant person, and he found that he thought the problem simple. The Bitcoin system is suitable as a currency issuance system and cannot be used to replace the traditional financial system. The endless needs were presented to him and put him in a dilemma; it’s not a good idea to do it or not; it’s better to walk away. Satoshi Nakamoto’s brilliance lies in walking well! History needs to evolve, and a new system is necessary to complete the mission left by Bitcoin.
One whale falls, and all things live. Satoshi Nakamoto opened Pandora’s box and released hope and the devil. In just over ten years, cryptocurrencies have gone through almost all the paths of human and financial development for thousands of years, including the way of the future. Because it is a new thing, the future is still unclear, and there are difficulties in pricing, which has created a group of speculators. There are many problems with cryptocurrency, but the sum of all the issues is not as great as the losses caused by a financial storm. It is the lowest-cost financial experiment for human beings. Its achievements are also tremendous. Knowing what roads lead and don’t lead to has also produced encouraging results that Satoshi Nakamoto had not considered or realized: cross-chain, stable currency, smart contract and Ethereum Systems, etc., have become tools to shake up traditional finance.
It is impossible to verify who proposed the cross-chain. The cross-chain interoperability protocol (interledger) proposed by Ripple in 2012 is the earliest.
Humans can’t rule the world with one currency and financial system. The Federal Reserve can’t do it, and the Bitcoin system can’t do it either. The significance of cross-chain is to connect a layered system and different layered systems to link all nodes into a plane in a cross-chain manner. With cross-chain, liquidation is unnecessary, and point-to-point real-time settlement can also be realized. Regardless of the node’s size, its status is equal with cross-chai, so the financial system has broken its defenses. Satoshi Nakamoto’s peer-to-peer is the transmission of cash M0. Banks cannot amplify funds in this environment, but centralized nodes themselves can amplify their funds before going to the chain. For example, USDT has an account in Ethereum, and the data in it is transparent, but the data that is not on the chain is opaque, and there are over-issues, which he admits. This area cannot be controlled by Satoshi Nakamoto’s peer-to-peer. That is, the data before going to the chain is opaque. Assuming the data before going to the chain is also transparent, the bank’s bubble lending will be exposed in broad daylight.
If the financial data of the whole society are transparent, there will be no need for various regulatory measures in the financial system. How to supervise the cross-chain single-layer financial system with traditional regulatory thinking? It is suitable for the opaque part to transparent. The regulation of the entire cryptocurrency is actually straightforward. Does Bitcoin need supervision? Unnecessary. Should Ethereum be managed? A little bit. Does Binance need to take care of it? Centralized opaque parts must be managed.
With smart contracts on the Ethereum platform, conditional transfers can be achieved without human supervision. Ethereum has been making progress. After it progressed to 2.0, it gave up the POW mining used by Bitcoin. There is a lot of opposition in the market. Right? Ethereum no longer issues coins; it is a suitable trading system. I introduced the reasons in detail in the article “Ethereum’s trick to catch up with Bitcoin’s market value” (https://chainless.hk/). However, Ethereum’s bookkeeping is still expensive, and there are problems with speed and throughput. I said in the second article of the series: “The future will be one-way bookkeeping, the hash value of the journal will be on the chain, and the Bitcoin system will be used as the root of credit. , will be a way out for future cryptocurrencies.” Of course, Ethereum also has the role of the root of credit.
Satoshi Nakamoto’s openness, transparency, and peer-to-peer; Ripple’s cross-chain exploration; the unremitting efforts of the genius idealist Vitalik; and advances dauntlessly in wave upon wave of countless people in cryptocurrency have made the new generation of peer-to-peer cross-platform automatic financial system The embryonic form has emerged, and all the conditions have been met. A Web3 financial platform based on Satoshi Nakamoto’s ideas, or a partial replacement of the modern financial system, is about to emerge.
Series four will introduce the role of the community in the future financial revolution.