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A Blockchain developer’s Story- The Past and Future

By Loning Ma

Blockchain system is self-incentivizing and supported by non publicly disclosed groups based on their own independent interests. It’s decentralized for a reason. In a system with the premise of self-motivation, system maintainers need to ensure two things: the proper supply of benefits, and the system surplus summarized by the following equation.

Profit — Cost + Financing Subsidy > 0

Like Blockchain, building a company is also a self-motivated system. During its initial establishment, a company will define its main purpose and articles of association, solidify the shareholder’s investment in its personnel, resources, and funds, and improve its valuation and monitor the distribution of net profit generated from its operation.

The Decentralization of the traditional company

The emergence of Blockchain is essentially decentralization of its business in a traditional company, allowing for all companies to participate in fair and open competition within their respective markets. The company’s main business is written within the initial code of the system, mostly through the usage of smart contracts. The company’s charter — a governance issue — is determined through voting processes by its users or it’s share holders. Of course, if one is to look at Ethereum and Bitcoin forking events, the traditional perspective would be that some members of the companies disagreed with their leadership and decided to take the original company data with the business model to start a new company. While this does seem to be a significant issue, we will not discuss it here.

Bitcoin offered a solution to two major issues, namely storage of value and transfer of value. In a centralized world, the functions of a bank can be compared to that of Bitcoin. Now, let’s make a simple comparison. The bank’s costs consist mostly of labor and daily operating costs such as includes IT system maintenance costs, pricy rents for its properties, and extraordinary security among others. On the other hand, it generates profit from lending income and transfer fees amongst others.

On the contrary, the cost of the Bitcoin operational system is only a one-time investment in purchasing the production equipment, mining machine, and an ongoing cost of power consumption. Profit is generated from the handling fee for all transactions in the mining and packing processes, and the financing subsidy is Bitcoin that is rewarded by each Bitcoin block system.

Bitcoin system is defined as a financial subsidy, because similar to company stock offerings, it produces rewards every 10 minutes. The asset difference between companies creating more stock and Bitcoin issuance is that the generation of Bitcoin does not directly bring capital into the Blockchain system. Rather, it comes from Bitcoin’s value in a secondary market, which will not be directly impacted by the issuance, due to the small amounts generated each time. The value of the 10-minute Bitcoin generation is the current trading price and this value is distributed by the mining pool at this stage based on total workload from miners. The miners can cash out the rewarded Bitcoin by selling them to the secondary market for legal tender. Simply put, these rewards are financed from the secondary market, on the premise that the market value of Bitcoin is still growing.

In a centralized company, Bitcoin’s financing subsidies act like a public company paying workers through the issuance of shares of the company, though through Bitcoin these shares are paid without any restrictions on the secondary market and are free to circulate. As the company grows, the market value of the company will grow, which will in turn increase the value of each share and thereby increase rewards for its shareholders. An interesting point here is that the holders are usually not in a hurry to cash out, because most workers and holders believe that their company will grow further in the future and the secondary market has a very high degree of liquidity. Since every current Blockchain system in the market is still at its start-up phase, and as there are very few people who can understand its value, there will constantly be conversion of non-believers to believers. Naturally, all Blockchain systems at the moment are essentially rewarding its employee with their own tokens.

The significance and value of the token

Blockchain tokens and company stocks are not entirely analogous, but it is understandable that a brand new concept will face difficulties when being directly compared to a current monetary system which has existed for decades.

From the market point of view, the two are relatively similar. In both cases, the market value is determined by the product of the company and the current token exchange price. From the Bitcoin point of view, the token’s value as currency is due to the fact that the token has a price on the secondary market. This is mainly because Bitcoin is not a non-profit system and the miners work for transaction fees from mining. The price of a transaction has a market price and anyone who initiates a transaction can grant a transaction fee to the transaction. When there are a large number of unpackaged transactions, the miners give priority to the transaction with high transaction costs. This then uses user inputs as a balance, implementing a predictive engine (Oracle) that takes into account the secondary market price (in fiat money prices).

To make a simplified analogy, the cost of Bitcoin mining is significantly lower than the operating costs of all the banks in the world, which generates an overall more efficient system should Bitcoin develop into a decentralized banking system. Also, as an added bonus, because anyone is able to participate in mining, the miners who take advantage of renewable energy such as wind and water power will gain an edge in a fully competitive environment.

Middleman, monopoly and corruption

The emergence of any new technology involves reduction of intermediate links and improved work efficiency. Prior to the emergence of the Internet, e-commerce, a merchandise going from merchants to consumers experienced multiple profit drawbacks. The emergence of e-commerce enabled skipping of these intermediate links, saving most of the cost burdened by the end consumers. In its most optimal state, e-commerce as a platform should be able to recommend the most suitable product to the user, taking into account past shopping behaviors and filters imposed. However, due to the monopolism and profit-driven nature of the e-commerce platform, they usually push the products with the highest profit potential to their users first. The platform-based e-commerce experiences a strong Matthew effect. We noticed a few years ago that although was backed by powerful Tencent, it was still unable to compete with Taobao. When a big player lacks a major competitor, it will inevitably see a sharp increase in profits.

Blockchain is a system model that counters this phenomenon. Since the whole system is decentralized where everyone can participate, each role is highly limited in what it can influence. Competitors are forced to use a variety of means to improve productivity, without being able to negatively affect the overall system robustness.

For example, in the Bitcoin system, the miner does not need to know marketing, nor need to understand cryptography. He or she simply needs to buy a machine from a company that sells them, find a place where electricity is cheap, and simply mine. There are no ways for any miners to bribe someone else to enhance their mining revenues. In the traditional world, however, competition is always accompanied by behind-the-scene transactions and corruption. The emergence of Blockchain can further eliminate layers of intermediate links, as well as the problems of monopoly and corruption enabled by centralization. It is an attractive and worthwhile future for any existing industry competitors.

Blockchain and its relationship to the Tech industry

Blockchain is a birth-child of iterations of its original business model and its competition business models along its development phase. It is roughly predicted that only one Blockchain algorithm will remain that will eventually cater to all industries.

Let’s make a hypothetical assumption about what would have happened if the concept of Blockchain had started a few years earlier than 2009. Perhaps Tencent would not have sold to Jingdong, but rather directly subvert its own platform and shared all the bottom shops. Anyone could search, make recommendations, sort, and make evaluation systems based on transactional data (Taobao was criticized immensely because the sellers fabricated their numbers). Blockchain could have reversed the situation by eliminating the barriers that resulted in commercial efficiency. It is worth mentioning that a potential rival of WeChat, Telegram, has been gearing up, and undergoing the largest token sale in history.

When it comes to the Internet, you may think of a few terms such as MAN and WAN. Much like those two, there have been many recent private or permissioned Blockchain projects that may not meet all the basic characteristics of the Blockchain. A simple way to identify a Blockchain system is that a true Blockchain system should still function even after the original developers are taken away. Both Bitcoin and Ethereum fits this description.

The Comparison

The development process of a Bitcoin has not been not much different from that of a ride hailing app. Take the example of Didi, which exhausted a huge amount of capital raised by various VCs to offer its users rides for 3 to 5 RMB in its initial phases of launch. It brought commuters the luxury of a car trip instead of having to deal with trains / buses. Both industries have been heavily criticized since their inception, but their adoption can’t be ignored anymore.

Major point of concern for the Bitcoin mining industry is that Bitcoin cannot be mined amy further after the 21 million coins are produced because the incentive to mine will cease to exist. This thinking is incorrect for the miners, who will now will to tap into new revenue streams with the growth in the number of transactions. Despite, the real uncertainty is whether the transaction fees could exceed the cost of energy required to mine. If the subsidies are reduced to an insignificant amount but the transaction fees cannot wholly support the cost of miners, the system faces a danger of collapse.

Tokens and traditional company financing

The issuance of tokens is not only transforming traditional investment and financing practices, but the tremendous vitality demonstrated by tokens also shows that they are more than just alternatives for financing.

The value of tokens is not based on the initial amount of funds raised, but rather in their value in the secondary market by the process of appreciation and the faith investors establish in the future of the systems. In essence, this is to let the early project participators and supporters get the reward as the project develops. The traditional investment and financing model is to allow angel investors and traditional venture capitalists to bear the huge risk and enjoy the success of the project dividends or possible liquidation in case of an IPO.

The emergence of tokens has given a wide diversity of people an opportunity to participate,but at the same time, they face similar risks to those involved in traditional investment practices. However, the critical difference is in the liquidity. Due to the existence of the secondary market, the initial investors can now sell off the tokens at any time if they deem them unworthy to hold.

For any Blockchain project, challenges and opportunities will always coexist. As exchanges are all over the world, and the world itself is made much smaller through social media, this enables the projects to run their operations globally from day one. Most Blockchain projects are open source. How to organize user interaction in various languages and regions, and how to establish a harmonious community environment amongst many others are all new problems that are faced by the community and the company.

Blockchain Network Classification

Existing Blockchain projects fall broadly into two categories. The first category consists of projects focused on solving the problems of Blockchain infrastructure while the others are focused on the applications of Blockchain systems.

The same category exists in the database industry: one class specialized in building the databases such as Mysql, MariaDB, PostgreSQL, MongoDB and Redis and another in developing applications for databases such as Facebook, Youtube and Twitter. With the rapid improvement of blockchain for applications, more and more users can are beginning to understand the value of Blockchain networks. Such examples include Ripple — decentralized swift, Steemit — decentralized twitter, ethereum — decentralized google, aelf — decentralized cloud computing platform and Sia — a centralized cloud storage are being followed closely and highly anticipated by the community.

Future technical challenges

Although the Blockchain industry has existed for nearly 10 years, it is still on its nascent stages and does not possess the sufficient infrastructure necessary for commercial adoption. As we previously mentioned, there has not been much discussion about the technical details of a decentralized system, as it restricts the development of the network in various industries that are still being exposed to such options.

When it comes to distributed systems, we have to mention the principles of CAP. Due to the strong consistencies in Blockchain, both consistency partitioning and availability partitioning systems cannot exceed the efficiency of a centralized system. However, there is still a lot of room for optimization in terms of efficiency for the existing system.

Loning Ma,Founder of ælf, founder/ CEO of Hoopox,
Blockchain expert, early adopter of digital assets,
Ex-CTO of GemPay, AllCoin.
He is also a member of Blockchain Experts’ Commission of Chinese Institute of Electronics.

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