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Hardcore | digital currency: from economy to society

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The article reflects a valuable spirit of reflection: mainstream economics, though habituated to self-mockery, is impatient with criticism of the "layman". We should see the challenge of digital money to existing ideas as an opportunity.

Original title: digital money: from economy to society
National laboratory of finance and development
Cheng lian is the secretary general of the academic committee of the national finance and development laboratory

Digital currency has not only gained wide attention in the society, but also caused the opinion difference between the mass media and the mainstream academic circles.This paper attempts to bridge the gap between different perspectives by exploring conceptually the characteristics, operational logic and cultural symbolism of digital currency.Our basic point is,The emergence of digital currency does not constitute a substantial challenge to the "new" mainstream currency theory, but it does reveal the need to reflect on the traditional conceptual framework and expand the perspective of analysis.We should use the conflicts reflected in digital money as a clue to explore the conceptual basis of modern economic and social operation.

Since the creation of bitcoin in 2009, digital currency has gained wide attention from the IT and financial industries and even the society. Recently, the Libra cryptocurrency plan announced by Facebook and the rumors that some central Banks are considering issuing digital currency have made digital currency hot again. The particularity of digital currency sparked controversy and expectation of the various circles of society, many people think that this is neither the government credit is the lack of "intrinsic value" currency can be produced, subvert the traditional concept of monetary and economic theory, some argue that the virtual currency is not only money, provides a more likely to change in the form of social governance.

The rise of digital currency interest mainstream economics, also has given rise to a lot of academic research, including the technical principle of digital currency, digital currency for the impact of monetary policy, the financial and economic effect of digital currency, digital currency for fiat currency substitution, digital currency exchange rate dynamics and transaction mode, digital currency regulation and so on. It is worth noting, however, that there is a clear difference between the focus of mainstream economics and that of the mass media. For example, although there is a lot of literature on "whether bitcoin is a currency" in mainstream economic journals, these analyses are basically not divorced from the traditional monetary theoretical paradigm and focus more on the empirical test of the attributes related to digital currency.

Compared with the mass media, mainstream economic literature seems unimaginative about the functions and effects of digital money, but given the rigor of academic research, this should be understandable. However, the academic community has not made a formal response to the impact of digital currency on the existing economic theory, it is still easy to cause public confusion. There are two reasons for this. First, the mainstream monetary theoretical paradigm does have a strong elasticity and robustness. Second, despite the expansion of the field of economic research brought about by "economic imperialism", there is still a relatively conservative consensus among mainstream economic journals, especially financial journals, on what is "serious" research topic, which also makes many disputes about digital currency fall out of the academic horizon.

This paper attempts to bridge the gap between the views of mainstream economists and the mass media through a conceptual discussion of digital money. Here we will explain the operational logic and economic effects of digital money based on modern monetary theory, and at the same time try to understand the perspectives of other social disciplines related to money, so as to find the interface between the two.Our basic view is that the emergence of digital currency does not constitute a substantial challenge to the "new" nature of the existing mainstream currency theory, but it does reveal the need to reflect on the traditional conceptual framework and broaden the analytical perspective. We should use the conflicts reflected in digital money as a clue to explore the conceptual basis of modern economic and social operation.

one
The historical origin of money

The ultimate question in the debate between supporters and critics of digital currencies is:"Is digital money money?There are two common paths to answer this question in the academic world: one is to first identify a set of characteristics (" what is money? ) and then compare the digital currency with this standard; The other approach focuses more on the specific function of money than on the abstract concept of money, so the question is "under what circumstances can digital money be regarded as money?" . Clearly, practitioners of the latter route are more tolerant of digital currencies, which, from their perspective, resemble a dancing dog: it's not how well it dances, it's that it can dance. Many researchers have therefore chosen this pragmatic strategy to avoid annoying conceptual arguments. In essence, however, the two paths are the same. The second path only temporarily avoids the ultimate problem through the segmentation of currency attributes, and once it encounters the complex situation in reality, it will reappear in the form of "model or method applicability".

In the literature that follows the first path mentioned above, a very common practice is to go back to the historical origin of money and look for the essential properties of money from its origin. But the difficulty with this approach is that, based on the available anthropological evidence, there is considerable debate about the origins of money, some of it very radical. At the same time, one of the logical pitfalls of this approach is that the currency's initial form does not necessarily represent its "essence". We can illustrate this with an evolutionary analogy. Some modern biological tissues and organs was originally evolved by perform different function groups, such as bird feathers in the original function is to regulate body temperature, then evolved into flight function, considering but we obviously cannot claim, feather of "nature" is the temperature regulating functions, or birds flying ability is thermoregulatory function of derivatives.

In spite of these difficulties, a historical review allows us to identify the core elements that support the performance of monetary functions by examining the characteristics that do not change with monetary forms. The highly simplified monetary evolution path in figure 1 should be the consensus in current monetary history. After the advent of Money, the first leap was from Commodity Money to Token Money: a bag of salt turned into a note of salt signed by a neighbor, or a silver or two turned into a silver or two issued by a bank. The original symbolic currency was tangible, mostly in the form of paper and base metals, and could be exchanged for the goods they represented to the original issuer. Since then, symbolic money has evolved along two paths. One path is symbolic abstraction, such as holding cash and turning it into a number in a bank account; The other path, which most governments have followed, is a decoupling of the symbols from the bonds they represent: money can no longer be redeemed as collateral for credit. The two paths met at the point where the uncashable, invisible symbol of money became the permanent form of modern money.

The bottom two modules are the changes that the Internet and IT technologies have brought to currencies. After the account and payment process are completely electronic, the form of stored value in some non-bank operating commercial platform accounts has the purchasing power beyond the commodity range of the platform, and becomes the medium of exchange in a more general sense. The most typical examples are m-pesa and XRP. The forms of value stored in such non-bank account systems can be thought of as "traditional" internet-based digital currencies: they are issued by institutions other than legal tender authorities, but are still issued centrally, with traditional Banks or licensed exchanges as partners, and are often protected against depreciation. Such "traditional" digital currencies are often used as an important channel for non-financial institutions to gain financial power, but they still need to operate on the existing monetary and financial systems. This competition within a centralized system seems to fit well with hayek's theory of private money.

Compared with such "traditional" digital currencies,"Narrow" digital or "virtual" currencies, such as bitcoin and Litecoin, are bigger jumps in the evolution of money.The peculiarities of the latter are not just in their decentralised issuance or anonymity, but more importantly in their (at least in theory) independence from the established financial system. In an ideal world, if all Banks, financial institutions and even governments disappear altogether, bitcoin owners would still be able to use it for transactions as long as the Internet worked. This seems to be a situation that has never been seen since fiat money dominated the economy, and the impact of the emergence of bitcoin on the existing financial order or concept is much greater than that of "traditional" digital currencies.

Figure 1 historical evolution path of currency

two
What mainstream monetary theory can and cannot explain

Now let's return to the question we raised earlier: what factors in the historical evolution of money have supported the different forms of money to perform their functions, especially as a medium of exchange. Commodity currencies has use value, even if its use value for each people are not equal, but as long as people believe in it for most people, even some people have enough value (or in the language of game theory, more strictly stated: "commodity currencies have use value" for some people is public knowledge), as a medium of exchange of acceptability can be supported. For convertible symbolic currencies, relying on the useable value of the collateral alone is not enough; it requires trust. Take the iou for a bag of salt. To be willing to accept it as a medium of exchange, you need not only to know the importance of salt to people's lives, but also to believe that the person writing the iou has the ability and willingness to return the bag of salt, and that the iou is real. Looking back to the history, in order to overcome the trust barrier about the ability and willingness to honor, the complex currency issue preparation system was born, and the trust problem around the authenticity of the certificate is a game between the currency anti-counterfeiting technology and the counterfeiting technology. So far, is everything in conformity with the mises "back Theorem" (Regression, unseen) : the acceptability of currency can be traced back to its original to derive the value of the goods, but once entered the legal tender of Fiat monetary form (Fiat) phase, this article traces the chain of interrupted suddenly, is replaced by fuzzy "national credit".

Given the history of fiat currencies, bitcoin's biggest impact on the public perception of money should not come from its lack of "intrinsic value" (after all, most of the world's fiat currencies don't have any), but rather from its lack of credit from public authorities. But when people are surprised by this, they often miss an equally important question: why people are willing to accept fiat money that lacks "intrinsic value". Simply stressing that a sovereign currency is backed by national credit is not a satisfactory answer, and it is vulnerable to a series of follow-up questions: what is national credit? If the government does not honor the currency at all, where is the country's credit? One explanation given by Chartalism is the tax function of fiat money. This view of tax-driven money allowed mises's backdating to continue (though currency nationalizers were clearly not interested in validating the Austrian theory) : the ability to pay taxes gave fiat money its initial "use value". This straightforward logic, however, faces another problem: the tax value is a tiny fraction of the total amount of money circulating in the economy, which means that most of it is not backed up by the backward chain. Beyond the tax-driven monetary argument, those that appeal to government authority or coercion are less convincing. In addition to the lack of micro-behavior foundation, there have been too many examples in the history of the government to force the people to do nothing. Even in the current real life, consumers complain that some businesses do not accept paper cash, which is common news, which also reflects the limitation of the government's monetary force.

Contrary to many people's impression,In mainstream monetary theory, the acceptability of money without "intrinsic value" is not a problem.Tirole et al. 's "rational bubble" model demonstrates that, even if all actors are perfectly rational, financial assets without any "intrinsic value" can become a store of value in the intergenerational overlapping model of indefinite boundaries, rather than cash delivery, as a typical example. Similarly, in the monetary model of Kiyotaki and Wright based on the search-match framework, the currency used as a medium of exchange in equilibrium can also have no "intrinsic value". Although these seemingly counterintuitive models are a little hard for the public to understand, the logic behind them is not hard to explain in plain language. Imagine an asset transaction in which an investor buys a financial product with no "intrinsic value" and then sells it to someone else in the next tranche, each of which brings a profit to both the buyer and the seller, but the amount is much less than the face value of the financial product. If the duration of the deal is given, that is, all investors will clear out at a certain point in the future, then no rational investor will participate in this game of "beating the drum and passing the flowers". Because people know that at the end of the game the value of the financial product is zero, no one will want to hold it then. Given that no one is taking the last shot, people won't want to hold the product until the end of the game, and so on. No one will enter the game in the first place, even if the financial product is good for everyone. In fact, this is also a specific situation of the fundamental theorem of game theory -- that equilibrium in a finite-repeat game is a finite-repeat of a single-game equilibrium -- that cooperation under the prisoner's dilemma cannot be achieved in a game of limited time.

Continue to consider the above example, but at this point we assume that there is no mandatory clearance time. The rules of the game this change was cancelled for the last runner is whether there is a concern, so as long as you believe that there are a lot of people are willing to participate in this game, you can safely far higher than that of the "intrinsic value" to buy financial products, the game on indefinitely, and make all participants benefit. Mathematically, The magical reversal of The situation comes from The peculiar nature of The concept of infinity, which allows paradoxes such as The Hotel Hilbert Paradox to exist and provides greater scope for economic co-operation. In the context of indefinite limit, the acceptance of financial products by potential buyers is not due to its "intrinsic value", but only due to the buyer's expectation that other potential buyers in the future will also accept the financial products, that is, the "Network Effect" on monetary acceptability. Of course, in order for this story to fit into reality, we need to add more conditions to the formal model, such as the rate at which the face value of financial assets rises, the degree of patience of people (discount rate), the probability of potential traders meeting, etc., but these do not affect the basic conclusion of the model:Money that functions as a store of value and a medium of exchange need not have "intrinsic value".

So far, however, the story is not over. A closer look at the second part of the above example shows that it describes only a happy ending in which the currency is accepted by everyone, but even in the indefinite bound scenario, it is possible to replicate the situation in the finite bound scenario, where everyone is unwilling to hold financial assets and does not trust others to accept them. In either case, the network effect will be locked in the state. In other words, expectations of any situation are self-fulfilling: when everyone does not trust everyone, their judgment is surely correct, and vice versa. This is the most similar difficulties facing monetary model of the structure, this kind of model usually exist in the welfare state of different variety of equilibrium (is not only the presence of monetary conditions, but also including the choice between multiple currencies), but no one can predict what kind of balance will eventually be realized, so they just gives the possibility of the existence of digital currency, most did not explain why digital currency will be in a legal tender has been dominated world.

Although there are few mainstream monetary models that focus on the above mentioned transition problems, the mechanism to get out of the dilemma of being locked by network effects has been much discussed in economic theory. One is to bring in outside coordinators, typically governments. It is important to note that while this approach may seem similar to the currency country approach, it is fundamentally different. Under the coordinator framework, the role of the government is only expected to be uniform in the choice of different currencies, it does not continuously intervene in people's behavior, nor is it a source of monetary credit. Still, given the not-so-friendly attitude of governments around the world toward things like bitcoin, such external coordination mechanisms are clearly difficult to explain. Another equilibrium transition mechanism, independent of external forces, appeals to reason and time: when the decision to choose a system of different welfare levels is not made by all at the same time, but in a sequential manner, the rational actor will spontaneously move one by one into a system of higher social welfare. The key to this mechanism still lies in the backward extrapolation of sequential rational behavior: it is conceivable that when almost everyone in the economy is already in a high-welfare system and only the last person is left with a choice, he will not hesitate to follow his predecessors' choice; With this in mind, the penultimate would follow; By extension, as long as the first person chooses the high welfare system, everyone else will follow him to make the wise decision, thus defeating the dilemma of network effect lock-in. However, this ingenious mechanism also has its problems, that is, when everyone's order of action is not determined in advance but needs to choose by himself, who takes the first step constitutes a new prisoner's dilemma, which needs to be solved by introducing new assumptions such as the heterogeneity of the actor.

In a roughly reviewed the related areas of research, our overall impression is the rationality of the digital currency has not yet pose special challenges to mainstream monetary theory, while the theoretical mechanism of the actual effect is questionable, in such as the existence of multiple currencies especially dynamic analysis on the situation of monetary competition results and is the mainstream in digital currency monetary theory for a long time before there have been problems. But when everything seems to be the final verdict, careful readers may find a problem: we will be digital currency throughout the discussion in front of the summed up as a non-government issuance of "intrinsic value" currency, so that it can apply the analysis of the existing framework (the typical way of mainstream economics abstract is also its most reviled, namely through clever assumptions and strict mathematical structure to avoid the real problem). But does this simplification encapsulate the "nature" of digital money, and if not, what makes it special?

three
Internet-based "retro" currencies

In order to answer the above question, we need to review two problems faced by the emergence of symbolic currency:The willingness of the issuer to repay and the authenticity of the notes themselves.In the era of fiat money, based on electronic payment systems, these two problems translate into trust in the government (the central bank) and those financial institutions that hold the accounts of savers and investors, respectively. When a shock such as the global financial crisis puts that trust at risk, alternatives are offered, such as a return to the gold standard, the creation of a world currency and so on. Digital money is undoubtedly the most radical of these alternatives, because it completely restarts the process, leaving no room for governments or financial institutions.

Although the technology of digital currency such as bitcoin seems extremely profound, its economic mechanism is not complicated, and it has already appeared in human society. It has been noted that the mechanism by which decentralised digital currencies operate is very similar to that of Yap island's Rai Stones. These millstone COINS are often placed next to public housing or roads as a symbol of their owner's wealth. The peculiar thing about the use of stone money is that even if the stones have changed ownership for a particular transaction, the position of the stones often does not change, and the ownership of the new owners is determined by popular consent, which is quite different from the modern mainstream monetary system. Although in daily life, we often rely on "public witness" to determine the ownership of the items we are placed in a public place, but for money, it is very rare, there are at least three reasons: first, the currency trading involves the number of trivial and very frequent, asked bystanders accurately record the Numbers would amount to a huge burden; Second, currency trading scenarios are so diverse that it is difficult to find a group of bystanders for each transaction who can call in witnesses afterwards; Third, many transactions are private, and people don't want to expose them to outsiders. Thus, a system such as stone money is only possible in acquaintance societies with small populations and very simple economies.

Looking closely at how bitcoin works, it's easy to see the similarities. The bitcoin transaction is actually a conversion of the cryptographic label of the ownership of the bitcoin as an asset marker, which does not involve the operation of other attributes of the bitcoin itself. As a result,Bitcoin is not a commodity currency or a tangible sign of money (transactions do not involve the physical transfer of money), nor is it a bank account system (where Numbers are abstract tokens of wealth that increase, decrease or even disappear with accounting operations, and where bitcoin, once created, remains in the system forever).So in some ways, digital currencies such as bitcoin are more likely to be a "retro" system of currencies built on the Internet, recreating "primitive" trading systems with modern technology. At the same time, in order to overcome the aforementioned "public witness" barrier, bitcoin introduces the blockchain to make accurate records of each transaction, provide incentives for the authenticators through mining proceeds and transaction fees, and protect the privacy of the traders through the anonymity of their identities, so that the system can work smoothly.

By keeping a copy of the ledger in each participant's computer, digital currencies such as bitcoin decentralise the creation and transfer of liquidity while bypassing the traditional financial system, a feature favoured by digital currency supporters. But "decentralisation" itself is not a new concept in monetary history, especially when money creation is discussed separately from payments. In the era of commodity money, both money creation and payments were decentralized: money could be created by anyone, and transactions could be made anywhere only by buyers and sellers. Entering the original era of fiat money, money creation became centralized, while payments remained decentralized. The centralization of the payment process is gradually expanded with the establishment of the bank settlement system, and the rise of electronic payment accelerates this trend, partly because it is extremely difficult to prevent the counterfeiting and "double payment" problems in decentralized electronic payment, which can only be controlled through third-party authentication. But even so, the cash still provides considerable scope for decentralized payments. Ironically, pay for currency centralized sent to "finishing" exactly is "decentralization" for the brand of the Internet: as "the Internet finance" surge of third-party payment almost completely swept through the cash and bank retail payment system of living space, and all transactions will be included in an account change. Along the way, digital currencies such as bitcoin's pursuit of decentralisation highlights their "retro" core in the guise of modern technology.

But even with a decentralized payment system, digital money works differently than precious metal money or paper money. Not only are payments dispersed in precious metal currencies or notes, but the processing of information is also local, requiring only buyers and sellers to complete the transaction, without knowing about other traders, let alone informing them of their trades. In the process of digital currency payment based on block chain, the flow and storage of transaction information is global, and every user of the currency system needs to backup all transaction data in the system. For this reason, Luther and Smith believe that bitcoin is not a decentralized payment system, but a Distributed payment system.

More importantly, the promotion of the decentralized nature of digital currencies intentionally or unintentionally ignores the fact that the systems and programs for bitcoin and other similar digital currencies are centralized, written and distributed by their creators, and the vast majority of other currency users are simply recipients of the system. Of course, in theory the system is completely transparent, and if you have enough knowledge, you can check the program's source code to make sure it is reasonable and safe, but it is unrealistic to require all digital currency users to have this ability. In this sense, digital money is still a centralised system, but it is centralised at a lower level and thus more hidden. Similarly, trust is still crucial to the functioning of digital currencies, but the trust required has been transferred from governments and financial institutions to the founders of digital currencies and the technocrats who understand the details of how the system works. So if we believe clemenceau's diction that money is too important to be managed by a central bank, why is it more reassuring to leave it to geeks?

Another important advantage of digital money that is often touted is the anonymity of transactions. If the attempt to exclude illegal activity is ruled out, the emphasis on this feature should stem from the fear of privacy leakage. However, at least in the case of bitcoin, this feature is quite a misnomer. Bitcoin's anonymity stems from the fact that its transactions do not require the account of any traditional financial institution, and thus do not reveal the real identity of the trader in the real world. But this line of defense is fragile, and once a person's public key address matches his real identity, tracking all his transactions is even easier than in traditional financial systems, thanks to the comprehensionof blockchain records. Given the connection between bitcoin transactions and the actual lives of the users (such as the shipping address or the broader network footprint), it is not so difficult for financial regulators or criminal investigation systems to verify the true identity of a public key address. Digital currency, of course, the users are aware of this problem, and in the currency and a new generation of digital currency enabled more complex tracking mechanism, the most typical is confusion (Mixing), the deals are mixed together to conceal the real payer, then multiple public key is used to protect the recipient's address. But this type of encryption could still be broken through by traffic analysis or other forms of social engineering. It may seem that digital money has fallen back into the cat-and-mouse game of traditional currency security when it comes to anonymity, but the implications don't stop there. As digital currencies introduce more and more sophisticated cryptographic mechanisms, it becomes increasingly impossible to visually verify the authenticity of a transaction like bitcoin, and ultimately one can only rely on proper programming and execution to ensure the currency's reliability. Once there is a potential vulnerability or attack in the system, it is extremely difficult to identify the cause and full impact of the problem. Here, digital money recreates real-world governance challenges.

Other features of digital money, such as the total control of the money supply, can be understood more clearly from the perspective of "retro" money on the Internet. Bitcoin limits its currency to 21 million COINS, and once that limit is reached, miners will no longer be rewarded with bitcoin for creating new blocks, relying instead on transaction fees for incentives. The strict cap is clearly intended to draw a line under fiat monetary authorities that abuse their power to issue currencies, while also giving bitcoin a firmer basis for value. But just as precious metal monetary regimes are often subject to deflation, if bitcoin becomes the dominant currency, it will surely face the question of how to meet the growing liquidity needs of the economy for transactions. Quite a few bitcoin advocates seem to be unimpressed, arguing that the divisibility of the digital currency unit naturally resolves these questions. But this confident approach clearly underestimates the power of price stickiness and, in particular, wage rigidity. In fact,The current high elasticity of bitcoin's price is due to the fact that it is not itself the main pricing currency in the economy, but rather depends on the legal tender to determine the price, which would be completely different once bitcoin actually achieved the pricing currency status.In addition, the amount of currency restrictions also brought a precious metal currency has not had the risk: as dig and gains more and more low, to keep the miners to create blocks to verify that the transaction, transaction fees will need to rise sharply, the large capacity mineral pool owners of its work force for the danger of attack main chain will also rise.

Closely related to the money supply ceiling is the difficulty of digital money in credit expansion, which is also a typical feature of the precious metal monetary system. In a pure precious metal monetary system (note the difference between this and a "precious metal based monetary system"), liquidity is determined entirely by the amount of precious metals, and there is no money multiplier due to credit, which also rules out any monetary policy. Because with tangible money, when you lend it out, you lose the ability to use it to make payments. For this reason, in a pure bitcoin system, it is impossible to have a financial institution like a bank, because "deposit certificates" are not acceptable payment instruments in the digital currency world. Those "bitcoin Banks" or similar bitcoin depository institutions that do exist in real life are derivatives of bitcoin, not part of the system, and are likely to be derivatives that bitcoin's founders would rather not see. This reflects a dilemma for digital money:If they really want to become the mainstream in the modern economy currency rather than a small circle of medium of exchange, so it is necessary to abandon the original concept, to embrace in the wiped out the traditional financial institutions, from the currency system into a "currency standard" system, and gradually abandon decentralization, anonymity, upper limit of total had designed a series of features.Looking back at the history of currency evolution, this is a deja vu path.

four
Speculation-driven competition and evolution

What if digital currencies settle for the next best thing and settle for a niche currency? As the "competition theory" of digital currency system emphasizes, although bitcoin or a specific digital currency may not be perfect, digital currency has broken the monopoly of legal tender, so it can promote the survival of the weak through currency competition, and finally realize the effectiveness of the monetary system. This view is often based on the Austrian concept of money, especially hayek's theory of private money. However, the soundness of this theoretical foundation is highly controversial. First of all, relative to have been accepted by mainstream scientists and give formal proofs commodity market free competition theory (although hayek clearly for this kind of mathematical reasoning, and think that the concept summed up as the walrasian equilibrium existence and effectiveness of the completely distorted his original intention), further free money competition theory is still in the "concept" stage. In fact, there are many counter-examples to the effect of free competition in the monetary system, both in theory and in policy practice. Even if we omit this layer of controversy, it is doubtful that digital money can play the role of a competitor to private money in hayek's theory. Although hayek well disposed for quick electronic currency trading system, but considering he for market competition process (private currency issuers adjustments according to the market conditions in the money supply) and the Austrian based on the "back theorem" currency values, it is hard to imagine that he would accept a automatic operation by the number of currencies in the world.

Even if the theoretical underpinnings of a competitive monetary system are not so sound, or if practical constraints force us to accept the dominance of fiat money, perhaps a potential rival currency can put pressure on central Banks not to let monetary policy run its course too far. This plausible idea has been around since long before bitcoin was invented. But whether today's digital currencies can play the role of potential competitors in this scenario and perform the role of "real" currencies is unclear. Empirical research on this aspect focuses on the price dynamics of digital currency and its correlation with other financial indicators, in an attempt to judge the real motivation of traders to hold currency by this means. Moreover, many literatures have given a negative conclusion that digital currency is more like a speculative asset than a medium of exchange. But others disagree, arguing that the sheer scale of demand for bitcoin itself suggests it has either acquired a position as a widely used medium of exchange, or is a lucrative speculative asset because of the prospect of becoming one. Although this logic does not look very convincing (even if all traders are rational, as long as the market is a certain degree of uncertainty, information may appear unsustainable speculative bubbles), but it raises an important question, namely speculative trading in the role of digital currency existence and development.

There is no doubt that the transactional demand for digital currency (by holding it as an intermediary to exchange for other things) and the speculative demand (by holding it as an intermediary to sell it for a profit as it appreciates) are vastly different not only in their motivations, but also in their focus on the characteristics of the digital currency market (figure 2). In some ways, this difference in market characteristics fits well with braudel's generalization of the types of trade: "there are two types of exchange, one that is ordinary, competitive and almost transparent, and one that is advanced, sophisticated and dominant." This difference makes it easy to "crowd out" those who really need digital currency with a large influx of speculators in the digital currency market. But on the other hand, in the process of widespread acceptance of a currency, especially in the initial stage, transactional demand may be beneficial or even necessary, because it can not only expand public awareness of the currency, but also bring market liquidity and supporting facilities to it. For traders outside the digital currency world, these two factors can be crucial in deciding whether to accept payments in digital currency.

Figure 2 difference between transaction demand and speculative demand for digital currency

We have already been used to the legal tender for daily use, so it's easy to overlook it depends on the infrastructure, such as payment and settlement system, laws and regulations, etc., and the corresponding financial knowledge, such as identification of counterfeit money, bank account operation, different occasions to the requirement of currency type (credit card or cash, notes and COINS) and so on. However, in the face of a new currency or payment method, the importance of infrastructure and financial awareness will be highlighted, and directly affect its user threshold and use efficiency. Similarly monetary use security, namely the possibility of losing money in the process of trading, including the payment process due to error or system failure led to the error to send money directly even disappear, when the trade dispute may withdraw the payment, the funds in the account is stolen or used in against their will, and so on. Obviously, it depends on both technical and legal factors related to a particular currency. The efficiency and security of a currency determines its number of users, which in turn influences its acceptability through network effects, that is, the abundance of goods or financial assets that the currency can buy. In turn, the acceptability of money and the number of users induce governments, businesses and users to invest in monetary infrastructure, application equipment and software, and cognition, thereby affecting its efficiency and safety, forming an endogenous cycle.

If we look at the development of digital currencies from the above perspective, we may be extremely pessimistic about their prospects. In terms of user experience, most digital currencies are more akin to half-baked products that are still in the internal testing phase, with few concepts of friendliness. Currency, for example, in addition to understand the technical knowledge of mining, the user must also rely on private key composed of irregular characters to operate, wallet address is also a string of characters, careless slightly, will be due to wrong operation money to the wrong address, because forget the private key or private key file is damaged and cause the condition of the missing COINS but also common occurance. The complexity of program operations also makes users often neglect security for the sake of efficiency, such as keeping private keys on an unencrypted hard drive or keeping a wallet online for a long time, which greatly increases the risk of being compromised by hackers. To make matters worse, since many governments are not friendly to digital currencies, it is difficult for them to get legal protection if they suffer losses due to transaction disputes or hacking attacks. In addition to these interface design and institutional issues, blockchain-based digital currencies are subject to an underlying technical constraint on their efficiency: due to the "public witness" mechanism, the time it takes for transactions to be confirmed also rises sharply as the number of users increases. Improvements in network speed and block capacity can mitigate some of this problem, but it is still impossible to keep up with the exponential growth in transaction volume with the number of users, so that some people think that the accuracy, decentralization, and efficiency of transaction recording systems are impossible triangles.

Given all this, it's almost a miracle that digital money is where it is today, so what's driving it? As Gandal and others have observed, there is a great deal of price manipulation in the bitcoin market, with a significant proportion of the price rise being driven by suspicious exchanges, which is clearly not what a medium of exchange should be. So, with the exception of a small group of believers in the bitcoin concept and those who have a special need for digital money for a variety of reasons, such as anonymity, the majority of digital currency traders are motivated more by speculation. It also explains why the currency of the sharp price fluctuations and highly fragmented market structure (these are fatal flaw) is a medium of exchange was not deterred influx of traders, because price fluctuations, market distortions and opaque information is speculative trading profits, and once the market transparency, the arbitrage space also disappeared. But while it may be counter-intuitive to the original purpose of bitcoin's creation, digital currency speculators do bring with them the knowledge, market liquidity, transaction infrastructure and better user experience that, when the right time comes in the future, will be the foundation for digital currencies to truly participate in economic life and currency competition. But on the other hand, we also need to see clearly the dangers of speculation: in addition to potentially damaging the reputation and credibility of digital currencies, speculative forces can conspire to perpetuate distorted market structures. Speculators will risk opening new routes, but will also be desperate to monopolize them, and we need to remember brodair's warning.

five
The entanglement of cultural image and monetary function

As we learn more about digital currencies, we find that, at least as far as bitcoin is concerned, it is not necessarily the higher welfare equilibrium of a mainstream currency model with multiple equilibria. Which brings us back to the original question, why is bitcoin still a medium of exchange within limits? Adding a "black market" (such as the Silk Road's special currency requirement) to the model or introducing the geek's love for bitcoin directly, as in the MIU (Money in Utility) model, would solve some of these problems, but it would still not be enough. We see many digital currency advocates who believe that digital money can be the currency of the future (though there are certainly some speculators who just want to play up the concept). Where does this confidence come from?

"Trust" is a key word in the bitcoin white paper. Though Mr Nakamoto does not make much of it, one can smell suspicion and resentment at the top manipulators of a highly complex financial system. But unlike many critics of the current financial system, Mr Nakamoto has chosen not to return to an acquaintance society to restore equality and trust (such as community currency), but to build a decentralised trading system based on the Internet that, at least in theory, does not require trust in any particular individual. Although technically different, the model is familiar to economists: perfectly competitive markets. In a perfectly competitive market, where the effect of any particular participant on price is close to zero and can be replaced locally by nothing (and thus no ability or incentive to do evil), the market does not rely on any particular individual to perform its functions. From this point of view, it is interesting to note that the seemingly deviant digital currency has a concept that is consistent with mainstream economics: that no individual can be trusted, but that groups under institutional constraints can be trusted. But, as institutional economics has repeatedly emphasised, the basis for the proper functioning of competitive markets is trust in free-market institutions. Similarly, as analyzed above, the trust issue with bitcoin has not disappeared, but has shifted from traditional financial institutions to the system (and its founders and technical elites who understand the details of how the system works). Here, the meaning of "trust" goes far beyond the expectation of the behavior of most people in the previous multiple equilibrium games, because not only is the benefit in each equilibrium uncertain, but even the structure of the game itself is uncertain.

The question of whether an unprecedented digital currency will eventually be accepted by the world depends not only on the information an individual receives, but also on his view of the world, or, in game theory terms, his "Belief" about the structure of the game. Of course, if the person is rational enough, he will update his "beliefs" as the game progresses (and the structure of the game itself will change as the players change and time evolves). Shaping the "beliefs" of current and potential players is critical to steering the game in the direction one wants. Digital currency creators are clearly aware of this. Early in the astute and COINS in the inner circle members explicitly mentioned in the currency of communication acceptability expected self-fulfilling effect, scale and to the COINS as soon as possible to the user to maintain the network effect of the threshold, they designed for different users demand groups gradually expand strategy, and will be the first user type locking in the subculture groups associated with the Internet. The cultural symbolism of bitcoin also played a huge role in its inception. Many early bitcoin holders used this action more to declare their "anti-establishment" political attitude or unique "geek" culture, which played an important role among bitcoin users.

While it provided an important boost in its early days, bitcoin's cultural symbolism is a potential impediment to its emergence as a mainstream currency, reflected in the differences in the nature of bitcoin and the digital currency that followed. We have seen that bitcoin users, who are theoretically anonymous, are traceable in their activities. As Meiklejohn and others have shown, with enough patience to analyze the addresses in the blockchain, you can get a handle on the flow of money, even those used for illegal activities and stolen funds. As a result, bitcoin users are like participants in a masquerade. Although we don't know the real identity of the people behind the mask for the time being, each guest still has his or her own unique personality and activities in everyone's eyes. This lack of complete anonymity has its initial technical limitations, but it also partly reflects the nature of geek culture: geeks want to remain anonymous not to mix with others, but to live in a virtual space with a new identity; In which they build their reputations and have their own social interactions, bitcoin is a medium for this alternative life. But this romantic style is clearly at odds with the modern business motto of "friends for friends, business for business".

At the same time,Another problem with the traceability of bitcoin flows is the specificity of each bitcoin.Bitcoin is easily "contaminated" by its users: if a bitcoin has ever been used by someone who has been involved in illegal activities or is hated by the public, it will remain on its transaction record forever, causing people to shun it. Conversely, if a bitcoin passes through the hands of a social celebrity, it is likely to be worth twice as much in the eyes of its admirers. For a currency, however, anonymity (no distinction can be made between currencies of the same face value) is the basis for it to perform its functions as a measure of value and a medium of exchange. Once each bitcoin has its own "personality" and different values, it loses its ability to be the unit of account. Here, too, we see a potential conflict between the cultural meaning of bitcoin and its monetary nature.

The above characteristics of bitcoin, coupled with the constraints on user size due to blockchain capacity and transaction determination speed limits, can easily create the impression thatWhatever the true intentions of its founders, bitcoin is still a niche currency within a particular social circle.The willingness of bitcoin's early backers to accept and use it was more an expression of the idea that "with blockchain, we don't need governments and bankers anymore," than a belief that the physical form of the currency could carry the dream. For the public, the term "currency used by geeks and hackers" was their first impression of bitcoin (which, unfortunately, was later replaced by "currency hyped by speculators"). At this point, the currency distrust any individual (and the abstract "human nature") technology concept and its supporters in the real world for social ideal relies on the subtle contrast, let us couldn't help think of the film and television works, often appear the sort of cynical on the surface, the role of passion burning inside.

But the conflicts between bitcoin's cultural symbolism and its monetary function have been greatly weakened by the subsequent emergence of digital currencies. These newcomers appear more "professional" in the currency function, more friendly for users, not refused to cooperate with the traditional financial institutions and government, issuing mechanism also make a compromise to traditional monetary concept (such as the reintroduction of centralized distribution mechanism, this effectively offset COINS first mover advantage, making them rapidly. While bitcoin still dominates the stock of digital assets, it has been overtaken in daily transactions by more commercial digital currencies such as Tether. As far as bitcoin itself is concerned, in addition to its technical limitations, the sustainability of some of its early ideas is in question. For example, the computational principle used to curb the monopoly power of capital has turned into a tool of capital game after the emergence of large mining pools, and the seemingly egalitarian governance structure has been torn to pieces in the fierce fight over the "capacity expansion" scheme. The emergence of Bitcoin Cash has filled people with doubts about its future. We have seen so many examples in history of challengers who eventually converted to tradition that the change in digital money may not come as a surprise. But the entanglement between cultural symbolism and the function of money in the evolution of digital money still offers many clues to our understanding of the complex relationship between economy and society.

six
conclusion

When bitcoin was born, "fintech" and "artificial intelligence" were not hot words. However, after the arrival of the "first year of Internet finance", digital currency has been included in the financial technology wave by many people and become a part of the "Brave New World" of the future digital financial system. The distributed information processing technology based on block chain is also highly expected in the economic development and social governance. It's hard to guess what Mr. Nakamoto really thought when he started bitcoin, but records of discussions at the time suggest that the current path of digital currency may have been somewhat unexpected. The prospect of bitcoin becoming a mainstream currency remains unclear, but its ideas and technology have had a huge catalytic effect, and its economic and social impact is highly uncertain, which leaves room for different perspectives.

Mainstream economics is good at equilibrium analysis, but in many cases, something as dusty as a digital currency is better able to highlight factors that are crucial to supporting equilibrium but are often overlooked (an advantage that Chinese economists have, but do not fully exploit). Realizing that the ideas we've been taking for granted may be wrong could lead to the kind of "overreaction" that the mass media claims bitcoin subverts currency theory; At the same time,The mainstream economics profession, for all its self-deprecation, has little patience for "layman" criticism.This kind of confrontation based on the knowledge background and the analysis perspective obviously does not help us to discuss the nature of digital currency and its role in the future society in a deeper way. At a time when entire economies and societies are likely to undergo a paradigm shift as a result of underlying technological change, the exchange and complementarity of different ideas is of great significance to understanding future trends, and the challenge of digital money to existing ideas should be seen as an opportunity to achieve this alignment.

(originally published in the social science front)

Source link:weixin.qq.com

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