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Zou chuanwei: "machine network + block chain" economics

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Large-scale cooperation between blockchain and machines will generate great economic value, develop new financing methods for network infrastructure construction, and bring blockchain into the broad application scenario of "Internet of everything".

[research on wanxiang blockchain industry] zou chuanwei: large-scale collaboration between blockchain and machines
Wanxiang block chain author: zou chuanwei

Question 01

Alibaba's dharma institute listed "the possibility of massive collaboration between machines" as the fourth major trend in its top 10 tech trends for 2020. According to dharma academy, the development of collaborative perception technology of the Internet of things and 5G communication technology will realize the collaboration between multiple agents, and the machines will cooperate and compete with each other to complete the target tasks together, while the swarm intelligence brought by the collaboration of multiple agents will further amplify the value of intelligent system.

Dharma emphasizes the role of information sharing and unified control in intelligent device network. I think we need to discuss the cutting edge of the question: is this the only mechanism for large-scale collaboration between machines, and is there any other mechanism?As a distributed collaboration network, does blockchain interact with large-scale collaboration between machines?

02 & have spentThe large-scale cooperative mechanism of human society

To understand large-scale collaboration between machines, it is best to compare it to large-scale collaboration between people.Large-scale collaboration is one of the most important features of human society.Without large-scale cooperation, human civilization could not have developed to where it is today.

Large-scale collaborative mechanisms in human society fall into two categories.The first type is centralized, characterized by top-down command chain, bottom-up feedback mechanism and multi-level principal-agent relationship.Typical representatives are administrative agencies, business organizations and military units.The second category is decentralized, represented by market mechanisms.There is no central planning or unified coordination in the market mechanism. While working for their own interests, each participant promotes the interests of the group through division of labor and market exchange. I'm going to focus on the market today.

In the market mechanism, the cooperation between people is carried out on the dimension, and the two dimensions cannot be cut off from each other.The first is the information dimension.For example, before a bank lends to a business, it needs to evaluate the credit qualifications of the business. The first is to analyze the financial statements of the enterprise, the enterprise credit score. After the rise of artificial intelligence and big data analysis, a lot of unstructured information of enterprises can also be analyzed. The second is to use the market price, from the enterprise's stock price, bond yield and credit default swap (CDS) spreads to deduce its credit risk. In various markets, participants trade assets based on the information they have, with the bulls buying and the bears selling, and the asset prices generated by the trades are a combination of the information held by different people. In many cases, the information disclosure function of market price cannot be replaced by artificial intelligence and big data analysis. In the road to slavery, hayek argued that "price is the only way for economic policymakers to communicate with each other through tacit knowledge and decentralized knowledge, so as to solve the problem of economic calculation."

The second is the value dimension.In a market mechanism, participants decide how to allocate resources based on market price signals. For example, consumers decide how to spend their money according to the price of goods and services to maximize their welfare. Enterprises decide what to produce and how much to produce according to the factors of production and the price of the product in order to maximize their profits. In modern society, market mechanisms are everywhere. We are in all kinds of markets all the time, constantly producing value, constantly exchanging prices, to maximize the use of limited resources. Adam Smith in the wealth of nations, vividly and profoundly reveals the role of market mechanism: "we need food and drink every day, not by the grace of the butcher, the brewer, or the baker, but out of self-interest. They each use capital and labor of individual, neither intends to promote the public interest, and I don't know himself is the extent to promote that interest. He guided by an invisible hand, try to achieve a was not his to achieve the purpose of this intention. By pursuing his own interest, he often promoted the social interest."

03 & have spentCan market mechanisms be introduced into machine networks?

Just now, human society has two types of large-scale cooperation mechanisms -- centralized and decentralized. The "information sharing and unified control" of dharma yuan represents the centralized mechanism. The market mechanism is the representative of decentralization, which operates in two dimensions of information and value, and the information disclosure function of market price cannot be replaced by artificial intelligence and big data analysis. The question is, can market mechanisms be introduced into machine networks?

The question concerns the relationship between machines and people. The relationship between machine and human has been studied from different angles by different disciplines. In 1944, schrodinger published "what is life?", which used thermodynamics, quantum mechanics and chemical theories to explain the nature of life. Many people are familiar with the idea that organisms consume negative entropy for food because of this book. This is the study of people as machines. Dartmouth summer 1955, artificial intelligence research project proposal begins: "every aspect of learning, or any other feature of intelligence can be accurately described, so in principle that can be simulated by a machine. Will try to find out how to make the machine to use language, abstract and conceptual formation, solve various problems now reserved for human beings, and improve themselves." This is about how to make machines think like people. At present, the weak artificial intelligence represented by pattern recognition is mainly implemented, while the strong artificial intelligence is still early.

Introducing market mechanisms into a network of machines is essentially about making machines behave like people. In the future of communication networks, the Internet of things and smart device networks, can blockchain enable machines to collaborate on a massive scale like humans? I think the answer is yes. Some might think this is science fiction, or even a fantasy. In fact, there is such a prototype system, has been running successfully for more than 10 years. I mean the bitcoin network.

The bitcoin network has no shareholders, managers or regulators. It has more than 10,000 nodes in the world and has been operating without failure or interruption for more than 10 years. Recently, it has been producing 16.2 million us dollars in mining every day, with an average of 350,000 daily transactions, or 7.1 billion us dollars.Many people are used to looking at the bitcoin network from a technical point of view, but it's actually more valuable from an economic point of view. There is a complex market economy in the bitcoin network.For example, a miner provides computing power, whose performance is shown as a Nonce and for which he is rewarded with a block. Block reward via Coinbase trade to the address of the miner. But nodes that provide only storage space, network routing, or wallet services get no return. When users initiate a transaction, they are required to offer high fees to incentivize miners to prioritize their own transactions, which is equivalent to bidding for the limited resources in the bitcoin blockchain.

Many excellent economists have studied the economics of bitcoin network from the perspectives of game theory, asset pricing and network economics.We also know that the underlying technologies that bitcoin relies on -- cryptography, distributed networks and distributed computing -- were developed before nakamoto. Many researchers have tried to construct electronic cash using these techniques, but without complete success, until satoshi nakamoto introduced game-theoretic designs that made bitcoin possible. This demonstrates the power of economic mechanisms: how, in a decentralized environment, miners can be prevented from doing evil and distributed ledger security, networks can be built, operated and maintained, and self-organizing and self-governing can be achieved. Joining the economic mechanism has produced good results for problems that cannot be completely solved by technology.

If the bitcoin network is regarded as a prototype system of "machine network + market mechanism", what successful experience can be copied and popularized?

04 & have spentThe economics of machine networks

Before discussing "machine network + market mechanism", it is necessary to express machine network as an economic problem. The machine networks I discussed mainly include communication networks (such as 5G), the Internet of things (IoT), smart device networks, and blockchain networks.

These machine networks have the following characteristics: first, the structure is centralized (such as "server-terminal") and point-to-point. Second, different types of nodes assume different roles, such as providing data, computing power, storage, bandwidth, and so on. Third, before the bitcoin network, the machine network was basically a physical problem, not an economic one. Compared with human behavior, machine behavior can be described more by functions. Input variables are control parameters and environment parameters, output variables are machine behavior, and function setting is determined by machine design.

A special problem in the construction, operation and maintenance of machine networks is that some of the machine networks belong to the infrastructure, which is difficult to charge users directly and has a voluntary or free nature. The typical example is the communication network. This belongs to the problem of the supply of public goods in economics. If the network of machines that serve as the infrastructure is provided entirely by the private sector, there will be a shortage. There are two practical solutions. First, the government USES fiscal and tax revenues to invest in the construction of network infrastructure and provide it as a public good. The second is a "cross-subsidy", in which the network infrastructure is free but the apps running on it are charged. Various public-private partnerships (PPP) have emerged, depending on how to attract and incentivise the private sector.

Can machines become economic entities? At the heart of the question is whether machines have their own utility and can adjust their behaviour to economic incentives. At the intersection of distributed artificial intelligence and economics, a major vision is the Machine Economy and Device Democracy -- machines that have their own utility and maximize their utility through strategic optimization, becoming so-called agents. But until this vision is realized, it can be argued that the machine has no utility of its own, and that the incentive machine is actually the controller behind the incentive machine. Of course, you can also think of what I'm talking about today as a rudimentary version of machine economy and device democracy.

Human behavior is very complex and affected by various factors, and there are many different ways to model it. The mainstream paradigm of modern economics is based on the hypothesis of economic man, which essentially USES machines to approximate the decisions and behaviors of human beings, which goes back to the relationship between machines and human beings discussed above. In this paradigm, everyone has a set of values that determine his preferences, such as whether he likes oranges or apples. Preference is quantitatively described by utility function, which should reflect the characteristics of diminishing marginal utility and risk preference. The goal of economic man is to maximize individual utility under various constraints. The problem for consumers, for example, is to maximize utility by choosing a consumption mix within budget constraints. The problem for the enterprise is to minimize the cost given the revenue target, or to maximize the revenue given the cost target. In short, both the problems of consumers and enterprises can be described by optimization problem, and optimization problem has two major elements -- objective function and constraint condition.

It should be noted that the economic man hypothesis is an approximation of human behavior under ideal conditions. In reality, behavioral economics research shows that individual decision making is difficult to eliminate irrationality, and behavior often deviates from the hypothesis of economic man.

05 & have spentThe economics of "machine network + block chain"

"Machine network + market mechanism" cannot be separated from blockchain. As discussed above, market mechanisms operate on both information and value dimensions. Block chain has the attributes of information Internet and value Internet, and can play a role in two dimensions of market mechanism.

As an information Internet, blockchain records the flow of goods, drugs, food and capital in public ledger, so that the upstream and downstream, different links check each other, through the information "island", so that the whole process can be managed, but does not involve assets or risk transfer. Blockchain, as the Internet of value, involves the transfer of assets and risks. But the block chain itself does not create value, the value comes from the real world assets, and through the economic mechanism and the block chain within the Token. Blockchain plays the function of infrastructure, which is reflected in the transaction settlement, automation and intelligence of clearing.

The core of "machine network + market mechanism" is the economics of "machine network + block chain". In methodology, penetrate the machine network to the controller behind, and use the "two-step method".

The first step: economic activities take place on the machine network, and the economic activities and participants in the machine network should be extracted from the perspectives of production, consumption, market transaction and division of labor.

Step 2: discuss how these economic activities are supported by blockchain, including the following aspects:

1. Blockchain records economic activities.This aspect USES blockchain as the function of information Internet. The difficulty lies in how to make the information outside the chain fidelity "on the chain" and record the economic activity and value flow outside the block chain in a highly credible way. For example, blockchain + supply chain management requires secure and efficient sensing devices to reliably write information outside the chain into the blockchain. There is no perfect solution to this problem, which is one of the core obstacles in the current blockchain application, and it is not only a technical problem, but also inseparable from the relevant institutional arrangements.

2. Blockchain provides payment and incentive tools for economic activities.In this aspect, the use of block chain as the function of value Internet has two core economic problems: one is the payment tool between machines, and the other is the economic model design of machine network. We'll focus on that.

3. The state change of Token/ intelligent contract in blockchain triggers the machine behavior.This aspect involves the transmission of state in blockchain to the real world.

There are three important economic questions about "machine network + blockchain". The first is how the machine becomes a measurable economic entity, because the premise of economic incentives is to accurately measure the contribution of the machine. For this purpose, it is necessary to introduce a unique ID to the machine through module, chip and other technologies, and correspond the machine ID with the address in the block chain. The goal is to retain traces of the activities and contributions of the machine (e.g. through signatures), and to cross-verify between different machines and upstream and downstream of the business process, laying the foundation for post-statistical contributions.

The second is the payment between machines. Payments between machines can be made through financial accounts (including bank deposit accounts and accounts of payment institutions) or through tokens within the blockchain. When the number of nodes in the machine network is large, the efficiency of payment through the financial account may not match the efficiency of the interaction between machines. In addition, pre-approval requirements for financial accounts are difficult to accommodate the openness of the machine network. In essence, Token payment through blockchain is to make blockchain become a value settlement protocol in the machine network. In this aspect, we need to face up to the problem of currency network effect and currency mismatch.

Machine networks also exist in a world dominated by fiat money. For example, the bitcoin network's capital expenditures (mainly mining machine development and acquisition expenses) and operating expenses (mainly electricity and personnel compensation) are denominated in fiat currency. Fiat money has a strong network effect. There is a currency mismatch problem if the machine network USES tokens that are not linked to legal tender as a payment tool. Bitcoin miners, for example, are exposed to fluctuations in the price of bitcoin against the dollar.

From the point of view of economic mechanism design, the machine should be given a stable incentive of value, so that the economic activities in the machine network are not disturbed by the fluctuation of the value of payment instruments. The central bank digital currency and global stability currency (represented by Libra) provide the appropriate inter-machine payment tools, which are the basis for introducing financial activities into the machine network. In turn, the huge number of nodes in the machine network and the rich economic interaction between nodes also provide a good scenario for the application and promotion of central bank digital currency and global stability currency.

The third is the economic model design of machine network. Although a single machine has a controller or owner, the machine network, as a network, has no owner and has a strong public good attribute. Any network in the early stages of development is small, the network effects are small, and new entrants switch to pay the costs and take the early risks. How to motivate new entrants so that they are incentive compatible with the further development of the network? In this aspect, the distributed economic model and Token with floating value should be introduced to ensure that Token can effectively capture value from economic activities in the machine network through programmable design. Only in this way, the machine network will have the endogenous growth force.

"Machine network + block chain" will generate great economic value. The first is to provide a new source of income for builders, operators and maintainers of machine networks. In particular, a fair and effective economic model should be implemented - every machine node that contributes to the network should be rewarded. Second, develop new financing methods for network infrastructure construction. Third, truly bring blockchain into the broad application of the "Internet of everything".

06 & have spentconclusion

Going back to the question raised at the beginning, my answer is that by introducing market mechanisms into the machine network, a decentralized, value-based mechanism for large-scale collaboration between machines can be achieved, enabling machines to collaborate as massively as people.Bitcoin network is a prototype system of "machine network + market mechanism". The core of "machine network + market mechanism" is the economics of "machine network + block chain".I discussed how to express the machine network into an economic problem through the "two-step method", and three important economic problems: the combination of machine ID and address in the block chain, the payment tool between machines, and the economic model design of machine network. These questions are also important for understanding the future of machine economies and device democracy.

Large-scale cooperation between blockchain and machines will generate great economic value, develop new financing methods for network infrastructure construction, and bring blockchain into the broad application scenario of "Internet of everything".Dr. Xiao feng pointed out that blockchain enables us to automate the value measurement, value distribution, value storage and value settlement of large-scale collaboration with smart contracts, making large-scale collaboration of cross-border and public affairs feasible, credible and efficient. Large-scale collaboration between blockchain and machines will be an important issue in this regard.

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