On the Nature of Money, Cryptocurrency, and Cross-Chain
How do you prove that a string of characters has value or is BTC? And which matters more for cryptocurrency -- decentralization or liquidity?
Before we get into the topic of cross-chain bridge, it is necessary to mention that both "cross-chain" and "bridge" are not the accurate way to describe the nature of two different blockchains connecting together. This is because the nature of cryptocurrencies is a decentralized ledger, and there is no physical object in circulation. Using the term "cross" or even "bridge" is too concrete, and both are wrong; the nature of cross-chain is to align the ledger of two chains.
While discussing the cross-chain of cryptocurrencies, let’s first dive into the history and nature of money.
Part One: The Nature of Money
🧾 A Unit of Accounting
Money is a unit of accounting, not the physical object such as paper money or a string of characters that we see now.
1. Barter: The beginning of accounting
In early human history, there was no money, and people traded through barter. For example, one sheep could be exchanged for one table (equivalent exchange). Afu has 10 sheep, but Ali only has 1 table. Should they exchange or not?
They couldn’t exchange equivalently as Ali did not have enough table; yet if they choose not to exchange, there is a high cost for Afu to keep the sheep. To exchange equally, they need to keep track of the exchange records, so Afu can say “Ali, you can take all my sheep, but you owe me 9 tables which you will give me next year.”
However, Ali couldn’t make 9 tables next year and started defaulting on his debt. In the area where Afu lives, everyone loves chocolate (in fact, in very early South America, chocolate did serve as a form of equivalent exchange). Ali at the time, however, coincidentally had 9 pieces of chocolate, so he used chocolate to pay his debt. Gradually, the most circulated object in an area such as chocolate in the story became a unit of accounting, which would decide the fair price in the market like one piece of chocolate could exchange for one sheep or one table.
This unit of accounting is money. Money is just a reference word or a puppet; the word or expression we use to refer money has no intrinsic value. However, this reference is prone to problems. For example, if someone can make a million pieces of chocolate, then they can easily rob other people's labor products. Thus, a better unit of accounting is in need.
2. Gold and silver; gold and silver notes
The core of a unit of accounting is sustained and stable liquidity.
Later, as human beings expanded the scope of commercial exchange and even began to trade globally, gold and silver came on stage. People have a natural affinity for silver and gold object; thus, silver and gold naturally became the unit of accounting for money. Indeed, gold and silver have been proven to be very rare on earth for thousands of years, which also fits the unit of accounting’s need for stability. Therefore, this puppet — silver and gold — as the unit of accounting will not be easily overthrown.
However, people found that gold and silver are not easy to carry. To make transfer and exchange easier, derivatives of gold and silver — silver notes and gold notes — began to appear on the market. Essentially, those silver and gold notes are still based on trust in the accountant — trust in the bank; bank is responsible for acceptance, and the right to account belongs to the bank.
Later, silver and gold notes became the unit of accounting for the state. For example, the US dollar is issued and accepted in conjunction with gold, and a small group of people called the Federal Reserve is responsible for accounting for everyone.
Until the 1970s, when the Bretton Woods system collapsed, the US dollar announced that it would not issue gold notes and would no longer be pegged to gold. The issuance of the US dollar is completely determined by the Federal Reserve, a group of accounting organizations. Of course, the Federal Reserve has its rationale for decision-making, but it is indeed a small group of people who make the (centralized) decision.
However, after the value of the US dollar lost its anchor on gold, it began to focus on another characteristic of currency: liquidity. Oil trading and financial trading are where currencies used most often. The US dollar holds rights in Middle East oil market in its left hand and Wall Street in its right hand. With its careful and critical operations, the US dollar has become the global unit of accounting.
The foundation of a unit of accounting is tamper-proof, or decentralized and trustless. Therefore, although the US dollar has shown extraordinary strength in liquidity, through issuing and tightening, it continues to reap the wealth of global workers. Meanwhile, it still goes against the most important attribute of money: tamper-proof accounting.
Therefore, in 2009, Bitcoin appeared. Unlike traditional financial institutions, Bitcoin is a peer-to-peer electronic cash payment system: one party initiates a transfer, and the other party accepts it, without relying on any centralized financial institution.
Part Two 🔹The Nature of Cryptocurrencies
🌐 A Decentralized Ledger System
1. Why is the nature of cryptocurrency a decentralized ledger system?
Let's start with the creator of digital currency —Bitcoin.
How did Bitcoin come to exist? — Through mining .
What is this mined BTC? — Well, just a string of characters.
How do you prove that this string of characters has value or is BTC?
This is where the nature of cryptocurrency came into play.
The mined BTC was recorded and confirmed in a ledger, and all BTC transfers will also be recorded in the ledger. At this point, we can think of a BTC is generated from mining, transferred from address to address, and all of this from its generation to circulation can be traced. The whole traceable and tamper-proof record is called a ledger.
Of course, this ledger is different from the traditional centralized accounting system of the Federal Reserve. But what is the difference?
2. Differences from traditional centralized accounting systems of the Federal Reserve
If we summarize the history of currency with a simple example, it will be like this:
Accounting done by a Village Chief: In a village, where the unit of account is an ax, all previous debts of one ax were recorded by the village chief; because the village chief had high prestige, if the Village Chief said A owed B an ax, no one would say otherwise.
Accounting done by Village Chief, Deputy Village Chief, and Elders: Later, the village chief often wrongfully recorded the transactions on purpose, as B was the village chief's nephew. As false accusations on B happened more and more often, the deputy village chief and a few elders requested to join the accounting team. As a result, the village chief, deputy village chief, and several elders began accounting together.
Yet not long after that, it was discovered that the village chief, deputy village chief, and elders were colluding, and all of them would write off the record with a single stroke and silently allowed each other to do so. As time passed by, the villagers couldn't take it anymore, and they decided that everyone should record debts themselves from then on, but the cost to maintain the records was too high and it was not easy to operate.
Accounting done by Satoshi Nakamoto: At this point of time, a village resident named Satoshi Nakamoto created a method of accounting called blockchain that is tamper-proof and 100% traceable. People in the village agreed with this method.
From then on, every loan would be recorded and broadcast to the entire village, and anyone could choose to record or not record a transaction at any time. Then, most people recorded the same ledger and confirmed it as the true ledger. For each successful record keeper, something called Bitcoin (a mining reward) would be sent as reward.
Part Three 🔹 The Nature of Cross-chain
📍 A Technology of Account Alignment Between Decentralized Ledger Systems
1. A real-life analogy of cross-chain
Now we can finally get into the topic of cross-chain. Cross-chain essentially refers to the "account alignment" technology between decentralized ledger systems. In other words, it is the process of aligning the ledger of two decentralized ledger systems, also known as reconciliation in finance. This is similar to a supermarket owner checking with a cashier.
However, in real life the supermarket owner speaks Chinese and the cashier speaks English, which in blockchain corresponds to cross-chain ledger alignment between heterogeneous chains.
Ledger alignment between EVM (homogeneous) chains is both the owner and cashier speaking Chinese, yet the owner speaks Mandarin while the cashier speaks Singaporean Chinese, with some differences in syntax and vocabulary. In finance, it is the alignment of financial statements under Chinese accounting standards with those under American accounting standards.
2. Aligning ledgers in blockchain
In decentralized ledger technology of blockchain, each chain is an independent decentralized distributed ledger. So, how to align the ledger of these two chains?
Based on the discussion of the accounting method in the previous section, we can come up with the following ledger alignment schemes:
The head of the town and several elders or village heads in charge of aligning the ledger (two villages) of the two chains. This is commonly known as MPC or TSS technology. In the blockchain world, how do you prove that someone is the head of the town or the village head or the elder? Either the project specifies a group of nodes or the amount of the Power of Staking as proof. Whoever stakes more coins is the authority. As we mentioned earlier, there is a risk of collusion between the village heads and the other authorities.
Authorities + a number of random witnesses for ledger alignment. In the blockchain world, a random witness is the Oracle node, and the authority is still ranked by the amount of staking. The risk of collusion between Oracle and authority still exists, which is the ledger alignment technology between two blockchains under Oracle + Relayer technology. LayerZero mainly adopts this technology.
Some may doubt, isn't the most important thing about cryptocurrency is to increase its usage or liquidity? Is decentralization really necessary?
The centralized accounting scheme led by the US dollar has reached its peak in terms of liquidity. If the cryptographic world abandons the condition of decentralization in accounting and pursues liquidity, it is undoubtedly a losing proposition and no different from a scam.
Align the ledger across chains using the ledger mechanism of the blockchain, which is the light client lightweight client verification technology. Blockchain’s ledger method is unquestionable in terms of decentralization. The ledger is tamper-proof and traceable.
Taking the POS consensus mechanism public chain as an example, the confirmation of all ledgers is responsible for accounting (on-chain) by a group of validators (the next group of validators is authorized by the signature of two thirds of the previous group of validators).
In theory, it is only necessary to synchronize the validator information of the ledger (including the collection of validator information from multiple sessions) to another blockchain ledger. This is equivalent to mutual confirmation of signatures.
3. Look into the light client cross-chain via company reconciliation
There are two companies — Company A and Company B — that work together to check their account records. Company B has Company A’s financial manager and CEO's signatures and vice versa.
If an employee from Company A tells Company B that company A owes him/her money, Company B only needs to see if there is a signature from company A's financial manager and CEO, and confirm the signature is real to find whether the employee is telling the truth or lying.
In blockchain world, the signers (validators) of blockchain are trustless with no authority and change sessions every 24 or 72 hours. This is equivalent to a company's financial manager and CEO changing changes every one or three days. After each session change, company A and B will immediately exchange signature verifier information sets (validator private key signature) between them.
What if the exchange process is centralized?
In fact, the exchange process must be centralized, but this doesn't matter because it can't pass false signature information to the target ledger (chain), as the validity of each new session of validators needs to be signed with a private key by the previous group of validators. False ones won’t have a private key signature, so light client is also called independent self-verifying cross-chain technology.
Currently, Polkadot, Cosmos, NEAR Rainbow Bridge, and MAP Protocol all use this technology. Although light client based cross-chain verification mechanism is secure and guarantees true decentralization, it comes with huge technical challenges, especially when using light client cross-chain mechanism for heterogeneous chains, more technical efforts are required.
But after nearly four years of full-stack development efforts, MAP Protocol finally successfully applied light client to cross-chain verification of all heterogeneous and homogeneous chains. At present, MAP Protocol has supported cross-chain of Polygon, NEAR, BNB Chain, and Eth 2.0 cross-chain is also under auditing, and is expected to go live by the end of the year.
Code snippets of MAP Protocol light clients
How should we align the ledger between heterogeneous chains (with different data formats)?
That is to say, the signature format of A chain is in French, while the B chain is in Chinese. In this case, we need a Relay Chain as the omniscient translation machine that can understand languages of all chains.
To do this, the Relay Chain needs to pre-compile signature algorithms and hash algorithms, as well as merkle tree proof, etc. in the smart contract development layer, and becomes a hub for converting ledger data formats to connect with different chains. This is also what the MAP Protocol team does to extend its connectivity across all blockchains.
Code Snippets of MAPO Relay Chain
4. Cross-chain and Zero-knowledge proof technology
Zero-Knowledge Proof technology has been widely discussed in the past few months and has also been widely used in various roll up schemes. It is commonly used in Layer 2s, and rarely used or even mentioned in cross-chain.
However, the MAP Protocol developer team found out that although using light-client for cross-chain verification is unquestionably secure, it consumes more gas fees compared to other cross-chain verification schemes. Therefore, the MAP Protocol team is further optimizing the cost of data verification using zero-knowledge proof (ZK) + light client for cross-chain verification, reducing the cost for gas fees and ledger alignment between chains.
Part Four🔹Conclusion
🌱 In the multi-chain future, understanding and truly embracing decentralized ledger alignment — a truly decentralized cross-chain technology — is a must for the entire industry.
As discussed above, blockchain projects that blindly pursue the number of crypto holders or users without the prerequisite for decentralization are no different from scams, because their cryptocurrency issuance and accounting methods are not different from those of central banks.
Moreover, there is no need for another centralized accounting method for currency in terms of liquidity. Therefore, in the multi-chain future, understanding and truly embracing decentralized ledger alignment — a truly decentralized cross-chain technology — is a must for the entire industry.
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