The U-Shaped Curve of A Trust Economy, Applied to Blockchainby@kaylonlee
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The U-Shaped Curve of A Trust Economy, Applied to Blockchain

by kaylonleeDecember 18th, 2020
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Through a series of observations and experiments, we have put forward the " trust economy " theory, and hope to use this to contribute useful thought to the sustainable development of the future blockchain. We summarize the conclusions of these studies into the “U” -shaped curve below (see the graph below).
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Through a series of observations and experiments, we have put forward the " trust economy " theory, and hope to use this to contribute useful thought to the sustainable development of the future blockchain. We summarize the conclusions of these studies into the “U” -shaped curve below (see the graph below).

First, let me explain the parameters in the graph. The independent variable ( X axis) is the value of the distribution, which means the total amount of producers and consumers of the blockchain economy composed of a certain product or services (the blockchain unifies producers and consumers through incentives and the mechanism of coordinated expectations, so we all consider them as participants on the " distribution " side, which will be discussed later). 

The dependent variable (Y axis) is the value of the consensus, which indicates the status of the efficiency and quality of the decisions reached by the participants in the economy (the transactions in the system and the execution of contracts, etc.). We believe that at the beginning of the system construction (Point A), the corresponding situation can be a new blockchain economy, or a system upgrade of the original business entity and Internet. 

Since the former can be regarded as no participants in the decision, the latter is currently used to make decisions in a centralized manner, and the distribution is approximately zero then (there is only one decision, without any discussion). In addition, since the decision has not been decentralized, the consensus then is also high. However, as we mentioned in the previous chapters, consensus in this state is not solid because it cannot represent the opinions of the majority.

In the second stage, with more participants, the value of the distribution begins to increase, and the unstable consensus gradually decreases, and the curve begins to move to the lower right at this moment. The reason for this is that the more participants, the more complicated the interests of all parties that need to be coordinated, and the decision-making needs to go through a process of adaptation. 

This leads to the consensus unable to reach effectively, and the consensus value also decreases compared to the first stage. Till it drops to the first equilibrium point (Point C ), the amount of participants continues to increase at this point, but their respective interests have been initially absorbed and adopted by the consensus system, and begins to reflect the increase of the overall economic benefits. In this state, the benefits derived from the distribution are equal to the losses caused by the inadequacy of the system. 

Although the inadequacy may continue to exist in the future, the growth rate of benefits due to distribution will exceed the growth rate of losses.

Benefits will continue to rise along with the distribution and the curve begins to move to the upper right. At this time, the number of participants will continue to increase, the consensus will start to rise, and the curve will reach Point D. 

At this point, the consensus value that can be achieved by a common decision-making system, which includes more participants, will return to the same value when there are no participants or single-center decision-making. Next, the blockchain economies begins to really exert the power.

Since the consensus mechanism is relatively mature, it can not only take care of the participants’ demands, but also achieve efficiency and quality of the consensus. Simultaneously, the values of X- axis and Y axis will be increased.

Moreover, it will bring in greater distribution and consensus, which the previous economy entities can’t reach. Someone will definitely ask: will this curve move to the upper right indefinitely as shown? According to our previous common sense, the answer is no. At some point in the future, the curve should change the current trend, become a horizontal trend or move to the lower right again. 

This is related to the principle of the three-layer game model that we discussed earlier. Each consensus state reaching in the curve is the result of the participants' constant game. The relationship between the game and consensus is to some extent a relationship between dynamic processes and static results.

After the system has continuously evolved and reached a certain static height of consensus, new game behavior will continue. In due time, the original consensus will no longer be able to effectively summarize and record the game behavior at that moment.

Therefore, the economy entities will once again show a certain disorder, and interest coordination will reappear then. In this case, we need to revise the parameters in the consensus model so that it can adapt to newly occurring situations. The curve will restart the cycle of the initial state, but the entire consensus in this state is based on the results brought by the previous stage. In addition, each economic system also has a theoretical final equilibrium point, that is, due to the limitation of production capacity, level of technology, or number of participants, no matter how the consensus model is adjusted, it will no longer be able to achieve a greater benefit growth. 

This state can only be reactivated through a new round of growth in production and technology, or the introduction of more participants who was not intended to participate in the economy. In the economy built by the blockchain, the contradiction between distribution and consensus is theoretically resolved, so this curve may extend to positions we can't imagine at present. 

Economic development will have a chance to get rid of the cycle of crisis and prosperity we are used to within a certain range, thereby creating a highly developed society that humans have never reached. All parties involved in the economy will also be able to escape from the dilemma of doubts and suspicions to a large extent, collaborate with each other effectively, and focus on research and development of new technologies and improvement of production efficiency.

Take using blockchain technology in Special Car Service in the whole market as an example to further explain the above model. Assume that the total number of passengers in this market is 30 and the total number of drivers is 10. In the past there are no companies providing Special Car Service in the market (or the function is assumed by a centralized platform. The curve movements of the two tend to be similar. The micro changes will be different.

To put it more simply, we only narrate the situation where there is no company that provides Special Car Services (as is shown in the graph below).

At the beginning of the application of the blockchain economic system, we guide the operation of the entire system according to the initial consensus rules, during which the distribution value is 0 and the consensus is set to 5 (Point A). At the beginning of the second stage, passengers and drivers join the system, and gradually develop to a state of 4 passengers and 2 drivers (Point B). 

Since the 6 people need to express their own interests, for example, transaction records require more people to jointly confirm before it can be completed. New passengers and drivers are not familiar with the service rules of the system, postponing the process, or some passengers expect free mineral water while in the Special Car, while it isn’t considered in the original design of the mechanism. Then the efficiency of the system consensus decrease, and the consensus could not effectively meet the reasonable demands of all participants.

The system will continue to operate and be improved to attract more participants to accept the Special Car Service provided by the system. When the number of passengers is 6 and the number of drivers is 3, the
consensus reaches the lowest point 2 (Point C). Although there are still some inefficient situations during the period, the blockchain Special Car Service will bring in the overall benefits to the 6 participants.

For example, it takes less time than hailing a car on the roadside; regarding the relative loss, payment beyond the blockchain technology will be confirmed more quickly (due to the current stage of the blockchain technology). The benefit and loss will offset each other. Since blockchain is expected to provide more incentives, participants will continue to increase. When the number of passengers is 12 and the number of drivers is 6, the consensus will reduce the efficiency loss caused by the decentralization of the blockchain in the early stage by learning and coordinating the demands of various parties, and return to the original level of 5 (Point D). After that, the participants continue to increase, and after a period of adaptation, the consensus could be reached more effectively. 

For example, the request for adding mineral water is implemented after confirmation from multiple parties, and a similar mechanism for adding additional services has also been sorted out. This will help the system quickly reach a consensus when facing the need to provide customers with tissues and phone charging services.

We may say that the proposal to increase the supply of mineral water under the centralized scheme can be reached faster, so why do we need to adopt a time-consuming decentralized system. 

This is because the centralized platform often considers more about the platform's revenue and include the cost of providing mineral water services in the overall price of the Special Car service – as the saying goes, one gets the benefit, but the price has been paid. Nothing comes for free, which to some extent harms the interests of users. In addition, in the case of decentralization, incentives will be provided directly to the participants.

Whether mineral water is necessary to be provided in the itinerary will be discussed and decided more rationally by the participants (if not necessary, it is better not to provide in exchange for a lower service price), and consensus will also be adjusted with reference to the opinions of all parties.

We also need to be clear that such an economic system does not mean that there are no leaders, and that the formulation of all opinions requires the participation of each user. 

Rules can still be initiated by a few people, like operators of special-car service economy entity, but after they cut the cake, the power to divide the cake is not on them. In other words, when the operator decides to increase mineral water services for each drive, it needs to accept the supervision of all participants in the entire economy. Users may not know the cause and process of the mineral water service, but through the blockchain, they can be more involved in the subsequent decision whether to retain or change the service. And most importantly, due to the open and transparent information in the blockchain and the fair distribution of profits created by the system among all contributors, users can confirm whether private interests are involved when the party makes the decision to increase mineral water services. 

In other words, when users discover behaviors that involve private interests, with the help of the blockchain, they will have the ability to force the party to modify it. The reason why users may obtain more practical ability to supervise the platform and modify unreasonable rules compared to before is that through the blockchain technology, the organization will undergo restructuring, and the original boundary among producers, servers, and users will be broken. The economic system will be liberated from the traditional situation where the platform and the user are confronted, and become the situation where all parties enjoy the benefits and co-build the platform. We will elaborate it in details later.

Through the Special Car Service example, we can observe that under the blockchain system, although the early consensus is relatively slow to reach, but because the mechanism guarantees dynamic and in-depth consideration of group and individual interests, more support will be obtained in the long run. After experiencing a slow adaptation period, the economy will eventually achieve faster development potential than centralization. 

Let's deduce it further. In the end, all 30 passengers and 10 drivers in the city will join the new system. Assuming that each passenger needs 10 rides per month, each driver can provide a maximum of 35 driving services per month. Then all possible participants have joined, and all Special Car Service needs can be met (the supply of 350 Special Car services is greater than the demand for these services), and the consensus reaches a peak of 20 at this stage. Further growth requires the addition of more passengers who do not need these services, such as an increase in consumption levels, that is converting some passengers who have previously chosen public transportation to special cars; or an increase in the service times, such as the expansion of the city area, increasing the scope and frequency of Special Car Services .

Another situation is that after mobilizing all the existing resources of the city, the final supply of Special Car Services is less than the demand for these services, and the consensus will also peak in this state. During this period, it is necessary to improve the technical capabilities of the system - such as reducing the technical difficulty of calling blockchain services for the elderly and the disabled, making the product easier to use, or transferring drivers from other cities to increase the number of supplies - -such as formulating more preferential employment and insurance policies to attract more migrant workers, which can reactivate economic growth. 

As the new economy can continuously improve its efficiency on the basis of creating greater fairness, we will observe in the future that the curve of the Special Car Service economy will shift to the upper right. Some services that are closely related to Special Car, such as hotel and catering reservations, will also be attracted to this service system because of the superiority of the mechanism, which will continue to push the curve further towards the upper right. The boundaries of many businesses will be broken, and various economic sectors will also reconstruct the trust mechanism according to the "U" shaped curve.

In addition to the "U" shaped economic curve of the blockchain we explained earlier, there are many examples of "U" shaped curves in actual production and lives, such as in the field of foreign trade and foreign exchange policy. 

Before starting the discussion, we need to know some necessary background knowledge, that is, the main purpose of export is to obtain foreign currency, and the purpose of import is to obtain foreign goods. Let us take the trade between China and the EU as an example. According to general experience, the devaluation of the national currency will promote exports and expand the external trade surplus. 

However, in order to achieve this purpose, it is the same as the case of the blockchain. It needs to undergo a "J" -shaped development process (similar to the "U" shape, but the decline process on the left side of the curve is relatively short), that is, reversely the deficit will increase or the surplus will decrease, and then the trade surplus will increase.

Why does this happen? This is because when China's currency devaluation policy is just implemented, for previous signed foreign trade contracts, export contracts denominated in Euros and import contracts
denominated in RMB will not be affected. For example, a Chinese
company exports 100 pieces of goods to European customers and obtains 1 million euros. Before and after the devaluation, the number and amount of merchandise exports of the euro will not get change. In a similar way, the amount of RMB paid and the number of imported goods will not change if a Chinese company purchases 200 imported goods from EU member countries for 30,000 yuan. However, due to the devaluation effect of the RMB, export contracts using it as the currency unit and import contracts using the euro as the currency unit will be affected. For example, the former, if a Chinese company exports 200 pieces of goods and obtains 20,000 Yuan, as the ultimate goal of export is to be converted into foreign currency, so the company will be converted back into fewer euros than before; the latter, for example, a Chinese company needs 40,000 Euros to
import 300 foreign goods, it needs to pay more RMB than before the devaluation in order to purchase the same amount of EU goods.

To sum up, in the above four situations, the first two will not change before and after the RMB devaluation. Regarding to the last 2 situations, after the devaluation policies, one will cause Chinese companies to earn less when exporting, and the other will make Chinese companies spend more when importing. Add the two up. Therefore, at the beginning, the deficit of China’s trade with the EU will increase (or decrease in surplus). But at the same time, the advantages of international sales competition brought about by the RMB devaluation begins to gradually emerge. In addition, for example, when the exchange rate of RMB to Euro drops from 1 : 4  to 1 : 3.5 (for the simplicity of explanation, while the actual value is far from it), the unit price of a candy made in China is 1 yuan, originally EU customers needed to pay 4 euros to buy this candy, but now it only costs 3.5 Euros. The residents in EU feel that the price of same candy has decreased, and they will be willing to buy more, thereby promoting the willingness of EU merchants to import. At the same time, for the devaluation effect of the RMB, domestic consumers in China will find that the price of purchasing EU goods with RMB has increased, which will prohibit Chinese consumers’ demand for imported EU goods. Under the combined effect of the two, after a certain period, the original unfavorable situation will gradually be offset (we also call the impact of exchange rates on trade conditions the " lag effect "). China's trade income will exceed its expenditures and eventually reach the rising part of the "J" curve. At this point, the implementation of the RMB devaluation policy will achieve its original purpose, namely, to increase the trade surplus.

Another example comes from our daily lives, which is easier to understand than the pure economics case. Many of us have experience in playing tennis and badminton. When there is no professional coach for guidance, or for special learning by watching instructional videos and other methods, we often cannot develop the most standard movement posture. However, due to long-term exercise experience, most of the time, we can find out a set of " exclusive " methods that can achieve a certain success rate. This method is easy to use, but it is also easy to encounter bottlenecks. For example, when encountering top professional athletes, the disadvantages of such amateurish method are easy to notice. Although it is a good way to improve through ordinary practice or find more tips, it is not stable and reliable. Therefore, if we want to improve sports performance in a long-term way, the most essential way is to improve the amateurish method in
accordance with personal physical conditions and exercise laws. For example, we can ask a professional coach for guidance.

However, in the early stages of training, we often find that if we play according to the coach's requirements, we will not only feel awkward, and even beat lower success rate than before. Then some of us may be skeptical and frustrated, and even some of them will soon lose patience
during the practice and simply return to the original style. Only a few
people are aware of mistakes and can persist. After a certain period of
adaptation, we began to have a deeper understanding of how to scientifically play the racket. In the application of practice, gradually there will be high proficiency. After reaching a certain level, if we continue to practice according to this scientifically method, our sport performance can take a good leap.

The above two examples are very similar to the development course of blockchain, of which the phenomena they produce are in the early stage of the implementation of a certain strategy, and the original situation will become worse. This also explains the current situation encountered in the popularization of technology. Because of the reverse development in the early stage, blockchain can easily fall into a questionable situation. Some people are even too lazy to go through this " sink ", take out the increase story on the right side of the curve and sell it, and then issue coins and do pyramid sale. As always, this chaotic market situation will shake many people's confidence in the future development of the blockchain.

The main reason for this kind of development curve is that the operation of the stock market has its own value. Likewise, although there are many imperfections in the centralized special car service market, such as the unreasonable pricing caused by the excessive concentration of platform power, and the imparity clauses. However, it is already much larger
than the situation of compared to no Special Car Service providers. Of course, this does not mean that the economy must go through the process of no service -- centralized service - -decentralized service, and some areas can also directly enter the decentralized stage. In addition, we need to pay the initial costs to improve and disrupt the original market laws. In the case of foreign exchange policies and playing tennis, due to the impact of signed contracts and established postures, this improvement effect cannot be immediately highlighted, but it takes a while to explore in the dark. Likewise, when we hope to raise the swamp, initially the stones thrown in them are submerged. This "U" shape is especially slower when a market with inherently stable interests needs to be transformed, and for the complexity of the new model, its own mature evolution, and its widespread recognition and acceptance are difficult to achieve overnight. With the introduction of a more reasonable blockchain
mechanism, even if the economy will experience lows, it is just a manifest of different slope of curve in the future development course for it will really result in a reduction in the service price and the benefit of all participants. We just need to find the right entrance, continue to work and improve, and then the emergence of the break point is just a matter of time for humans.

Let us go back to the model of blockchain “trust economy”. We describe in
detail the conflicting evolutionary process between distribution and consensus in the model, and also analyze its economic development prospects. But till now, we have not focused on the meaning of the most
important word " trust " . We have talked about that the core value brought by the blockchain economy is to unify the interests of individual distribution and collective consensus. The process of achieving this goal will lead to the elimination of intermediary institutions, making the participants able to smoothly and directly communicate and conduct transactions, and the cost and price of the products (services) will also decrease. The driving force behind the unification of the two lies in the trust in the economic environment. Through the combined effects of the five core technologies of the blockchain, producers can no longer use information gaps to violate the interests of consumers, and consumers can no longer make endless demands. The reasonable interests of each participant have been better satisfied, and the effectiveness of the entire economy can be better exerted.

In the previous description of the "U" -shaped curve, we respectively talk about the development trends of distribution and consensus. For an economic system, what is more important is that through the interaction of the two, an unprecedented state of " trust " has been generated. We regard this state as a " trust " network woven together by distribution and consensus. For its own benefit, the " distribution " on the horizontal axis vigorously weaves the web to the left and right, trying to continuously expand its territory. The consensus on the vertical axis is to weave the net from the perspective of collective decision-making, but often ignore the voice of some individuals. The two are acting in their own interests and never make a concession to each other, but what allows them to form a complete grid is what is called " trust ". Trust is invisible and intangible, but it doesn’t emerge out of void. Each time the two drag to their own direction will provide them with materials. Trust is like a wise old man who unhurriedly records the squares pulled out in horizontal and vertical axis, and then formulates appropriate strategies and rules, so the two parties will not go too far to deform the entire grid.

This reminds us of the Go example in Chapter 1. On a chessboard of 361 intersections, the black and white sides play Go in order to defeat the opponent. " Trust " is the established rule of Go. In the end, whether it is a tie or one side wins, by filling the chessboard with chess pieces, the wisdom and interest of the two parties will be enhanced, and eventually they will realize the philosophy behind it. " Trust economy " is this philosophy and the ultimate economic goal that our entire human beings pursue. Regarding the economy entities, we don’t aim to satisfy only biased interest of the collective or the individual. As described in " Pareto
Optimal Interest ", not only we should gain collective prosperity, but also do not harm the interest of the individual. Conversely, the boundaries of individual interest expansion cannot harm other people's rights, because this will also lead to damage to the collective interests. Individuals and collectives have been fighting for long years, and their interests are subtracted from each other. However, what the whole society needs to seek is the state of " trust " and the impartiality that it brings. This is like the essence of Go is to allow the participants to understand the philosophy of the game, that is, to be courteous and openminded, and not to emphasize the temporary success or failure.

The ultimate measure of the " trust economy " prosperity is neither the infinite increase of the Y- axis value nor the continuous increase of the X- axis value, but the combination of distribution and consensus, so as to promote the acquisition of trust, and create conditions for consensus under a larger distribution on the basis of continuous trust creation, and ultimately promote the orderly and healthy growth of the entire economy and society. Blockchain technology provides a strong guarantee for a higher level of trust economy. In a blockchain economy developing along
a "U" -shaped curve, trust is the key force for facilitation and the core for coordinating distribution and consensus interests in the curve. Here trust represents good order and collaboration, which can be a widely expected open and transparent market environment, or a well-praised reputation. The interruption and even the decline of trust will make the entire economic system impossible to establish, thereby losing the vigor and value of the blockchain to promote economic growth (another important power to promote economic development is the improvement of productivity).

Of course, we can’t say that the trust economy must develop in a U -shaped curve, but so far, the blockchain technology is the closest we know to promote the trust economy. Therefore, we will define the graph of trust economy representing by the blockchain as a "U" curve. In other words, the premise of the trust economy we are currently discussing is built on blockchain technology. Maybe one day, the emergence of new technologies or business patterns (including the evolution and change of the blockchain technology itself) can avoid the downward curve on the left
side of the "U" shape, so that the right curve can be directly displayed at the beginning of creation. 

In addition, the practice of applying blockchain to the economic system is still at an early phase, and there are not enough practical examples.

Therefore, we will not make too many mathematical models deduction for the "U" -shaped curve now, and only propose some foresighted theories based on some conceptual induction and abstraction. Meanwhile, we are also eagerly looking forward to more practical applications to help the model constantly improve and optimize.