Latest Progress in the Fed's Digital Currency

Since 2016, Central Bank Digital Currency (CBDC) has gradually become an important subject of research and development experiments by central banks around the world. In terms of application scenarios, general CBDC is oriented to retail, online shopping, personal payment, etc., basically corresponding to cash scenarios, and is the main research direction at present. In addition, there are CBDCs such as financial institutions’ reserves.

The Federal Reserve has been cautious in its exploration of digital currencies, and has suppressed Facebook's Libra project. But it has been conducting exploration and research itself, mainly including its financial laboratory and the "Hamilton" project that authorized its Boston branch.

Note: The project name honors two people: Alexander Hamilton, the first U.S. Treasury Secretary and founder of the financial system. Margaret Hamilton, director of software engineering at the MIT Instrumentation Laboratory, was involved in software development for the Apollo program.

Hamilton Project

The "Hamilton" project is an exploratory research project by the Federal Reserve Boston Branch and the MIT Monetary Research Center.

The project is divided into two phases:

• Phase 1: Solve core issues such as high performance, reliable transactions, scalability, and privacy protection. Target 100,000 TPS, second-level confirmation, multi-region fault tolerance.
• Phase 2: Solve key issues such as auditable, programmable contracts, support for intermediary layers, attack prevention, and offline transactions.

After several years of hard work, the first phase was completed in February this year. The source code OpenCBDC was released in the form of open source software, mainly developed through C++, following the MIT open source license agreement, and the project address is mit-dci/opencbdc-tx.

Two kinds of engines were tested. The single-order node engine Atomizer (order-preserving) can reach a peak value of 170,000 TPS; the parallel execution engine 2PC (order-preserving) can reach 1.7 million TPS.

In terms of architecture, it is similar to other central bank digital currency systems, drawing on the technical characteristics of blockchain and cryptocurrencies.

• A centralized transaction structure is adopted because the central bank can provide a strong premise of trust;
• Transactions are verified by private key signature;
• The user uses the currency through the wallet client;
• Referring to the UTXO model, the spent currency will be destroyed, and then a new currency will be created;
• Transaction verification and execution are decoupled, making it easier to expand.

The project is still at an early stage and the scenarios under consideration are very limited. The author believes that there is still a long way to go before it can be used on the ground.

Several major open issues at present:

• How is identity verification implemented? This still depends on the public-private key mechanism, which can be accelerated by specific hardware.
• How to monitor anti-money laundering? This may be handled offline in an extended manner.
• How is the audit granularity of identity and transaction data achieved? The main purpose is to allow different roles to see different granularities. This can be achieved through data isolation and encryption mechanisms.
• How is the currency issued? It can be directly exchanged to individuals, or it can be authorized by secondary commercial banks (the latter is adopted by the digital renminbi).
• How to integrate with the existing financial system? You can go through the transaction gateway, or simply not get through first, and go separately.

Summary

In fact, objectively speaking, under the premise of a centralized architecture, it is not difficult to implement a high-throughput trading system by using the existing software and hardware system. The difficulty is to support complex financial services, multi-transaction associations, and scalability, while taking into account conflicting requirements such as compliance, auditability, and privacy protection. These often require a lot of hands-on experience.

Decentralized Exchange

If you want to exchange between different digital assets, you need to go through intermediary channels such as exchanges.

The traditional exchange is a centralized model, that is, the two parties of the transaction exchange according to the exchange rate through the trading platform provided by the third party, and the trading platform side often needs to collect the handling fee from the transaction. This model is not only costly, but also has the risk of relying too much on the trading platform.

To solve these problems, Decentralized Exchange (DEX) was designed. The initial idea is to allow both parties to exchange directly peer-to-peer through a blockchain-based protocol. Since there is no need to participate in the trading platform, the transaction cost is low, and it can be completed in real time without worrying about security risks. Currently, decentralized exchanges are one of the hottest topics in decentralized finance.

To implement a decentralized exchange, some basic problems need to be solved:

• The transaction can be completed automatically without manual participation;
• No one can fake or deceive the other party during the transaction;
• Calculate the exchange rate automatically and complete the transaction according to the exchange rate;
• Avoid excessive market volatility and losses.

At present, decentralized exchanges mainly include three modes according to their order positions: on-chain bookkeeping, off-chain bookkeeping and automatic market makers.

On-chain accounting

The idea of ​​on-chain bookkeeping is very simple, and the exchange transactions are directly stored on the blockchain.

This mode is simple to implement, but has major flaws.

• Every transaction needs to be on the chain, and there will be billing fees. When transactions are frequent, the cost of bookkeeping is too high;
• All information needs to be recorded on the chain, which may benefit someone from knowing the transaction information in advance;
• When there are many transactions, the performance requirements of the blockchain are very high, and most public chains cannot support it.

Platforms adopting this scheme include Stellar and others.

Off-chain accounting

In contrast to on-chain bookkeeping, off-chain bookkeeping stores transactions on a third-party platform. Third-party platforms only write transactions to the blockchain when needed.

This method can avoid writing a large number of transactions to the blockchain, but it needs to rely on a third-party platform, and there is a high security risk.

Platforms that have adopted this solution include Binance and others.

Automated market maker

Similar to market makers in the securities market, smart contracts can be used to implement an automated market maker mechanism (AMM).

When users need to exchange currency, they do not directly trade with other users, but exchange with blockchain smart contracts.

Behind the smart contract, the exchange rate is calculated in real time according to its liquidity pool and pricing algorithm (such as reciprocal curve, straight line, etc.). A small fee is charged per transaction (e.g. Uniswap charges 0.3%).

This mechanism does not need to rely on transaction bookkeeping, transaction costs are generally low, and risks are small.

Users can also put the currency they hold into the liquidity pool according to the protocol and become a Liquidity Provider (LP). Liquidity providers can obtain benefits from transaction fees.

The main problem of this model is that the depth of the market depends on the liquidity pool, and it is necessary to balance the contradiction between LP income and transaction costs. At the same time, when the currency price fluctuates greatly, LP may incur Impermanent Loss.

Typical implementation protocols include Uniswap, Bancor, etc., and platforms include Chainlink, Kyber, etc.

From Digital Artwork to NFT

Over the past few years, digital artwork has explored the possibility of using NFT (Non Fungible Token), a new digital medium for asset transactions.

In the future, a large number of item transactions can be carried out in the form of NFT. In addition, NFTs can digitize asset ownership, making it easier to realize value more fully.

The emergence of NFT represents the urgent need for traders to switch from paper-based contracts to digital contract-based transactions.

Note: If you want to understand the ins and outs of web 3.0, you can read From web 1.0 to web 3.0.

Digital Art

Digital artwork refers to a set of data with certain artistic value generated by computer technology. Similar to traditional physically created artworks, digital artworks are considered unique and collectible. Since the transactions of digital art are mostly carried out through cryptocurrencies, it is also called CryptoArt.

Back in 1993, Hal Finney (also an early Bitcoin expert) discussed the idea of ​​a "crypto trading card" on the crypto forum Cypherpunks, possibly the earliest discussion of cryptographic artwork and NFTs.

Digital artwork mainly includes the following characteristics:

• Based on the blockchain platform, once the generation rules are determined, artworks cannot be issued or modified, nor can they be counterfeited;
• More use of cryptocurrency transactions, all records are publicly visible and can be effectively traced;
• After the user purchases, the ownership is recorded on the distributed ledger, which cannot be tampered with or faked;
• Art transactions are completed directly and immediately, and there is no traditional third party;
• Digital artwork itself is not scarce, and even easily copied, but its ownership is unique and recognized by the market.

In 2014, Robby Dermody, Adam Krellenstein, Ouziel Slama and others launched the Counterparty trading platform based on the Bitcoin network. The platform provides peer-to-peer financial transactions through the Metadata Token Protocol, supports the creation of tokens, decentralized asset transactions, and more. In September 2016, the "Rare Pepe" project was launched, becoming an early digital artwork.

On June 23, 2017, Larva Labs launched the CryptoPunks project. The project created 10,000 punk avatars, each as a unique 24x24 8-bit pixmap. Initially, the project was released for free on the Ethereum network, hoping to honor the spirit of punk. Later, with the publicity and participation of enthusiasts, the project attracted the attention of a large number of users and even investment institutions. It is still very active to this day, and the single price is often tens of thousands of dollars. In June 2021, Avatar No. 7523 sold for $11.8 million. CryptoPunks have unique cultural interest as collectibles and are considered to be the beginning of the later trend of encrypted digital art. Since then, Larva Labs has also developed Autoglyphs and Meebits projects, which have also attracted market attention.

On November 28, 2017, the Axiom Zen team (which later incubated Dapper Labs) launched the CryptoKitties game based on Ethereum trading. Each player can buy a digital cat with ether, breed offspring, and sell it. All records are publicly visible on the Ethereum network. Through this game, players can learn to master the basic usage of ether. The game was once very popular. The price of a single digital cat once exceeded 100,000 US dollars, and related transactions accounted for nearly 20% of the transaction traffic of the Ethereum network, causing transaction delays and blockages. The success of the game has also inspired many imitators. The ERC-721 standard that the project follows is widely adopted.

In April 2021, Yuga Labs launched the Bored Ape Yacht Club project on the Ethereum network, which includes 10,000 different ape portraits, generated by computers. Among them, the portrait numbered 8817 was auctioned for a high price of 3.4 million US dollars.

NFT

Although many NFTs are digital artworks at present, the connotation of NFTs is actually more extensive. Anything that can be circulated in the digital world can be considered an NFT. Including paintings, photography, music, books, games, etc.

NFT literally means non-fungible token. Traditional encrypted digital currency is homogeneous (Fungible Token), there is no difference between any two coins, can be replaced with each other, and can often be split into smaller units, such as Bitcoin. NFTs, on the other hand, are unique, cannot be replaced by other NFTs, and often cannot be divided into smaller units. For example, a painting NFT represents the painting itself and cannot be replaced by other NFTs.

At present, NFT products often have the following characteristics:

• not interchangeable;
• cannot be split into smaller units;
• Often only exists.

The non-homogeneous nature of NFT makes it easy to anchor to objects in the physical world, such as real estate, cars, collectibles, etc. The property rights of any real object can be tied to an NFT. Therefore, NFTs are considered to have great potential.

In 2020, with the massive issuance of sovereign currencies around the world, NFTs have begun to be more and more sought after. In 2021, the NFT project has ushered in a big explosion, so 2021 is also called "the first year of NFT" by many people. At present, most NFTs are traded through platforms such as Opensea, Rarible, and Nifty Gateway, and rely on the Ethereum network and IPFS for storage.

The emergence of the NFT idea is very natural, and its earliest prototype can be traced back to the Bitcoin-based ColoredCoin that appeared in 2012. Colored coins have color attributes, and colors can be used to represent different assets. This provides feasibility for real-world assets to be put on the chain.

But the Bitcoin network does not support smart contracts, limiting its expressiveness. The Ethereum network, which was launched in July 2015, strengthened its support for smart contracts, making the emergence of a large number of NFTs a reality. In particular, in September 2017, the ERC-721 specification was officially proposed and became the reference standard for a large number of NFTs based on Ethereum projects. This year, the encrypted cat project was launched, and the concept of non-fungible tokens was officially established. In 2018, the Ethereum community also proposed the ERC-1155 standard that supports batch transactions, which is currently supported by the trading market Rarible.

Sky Mavis developed the game Axie Infinity in 2018, which has since become one of the popular games on the Ethereum network. It supports players to trade virtual pets and land resources through NFT. At the same time, players can obtain points and exchange them by playing games. Some virtual pets cost as much as 300 ether (about $1 million).

In October 2020, Dapper Labs partnered with the NBA to launch the NBA Top Shot game project. It uploads the highlight video clips of a player in the game to the public chain Flow developed by Dapper Labs and makes it as an NFT product. After the NBA Top Shot project was launched, it attracted the participation of a large number of users. The total turnover has exceeded 200 million US dollars, and the NFT price of some products such as player LeBron James's slam dunk video once soared to 400,000 US dollars.

In addition, the British Museum, the Russian Hermitage Museum, etc. have also auctioned NFT products of world famous paintings.

In February 2021, Linkin Park (Linkin Park) band member Mike Shinoda released an NFT music composition on the platform Zora for a whopping $400,000.

In February 2021, digital artist Mike Winkelmann (aka Beeple) created 5,000 digital paintings "Everydays – The First 5000 Days" which took 13 and a half years from May 2007 to create a 316 MB image NFT. , sold at Christie's for a historic price of $69.34 million (42,329 ETH) to cryptocurrency investor Vignesh Sundaresan.

In April 2021, Centrifuge successfully secured a MakerDAO loan using the house as collateral.

In December 2021, the digital artist, codenamed Pak, will include 312,686 digital art collections, "The Merge," sold on digital art auction platform NiftyGateway to 28,983 buyers for a total of $91.8 million. This is also the most expensive NFT work at present.

Advantages of NFT

The use of NFTs for transactions includes the following advantages:

• Instant transaction: After the buyer and the seller reach a transaction from the platform and write it into the blockchain, the ownership of the NFT is transferred, and the transaction record is stored on the distributed ledger, which cannot be tampered with;
• Not easy to fake: Once the NFT product is confirmed, its transaction history will be completely recorded, and it is difficult for others to fake it;
• Improve efficiency: NFT-based transactions are processed automatically through smart contracts, and the processing efficiency is much higher than manual operations;
• Reduce costs: The handling fee of NFT platforms is usually much lower than the intermediary fee for real transactions, and reducing transaction costs can also promote the prosperity of the market.

Problems with NFTs

The rapid development of NFT has also led to the emergence of some problems:

• Auditing issues for NFTs: Before becoming an NFT and being traded, the platform or auditor needs to confirm the actual ownership of the bound items. Once there is a false property right situation, there needs to be a way to roll back, which puts forward new requirements for the current distributed ledger technology;
• The problem of rational return of the market: At present, excellent NFT products are very scarce, resulting in many products being hyped up with inflated prices after they are launched. Excessive prosperity in the early stages of the development of new things often leads to the rapid creation and bursting of bubbles. The trading platform should design a more rational auction mechanism and raise the threshold for participation.
• Interconnection between different platforms: NFTs based on different platforms often adopt different standards, and it is difficult to interconnect with each other, which limits the circulation of NFTs in the larger market.

Design and Management of Digital Token

NIST’s February 8301 report, “Blockchain Networks: Token Design and Management Overview,” specifically addressed issues related to digital tokens. There are several interesting topics that are worth thinking about.

The focus of future architecture

According to the mainstream design, the architecture is divided into 5 layers from bottom to top:

• Physical layer: Physical hardware. Including servers, network infrastructure, etc.;
• Network layer: A network that supports peer-to-peer network communication. Such as the Internet, enterprise network, etc.;
• Blockchain layer: The implementation of blockchain-related protocols. Including consensus, storage, smart contracts, etc.;
• Integration layer: An integrated application based on blockchain smart contracts. Such as middleware, offline computing storage, etc.;
• Interface Layer: User-facing interface. Such as data analysis, client applications, etc.

The bottom layer and the top layer are rich in research and practice, but the integration layer has strong definability and complex functions, and currently faces great challenges. In fact, in the traditional software architecture, the most important is the middleware layer. Only when the middle stability function is powerful can it effectively link the previous and the next.

At present, the industry does not have in-depth research on the middle layer, and there are not many problems in the traditional academic category. Only the open source community such as the Hyperledger community has begun some explorations on the basis of practice.

Token Definition and Classification

Explicitly defines a token as the data that the service can verify the data exchange with. It is classified into Blockchain-Based tokens (such as various NFTs and FTs) and Self-contained tokens (such as JWT).

The mainstream blockchain-based token implementation is the authentication data bound to the account. And accounts can be on-chain or off-chain (in client wallets). The implementation of Token can be native or contract-based; it can be a UTXO model or an account model; it can be split or non-split.

This actually implies that the digital currency will be taken out separately. After all, the digital currency has a greater significance in the currency, and the underlying realization is just the carrier. The current official digital currency is more about digitizing real currency than a certificate of circulation in the digital world that geeks envision.

Token exchange

Mainly through atomic swap (atomic swap). Unmanaged, the exchange is either fully implemented or will fall back to its original state. The implementation is mostly achieved through hash locks and time locks.

Atomic swaps can be within the same chain or across chains.

It relies heavily on the security of the contract.

Cross-chain support

Including two-way exchange or one-way transfer two scenarios. The implementation depends on the intermediate coordination system, or requires the support of contracts or agreements on both sides.

There is no practical solution for this yet, and further development is required.

The Ceiling of Civilization

The law of technological development

Perhaps you have ever thought about what is the process of the development of civilization? Sprout, grow like a tree, and eventually become a towering tree? Or is it just like picking up shellfish in a wild sea, purely by random luck?

In fact, it is more like climbing a tower of civilization. After each climb to a new layer (technological revolution), it takes hundreds or even tens of millions of years to explore and develop on this layer, and then stagnate. Until the opportunity appeared, a few wise men accidentally raised their heads and found the entrance to the upper floor.

Fortunately, over the past million years, we have been climbing upwards, and technology and civilization have also been advancing.

Unfortunately, we may have reached the very top of the Tower of Civilization.

The Illusion of the Tower of Civilization

Some people will say, no, technology is still progressing, and life will be better.

Indeed, with the fuller application of technology, the future of food may be more abundant, the environment may be cleaner, the working hours may be shorter...

However, within the same layer, no matter how the application of technology is deepened, the upper limit is fixed.

The Stone Age has developed for millions of years. Even if it were given millions of years, humans based on stone technology would not be able to build a rocket to fly to the moon. Similarly, we based on fossil energy, even if we develop further, until the sun goes out, we will not be able to leave the Milky Way.

If we don't continue to climb, although it seems that technology is still improving, as we approach the upper limit, the rate of development will become slower and slower.

Metaverse

Why hype the "metaverse"? Why put virtual reality, blockchain, cloud computing and other technologies together to give the virtual world a new name?

On the one hand, the capital market needs new concepts, and on the other hand, it is precisely because the development of modern technology has almost stagnated.

At the beginning of the twentieth century, with the breakthroughs in a series of basic sciences such as quantum mechanics, relativity, and genetic technology, the upper limit of human science and technology broke through to an unprecedented height. ability.

However, perhaps a few keen people have begun to realize that although new technological achievements are still emerging, from the perspective of technology as a whole, human civilization seems to have stagnated.

Where is the entrance to the upper tower? It is currently unknown.

A possible way of thinking is that since the progress of science and technology in reality is too slow, can we use the power of the virtual (digital) world? The biggest advantage of the virtual world is that its time flow rate (frequency) is different from that of the physical world, which allows calculations and experiments to be performed in the virtual world at a speed far exceeding that of the real world.

For example, after a thousand years of development and exploration in the virtual world, it may only be a year in the real world.

Opportunity or trap

So, is the Metaverse really the cure for technology? not necessarily.

Everything has two sides. The virtual world will be a brand new thing, and the current cognitive system will face great challenges. In the metaverse, everyone can be what you want to be and live the life you want.

Just like the world in The Matrix, at that time, how many people can still remember the original intention to return to reality? Will humanity as a whole sink completely and become a walking dead? That would be the biggest tragedy.

Future

There is a theory in astronomy: based on the conditions of a galaxy, the upper limit of the development of its civilization can be inferred. For example, a small galaxy with poor material is difficult to break through no matter how it develops. Innate conditions will lock the possibility of growth.

The solar system is running out of time for us.