Conversation with Hu Dinghe: From Bitcoin to the Metaverse

Editor's note:

Since its inception, Bitcoin has had a profound impact on the global digital economy: on the one hand, it has spawned a complex cryptocurrency market; on the other hand, it has spawned an all-encompassing blockchain technology system. They have created new business models and are also “absorbed” by traditional finance and industry. New ecosystems such as the metaverse and AIGC can also be seamlessly connected to them.

Scholar Hu Dinghe studied in depth during his visit to Harvard University and wrote “The Time of the Storm on Bitcoin”. Editorial board member Bai Liang of this magazine and Mr. Hu Dinghe had a conversation about the development and future trends of Bitcoin over ten years; at the same time, we have excerpted the chapter “Bitcoin 2022” for the benefit of readers.

As stated in the book's introduction, “Bitcoin is an economic phenomenon; it itself is still growing and evolving, and so are the questions and answers.” Bitcoin and the virtual currency market derived from it are still in the early stages of development, and different countries and regions around the world face different regulatory rules. The contents of this book and this conversation are all opinions and family comments, and do not involve any investment suggestions.

01

Bitcoin didn't come about by accident

Bai Liang: You have studied the development process of Bitcoin since its inception and wrote the book “A Time in the Wind”. A “turbulent event” means that Bitcoin did not appear by chance, but rather the result of various factors such as society, economy, and technology. What do you think were the conditions that led to the birth of Bitcoin? Was it a coincidence or a necessity?

Hu Dinghe: I do believe that the emergence of Bitcoin was not an accident, but an inevitable result of social, economic, and technological factors.

From an economic point of view, in 1976, Hayek officially proposed the denationalization of money, believing that only by denationalizing the currency can control the amount of money issued and prevent artificial depreciation of the currency.

He believes that inflation is caused by the country controlling the amount of currency issued, and is unavoidable, even in Europe and America.

In reality, currency issuance in Europe and America is not something that can be decided unilaterally by the government; it also requires various institutions such as the parliament and central bank to play, control, and consult with each other before making a decision.

However, Hayek believes that even so, as long as the currency is controlled by the country, it will inevitably be overissued.

In fact, the same is true. The amount of British pounds and dollars has increased greatly in the past 100 years, and as a result, they have all depreciated very much. The dollar's purchasing power is probably only about 3.87% of what it was 100 years ago.

In terms of technology, Bitcoin is the result of the co-evolution of multiple technologies.

In 1981, the hash chain data was continuously complete, and the predecessor of blockchain technology began to appear.

In 1982, an untraceable cryptographic online payment system appeared again.

In 1991 and 1992, private keys and proof of work mechanisms appeared.

In 1998, an experiment with distributed digital currency appeared.

In 2001, the SHA256 algorithm, or secure hashing algorithm, appeared.

In 2008, after the global financial crisis caused inflation, “Satoshi Nakamoto” sent an email. He believed that in order to solve the inflation caused by the financial crisis, it was necessary to create a decentralized currency, a currency with peer-to-peer payments. This is Bitcoin.

He believes that only a currency such as Bitcoin, which has no center, no authority, and no third party guarantees, but can also establish a trustworthy mechanism, can solve the inflation caused by the financial crisis.

I think this is an inevitable result of the development and application of the concept of a market economy to digital currencies.

The great Adam Smith founded Market Economics. Theoretically, the production and sale of products are all completed through a completely competitive market. However, in terms of currency, it is still up to the country to control it, issue it by the country, and increase the credit of the authorities.

I think in fact, currency is also a special product. Like other products, it can also be distributed and used through market competition, so that everyone can freely choose.

If we think that an enterprise or product is completely controlled by a state-owned company, and that it is better to use market competition to do better, then currency may also achieve optimal choices through market competition, bringing maximum benefits to society. Bitcoin is a completely market-based currency, while fiat currency is controlled by the state.

Thank you for the interview with me today. It may also be considered a lackluster hair. Suddenly I changed my mind and my mind was lit up:

If the market economy may gradually replace the planned economy, why can't the market currency compete with the planned currency (that is, fiat currency)? Think about how convenient WeChat and Alipay have brought! Competition will inevitably lead to optimization, leading to the maximization of human social welfare.

In the spring of 1992, Comrade Xiaoping fearlessly and shockingly proposed a socialist market economy, making a name for a vibrant market economy. Now, can't we realistically think and discuss the issues of market currency and digital currency as reforms deepen?

02

Bitcoin is hard to manipulate

Bai Liang: What stimulates market nerves the most is its price fluctuation, and what is most criticized is price fluctuation, ups and downs, ups and downs. Judging from your research, what are the main factors affecting Bitcoin's price fluctuations, and what are the core factors? Many people think that Bitcoin's price is highly manipulative. What do you think?

Hu Dinghe: Bitcoin has indeed fluctuated very drastically since its inception. There are several basic reasons:

First, it has only been more than 10 years since its inception. It has developed rapidly. At the beginning, it was very small in size and had a very small market value. It was like a small sampan in the ocean. It must have a lot of ups and downs, and it cannot withstand big waves.

As Bitcoin gradually becomes recognized by society and more people, its market capitalization will gradually increase, and its volatility will decrease. Once it becomes an aircraft carrier, its ups and downs will naturally iron out. In fact, after a few “halving” cycles of Bitcoin, the volatility has gradually decreased.

Second, Bitcoin is traded globally 24 hours a day, 365 days a year. Unlike the stock market, which can only be traded on weekdays and specific hours a week, there are border restrictions.

It's also easy to open a Bitcoin account; its target can be said to be a global exchange. If you use it as a currency, you can think of it as a reference to global GDP.

Third, the “four-year halving” mechanism of Bitcoin mining will also affect the price. In response to the “halving cycle,” it will have a peak and a trough. Meanwhile, it was also affected by various news, such as March 12, 2020, when the COVID-19 pandemic and countries closed down one after another. Oil, the US dollar, US stocks, and US debt plummeted, and Bitcoin plummeted along with it.

But it plummeted, and no one interfered. US stocks and US debt have plummeted, and the government can intervene, such as a fusing mechanism. Bitcoin will rise and fall even more if no one interferes.

Fourth, the government's attitude towards Bitcoin will also affect the Bitcoin price. For example, government regulations, crackdown on Bitcoin transactions, closure of mining farms, etc., or some countries support and encourage Bitcoin transactions, all affect market prices.

Fifth, on whether the price of Bitcoin is being manipulated. Bitcoin's price manipulation theories and even conspiracy theories have always been popular, and there are various versions.

I think with Bitcoin's current market capitalization, price manipulation is difficult.

Bitcoin holdings are not concentrated, and almost none hold more than 5%, or more than 1 million. It is said that Satoshi Nakamoto had a large amount of bitcoins he mined in the early days, but it hasn't moved. This can be seen from the chain. Currently, there are very few that own more than 1%, that is, 200,000 or more, and it is very difficult to manipulate prices.

Some large exchanges may have brief and fueled manipulations, such as exchange contract bursts. However, they often “follow the trend”. For example, when the market plummets, they follow the trend and smash prices even lower, use pins to lower prices, and pick up omissions themselves. Manipulation against the trend is unlikely.

If anyone actually wants to manipulate the market, he should be more willing to manipulate “small-cap stocks,” such as altcoins, rather than manipulating a large market worth trillions of dollars, such as fighting fires with a salary and nothing at all. That can be said to be impossible and foolish.

Conspiracy theories don't fit the current size of Bitcoin.

03

Blockchain is more valuable in the metaverse

Bai Liang: A complete “blockchain technology framework” was born out of Bitcoin. With the development of Bitcoin, blockchain rapidly expanded and penetrated all aspects as a category of technology. What do you think are the characteristics of blockchain technology? What kind of changes will it bring? What aspects will its market value and social value be reflected in?

Hu Dinghe: If Bitcoin is a chicken, blockchain is an egg. The fundamental characteristic of blockchain technology is the mathematical consensus it has generated.

The consensus we have reached in the past was a human consensus, such as what the emperor said, what the parliament said, and how the courts decided. These are all human agreements; there may be errors, deviations, or even conspiracies.

Mathematical consensus cannot be governed, and it cannot be biased. The mathematical consensus brought about by blockchain technology is mainly reflected in characteristics such as distributed ledgers, immutability, and traceability. The most important thing is to confirm the uniqueness of digital assets.

From 2018 to 2019, when I first started studying Bitcoin and blockchain, I felt very confused. I thought this technology was very good and had a huge impact, but what use is blockchain? What is Bitcoin good for? What is Ethereum used for? It's like playing a game yourself.

However, in the second half of 2020, the “metaverse” came out of nowhere, and Facebook changed its name to META, I discovered that Bitcoin and blockchain are the most useful and provide a stage for the metaverse. The metaverse requires blockchain as a technical foundation, because the metaverse requires credible digital authorization.

The market value and social value of blockchain technology will be mainly reflected in the metaverse, building a more credible social system, and transforming our lives from carbon-based to silicon-based.

With the development of AI, humans will be “humanized”. After the human body is implanted with a chip, the integration of humans and robots will make blockchain technology even more important.

04

Bitcoin will become more mainstream

Bai Liang: In terms of price, Bitcoin has been in a “bear market” for the past two years. Where do you think the future of Bitcoin is? What is its likely role in the future socioeconomy? Will it become a mainstream financial asset?

Hu Dinghe: The future of Bitcoin, I think, is digital gold; it will become a mainstream digital asset.

Some countries have now begun to accept Bitcoin as fiat currency, and the Bank for International Settlements also proposed allowing banks to hold 2% of their cryptocurrency reserves in a December 2022 consultation document.

I think in the future, it is possible that central banks in various countries will gradually adopt Bitcoin in their reserve assets. Currently, the most reliable asset in central bank reserves is gold, which is produced through physical mining and gold mining. Bitcoins are obtained through mathematical algorithms and digital mining operations.

Bitcoin is a perfect digital asset, and I compared the advantages and disadvantages of Bitcoin and gold in “Fury Bitcoin.” Bitcoin will become a mainstream financial asset in the future, and even Bitcoin's total market value will have a comparable correlation with global GDP.

As mining generates fewer and fewer incremental bitcoins, its price fluctuation may also become minimal, and its market capitalization is relatively stable. Moreover, each Bitcoin will be subdivided into 100 million Satoshi, so it may become a payment tool. If you buy a bottle of soda and two Satoshi buy a hamburger, it becomes a universal world currency. I think it's possible.

05

Blockchain is a metaverse

“Production relationships”

Bai Liang: Today, technologies such as big data, artificial intelligence, and the industrial Internet are changing rapidly. In particular, the recent breakthrough in ChatGPT has shocked the world. What role do you think blockchain technology will play in the future technology system?

Hu Dinghe: Blockchain will mainly play a role similar to a production relationship in the future technology system. The main thing is to confirm authority and establish mathematical consensus. In the future metaverse digital world, the decentralization and uniqueness of identity authentication is very important.

Although the current identity authentication system is perfect, there are still problems such as forgery and multiple identities.

Assets have value only when rights have been confirmed. For example, the value of a commercial house and a small property house is not the same.

This is especially true of digital assets. If our own data, such as our medical records, genes, etc., is sold to others by the hospital without confirmation, we cannot control it, and it has no value to us. If the authority is confirmed through the blockchain, who wants to use this data must obtain our consent, and we can bargain with him through the market.

After authorization is confirmed through blockchain, our creations, such as music and painting, may generate many seemingly small business opportunities in the process of being used. These small opportunities can be automatically authorized, priced, and traded through tokens to achieve value and promote innovation.

06

Web3 will take the world by storm

Bai Liang: Major countries are promoting central bank digital currencies. It should be said that the current round of central bank digital currency promotion has certain roots with the development of Bitcoin, and has even adopted some technical models in Bitcoin. What will be the relationship between central bank digital currency and virtual currencies such as Bitcoin in the future economy and market?

Hu Dinghe: Bitcoin is a natural digital asset or digital currency that circulates globally. If humans migrate to outer space, Bitcoin can circulate interstellar.

Central bank digital currencies may mainly circulate domestically. There are border restrictions, and cross-border circulation will also be affected by sovereign countries' monetary policies.

The central bank's digital currency will also be used in the metaverse. How many people can recognize it also depends on the country's strength, convertibility, convenience, etc.

Once 80% of the world's Bitcoin mining was in China, China also had 80% of small hydropower plants in Sichuan and Yunnan. The National Development and Reform Commission also listed Bitcoin mining on the list of supported industries in 2019, but only two years later, in 2021, it was completely banned. In 2022, Zhejiang, Inner Mongolia, Sichuan, etc. relaxed the ban slightly after drastically raising electricity prices.

I think the reason why the government is shaky is that it is fully aware of blockchain technology — the benefits of this egg, but they think Bitcoin is not easy to control, and it has also created black holes such as money laundering and tax evasion.

However, on the other hand, Sichuan, Yunnan, etc. lose tens of billions of dollars of hydraulic energy every year in summer, and a large amount of mining sites, computing power chips, etc. are also idle. Bitcoin mining talents, equipment have been exported, and large nodes have been handed over to the US, etc.

In fact, the Sichuan and Yunnan governments should apply to the central government to restart mining under reasonable taxation, so that the major Bitcoin mining nodes can return to China, which is beneficial to taxation, employment, and people's wealth.

At the same time, we should also see that Bitcoin's settlement network is decentralized and not controlled by the US.

Should the US blatantly shut down the SWIFT system for international settlement to us in the future, our transactions with the outside world will also be able to use Web3 settlement systems based on Bitcoin and blockchain. America sees nothing to do; we can't shut ourselves down by choking to waste food.

In this sense, our central bank reserves should also explore, discuss, and study Bitcoin.

The Prophet Mohammed was not the last to have no choice but to admit reality, bravely, and smartly: “If a mountain doesn't come to me, I'll go to the mountain.”

After all, majestic mountains stand there.

Isn't it?

Bai Liang: The current development of Web3 is also largely due to Bitcoin and the decentralized economy derived from it. Do you think the various new economic models currently being “promoted” by Web3 have a future? How will the development of Web3 affect Bitcoin?

Hu Dinghe: Web3 is actually a new Internet or a more advanced Internet. It has blockchain technology as the foundation to confirm digital assets. It is an Internet of value. It is not only the circulation of information, it can also bring about the circulation of value.

The metaverse is a digital world based on Web3. In addition to being Web3, it is also a complete digital world, including the economy, society, various legal relationships, etc.

Web3 definitely has a future. Just as the Internet soon became popular around the world, Web3 will definitely become popular in the world soon.

Blockchain has laid the foundation for the development of Web3, and Web3 has also provided a broad stage for Bitcoin. Blockchain is the core technology of Web3, and Bitcoin is definitely a common currency in Web3. Other digital currencies, including the digital yuan, may also be commonly used on Web3.

Bai Liang: In the development of the metaverse, many people think that blockchain and non-central currency are essential elements of the metaverse. What is your opinion?

Hu Dinghe: The metaverse is a sustainable digital world. Blockchain is its foundation. Without blockchain to confirm authority, the metaverse cannot develop. Blockchain and digital currency are essential conditions for the metaverse, because the transfer of value in the metaverse can only rely on digital currencies, reliable digital currencies, and digital currencies that everyone is willing to accept.

I had a discussion with a Tsinghua teacher yesterday. He believes that Bitcoin cannot succeed. He said that if all bitcoins succeed, then each of us can issue money. My answer: Yes, everyone may be able to send money, but whether others accept it or how widely they accept it is another story.

In the metaverse, Bitcoin is widely used as a mainstream digital currency. It will be the foundation for all value anchoring, and even far surpass the role of gold in the real world.

The computing power required for a vast metaverse with thousands of meteors will be an astronomical number. Due to the high degree of decentralization and lack of authority maintained by the country, military, elections, courts, government, etc., various DAO systems and Meta may also clash with the metaverse of Microsoft, Nvidia, and Tencent.

How can consensus be reached, and a fundamental consensus on the metaverse?

If our consensus in the real physical world depends on laws and governments at all levels, and the international community relies on the United Nations, international law, international organizations, and even gold and dollars, then the metaverse in the pure mathematical digital world may only rely on distributed consensus reached by computing power.

Where is the original and most solid source of this consensus?

The sky falls to Sri Lanka. Currently, it seems that only Bitcoin, whose entire network's computing power has exceeded 22,000 trillion hash collisions per second, and the computing power is still rapidly increasing day by day as fast as Wanzogang. In this sense, unattainable and impenetrable barriers to computing power are protective walls and protective nets in the digital age.

Currently, it seems that Bitcoin's computing power is large, and the world may only be able to gather more than 51% of the computing power of Bitcoin's entire network and be able to break through with the combined efforts of China and the US. (It is said that tens of thousands of the world's most advanced supercomputing computers need to be concentrated)

However, the result of the breach may have been the collapse of digital consensus. The value of Bitcoin dropped sharply, and the attackers spent a huge amount of money, but got nothing.

Seen from another perspective, if the attackers break Bitcoin by more than 51% of their computing power, as the old legend says: “If a teenager slays a dragon, the result is its own dragon.” In other words, whoever destroys Bitcoin becomes Bitcoin.

The so-called follow the longest chain principle. According to the principles of honest chain and attack chain rollback coverage in the Bitcoin white paper, the included block chain lock mechanism can reduce the possibility of an attack to an infinite extent.

At the same time, once the attack chain succeeds, it is automatically transformed into an honest chain, automatically followed, and becomes the longest chain. However, if the original honest chain were to catch up with the longest chain, it instead became an attack chain. Each successful attack forms a stronger chain, increasing the difficulty of the next attack (starting again from the current one).

So in theory, Bitcoin follows the strongest computing power. Whoever is the strongest is Bitcoin, and whoever attacks themselves again will need to rebuild a stronger self and fall into an infinite cycle.

From this perspective, I believe that Bitcoin will become the “guiding principle” of the metaverse.

Qu Yuan, who complained more than 2,000 years ago, definitely wouldn't have anticipated today's unbelievable human entropy reduction journey. When he was young, he also sang in “Chu Ci: The Great Trick” with great passion:

“Thanks to youth, Bai Rizhao is only full of spring energy, everything is limited”

It means that spring falls alternately in the four seasons. The sun is so bright and brilliant. The spirit of spring is flourishing, and everything is prosperous and growing rapidly.

Fengyun Jihui's Bitcoin has been booming for 14 years, and the long road of rapid growth is unfolding ahead.

07

Open source in the US, open in China

Bai Liang: During your study at Harvard, you systematically studied the development of digital finance in China and the US. What do you think are the main differences between the two? Will the future be more and more diverse, or will it gradually move towards integration?

Hu Dinghe: While a visiting scholar at Harvard University, I did a lot of research on the development of digital finance in China and the US. I also attended several digital finance forums organized in New York, San Francisco, etc., and gave lectures at Harvard University and MIT.

Americans focus on basic research, innovative research, and are open source. For example, the open source software movement originated in the US. It's not afraid of you imitating it. The originator of electric cars was Tesla. As soon as Tesla came out, it was open source and published its patents. They didn't even apply for patents for many of the technologies, so they weren't afraid to imitate them.

China has a large population, imitation and learning quickly, and is more focused on market applications. For example, in terms of digital payments, China is ahead of the US, Japan, and Europe.

After the advent of Bitcoin, Satoshi Nakamoto originally intended to be mined using a computer, and the distribution would be more average, but the Chinese soon understood and immediately mass-produced special mining machines to mine using mining machines.

Due to the cheap hydropower in western Sichuan, Chengdu was once the center of global mining. It is said that there was a time when more than 50% of bitcoins were generated near Chengdu, especially in summer.

As we continue to reform and open up, the digital finance gap between China and the US will become smaller and gradually integrated.

Bai Liang: The current regulation of the virtual currency market in mainland China is very different from overseas. How can China and foreign countries be better connected?

Hu Dinghe: To connect, the best way is to open up, seek truth from facts, face up to reality, and face up to the world we are currently facing.

Twenty years ago, I was the Vice Minister of Propaganda in the Ningxia Autonomous Region. At that time, the dissemination of information was mainly tree-like. For example, the central government published a message, published through “People's Daily,” then reprinted by “Ningxia Daily,” then reprinted by “Yinchuan Daily,” and so on, spread in the form of a tree.

The Internet is a two-dimensional network-like transmission. Digital currency is a three-dimensional four-dimensional network transmission across time and space. It is a product of an open source network, and it is difficult to manage like tree communication.

A few thousand years ago, Daewoo discovered a treasure book that is better than blocking water. More openness, more communication, more communication, more guidance, and more innovation are far better than searching for gaps and filling gaps like running errands and fighting fires, and can only be more conducive to economic development.