An In-depth Understanding of DIGICCY

In our impression, digital currencies may be electronic currencies such as Bitcoin and Ethereum on certain trading platforms. In fact, the original intention of the creation of digital currency is not based on the emergence of current electronic currency. So, what exactly is digital currency? What exactly is the use of digital currency? Will it be able to circulate in society in the future? Today we’re going to talk about it.

First of all, we need to know why digital currency has emerged. With the development of computers, people’s communication efficiency is accelerated, but it also comes with a lot of problems, among which, personal information security and asset security are problems that people cannot avoid. Many hackers can wantonly tamper with people’s personal information as well as asset information, causing a lot of losses to people. At this time, people come up with the idea of having private rights to data and digital assets, because only when you have private rights, you have freedom, you have rights to privacy and profit. In order to realize these two kinds of liberty, a decentralized distributed database comes in handy.

What do we mean by distributed? For a simple example, we deposit our money in Bank A with a centralized database whose characteristic is that only Bank A can see your deposit information. If anything goes wrong with Bank A’s database which leads to the loss of your deposit data, but you only have the deposit slip in your hand and Bank A cannot find your deposit information, then you may not be able to receive the money back. Even if your deposit information with Bank A is still available, it will still have to go through Bank A’s lengthy process before the money is returned to you. Another Bank B, adopts a distributed database featuring that not only your deposit information, can be seen through Bank B but it is also completely perceivable to many other banks. In other words, even if Bank B has a problem with its database in the future, you can still see your deposit information at another bank and still get your money back from Bank B easily.

From the above example we can clearly see that the security of distributed data records is very high, and distribution is the essence of digital currency, so here we can understand the essence of digital currency. To be specific, there are three main characteristics of digital currencies. The first is non-legal and borderless currency, that is, the denationalization of currency. The second is that the Bitcoin network is a decentralized distributed network and a borderless bank transfer as well as a payment system. The third is that the emergence of Bitcoin implies a non-nationalized, super-sovereign currency and an attempt at a borderless financial system.

Since the security of digital currency is so high, is it possible that it could become a new generation of world currency? The answer is that there is a possibility, but it is immature now and there are many problems that need to be solved. The first problem is the credit issue. The U.S. dollar, British pound, and Chinese yuan in circulation in the world are issued by various sovereign countries. With the credit of each country as collateral, the possibility of default is almost zero, so people are very confident in using them. However, the digital currency has not established such a credit system and people’s sense of trust is a major problem. It takes a long time to be recognized in a country, let alone circulate in every country in the world without discrimination.

The second issue is that of price stability. Now as long as it is a sovereign currency, the value of the currency is relatively stable. You might say that the exchange rate also fluctuates. However, although the exchange rate does fluctuate, the fluctuation is generally relatively small. That is because central banks use securities, bonds and foreign exchange as reserve assets to issue currency. When the currency price falls or rises, they recover and release the local currency by buying and selling securities, Treasury bonds, foreign exchange reserves and other assets to maintain the stability of the local currency price. It is also this stability that people like to use and are willing to use. However, the current digital currency cannot solve the problem of currency stability. Anyone who has ever traded Bitcoin knows that the volatility range is very large and it is not stable at all.

The third problem is the efficiency of digital currency distributed data calculation. One of the reasons why centralized databases are so popular in the market, in addition to strong centralization, is that the algorithm is highly efficient and progressive. However, in contrast to the distributed data algorithm of digital currency, it is very troublesome to calculate and requires a lot of arithmetic power, which is afraid to be difficult to maintain at the current computer level.

In spite of the above three problems of digital currency, it is not impossible to solve. Some time ago, Facebook’s stable currency Libra is the closest to the prototype of digital currency. Libra adopts the advantages of super nodes of Enterprise Operation System and and combines the modern monetary system with a basket of currencies as reserve assets, which is a relatively complete digital currency contract. Libra is initially collateralized by a basket of low volatility assets denominated in four fiat currencies, that are the U.S. dollar, British pound, euro and Japanese yen (and possibly the Singapore dollar). Libra can maintain its price stability by buying and selling U.S. dollars and U.S. bonds. In this way, Libra has the conditions to fulfill its currency contract and become a real currency.

However, as it stands, Libra has neither solved the problem of algorithmic efficiency common to digital currencies, but does it appear to have moved the dollar’s cheese and been boycotted by the U.S. government, so its prospects are non-committal.