the Dual Engine Drive and “Tokenization” of Financial Contracts

This article explores the framework design of the Huobi Financial Public Chain and how to design a safe, fair and efficient financial public chain. The article starts from the “Trust Crisis” faced by existing exchanges, as well as the advantages and disadvantages of the “decentralized exchange” solutions. Drawing inspiration from these solutions, we will see how to establish the foundation of the token economy and build a new financial ecology based on the public chain.

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Introduction: the “Gray Area” of Digital Currency Exchanges

An exchange is a platform for trading information or items, bringing together the buyer and the seller to make a deal. Since it is an information trading platform, the information provided by both parties should be accurate and transparent so as to guarantee the authority and fairness of the platform.

However, there are a number of untrustworthy exchanges in the crypto world. False transactions and runaway exchanges are not uncommon. Those “malformed tokens” are jeopardizing “well-formed” tokens and poisoning the blockchain world step-by-step.

1. Are Centralized Exchanges “Credible”?

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【 MT.Gox Mystery 】

In February 2014, the MT.Gox Exchange in Japan collapsed, taking almost 80% of the Bitcoin transactions active at that time. The collapse was publicized on its webpage: All the transactions were terminated. Mt. Gox subsequently filed for bankruptcy. They claimed to have been hacked and that a total of 744,000 Bitcoins were stolen. This stolen amount has not since been recovered. In terms of the current Bitcoin price, 750,000 Bitcoins are worth about $2.2 billion dollars!

The “MT.Gox incident” shocked the world. After the incident, the price of Bitcoin plummeted. At the same time, a large number of users chose the rough road and fought for justice. They went to the front gate of MT. Gox to complain and went to the Tokyo court to sue, but most were unable to get back their Bitcoins or get compensation.

[w2]https://en.wikipedia.org/wiki/Mt._Gox

The event had a great impact on Bitcoin and the blockchain ecosystem. People’s trust in Bitcoin and exchanges fell sharply all of sudden. People within and without the community questioned the decentralization concept of blockchain, bring an overcast atmosphere to the whole industry.

There were no clear explanations for the theft and opinions varied. MT. Gox claimed the loss was due to hacking, while others claimed that the exchange itself stole the money and sold the coins to other trading platforms. Whatever the reason, it is an indisputable fact that the Bitcoin owners suffered a great loss. The trust of users in the centralized exchanges fell to freezing. The price of BTC plunged and the market was badly hurt.

[The Mourning of Modern Exchanges]

There are still many problems with centralized exchanges. Some centralized exchanges are suspected of arbitrarily moving user funds. Even when these employ a 100% margin (security deposit) mechanism, it is still difficult to prove their innocence. Some centralized exchanges are suspected of issuing virtual tokens to manipulate the market — transaction data cannot be made transparent, and it is difficult to judge whether it is fraudulent.

In some extreme cases, centralized exchanges can be forced to roll back transactions. But no matter what the reason, the rollback must have involved the redistribution of benefits, which will cause harm to some users.

There are more types of problem connected to centralized exchanges. The opaque data, the unequal platform, and the lack of effective supervision are just like a time bomb that can explode at any time. There are tragedies caused by external reasons and there are also those triggered by ulterior motives. Users can only blindly believe that the bigger the exchange, the less it will deceive the user, the less chance it will play under the table and the less likely it will run away.

But are you willing to believe the world of capital?

In order to resist this kind of opaque and unfair centralized exchange and to provide everyone a clean “transaction environment”, many projects have launched “decentralized exchanges”, including Loopring (LRC), Cybex, etc. In each case part of the plan is to solve the “trust” problem.

But is the decentralized exchange really an elixir for the industry?

2. Decentralized Exchange Solutions: Perhaps too Great a Sacrifice?

In order to solve the trust problem of the exchanges, EtherDelta has been trying decentralized transactions for 16 years. Omesigo and Kyber Network also joined this initiative, and Vitalik acted as a consultant to the latter. Cybex, led by Prince Gong, was also committed to decentralized exchange. The idea of a decentralized exchange is to make transactions transparent and credible.

However, this is based on a substantial sacrifice of liquidity. With the lack of a centralized trading exchange, flexibility will be greatly reduced, and the market is difficult to scale up.

Stocks and other trading markets have very mature mechanisms and prove that centralized dispatching efficiency is much higher than that in C2C trading markets–this efficiency means liquidity.

The earliest trading of Wall Street was also direct trading between people. However, with the development of technology and the improvement of financial instruments, with standardized supervision, the market capacity was rationally increased through various market-making methods, allowing high frequency trading, global arbitrage, etc. It is possible to quantify transactions and to continue to use the power of capital to continuously upgrade industrial value.

Therefore, we can still argue that the “trust problem” is difficult to solve in decentralized exchanges–the financial public chain will instead be the trend in the future. We need to solve the problem of centralized trading, and use the technology of blockchain to make the operation equally fair. That leads us to the financial public chain, rather than to a return to the original stage of peer-to-peer and person-to-person.

Let’s outline the vision of the financial public chain, starting with trading,

“Tokenization” of the financial contract begins with the development of the Huobi eco-business.

The main purpose of the Huobi Ecology is to ensure the safety of assets in a fair manner, while at the same time giving full play to the power of capital. For the generation, circulation, confirmation, and notarization of various assets and warrants, it is desirable to record these in the chain and provide a public system that is open, transparent, immutable, trustworthy and ready to be audited.

In order to achieve this vision, there are three things that need to be put online specifically.

1. Transaction Information Represented by the Huobi Global Station

For each asset, one of the main ports of liquidity is the exchange. The starting point of the vision of the financial public chain is naturally the exchange. The transaction information going on the chain can provide a fair and transparent stage for all participants. The operation of the centralized exchange also maintains the advantages of centralized exchange efficiency and liquidity.

2. Huobi’s Business

The existing business of Huobi can also move onto the chain, optimize their business processes, and be more fair and transparent, such as ‘Super Node’ voting, Huobi Pool, Huobi Capital and Huobi Labs. The business is based on smart contracts, and some businesses can be regarded as based on Huobi. The DApp of the financial public chain needs to be explored combined with the Huobi ecosystem.

I believe that everyone is already very familiar with the trading and overall ecosystem, and various discussions have emerged in an endless stream, so I want to focus on the next part: tokenization of financial contracts.

3. Unlimited Imagination, Tokenization of Financial Contracts

I believe that the mission and vision of the Huobi financial public chain is far more than the first two steps, but with transaction as the starting point, next comes the development of the Huobi ecosystem and the tokenization of financial contracts, to apply the existing mainstream mature financial model to the blockchain token economy.

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So far, the main mode of the token economy in finance is financing and increasing market liquidity, and this is only a small area in the financial sector. In the future, there will be more and more financial models, such as:

a. Apply the mutual conversion mechanism of debt and shares to the token economy, avoiding the founding team to increase the available funds of the Foundation by selling the team, community funds or other portions of the tokens.

b. Combine financial leasing and operating leasing, for example, to obtain hardware resources such as nodes and bandwidth required for public chain layout, thereby reducing one-time investment in initial capital of equipment assets, increasing capital liquidity, reflecting the team’s operational strength and transforming the business model into actual value.

c. Introduce token swaps and private placement to token economy model through mergers and acquisitions, focusing on effective capital and avoiding waste of resources so as to increase the strategic cooperation between projects, and effectively promote the development of the industry.

d. Asset-Backed Securities (abs). In traditional finance, banks or insurance companies will package their debts into bonds for sale, so that they can continuously increase liquidity. In the token economy, the public capital of Huobi can provide high security. The securities are packaged into tokens for sale and continue to improve the liquidity of the token.

There are also many types of financial models that are applicable to the token economy. The main purpose of tokenization is to improve the liquidity of funds.

At present, the liquidity of the project is very limited. It only depends on the primary and secondary markets. The project is forced by the community pressure to carry out further rounds of financing after being listed on exchanges, and there is no other way to increase operational resources. Liquidity is mainly concentrated in the capital side, and it is not directly and effectively reflected in the long-term development of the project. On the other hand, the increasing liquidity of assets will also allow more capital parties and project parties to enter the market and jointly build a blockchain ecosystem.

The implementation of tokenization of financial contracts will mean that the blockchain industry will have evolved from barbaric growth to a mature system, which is more standardized and more efficient. The traditional financial world has had hundreds of years to explore the rules of financial technology. Let us expect this day to come early, maybe ten years, maybe three years.

Chapter 2：Framework Design and Milestone Prospects of the Huobi Financial Public Chain

1. Analysis of the Performance of Financial Public Chains

As has been previously discussed, to tokenize the financial contract in order to develop Huobi’s business is a matter of taking transactions as a starting point. The first step is to put transactions onchain and the second is to put financial contracts onchain.

If the public chain can be likened to a highway, then a transaction is equivalent to a car, and the necessary speed is extremely fast. The financial contract is equivalent to a heavy truck, and is more complex. But both have extremely high requirements for security.

Any distributed system needs to meet the CAP theorem: Consistence, Availability and Partition Tolerance. These typically cannot achieve optimal conditions at the same time. As a kind of distributed system, the blockchain must also comply with the CAP. In fact, there is a more straightforward principle that applies to the blockchain. It is impossible to overcome the ‘trilemma’ problem: between decentralization, security, and efficiency/ scalability, one cannot increase all three together.

Many people have a misunderstanding about public chains, that is, the higher the degree of decentralization, the better.

In fact, decentralization is only one means to ensure the credibility of the system: The consensus mechanism does not need to trust every node, but the cost of doing evil should be higher than the benefit of respecting the rules, so the whole network is credible.

You can achieve the same goal without a full-node consensus, such as via the DPoS mechanism used by Bitshare and EOS (101 and 21 super nodes are generated by voting respectively). Genaro uses the storage network to filter nodes, retaining 101 committee nodes.

In order to meet the needs of trading on the chain, one not only needs to be as efficient as traditional financial transactions, security is also very important. We need to sacrifice a degree of decentralization to meet, for example, using a small number of highly configured committee nodes to generate and verify transactions.

In order to meet the needs of financial contracts, speed is not so important, and a certain degree of decentralized verification can be added to ensure the fairness of the results. For example, it is necessary to increase the number of committee nodes to perform more rounds of verification.

From this we can see that on the one hand, we need a very high TPS for trading. On the other hand, we need extremely high security to contractually update the chain. If we can’t choose, how to break the dilemma?

1. Huobi Financial Public Chain Design Framework

For the different needs of trading and financial contracts, we can refer to the design of a highway:

The leftmost carpool lane is a fast lane. A carpool lane requires at least two people in the car to make more use of the lane resources. Similarly, we need to package and verify multiple transaction records, which is the off-chain solution.

The rightmost truck lane needs a speed limit to avoid car accidents. Similarly, we also need to give sufficient time for large financial contract verification.

The vehicle can change lane and ordinary transactions need to be linked and settled with financial contracts. Similarly, we also need some kind of protocol to connect the two.

Therefore, we proposed a “double-chain” structure for this financial public chain. Two public chains are needed, one focusing on scalability for recording transactions, one focusing on security and running financial contracts. We use cross-chain protocols to connect them.

Let us temporarily name them as follows:

H Exchange Chain: The Exchange Chain only records large and fast transactions, and does not need to support smart contracts for the time being. For special functions related to transactions, we can implement them through special transactions. At the same time, we use DPoS consensus and chain expansion to improve efficiency.

H Contract Chain: The Contract Chain is for recording the part of the smart contract that consumes a large amount of resources. We can use Wasm to do the VM part. The main function is to integrate more parts of traditional finance into the contract chain. Relatively speaking, it does not require a lot of concurrency, and the consensus mechanism has more choices, such as a secure PoW (of course, the Genaro team put forward the concept of a sustainable consensus mechanism, we still hope to find a business-related effective calculation to replace PoW and do a safe calculation at the same time).

H Protocol: A cross-chain protocol that can be changed according to the GSIOP (Genaro Streaming IO Protocol) cross-chain protocol, so that H Exchange Chain and H Contract Chain can exchange information.

3. Huobi Financial Public Chain Milestone Outlook

Improvement of the design framework of the financial public chain system and technical selection: 3 months

H Exchange Chain, H Contract Chain and H Protocol algorithm determined: 3 months

R&D of H Exchange Chain and H Contract Chain: 6 months

R&D of H Protocol: 3 months

(The specific plan is based on Huobi’s actual situation.)

It should be noted that the financial public chain is a brand new creation. It is impossible to change the existing public chain of Fork, but to prepare for the underlying algorithms, including but not limited to virtual machines and compilers, programming language design and implementation, special transactions, consensus mechanisms, distributed storage, cross-chain protocols and other parts.

4. How will the Genaro Team Help Create the Financial Public Chain for Huobi?

The Genaro Network is the first smart data ecosystem with a Dual-Strata Architecture, integrating a public blockchain with decentralized storage. Genaro pioneered the combination of SPoR (Sentinel Proof of Retrievability) with PoS (Proof of Stake) to form a new consensus mechanism, ensuring stronger performance, better security and a more sustainable blockchain infrastructure. Genaro provides developers with a one-stop platform to deploy smart contracts and store the data needed by DApps simultaneously. Genaro Network’s mission is to ensure the secure migration of the core Internet infrastructure to the blockchain.

Genaro was officially established in 2016. The core R&D members of the team have rich experience in the underlying technology of blockchain. The team overall has more than 40 core members and is expanding. At the same time, it has formal cooperation or close relationships with many top university laboratories or professors such as members of Fudan University faculty, and can negotiate and jointly promote the research and development of the Huobi public chain[M1] . Combined with the development of the Genaro public chain and the development goals of the Huobi public chain, it is possible to invest 3 to 50 people in different stages to complete the above milestones.

First of all, Genaro’s technological system can be integrated with Huobi’s financial public chain to save research and development costs. Secondly, Genaro has a solid accumulation of blockchain core technologies such as the consensus mechanism, peer-to-peer technology, cross-chain protocol, the virtual machine, compiler and smart contracts. The Huobi financial public chain will carry the business logic of the Huobi ecology and continue to innovate. We believe that Genaro’s technology accumulation can cope with unknown challenges.

The Genaro team took the lead in proposing the concept of “sustainable consensus” and obtained several patents related to SPoR + PoS. At the same time, Larry, the founder of Genaro, delivered an important speech based on years of underlying technology accumulation and wrote a written article ‘The Seven Major Challenges of Public Chains and their Solutions’ which elaborates on the bottleneck of the public chain and how the framework proposed by Genaro solves these problems, including (the first four can be clicked to view):

1. How to Design a Sustainable Consensus Mechanism

2. How to Establish a Peer-to-Peer Sharing Network

3. How to Increase Blockchain Transaction Per Second(TPS)

4. How to Establish Data Channels between Blockchains and the Real Word

5. How to Store DApps’ Data Securely in a Decentralized Way

6. How to Design a Sustainable Token Model

7. How to Specify Blockchain Governance

The Genaro Foundation elected Larry Liu, the founder and chairman of the Foundation, to run for the election. The R&D team behind it was jointly led by Genaro founder and CTO Waylon Wu.

As a sponsor of the public chain leader, the Genaro R&D team is keen to work with Huobi to create the most equitable, fair, open and efficient financial public chain in the blockchain.

If you believe in the future of Genaro and Huobi, please support us. All participating voters will have the opportunity to get GNX airdrop rewards, let us do it!

Huobi Chain Global Technology Leaders Selection Campaign Voting Process

Huobi Token (Hot Global Token, HT for short) holders will be able to select the technology leader at zero cost with a snapshot of the HT number held, and vote for the airdrop token.

The voting is divided into three rounds and lasts for two months. The first round of voting lasts for one month. After one month, the top 30 will be selected by the number of votes to enter the second round of voting. The number of votes is not clear.

A natural person or organization holding no less than 100 HT can vote, and voting does not consume HT or lock. The number of votes available for each account will be based on a snapshot of the number of HTs held (previously the assets of 23:30:00 on a natural day), 1 ticket per 1HT, and each ballot account will receive a ballot every day. The upper limit is 200,000 votes. The ballots are issued daily, valid within 24 hours, and expire after 24 hours.

Users can visit the Huobi Global Professional Station homepage (new domain name www.hbg.com) or follow the WeChat public platform of Huobi public chain HuobiChainOfficial, jump to the voting interface (both on the computer or mobile phone), and click on the end of the article ‘Read the original’ button to enter the voting page.

In order to motivate users to vote, the Huobi public chain will cooperate with GNX to form a token incentive pool. Anyone who participates in the voting, regardless of which candidate is cast, will be able to obtain the token of the GNX airdrop on a pro rata basis. The calculation method is the ratio of the actual number of votes of the user to the total number of votes. In addition, users with the highest number of votes will also get the opportunity to communicate with the industry’s leaders, as well as free access to the Huobi public chain leader’s selection ceremony.