On April 9th, at the closing ceremony of the 2024 Hong Kong Web3 Carnival, Dr. Xiao Feng, Chairman of Wanxiang Blockchain and Chairman and CEO of HashKey Group, delivered a deep observation on the imminent explosion of blockchain and Web3 industry applications. Dr. Xiao Feng believes that Web3 is about to usher in its "1995 moment" and comprehensively analyzed the framework and timing of this moment. In addition, Dr. Xiao Feng released the white paper "The First Principles of the New Economy of Web3" at this carnival.
Dr. Xiao Feng believes that blockchain has gone through the "0-1" stage, experiencing the construction of basic protocols and infrastructure, and it has been 15 years since the birth of Bitcoin. Next, blockchain will enter the stage of explosive applications, the "1-10" stage. To discuss the "1995 moment of Web3," one must extend the timeline and observe when such a great moment began to arrive from the perspective of the past two hundred years.
First, Four "Technological Paradigm Revolutions"
Over the past 200 years, there have been four important technological paradigm revolutions:
The first technological paradigm revolution was "mechanization," represented by the British Industrial Revolution, which occurred in the mid-18th century.
The second technological paradigm revolution was "electrification," which occurred at the end of the 19th century and was characterized by the "electrification" era represented by electric lights and telephones.
The third technological paradigm revolution, "informatization," occurred in the 1920s of the last century and was represented by the emergence of computers and the internet, known as the "informatization" era.
The fourth technological paradigm revolution, "digitalization," occurred at the beginning of this century, with representative elements being cloud technology, blockchain, and AI development. The underlying technology of cloud computing is also distributed computing. A significant characteristic of the digital era is decentralization and self-organization.
Accompanying the four technological paradigm revolutions, there have been significant transformations and upgrades in financial and capital paradigms.
Second, Four "Capital Paradigm Shifts"
In conjunction with the "mechanization" first technological paradigm revolution, the main street model characterized by financial capital took center stage in the financial market, with renowned financial conglomerates such as Morgan Stanley, Carnegie, and Rockefeller, although no longer at the center of the historical stage, still present. With each technological paradigm revolution, the leading role of financial capital has been continuously replaced.
With the electrification revolution at the end of the 19th century, the "Wall Street model" characterized by financial capital began to take center stage in the financial market, with representative companies such as Goldman Sachs and Morgan Stanley.
During the mid-20th century information revolution, the "Silicon Valley model" characterized by venture capital began to emerge. I once walked back and forth on Sand Hill Road in Silicon Valley, counting the famous VCs, to experience how they changed finance and also changed the financing methods of technological innovation.
The digital technological paradigm revolution at the beginning of this century is accompanied by a new form of financial capital, the so-called encrypted capital, gradually taking center stage in the financial market. We call this model "encrypted mode," including BTC, ETH, the ICO in 2017, and the currently widely discussed STO, IEO, RWA, stablecoins, and other encrypted capital. These encrypted capitals share a common feature, which is the new asset category based on cryptography and distributed ledger technology.
Third, The First Principle of Blockchain: A New Method of Accounting
Focusing on the development and changes of the past 200 years in the last decade, we can see that due to the change in technological paradigms, encrypted assets have emerged in the capital paradigm. Encrypted assets are a new asset category and capital model based on distributed ledgers and cryptographic technology.
If we fundamentally, from the bottom-up, from the essence, and from the perspective of the first principles, look at blockchain, its first principle is a new method of accounting.
Human society has experienced three different methods of accounting. The earliest method of accounting was single-entry bookkeeping, which only recorded income and expenses, and each kept its own accounts, which were private ledgers.
Later, double-entry bookkeeping emerged, bringing assets and liabilities into accounting on top of income and expenses, but still keeping accounts in private ledgers.
In 2009, with the emergence of blockchain, as a distributed ledger (DLT), it records digital value and network value, and no longer keeps accounts in private ledgers, but on a publicly transparent global ledger, where all stakeholders keep accounts together. This is the first principle of blockchain, a transparent, open "global public ledger," and all Web3 innovations are based on this first principle.
Fourth, The Millennium Change of Accounting Methods
In the 5000 years of human society with written records, there have been three iterations or innovations in accounting methods. It is evident that the millennium change in accounting methods has had a huge impact on the social economy of human society.
The earliest single-entry bookkeeping appeared around 3500 BC, with account books found on a clay tablet unearthed in the Sumerian region, using single-entry bookkeeping to record only income and expenses. Double-entry bookkeeping was born in the early 14th century in the northern Italian city-states of the Mediterranean, as the complexity of maritime trade required a more sophisticated accounting method. The third accounting method emerged over 700 years after 1900. In 2009, with the emergence of Bitcoin and blockchain, a new method of accounting emerged, recording digital value and network value through distributed accounting. Distributed ledgers can also be said to be an accounting system created by the digital survival needs of human beings.
The book "Digital Survival" predicted the digital migration of human society decades later, and distributed accounting was created for digital migration and digital survival.
Fifth, The Three-Layer Structure of Distributed Accounting System
Any computing system has a three-layer architecture, and the distributed computing system is no exception.
The distributed accounting system first has a set of accounting methods, both double-entry bookkeeping and distributed accounting belong to accounting methods. At the same time, there is an account system. Double-entry bookkeeping records value, stores value, and transfers value through bank accounts. In the Web3 era, it has transitioned to encrypted accounts, whether it's Bitcoin's UTXO or Ethereum's account system, they are all encrypted accounts. In addition to the account system, there is also a unit of account. The unit of account for double-entry bookkeeping is the fiat currency of each country. In the distributed accounting system, the unit of account has become digital currency.
Sixth, Accounting Methods - The Foundation of Economic and Social Civilization
Accounting methods have great value for human economy, society, politics, and are the foundation of economic and social civilization. Two economists have discussed that double-entry bookkeeping is the core of capitalism, the beginning of the capitalist economic and political system. Without proper accounting, the economic and civilizational system of capitalism would not have been possible, and corporate governance, partnership systems, financial markets, including taxation, would not have been possible.
Taxation is very important for modern states. To collect taxes from commerce, the accounts must be clear. The Italian double-entry bookkeeping began and continued to improve from 1300. In China, during the Ming Dynasty, "The Failure of the Ming Dynasty in the Fifteenth Year of Wanli" mentioned that the Ming Dynasty lacked the ability for "numerical management." At that time, China used single-entry bookkeeping, which recorded cash flows, and the numerical management capability was relatively less developed compared to Europe. Accounting and financial verification are actually two sides of the same coin, and the Ming Dynasty clearly lacked a good accounting foundation for accounting and financial verification.
Seventh, The "1995 Moment" of the Internet
Returning to the topic of embracing the "1995 moment" of Web3. This concept is proposed in relation to the "1995 moment" of the internet. The well-known large internet platforms almost all emerged between 1995 and 2005, with a few exceptions. Upon further investigation, it was found that before 1995 was precisely the mature period of the basic architecture of the internet.
Maturity is reflected in two aspects:
First, the internet transitioned from the architecture of ARPANET to the architecture of the World Wide Web, establishing the TCP/IP model of the internet system architecture.
Second, in addition to the mature basic infrastructure before 1995, user-friendly browsers and graphical operating systems gradually improved, enabling end-users to use the internet effectively.
The basic infrastructure of the internet was established, and the tools and means for using the internet were perfected before 1995, making 1995-2005 the "golden decade" of the explosive application of the internet, with almost all major internet platforms emerging during this time.
Eighth, The "1995 Moment" of Web3 (Part 1)
When will the "1995 moment" of Web3 occur? The development of Web3 is supported by two major pillars: blockchain and AI.
The earliest blockchain, the "Bitcoin network," was born in 2009, and the earliest AI was born over 60 years ago. However, it wasn't until the appearance of AlphaGo in 2014 that people realized that deep learning might be a new path for AI development. The first half of the 2010s was also a period of phased transformation for the two pillars of Web3, blockchain, and AI.
In 2015, the hot topic of discussion in the blockchain community was the "relationship between blockchain and AI." The conclusion drawn was that "AI is a revolution in productivity, while blockchain is a revolution in production relations," and these two are complementary.
Ninth, The "1995 Moment" of Web3 (Part 2)
Fast forward to 2024, we find that the two pillars of Web3, blockchain, and AI, have reached a critical juncture for ultimate solutions. Blockchain has always had the "impossible triangle." If you only do things on the L1 basic public chain, directly deploy contracts, and directly deploy applications, your scalability and performance cannot support large-scale applications. At the same time, gas fees and costs do not support large-scale applications.
Blockchain has solved the "impossible triangle" of the basic public chain through Ethereum's sharding, where the L1 chain is only responsible for decentralization and security, and scalability and performance are addressed through layering. Today, Vitalik also mentioned solving scalability and performance issues through L2 and even future L3. This confirms that the basic system architecture and ultimate technical solutions of blockchain have been determined.
Similarly, AI has also established its technical system architecture, from the deep learning model of AlphaGo in 2014 to the current neural network model. The technical system architecture of AI has essentially been established through general multimodal large models.
When both technical system architectures mature in 2024, we can anticipate that the "1995 moment" of Web3 will begin this year and continue for the next decade, from 2024 to 2034. This is likely the best time for Web3 application innovation.
Subversive innovation at the application level can only be supported after both foundational system architectures are established.
Tenth, Subversive Innovation
Speaking of Web3 application innovation, what is truly subversive innovation on the Web3 platform? It is often said that blockchain is a value network, and the internet is an information network. From the perspective of subversive innovation at the fundamental level, the subversive innovation of internet platforms, whether it's e-commerce, social media, ride-hailing, or food delivery, all essentially involves the same thing. At the most fundamental level, they are all involved in information matching, collecting information, data, precise profiling, and efficient matching.
The most fundamental aspect of subversive innovation on internet platforms is "information matching," while the most fundamental aspect of subversive innovation on Web3 platforms is "value matching," creating a virtual world and a digital native world.
In the digital native world, through distributed ledgers, all participants have data sovereignty and are no longer deprived of their data by platforms. Everyone can have sovereignty over their data, and the rights to this data can be carried away.
Then, in the token economic model, value creation and sharing are done through the economic system of stakeholders, where everyone collaborates to create and share value, rather than having their value taken away by others.
From the perspective of subversive innovation at the fundamental level, Web3 platforms are involved in value matching.
Eleventh, Principles of Subversive Innovation in Web3
From the fundamental level, I personally believe that subversive innovation in Web3 may need to follow the following five principles:
(1) From the edge to the core. Starting from scratch, from zero to one, rather than transforming popular products of the internet era or subverting a popular product. It should start from the edge and gradually grow to become a core element in the Web3 world.
(2) From native to twin. Do not go in the wrong direction, do not go from twin to native. Digital native elements are the foundation of subversive innovation, and only they can produce subversive innovation. Any use of digital twins is an improvement in marginal effects, and clearly not an innovation in subversive business models.
(3) From essence to explicit. It is often heard that someone says, "WeChat is very popular, so I want to use blockchain and AI to create a decentralized WeChat." Decentralized WeChat does not exist. Social interaction is a human essence, and has been so for thousands of years. WeChat satisfied the essential social or social nature needs of others through information matching in the internet era. In the Web3 world, there will certainly not be social tools/social networks like WeChat, but rather new tools, new methods, and new modes to satisfy the essential social needs of everyone. Do not reverse these two relationships.
(4) Innovate Web3 from the first principles, meaning to create new business models of value matching on a globally transparent ledger.
(5) In addition to the maturity of the basic system architecture, the internet's "1995 moment" also involved the maturity of user-friendly browsers and operating systems, allowing more people to use the internet. I believe that Web3 is also exchanging similar user-friendly tools such as "browsers" and "graphical operating systems" from the internet era.
Earlier, Mr. Jiang mentioned that the operating system of the AI era might not be a graphical operating system, but possibly a natural language operating system. Therefore, the operating system of Web3 might be based on natural language, which is original, starting from the native, from the edge, and from the essential user-friendly tool innovation. I believe that the graphical operating system is indeed a product of the information internet era, and the natural language operating system might be an innovation of the Web3 era.
Twelfth, Technical Architecture of Web3 Application Innovation
Innovations at the application level must be based on the modules and protocol stacks built over the past decade for Web3 application innovation. Over the past decade, we have built a distributed network, Web3.0, and a distributed ledger - blockchain. On this basis, we have also built a distributed finance, DeFi.
All Web3 application innovations are based on this network foundation, on this accounting system, and on financial support systems for Web3 innovation, hence the term "distributed business."
Thirteenth, Economic Model of Web3 Application Innovation
In the closing speech at the 2023 Hong Kong Web3 Carnival, I talked about the economic model of blockchain applications. The economic model of blockchain applications is different from the economic model of blockchain infrastructure. Blockchain infrastructure like Bitcoin and Ethereum has a basic single-token economic model because it is a basic protocol. However, after the application protocol comes out, it can have a much wider range of economic models and tools than the basic protocol.
I proposed the "three-token model" at the time, but I won't go into detail today. The "three-token model" mainly refers to three types of tokens: functional tokens, which represent usage rights; security tokens, which represent ownership rights; and NFTs, which represent tokenization of digital goods and services.
All Web3 application innovations may use one, two, or all three types of tokens to build their economic models, providing much more space for innovation than technical protocols.
Fourteenth, Interoperability of Web3 Application Innovation
The bridge between traditional finance and crypto finance is not only a prerequisite for Web3 technical innovation but also the result of Web3 application innovation. The convergence and interoperability of the two are the future trend.
There are at least five bridges helping to connect traditional financial markets and Web3 financial markets/crypto financial markets.
First, encrypted asset ETFs.
Second, fiat stablecoins. There were no compliant and legal fiat stablecoins before, but now they are emerging in Hong Kong and Singapore.
Third, STOs. Today's discussions are largely about compliant and legal tokenization of equity through STOs.
Fourth, RWAs, tokenization of traditional financial assets. HSBC in Hong Kong has tokenized gold, and BlackRock in the US has tokenized US Treasury bond funds. These are all RWAs, building bridges to connect traditional finance and crypto finance.
Fifth, licensed exchanges. Regulatory compliance is a major trend, and licensed, compliant, and regulated exchanges can effectively connect traditional finance, traditional investors, and the crypto market and crypto asset investments.
Licensed, compliant, and regulated exchanges play two roles:
(1) Investment and trading of crypto assets.
(2) Exchange of fiat and digital currencies. For example, on Coinbase, a large amount of USDC is issued through the trading platform, providing exchange services for fiat and digital currencies.
The above may be the complete framework for Web3 application innovation for the next decade.
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