On April 9th, at the closing ceremony of the 2024 Hong Kong Web3 Carnival, Dr. Xiao Feng, Chairman of Wanxiang Blockchain and 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 underlying framework and timing of this moment. In addition, Dr. Xiao Feng released the white paper "The First Principles of the Web3 New Economy" at this carnival.
I. The "1995 Moment" of Blockchain
1.1 The Revolution of Distributed Accounting
Accounting is the foundation of human economic activities. Every major change in accounting methods has accompanied the upgrading of human economic systems and had profound impacts on human society.
Human accounting method 1.0 can be traced back to the single-entry accounting books in the Sumerian society in Mesopotamia around 3500 BC. This simple accounting book recorded the development of lending relationships through temples at that time. They thereby achieved inventory management, learned to maintain a balance between income and expenses. This was the origin of credit currency and the first time humans observed and managed their economic activities from a quantifiable perspective.
Human accounting method 2.0 began with the double-entry bookkeeping system invented by European commerce in the 1300s. The double-entry bookkeeping system combined the seven elements of calligraphy, arithmetic, private property, monetary symbols, credit, remote commerce, and capital, proposing the principle of "debit must equal credit." This system better protected the rights of fund providers (mainly banks and investors), facilitated the aggregation and circulation of social funds, and shifted the perspective of observing economic activities from balancing income and expenses to balancing assets and liabilities, profit, and shareholder equity. The double-entry bookkeeping system was a huge advancement in human commercial civilization and played a crucial role in the rise of modern corporate systems and the formation of the global financial system.
Human accounting method 3.0 began with the blockchain technology proposed by Satoshi Nakamoto in the Bitcoin white paper in 2008. Blockchain technology achieved distributed accounting in a trustworthy and transparent manner, making value transfer as convenient and efficient as information transfer, and not relying on any intermediary institutions. The digitization of digital currencies and assets not only changed the accounting unit but also promoted global fund connectivity and liquidity aggregation, breaking through the geographical boundaries of sovereign nations in economic and financial activities and continuously expanding into the digital world. Human division of labor and collaboration models are undergoing tremendous changes, empowering individuals and restructuring organizations, and the Web3 new economy is flourishing.
1.2 Maturation of Blockchain Infrastructure and Explosive Application
The blockchain infrastructure capable of supporting large-scale applications is basically in place. Since 2023, the Bitcoin second-layer protocol has shown tremendous innovation potential. Ethereum has progressed step by step from a single chain to the Rollup central route, modular blockchains, the Cancun upgrade, and future account abstraction and chain abstraction. High-performance Alt Layer1 is continuously iterating, and the ecosystem is growing and vibrant. Meanwhile, many developers are working in specific areas, such as the development of full-chain game engines, the practical application of ZK, and breakthroughs in fully homomorphic encryption.
The barriers to blockchain application development are continuously decreasing. Application projects can compare DApps, Rollup Apps, Layer3, and App Chains from the perspectives of scalability, decentralization, autonomy, and security, and formulate the most suitable technical solutions as needed. Various open-source tools that reduce the difficulty of application project development, donations from different ecosystems, and platforms and communities for developer communication and learning have made Web3 application development more convenient and effective.
Digital currencies and digital assets are integrating into the mainstream financial system. The approval of a Bitcoin spot ETF by the U.S. Securities and Exchange Commission in 2024 is a milestone event in the development of the Web3 new economy. This allows digital assets to reach a wider range of users and liquidity and gain a foothold in the mainstream financial market. The tokenization of real-world assets and securities (i.e., RWA and STO) will further integrate digital assets into the mainstream financial market.
1.3 Embracing the "1995 Moment" of Blockchain
The birth of the World Wide Web and the retirement of the NSFNET backbone network in the 1990s marked the commercialization of Web 1.0. The "1995 moment" was a crucial moment for the transition of the internet from system and architecture construction to application platform development. Most global internet platforms, including Amazon, eBay, Yahoo, and Google, were born between 1995 and 2005. Looking back at history, the factors that contributed to the "1995 moment" of the internet include: first, technological iteration and infrastructure improvement; second, the open and free spirit of open source; third, full of imagination; fourth, capital boost.
The current blockchain field possesses all these contributing factors and is about to embrace the "1995 moment" of blockchain. The accumulation of 16 years of technology, an active community of developers, continuous adventures and innovations, the emergence of generative artificial intelligence, the upcoming Bitcoin halving, and the integration of digital currencies and digital assets with the mainstream financial system will all give birth to a "Cambrian explosion" of blockchain applications in the next 10 years. The next 10 years will be the most splendid and colorful decade, and 99% of wealth creation in the Web3 new economy has just begun.
II. All Value Can Be Tokenized
2.1 The Value Law of the Web3 New Economy
The Web3 new economy is a "borderless economy." Constrained by technology, transaction costs, trust radius, and contract enforceability, most traditional human economic activities have boundaries, ranging from small ones limited to a single enterprise or industry to large ones limited to a country, requiring complex trade relationships to form a unified market. The Web3 new economy, based on the decentralization, disintermediation, and smart contract guarantee of blockchain, naturally possesses characteristics of crossing time and space, organizations, industries, and even legal jurisdictions. As an open and transparent global public ledger, blockchain supports borderless value creation and circulation, making it the most suitable ledger system for the Web3 new economy.
The Web3 new economy follows the law of high fixed costs and low to zero marginal costs. This law determines the difference between the Web3 new economy and the traditional economy. In the Web3 new economy, the construction of the protocol layer and infrastructure requires significant fixed costs, but once constructed, the application layer's invocation of the protocol layer and infrastructure has low to zero marginal costs. This will accelerate Web3 application development on one hand and allow more value to be deposited into the protocol layer and infrastructure on the other.
Value in the Web3 new economy exists in tokenized form, i.e., digital currencies and digital assets. The technical basis for tokenization is cryptography and blockchain. The registration, issuance, and circulation of digital currencies and digital assets are based on distributed ledgers and distributed accounting, and have established a distributed financial service system and distributed commercial applications based on smart contracts and token economics. Since 2009, technological research and development, market innovation, and regulatory breakthroughs related to blockchain can be seen as constructing the financial infrastructure of the Web3 new economy, which fundamentally differs from traditional financial infrastructure (see Part Four).
In the Web3 new economy, in addition to existing in tokenized form, value has two important characteristics. First, the path to maximizing value lies in open and permissionless usage rights. In the Web3 new economy, whether at the protocol layer or the application layer, to achieve value maximization after system development, open source, open, and free strategies must be adopted to create and aggregate value through network effects; closing off will dissipate value. Second, the importance of usage rights exceeds ownership rights. When the system becomes open, open, and permissionless, the importance of ownership rights decreases, and usage rights become the key to maximizing value. From Bitcoin and Ethereum, it can be seen that the Web3 new economy is an open usage rights economy.
2.2 Digital Currencies
In the Web3 new economy, as accounting shifts from centralized to distributed, the accounting unit becomes digital currency. In the bank account system based on traditional bookkeeping, the accounting unit is legal tender. In the internet account system based on network-registered accounts and bank accounts to support electronic payments, the accounting unit is platform currency associated with legal tender. In the distributed ledger, the accounting unit is digital currency, mainly divided into the following three categories.
Central bank digital currency (CBDC), also known as legal digital currency. CBDC is a digital currency issued by the central bank and belongs to the category of base currency (M0). CBDC is essentially the digital form of cash.
Institutional digital currency, represented by stablecoins. In the mainstream financial system, central banks are only responsible for issuing base currency, while commercial banks create money based on the base currency through credit activities and the multiplier effect, forming broad money (M2). Stablecoins are created by commercial institutions rather than central banks and belong to the M2 category.
Native digital currency, including native tokens in blockchain protocols (such as Bitcoin and Ether), and smart contract native tokens built on standards such as ERC20. Native digital currencies are issued through algorithms, not associated with legal tender, and are the most innovative form of digital currency. There is a certain intersection between native digital tokens and the functional tokens to be introduced below.
2.3 Digital Assets
With the introduction of a new accounting unit, the Web3 new economy has seen the emergence of a new asset category, mainly divided into the following four types.
Functional tokens, representing virtual goods. Users purchase functional tokens to obtain the right to use virtual goods, so functional tokens are essentially fractional ownership of virtual goods usage rights.
Security tokens, representing fractional ownership of companies. Traditionally, ownership of a company is converted into shares. With the application of distributed ledgers, ownership of a company has been tokenized into security tokens.
Non-fungible tokens (NFTs). In the real world, verifying the identity of individuals and institutions or their relationships often requires the proof of multiple independent institutions. In the digital world, relying on independent third parties for identity verification becomes very difficult, and NFTs, as tools for self-verification, have significant value. NFTs not only serve as proof of identity and qualifications, but also as proof of work, contributions, rights, and power in the digital world, and can even become self-verification tools for everything in the digital world.
Real-world asset tokenization (RWA). This includes the issuance of real-world assets such as real estate trusts, credit assets, securities, and funds in token form to investors. Some RWAs can be listed and traded on digital asset exchanges, while others can be traded in token form between institutions.
It is necessary to distinguish several concepts related to digital currencies and digital assets. First, digital currencies and digital assets are tokenized products and do not include currencies and assets based on traditional account systems and double-entry bookkeeping in traditional financial infrastructure, although they are also in digital form (see Part Four). Second, encrypted assets are a subset concept of digital assets. According to the Basel Committee, except for legal digital currencies, all other digital assets belong to the category of encrypted assets. Third, data assets come from the data element market. On the one hand, data assets have nothing to do with traditional financial infrastructure or Web3 financial infrastructure, are generally stored in databases, have structured and unstructured forms, are easily replicable, can be used by multiple people at the same time without consumption or loss, and are difficult to define ownership clearly, largely possessing public goods characteristics. Digital currencies and digital assets, on the other hand, have clear ownership, and related transactions reflect changes in ownership, making them typical private goods.
III. Empowerment of Individuals and Restructuring of Organizations
Technology drives society, and technology reshapes the future. The productivity revolution triggered by the Web3 new economy will inevitably lead to the innovation of production relations, first and foremost manifested as the empowerment of individuals and the restructuring of organizations.
3.1 Rise of Individual Capabilities
Network state, i.e., trans-temporal network space. The Web3 new economy is built on the interconnection of hundreds of millions of computer users, creating a new social space—a global, free, and trans-temporal network space, which can be called the "network state." On the one hand, digital technology transcends geographical boundaries, decouples economic functions, and breaks the geographical restrictions in traditional employment relationships, allowing employees and employers to live and work in different jurisdictions. On the other hand, the globalization of the digital economy transcends the boundaries of sovereign nations, accelerating the global division of labor and crowdsourcing trends. As user groups become digitized and virtualized, more and more economic activities are taking place in the network state. This will fundamentally change information and transaction costs, thereby completely changing the logic of economic and commercial activities. The influence of global factors will rise, while the influence of regional factors will decline. The Web3 new economy is not limited to users in a specific country or region, but expands to a global user base, creating greater business opportunities.
Sovereign individual, i.e., individual capabilities surpassing organizations. Web3 and AGI will greatly enhance the productivity of individuals with special skills and talents. Most artificial professional boundaries will be broken, and people will no longer need to follow the 10,000-hour rule to learn new knowledge, as they can acquire expertise in law, medicine, programming, and arts at a lower threshold and cost. The economic value of memory as a skill will decline, while skills in information synthesis and creative application will become more important. This will inevitably break the existing power structure and management models in economic activities. The advantages of enterprise organizations in information and transaction costs are declining, capital taxes will be reduced under competition, economies of scale to maintain the long-term existence of companies will no longer exist, and the phenomenon of lifelong employment will disappear. At the same time, sovereign individuals are rising, gaining more economic and social resources, and reshaping the allocation of resources. In the network state, the survival rules based on individual autonomy will be promoted, and sovereign individuals are expected to simultaneously gain autonomy and excess returns. In the future, most wealth can be created and earned anywhere, consumed and traded anywhere, and business organizations need to adapt to the development of sovereign individuals, enabling them to realize maximum value.
Digital nomad, living by following the "grass." In 1997, the former CEO of Hitachi, Tsugio Makimoto, proposed the concept of digital nomads, referring to those who earn first-world level income through the internet but choose to live in places with the cost of living of developing countries. The Web3 new economy has accelerated the development of the digital nomad lifestyle. With the emergence of the network state and the rise of sovereign individuals, talent mobility, knowledge sharing, and cultural collisions between transnational virtual communities are taking place on an unprecedented scale and efficiency. For example, in the experimental mobile community Zuzalu conceived by Vitalik Buterin, outstanding talents from various fields such as the crypto community, bioscience, philosophy, politics, and arts around the world are actively joining. A series of spontaneous topics emerge in the community, covering longevity, public goods, zero-knowledge proofs, synthetic biology, and network states, among other cutting-edge topics. After living together for two months, they disperse, spreading pioneering ideas around the world. In February 2024, the Japanese government opened the "specific activities for digital nomads" residence status to IT workers worldwide, allowing visa-free stays for six months.
These phenomena appearing around the world may seem random, coincidental, and distributed, but the logic behind them is the new lifestyle and production methods brought about by the Web3 new economy, manifested as a combination of fluidity and aggregation, digital space and local culture, and globalization and individualization.
3.2 Transformation of Business Organizations
In the Web3 new economy, business organizations need to rethink the organizational models of human-machine collaboration and redefine the division of labor and cooperation among intelligent entities.
We are pleased to see that OpenAI has adopted a unique equity structure. Currently, OpenAI has established a limited liability company, but there is a profit cap for all shareholders, creating a special governance structure where non-profit entities and for-profit entities coexist. Ultimately, OpenAI will become a human universal infrastructure like the open, free, permissionless, and trustless Internet TCP/IP protocol. This architecture is very innovative and difficult to design under existing Wall Street models. Only Silicon Valley technology companies with increasing levels of digitization will adopt such an architecture. They understand their social responsibility and understand how to alleviate concerns about monopolies and a small group of people enjoying excess profits in the AGI era through a new framework for profit distribution and property licensing.
In the Web3 new economy, all blockchain protocols are open source, permissionless, and trustless. Anyone can use them, anyone can fork the original protocol, and anyone can build their own applications on the protocol without any approval. There is a key difference between blockchain protocols and open-source organizations, which is the inclusion of functional tokens, standardizing and fractionalizing usage rights, capturing the usage value of the network through functional tokens, and then providing economic incentives and profit distribution. This mechanism design fully adapts to the value characteristics of the digital economy with high fixed costs and low marginal costs.
The decline of the ownership market and the rise of the usage rights market. The industrial economy gave birth to the ownership market, where ownership (equity) is traded, and the institutional foundation is shareholder capitalism. Under shareholder capitalism, the corporate structure represents the ownership structure, with the interests of all shareholders being securitized and traded on stock exchanges. The digital economy has given rise to the usage rights market, where usage rights are traded, and the institutional foundation is stakeholder capitalism. Under stakeholder capitalism, non-profit organizations and open-source organizations have become mainstream. Usage rights cannot be securitized, only tokenized, and the functional tokens obtained from this can be traded on digital asset exchanges.
IV. Global Financial Infrastructure 2.0
4.1 Web3 Financial Infrastructure
Web3 financial infrastructure is the product of distributed ledgers and distributed accounting, fundamentally different from traditional financial infrastructure based on traditional account systems and double-entry bookkeeping. The traditional financial infrastructure carries currencies and financial assets, including central bank currencies other than cash, commercial bank deposits, internet payment account balances, and stocks, bonds, and commodities recorded in central securities depositories or custodian accounts, all essentially representing value in the traditional account system. The circulation and trading of these currencies and financial assets are fundamentally based on double-entry bookkeeping operations on relevant accounts. Web3 financial infrastructure carries digital currencies and digital assets, supporting their registration, registration, custody, issuance, circulation, trading, clearing, and settlement. Digital currencies and digital assets are tokenized values, with characteristics of property rights, key to "occupancy is ownership" and "transaction (or payment) is settlement."
Web3 financial infrastructure represents the 2.0 version of global financial infrastructure. Going back to the basics, the essence of the financial system is status and transactions, with status reflecting the distribution of various assets and liabilities among various participants in the financial system at a certain point in time, and transactions driving the update of the status in the financial system over a certain period. The status and transactions of the financial system can be recorded through traditional account systems or distributed ledger systems. Only by rising to this level can the innovative significance of Web3 financial infrastructure be understood. Web3 financial infrastructure has many excellent features in management, transactions, clearing, settlement, and privacy protection.
First, it is more open. Anyone or any institution can use it without permission or trust as long as they follow the blockchain protocol. This is an important manifestation of financial democratization and inclusiveness.
Second, it is essentially anonymous but supports controlled anonymity. Compared to traditional financial infrastructure, Web3 financial infrastructure better protects user privacy, safeguards each user's sovereignty over their own data, and supports compliance with financial laws and regulations regarding "know your customer" (KYC), anti-money laundering (AML), and countering the financing of terrorism (CFT). This is the foundation for the integration of digital currencies and digital assets into the mainstream financial system.
Third, it enables peer-to-peer transactions, where transactions are settlements. With the support of Web3 financial infrastructure, any two people, regardless of their location or whether they know or trust each other, can engage in convenient and secure value exchange without relying on any third party. This will greatly upgrade human cooperation models and expand market reach.
Fourth, transactions are naturally cross-border. Web3 financial infrastructure supports the most efficient value network globally, from the outset.
Fifth, the value carrier and programming logic (i.e., smart contracts) are combined, introducing programmable functions to transactions, enhancing the composability of activities on the blockchain, and supporting innovative models not previously seen in the traditional financial sector. The innovation sparked by smart contracts has been fully validated in the NFT and DeFi fields.
Sixth, it has high security. The distributed ledger is public, and with cryptography and consensus mechanisms, it ensures the security and immutability of transaction records, allowing anyone to download the ledger to verify transaction results. Asymmetric encryption technology ensures that only the owner of the private key can control the related digital currencies and digital assets.
Web3 financial infrastructure naturally adapts to the digital native economic system. First, in the digital native economic system, asset issuance and trading activities are completely digital, without borders, requiring financial infrastructure that supports the free circulation and high interconnectivity of assets. Web3 financial infrastructure supports the most efficient value network globally. Second, the decentralized nature of blockchain eliminates the high intermediary costs and trust foundations present in traditional financial infrastructure. In Web3 financial infrastructure, users have better protection of their asset sovereignty, data transparency, and transaction security. Third, the digital native economic system is based on the usage rights economic system, where network effects are the channel for maximizing usage rights value. Web3 financial infrastructure can better promote the liquidity and efficiency of the usage rights market.
4.2 Web3 New Economic Ecosystem
The Web3 new economic ecosystem revolves around digital currencies, digital assets, and related business applications and activities, mainly consisting of three components.
Primary market activities for digital currencies and digital assets. This is the source of the Web3 new economic ecosystem, involving the generation and issuance of various digital currencies and digital assets listed in the second part. These digital currencies and digital assets represent different values, have different application scenarios, are suitable for different investor groups, and are subject to different regulatory frameworks. Primary market activities mainly meet three needs: first, the financing needs of project parties; second, the liquidity needs of early investors in projects; and third, the needs of project construction networks and ecological development. High-quality digital currencies and digital assets are key to the success of the Web3 new economy, requiring professional work in legal compliance, tokenization, technical development, and market expansion.
Secondary market activities for digital currencies and digital assets. The core of the secondary market is the trading platforms for digital currencies and digital assets. They provide liquidity for digital currencies and digital assets, promote price discovery and resource allocation, enable investors to flexibly enter and exit the market, and support risk management. Currently, the secondary market trading of digital currencies and digital assets is active and diverse. Professional individuals and licensed regulation play a crucial role in ensuring the compliance of transactions and the normal operation of the market. Regulatory agencies prevent market manipulation and protect investor interests by establishing and implementing strict market rules, maintaining market stability and transparency. Effective regulation also helps enhance market confidence, attract more participants, and drive the maturity and development of the entire digital financial ecosystem.
Industry services for digital currencies and digital assets. These services mainly include blockchain technology support, issuance processes, legal advice, project consulting, and licensed financial services, providing necessary support and connections for the efficient operation of the primary and secondary markets. Industry services cover the entire process from the launch to the completion of digital currency and digital asset projects, aiming to ensure that every step complies with industry standards and the interests of participants. During the preparation and issuance stages of projects, the focus is on market analysis, token scheme design, and compliance review, aiming to ensure the smooth launch and operation of projects. Professional technology service providers are responsible for building and maintaining trading platforms to ensure their security and efficiency. As application projects gradually land, legal and audit teams provide support for regulatory compliance and financial transparency, while cryptography experts and anti-money laundering organizations ensure the security and legality of transactions. Data analysis and consulting firms provide deep market insights and strategic advice to help participants make wise decisions in a complex and ever-changing market. Overall, the common goal of these services is to provide a stable, efficient, and transparent business environment for Web3 industry participants, driving the healthy development of the entire industry.
V. Conclusion: The Future-Oriented Web3 New Economy
The Web3 new economy will lead the global economy towards a more open, efficient, and inclusive direction, contributing to the prosperity and progress of all humanity. In serving the real economy, the Web3 new economy will promote efficient resource allocation, stimulate industrial innovation, and economic growth vitality through more efficient and transparent currency and asset circulation and financing methods. The distributed nature and programmable power of the Web3 new economy will provide a flexible, low-cost development environment for emerging technology companies and projects, accelerating the transformation and application of technological achievements. In promoting financial development, Web3 financial infrastructure, as the 2.0 version of global financial infrastructure, naturally adapts to the digital native economic system, breaking the geographical and temporal limitations of traditional financial services, making financial services more global and interconnected, and providing new opportunities for the integration and innovation of global capital markets.
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