On April 9, 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, expressed his in-depth observations on the explosion of blockchain and Web3 industry applications. Dr. Xiao Feng believes that Web3 is about to usher in its own "1995 moment" and comprehensively analyzes the basic framework for the arrival of this moment and the timing of its arrival. In addition, Dr. Xiao Feng released the white paper "The First Principles of the New Web3 Economy" at this carnival.
1. Blockchain’s “1995 Moment”
1.1 Distributed Ledger Revolution
Bookkeeping is the foundation of human economic activities. Every major change in bookkeeping methods is accompanied by the upgrading of human economic system and has a profound impact on human society.
Human accounting 1.0 can be traced back to the clay tablet single-entry book of the Sumerian society in Mesopotamia in 3500 BC. This simple book recorded the loan relationship developed by people through the temple at that time. They realized inventory counting and learned to maintain a balance between income and expenditure. This is the source of credit currency, and it is also the first time that humans observe the world and manage their own economic activities from a quantifiable perspective.
Human accounting 2.0 began with the double-entry bookkeeping method invented by European industry and commerce in the 1300s. Double-entry bookkeeping combines the seven elements of writing art, arithmetic, private property, currency symbols, credit, remote commerce and capital, and puts forward the principle of "there must be a loan for every debit, and the loan must be equal". Double-entry bookkeeping can better protect the rights and interests of fund providers (mainly banks and investors), facilitate the gathering and circulation of social funds, and shift the perspective of observing economic activities from the balance of income and expenditure to the balance of assets and liabilities, profits and the appreciation of shareholders' equity. Double-entry bookkeeping is a great progress in human commercial civilization and has played a vital role in the rise of the modern corporate system and the formation of the world financial system.
Human accounting 3.0 started with the blockchain technology proposed by Satoshi Nakamoto in the Bitcoin white paper in 2008. Blockchain technology realizes distributed accounting in a credible and transparent way, making value transfer as convenient and efficient as information transfer, and does not rely on any intermediary institutions. The digital currency and digital assets generated by tokenization not only change the accounting unit, but also promote the financing and liquidity aggregation around the world. Economic and financial activities break through the geographical boundaries of sovereign countries and continue to expand into the digital world. The human division of labor and collaboration model is undergoing tremendous changes, individuals are empowered, organizations are reconstructed, and the new Web3 economy is booming.
1.2 Blockchain infrastructure matures and applications explode
The blockchain infrastructure that can support large-scale applications has basically taken shape. Since 2023, the Bitcoin Layer 2 protocol has shown huge room for innovation. Ethereum is advancing step by step according to the roadmap, from the initial single chain to the Rollup center route, modular blockchain and Cancun upgrade, and then to the future account abstraction and chain abstraction. High-performance Alt Layer1 is constantly iterating, and the ecosystem continues to grow and is full of vitality. At the same time, many developers are working in niche areas, such as the development of full-chain game engines, the implementation of ZK in actual scenarios, and breakthroughs in fully homomorphic encryption.
The barriers to blockchain application development are constantly decreasing. Application projects can be scalable, decentralized, autonomous, and secure.
Compare DApp, Rollup App, Layer3 and App Chain from different perspectives, and formulate the most appropriate technical solutions according to needs. Various open source tools that reduce the difficulty of application project development, donations from different ecosystems, and platforms and communities for communication and learning among developers make Web3 application development more convenient and effective.
Digital currencies and digital assets are integrated into the mainstream financial system. The approval of the Bitcoin spot ETF by the US Securities and Exchange Commission in 2024 is a milestone in the development of the Web3 new economy. This allows digital assets to connect with a wider range of users and liquidity, and occupy a place 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 Welcome to the blockchain’s “1995 moment”
In the 1990s, the birth of the World Wide Web and the retirement of the NSFNET backbone network marked the beginning of the commercialization of Web 1.0. The "1995 moment" was a critical moment when the Internet shifted from system and architecture construction to application platform development. Most global Internet platforms, including Amazon, eBay, Yahoo and Google, were born in the 10 years from 1995 to 2005. Looking back at history, the factors that contributed to the Internet's "1995 moment" include: first, technological iteration and improved infrastructure; second, the open and free spirit of open source; third, full of imagination; fourth, capital boost.
The current blockchain field has all these contributing factors and is about to usher in the "1995 moment" of blockchain. The past 16 years of technological accumulation, active developer groups, continuous risk-taking and innovation, the emergence of generative artificial intelligence, the upcoming halving of Bitcoin, and the integration of digital currencies and digital assets with the mainstream financial system will all give rise to the "Cambrian Explosion" of blockchain applications in the next 10 years. The next 10 years will be the most exciting 10 years, and 99% of wealth creation in the new Web3 economy has just begun.
2. All value can be tokenized
2.1 The value law of Web3 new economy
The new Web3 economy is a " borderless economy " . Subject to limitations in technology, transaction costs, trust radius, and contract enforceability, most of humanity's traditional economic activities are bounded, limited to a small enterprise or industry, and limited to a country. Complex trade relations are required to form a unified market. The new Web3 economy is built on the decentralization and trustlessness of blockchain, as well as the automatic execution of smart contracts to ensure contracts. It naturally has the characteristics of being cross-time, cross-organization, cross-industry, and even cross-jurisdiction. As an open and transparent global public ledger, blockchain supports borderless value creation and circulation, and is the most suitable ledger system for the new Web3 economy.
The new Web3 economy has the law of high fixed costs and low or even zero marginal costs. This law determines the difference between the new Web3 economy and the traditional economy. In the new Web3 economy, the construction of the protocol layer and infrastructure requires a large fixed cost, but once the construction is completed, the application layer's call to the protocol layer and infrastructure is low or even zero marginal cost. This will accelerate Web3 application development on the one hand, and on the other hand, more value will be deposited in the protocol layer and infrastructure.
The value in the Web3 new economy exists in the form of tokens, namely digital currency and digital assets. The technical basis of tokenization is cryptography and blockchain. The registration, issuance and circulation of digital currency and digital assets are based on distributed ledgers and distributed accounting, and a distributed financial service system and distributed commercial applications are established based on smart contracts and token economics. Since 2009, blockchain-related technology research and development, market innovation and regulatory breakthroughs can be regarded as building the financial infrastructure of the Web3 new economy, which is essentially different from the traditional financial infrastructure (see Part 4).
In the Web3 new economy, value exists in tokenized form and has two important characteristics. First, the path to maximizing value lies in open and permissionless use rights. Whether at the protocol layer or at the application layer, the Web3 new economy must adopt an open source, open and free strategy to maximize value after the system is developed, and create and gather value through network effects; closing it will dissipate value. Second, the importance of use rights exceeds ownership. When the system becomes open source, open and permissionless, the importance of ownership decreases, and the right to use becomes the key to maximizing value. As can be seen from Bitcoin and Ethereum, the Web3 new economy is an open use rights economy.
2.2 Digital Currency
In the Web3 new economy, as the accounting method changes from centralized to distributed, the accounting unit changes to digital currency. In the bank account system based on the traditional bookkeeping method, the accounting unit is legal tender. In the Internet account system that relies on online registered accounts and bank accounts to support electronic payments, the accounting unit is the platform currency associated with legal tender. In the distributed ledger, the accounting unit is digital currency, which is mainly divided into the following three categories.
Legal digital currency, also known as central bank digital currency (CBDC). Legal digital currency is digital currency issued by the central bank and belongs to the category of base currency (M0). Legal digital currency is essentially a digital form of cash.
Institutional digital currencies are represented by stablecoins. In the mainstream financial system, the central bank is only responsible for the issuance of base currency, while commercial banks create money through credit activities and multiplier effects on the basis of base currency, thus forming broad money (M2). Stablecoins are created by commercial institutions rather than central banks and belong to the category of M2.
Native digital currencies include native tokens in blockchain protocols (such as Bitcoin and Ethereum), as well as native tokens of smart contracts built on standards such as the ERC20 protocol. Native digital currencies are issued through algorithms and are not associated with legal tender. They are the most innovative digital currencies. There is a certain overlap between native digital tokens and the functional tokens described below.
2.3 Digital Assets
With the introduction of new accounting units, a new asset class, digital assets, has emerged in the Web3 new economy, which can be mainly divided into the following four categories.
Functional tokens represent virtual goods. The purpose of users purchasing functional tokens is to obtain the right to use virtual goods. Therefore, functional tokens are essentially the share of the right to use virtual goods.
Security tokens represent the fractional ownership of a company. Traditionally, company ownership is converted into shares. With the application of distributed ledgers, company ownership is tokenized to generate security tokens.
Digital tokens, or NFTs. In the real world, to verify the identity of individuals and institutions or the relationship between them, it is often necessary to rely on proof from multiple independent institutions. In the digital world, it becomes difficult to rely on independent third parties for identity verification, and NFTs have great value as a tool for self-verification. NFTs are not only proof of identity and qualifications, but also proof of work, contribution, rights and power, and can even become a self-verification tool for everything in the digital world.
Tokenization of real-world assets, or RWA. Real-world assets including real estate trusts, credit assets, securities and funds can be issued to investors in the form of tokens. Some RWA can be listed and traded on digital asset exchanges, while others can be traded between institutions in the form of tokens.
It is necessary to distinguish several concepts related to digital currency and digital assets. First, digital currency 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 4). Second, crypto assets are a subset of digital assets. According to the definition of the Basel Committee, except for legal digital currencies, other digital assets belong to the category of crypto assets. Third, data assets come from the data factor market. On the one hand, data assets have nothing to do with traditional financial infrastructure or Web3 financial infrastructure. They are generally stored in databases and can be structured or unstructured. On the other hand, they are easy to copy and can be used by multiple people at the same time. Use will not cause consumption or impairment, and it is difficult to clearly define ownership. To a large extent, they have the characteristics of public products. Digital currency and digital assets have clear ownership, and related transactions are reflected in changes in ownership, which are typical private products.
3. Individual empowerment and organizational reconstruction
Technology drives society and reshapes the future. The productivity revolution triggered by the Web3 new economy will inevitably lead to the innovation of production relations, which will first be reflected in individual empowerment and organizational reconstruction.
3.1 The rise of individual capabilities
Network state, that is, cross-time and space network space. The new Web3 economy is built on the interconnection formed by the connection and reconnection of hundreds of millions of computer users, which has created a new social space - a global, free and time-transcending network space, which can be called a "network state". On the one hand, digital technology transcends geographical boundaries, decouples economic functions, and breaks the geographical restrictions in traditional employment relationships. Employees and employers can live and work in different jurisdictions. On the other hand, the globalization of the digital economy transcends the boundaries of sovereign states and accelerates the trend of global division of labor and crowdsourcing collaboration. After the user group is digitized and virtualized, more and more economic activities are carried out in the network city-state. This will fundamentally change the information and transaction costs, and then completely change the logic of economic and business activities. The influence of global factors will increase, and the influence of regional factors will decrease. The new Web3 economy is not limited to users in a certain country or place, but is to expand greater business opportunities for global users.
Sovereign individual means that the individual's ability exceeds that of the organization. Web3 and AGI will greatly improve 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. They can acquire any professional knowledge such as law, medicine, programming and art with a lower threshold and lower cost. The economic value of memory as a skill will decline, and skills in information integration and creative application will become more important. This will inevitably break the original power structure and management model of economic activities. The advantages of corporate organizations in information and transaction costs are declining.
Capital taxes will be reduced under competition, artificial economies of scale that maintain the long-term survival of companies will no longer exist, and the phenomenon of lifetime employment will disappear. At the same time, sovereign individuals are rising, will control more economic and social resources, and will reshape the way resources are allocated. In the network city-state, the survival rules based on personal autonomy will be carried forward, and sovereign individuals are expected to obtain personal autonomy and excess returns at the same time. In the future, most wealth can be created and earned anywhere, consumed and traded anywhere, and commercial institutions need to adapt to the development of sovereign individuals so that they can achieve maximum value.
Digital nomads live wherever there is water and grass . In 1997, former Hitachi CEO Motoo Maki proposed the concept of digital nomads, referring to those who earn first-world incomes through the Internet but choose to live in places with prices in developing countries. The new Web3 economy has accelerated the development of digital nomads as a way of life. With the emergence of cyber city-states and the rise of sovereign individuals, the flow of talent, knowledge sharing and cultural collisions between transnational virtual communities are taking place at an unprecedented scale and efficiency. For example, in Zuzalu, an experimental mobile community conceived by Vitalik Buterin, outstanding talents from cryptography, biological sciences, philosophy, politics and art from all over the world actively join. A series of spontaneous topics have emerged in the community, covering cutting-edge propositions such as longevity, public goods, zero-knowledge proofs, synthetic biology and cyber states. After experiencing human group cohabitation for two months, they each dispersed and spread their pioneering ideas around the world. In February 2024, the Japanese government opened the "Digital Nomad Specific Activities" residence status to IT workers around the world, which can be visa-free for 6 months.
These phenomena appearing around the world seem random, accidental and distributed, but the logic behind them is the new way of life and production spawned by the new Web3 economy, which manifests itself in the combination of mobility and aggregation, the combination of digital space and local culture, and the combination of globalization and individualization.
3.2 Transformation of Business Organizations
In the new Web3 economy, business organizations need to rethink the organizational model of human-machine collaboration and reposition the division of labor and cooperation among intelligent entities.
We are delighted to see that OpenAI has adopted a unique equity structure. Currently, OpenAI has established a joint-stock company, but it has set a cap on the profits of all shareholders. It is a special governance structure where non-profit entities and profit entities coexist. OpenAI will eventually become an open source, open, permissionless and trustless infrastructure that is universal to mankind, like the Internet TCP/IP protocol. This architecture is very innovative and difficult to design under the existing model of Wall Street. Only Silicon Valley technology companies with increasingly high digitalization like OpenAI will adopt this structure. They understand their social responsibilities and how to alleviate people's concerns about monopoly and excessive profits enjoyed by a small number of people through a brand-new profit distribution framework and property rights licensing model in the AGI era.
In the new Web3 economy, all blockchain protocols are open source, free, permissionless, and trustless. Anyone can use it, anyone can fork the original protocol, and anyone can build their own applications on the protocol without any approval. A key difference between blockchain protocols and open source organizations is that they have built-in functional tokens, which standardize and share the right to use, capture the use value of the network through functional tokens, and then carry out economic incentives and benefit distribution. This mechanism design is fully adapted to the value characteristics of the digital economy with high fixed costs and low marginal costs.
The status of the ownership market has declined, while the status of the use rights market has risen. The industrial economy gave birth to the ownership market, which trades ownership (equity) and the institutional basis is shareholder capitalism. Under shareholder capitalism, the company system is the embodiment of the equity structure, and the interests of all shareholders are demutualized and listed on the stock exchange. The digital economy gave birth to the use rights market, which trades the use rights and the institutional basis is stakeholder capitalism. Under stakeholder capitalism, non-profit organizations and open source organizations have become the mainstream. The use rights cannot be demutualized, but can only be tokenized, and the resulting functional tokens can be traded on digital asset exchanges.
4. Global Financial Infrastructure 2.0
4.1 Web3 Financial Infrastructure
Web3 financial infrastructure is the product of distributed ledgers and distributed accounting, which is fundamentally different from traditional financial infrastructure based on traditional account systems and double-entry bookkeeping. The currencies and financial assets carried by traditional financial infrastructure, including central bank currencies other than cash, commercial bank deposits, Internet payment account deposits, and stocks, bonds and commodities recorded in the accounts of central securities registration institutions or custodians, are essentially values expressed in account balances in the traditional account system. The circulation and transactions of these currencies and financial assets are essentially debit and credit operations on related accounts based on double-entry bookkeeping. Web3 financial infrastructure carries digital currencies and digital assets, and supports their registration, registration, custody, issuance, circulation, trading, clearing and settlement. Digital currencies and digital assets are tokenized values with property rights characteristics, which are mainly reflected in "occupancy means ownership" and "transaction (or payment) means settlement".
Web3 financial infrastructure represents the 2.0 version of global financial infrastructure. The essence of the financial system is status and transactions. The status is reflected in the distribution of various assets and liabilities among various participants in the financial system at a certain point in time. Transactions are reflected in the activities in the financial system during a certain period of time. Transactions drive status updates. The status and transactions of the financial system can be recorded through both the traditional account system and the distributed ledger system. Only by rising to this level can we understand the innovative significance of Web3 financial infrastructure. Web3 financial infrastructure has many excellent features in terms of management methods, transactions, clearing, settlement and privacy protection.
First, it is more open. As long as anyone or institution follows the blockchain protocol, they can use it without permission or trust. This is an important manifestation of financial democratization and inclusiveness.
Second, it is essentially anonymous, but supports controllable anonymity. Compared with traditional financial infrastructure, Web3 financial infrastructure can better protect user privacy and guarantee each user's sovereignty over their own data. Web3 financial infrastructure can adapt to financial laws and regulations on "know your customer" (KYC), anti-money laundering (AML) and counter-terrorist financing (CFT). This is the basis for digital currency and digital assets to be integrated into the mainstream financial system.
Third, peer-to-peer transactions, transactions are settled at the same time. With the support of Web3 financial infrastructure, any two people, no matter where they are, and whether they know or trust each other, can conduct convenient and secure value interactions without relying on any third party. This will greatly upgrade the human cooperation model and expand the market scope.
Fourth, transactions are naturally cross-border. From the outset, Web3 financial infrastructure supports the allocation of financial resources, the discovery of prices for financial assets, and the management of financial risks on a global scale.
Fifth, the value carrier and programming logic (i.e. smart contracts) are combined into one, introducing programmable functions for transactions, enhancing the composability of activities on the blockchain, and supporting innovative models that have never been seen in the traditional financial field. The innovations triggered by smart contracts have been fully verified by the market in the fields of NFT and DeFi.
Sixth, high security. Distributed ledgers are public, and with cryptography and consensus mechanisms, they ensure the security and immutability of transaction records. Anyone can download the ledger to verify transaction results. Asymmetric encryption technology ensures that only the owner of the private key can control the relevant digital currency and digital assets.
Web3 financial infrastructure is naturally adapted to the digital native economic system. First, in the digital native economic system, activities such as asset issuance and trading are completely digital, without national border restrictions, and require a financial infrastructure that supports the large-scale free circulation of assets and highly interconnected values. Web3 financial infrastructure supports the most efficient value network in the world. Second, the decentralized nature of blockchain eliminates the problems of high intermediary costs and high trust foundation in traditional financial infrastructure. In Web3 financial infrastructure, users have better protection of their sovereignty over their assets, data transparency, and transaction security. Third, the digital native economic system is an economic system based on the right of use, and the network effect is a channel to maximize the value of the right of use. Web3 financial infrastructure can better promote the liquidity and efficiency of the right of use market.
4.2 Web3 New Economic Ecosystem
The new economic ecosystem of Web3 revolves around digital currency, digital assets, and related business applications and activities, and has three main components.
Primary market activities of digital currencies and digital assets. This is the source of the Web3 new economic ecology, involving the generation and issuance of various types of 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 the project party; second, the liquidity needs of the early investors of the project; third, the needs of the project to build a network and promote ecological development. High-quality digital currencies and digital assets are the key to the success of the Web3 new economy, which is inseparable from professional work in legal compliance, tokenization, technology research and development, and market expansion.
Secondary market activities for digital currencies and digital assets. The core of the secondary market is the trading platform for digital currencies and digital assets. They provide liquidity for digital currencies and digital assets, promote price discovery and resource allocation, enable investors to enter and exit the market flexibly, and support risk management. Currently, secondary market transactions for digital currencies and digital assets are active and diverse. Among them, professional and license supervision plays a vital role to ensure the compliance of transactions and the normal operation of the market. Regulators prevent market manipulation, protect the interests of investors, and maintain market stability and transparency by formulating and implementing strict market rules. Effective supervision can also help enhance market confidence, attract more participants, and promote the maturity and development of the entire digital financial ecosystem.
Industry services for digital currency and digital assets. These services mainly include blockchain technology support, issuance process, legal counsel, project consulting and licensed financial services, etc., providing necessary support and connection for the efficient operation of primary and secondary markets. Industry services cover the entire process of digital currency and digital asset projects from initiation to transaction completion, with the goal of ensuring that every step complies with industry standards and the interests of participants. In the preparation and issuance stage of the project, it mainly involves market analysis, token scheme design and compliance review, etc., with the goal of ensuring the project is launched and runs smoothly. Professional technical 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 will provide regulatory compliance and financial transparency support, while cryptographic security experts and anti-money laundering agencies will ensure the security and legality of transactions. Data analysis and consulting agencies provide in-depth market insights and strategic recommendations so that participants can make wise decisions in a complex and changing market. In general, the common goal of these services is to provide a stable, efficient and transparent business environment for Web3 industry participants and promote the healthy development of the entire industry.
5. Conclusion: Web3 New Economy for the Future
The new Web3 economy will lead the global economy to a more open, efficient, and inclusive direction, and contribute to the prosperity and progress of all mankind. In terms of serving the real economy, the new Web3 economy will promote efficient resource allocation and stimulate industrial innovation and economic growth through more efficient and transparent currency and asset circulation and financing methods. The distributed characteristics and programmable functions of the new Web3 economy will provide a flexible and low-cost development environment for emerging technology companies and projects, and accelerate the transformation and application of scientific and technological achievements. In terms of promoting financial development, Web3 financial infrastructure, as global financial infrastructure 2.0, is naturally adapted to the digital native economic system, can break the geographical and time limitations of traditional financial services, make financial services more globalized and interconnected, and provide new opportunities for the integration and innovation of the global capital market.
