On the afternoon of April 15, Dr. Xiao Feng, Chairman of Wanxiang Blockchain and Chairman of HashKey Group, delivered a closing speech on "Three Token Models for Web3 Applications" at the "Tokenized Future" theme forum event at the main venue of the 2023 Hong Kong Web3 Carnival. He said that the application of Web3 must be a demand from all aspects. The Token model at the Web3 application level is different from the Token model of the basic protocol. The basic protocol is a single Token model, which should be unified globally. The application protocol is a three- Token model, and each application scenario has its own characteristics.

In the three-token model, the first is NFT (data, product and service value), the second is functional token (use right value), and the third is security token (ownership value, that is, equity value).

At the same time, Xiao Feng also pointed out that NFT is not just a work of art or an avatar, but also self-created, self-managed, and self-proven.

The basic principles of functional token design include that, similar to ecological points, they are given away free of charge to incentivize users and launch the market. There cannot be any financing activities such as issuance, sales, and subscription. Price discovery depends on the secondary market, and they are not assets on the company's balance sheet.

The nature of security tokens is the same as that of stocks. STO can be carried out on virtual asset exchanges. After STO, it is equivalent to being sold on the global network of public chains. It can be listed on the same exchange as functional tokens , which can bring users and investors together.

The following is the full text of the speech (some parts have been deleted without affecting the original meaning):

Xiao Feng: Good afternoon, everyone! Today is the fourth day and also the last day of the summit.

Token economics is the core topic of Web3. It is intentionally placed in the afternoon of the last day to be presented to everyone as the finale topic of the four-day summit.

The title of my speech today is "The Three Token Model of Web3 Applications". Dr. Zou's explanation of the Web3 New Economy and Token Economics White Paper is actually an explanation of the "Three Token Model".

First, Web3 applications must be tokenized.
First of all, my point of view is that the application of Web3 must be Tokenization. Any business that does not use the Tokenization method to build Web3 cannot be called Web3. Web3 must be based on the value Internet, and is also a network based on blockchain, digital wallets and smart contracts.

Second, basic protocols and application protocols.
However, the token model of Web3 at the application level is very different from the token model of the blockchain basic protocol. What we are familiar with now is the token model of the basic protocol, whether it is Bitcoin or Ethereum, they are all single tokens.

One of the important reasons why the basic protocol is designed as a single token is that the basic protocol should be globally unified. There can only be one basic protocol for the Internet. If there are multiple, the contribution of the Internet to human society will be weakened. The same is true for blockchain.

Just like the Internet, when blockchain moves towards application, the single token model is no longer applicable.

When the Internet moves to the application layer, various protocols and applications will be spawned; the Internet has hundreds of protocols at the application level, but at the most basic level, each layer has only one protocol - IP, TCP, UDP, HTTP, because the world needs to use a unified basic protocol to build a global Internet application.

Therefore, when we discuss blockchain applications and Web3 business applications, we should not be confused by the single model of blockchain infrastructure. This confusion is what I felt when communicating with many Web3 entrepreneurs in the past year. It was during the communication process that I proposed the "three- token model", which can well solve technical problems, performance problems, incentive problems and compliance problems.

Second, the three- token model of Web3 applications.
What are the three types of tokens in the three- token model of Web3 applications?
(1) NFT.
(2) Utility Token.
(3) Security Token.
The three types of tokens together constitute the economic model of Web3. Each of them plays its proper role, incentivizes each other, and also incentivizes compatibility.

Third, the value of the three- token model of Web3 application.
The value represented by NFT is the value of goods, which includes products, services, and various data. Utility Token represents the value of the right to use/network value, and obtains the value of network benefits.

We talked about the "fax machine effect" a few days ago, that is, everyone buys a fax machine and joins a fax machine network, uses the network, and also increases the value of the network, but the fax machine network does not belong to anyone, and the value of a fax machine joining the network cannot be extracted and sold, so the network value is separate from the shareholder value, and the company cannot profit from it. The Internet has a large network effect, but the network value does not belong to the participants. Utility Token pioneered the extraction of network value through network effects and made it standardized, share-based, and financialized.

Security tokens reflect the value of the equity and ownership of Web3 participants. In the future, if a Web3 application uses both functional tokens and security tokens, then generally speaking, the value of the functional token will be greater than the value of the company's project security token, because the network effect is much greater than the effect of a single participant.

Fourth, NFT.
When designing Web3 business models, most Web3 entrepreneurs do not have a clear enough understanding of the functions of NFTs, the role of Web3, etc., nor do they pay enough attention to them.

NFT is a digital proof that not only represents the ownership of the artwork, a "digital collection", but also more than just an avatar. As a digital proof, the most fundamental difference between NFT and various existing proofs is that NFT is self-created, self-managed, and self-proven.

Because NFT is placed in a digital wallet, and the digital wallet is created by you yourself, whether it is a wallet of Bitcoin, Ethereum network or other network, as long as it is built on the blockchain, it is actually self-registering, self-managing, and self-proving your identity, behavior, process, results, workload, contribution, and some products or services with intellectual property rights that you created. This is the most essential difference between NFT as a digital token and the various proofs provided by other centralized institutions.

For example, ChatGPT can help everyone create many products and services, but does the ownership of this product or service need to be registered with the Copyright Office, or is it self-managed and self-proven using NFT? So far, at least the U.S. Copyright Office believes that creations based on ChatGPT are not protected by copyright.

Indeed, when 1 billion people apply to the Copyright Office every day for the products and services and knowledge they created through ChatGPT, I believe that the copyright management department of any country will collapse. Therefore, in the AGI era, the best management model is self-registration, self-management, and self-certification through NFT.

When you work and live on the global network, NFT is the best tool to help prove your experience, qualifications, behavior, and identity . At the same time, if you can prove that I am indeed the earliest producer of a certain NFT, even if it is only one minute earlier than others, then its invention rights should belong to you, not others.

Fifth, the source of NFT’s value.
Where does the value of NFT come from? I think its value comes from two points, one is Play to earn, and the other is Play to owner. Whether it is Play to earn while playing or Play to owner while playing, what you actually play are those NFTs. When we design our own entrepreneurial projects in the Web3 field, NFT will be a very important tool, a self-managed and self-certified digital token.

Sixth, NFT connects everything.
How can NFT help us build Web3 business? NFT is a "connector" that connects Web2 to Web3, the real world to the virtual world, and of course, your fans and products, consumers and communities, consumer behavior and emotional experience.

Let your imagination run wild. NFT is all-encompassing. It can prove everything and represent everything. Moreover, this proof and representation is self-managed and self-registered. It exists in your digital wallet and can be carried with you.

Seventh, functional tokens.
The biggest challenge facing functional tokens is that if the legal design boundaries are not clear enough, they may be suspected of securities issuance. Therefore, functional tokens must be designed with very clear boundaries to keep them away from various securities laws.

If functional tokens are positioned as ecological points, then naturally, any company and project has the right to issue its own ecological points without violating any laws, especially without touching on securities issuance.

Since it is ecological points, it means that they are given away for free and cannot be used as a financing tool. No matter how many transactions occur between customers/investors in the secondary market in the future, even if the ecological points are as high as 1,000 or 10,000 US dollars, for Web3 project parties/companies, they will always be given away for free to users.

Incentivize users and start the market, but there should be no financing activities such as issuance, sales, and subscription. At the same time, it should not be included in the company's balance sheet, because it does not belong to the company's assets, but is just a set of points system you set up. It has no price for the issuer. However, users and investors will generate prices through transactions in the secondary market. This price has nothing to do with the issuer and you cannot manipulate it. This is a basic principle of functional token design.

Eighth, the source of value of functional tokens.
Where does the value of functional tokens come from? Where does the investment value of functional tokens come from? Just like the "fax machine effect", if you want to join a very large fax machine network, this fax machine network may be worth 10 billion US dollars. You must first buy a fax machine. If you don't buy a fax machine, you obviously cannot obtain the license or right to use this fax machine network.

It’s the same with Bitcoin and ETH. You have to hold Bitcoin to use the Bitcoin network, and you have to hold ETH to use a blockchain network like Ethereum.

The same is true for Web3 startups. You need a utility token to use the corresponding network. So, first of all, its value comes from the permission to use the network. Secondly, if you obtain such a utility token, you can pay the gas fee. The exchange can pay the transaction commission, and the startup company will also promise to use part of the cash or a certain proportion of the profit to buy back and destroy the utility token . The legal boundaries of the repurchase behavior must be designed very clearly.

If an asset becomes part of your company's balance sheet after you repurchase it and if you destroy it after you repurchase it, they are two different things. Try not to reflect such an asset on your company's balance sheet. If you destroy it by repurchase, it will obviously become clearer in terms of legal boundaries and further away from the judgment of securities attributes.

Of course, Utility Token also has some rights in community governance. The data of NFTs, Utility Tokens, etc. held in the wallet is public on the entire network. Therefore, when other entrepreneurial projects need to use their own tokens to develop users, they may airdrop tokens into your wallet, which is also a benefit for you. When popular NFTs are issued, you are more likely to be included in the whitelist, which is also a source of value.

Of course, the most important and core value of Utility Token is that it reflects the value unit of network effect. The network effect in Web2 has always existed, but the network effect does not have its own value measurement unit. Without a distributed ledger or blockchain, there is no way to extract the value of the network effect separately and standardize, share, and financialize it.

Ninth, security tokens.
In fact, security tokens are easier to understand. They are the tokenization of company equity, and they are the same as stocks in nature. When a Web3 startup project launches its mainnet or goes online, it starts issuing utility tokens, which can be used to start the market, reward users, and gain growth. However, the company must go through a period of time to prove its commercial maturity and a stable balance sheet before it can go public.

When Web3 startups are proven to have mature business models, healthy balance sheets, and sustainable businesses, they will have at least two options: one is to use IPO to trade on a stock exchange; the other is to choose STO and trade on a virtual asset exchange.

Tenth, why STO?
Why should you choose STO?
First, because issuing Security Tokens on a global network, such as Ethereum, can obtain investment from global investors, while a stock exchange is usually a regional market under the jurisdiction of a certain judicial region.

Second, STO allows your Security Token and Utility Token to be traded on the same trading platform, which makes it easier to integrate consumers, users and investors. If your fans and users really like your product, they will also give your stock or security token a better valuation, and perhaps get better liquidity.

Today I will briefly introduce the three Token models related to Web3 applications. Finally, I would like to express my sincere gratitude to everyone for participating in our four-day Web3 Carnival. To be honest, when we were preparing for this conference, we really did not expect so many friends to come to the scene and actively and enthusiastically participate in the various activities of the carnival for four consecutive days. Here, on behalf of our organizers, organizers, and all sponsors, I would like to express my gratitude for everyone's enthusiasm and encouragement! Thank you!

END

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