This article is the closing speech delivered by Dr. XIAO Feng, Wanxiang Blockchain President and CEO, at the 5th Global Blockchain Summit. The summit was organized by Wanxiang Blockchain Labs, and gathered many vanguards and industry leaders such as Vitalik Buterin, Gavin Wood, Jae Kwon, Dawn Song, etc., shared their insight and expectation on hot issues, including Libra, blockchain and financial infrastructure, DeFi, Investment Trend, distributed business, staking and so on.
Taking advantage of the privilege of the sponsor, I’m going to be the last one to give a speech and the main content is to say thank you to all the guests who have insisted till now. Thank you for your hard work and attendance these two days!
There are more guests who stay until now this year than last, and I know it’s not because of me. Last year I was the last one to give a speech, so it’s mainly because of Vitalik.
Today, I would like to share with you some of my personal thoughts about Libra, not to make a comment on it.
I. From the Perspective of Currency
Firstly, use of credit endorsement.
Most people evaluate Libra in perspective of currency. Some people say it’s currency, while some people say not.
I think it’s not just sovereign governments that can issue currency. From the perspective of credit endorsement, in the past several thousand years, there are three kinds of issuers who endorse the currency credit, or issue currency by means of credit endorsement.
(1) Sovereign currency. Sovereign governments make the credit endorsement with sovereignty. The US dollar, RMB and the future digital currency issued by central bank all use sovereignty to make credit endorsement.
(2) Cross-sovereign currency. This is a kind of currency issued under multiple sovereign credit endorsement, such as Libra, which is likely to be issued next year. It has been stated that Libra will be issued with the national currency of four sovereign countries (organizations) or the short-term investment instruments of sovereign governments (organizations) as a reserve currency.
(3) Non-sovereign credit endorsement currency, which has the longest history. Such as gold, bitcoin, etc., as well as the stable coin DAI mentioned by Vitalik, which is issued by using digital assets as collateral.
Whether it’s Libra, bitcoin, or DAI, there’s no innovation in terms of credit endorsement. That’s not to belittle Libra or bitcoin, of course, but there’s nothing new under the sun. There is no need to worry. The shape and function of currency is changing all the time.
Secondly, the issuance of digital currency.
In fact, there are usually three types of digital currency issuers:
(1) Technology geeks. Bitcoin was created by technology geeks, and Vitalik created ETH. Any innovation, especially the disruptive innovation, is mainly created by technology geeks from scratch. After that, it may continue to be optimized and improved by other institutions to make it more suitable for the real world and regulatory requirements, and thus gradually spread.
(2) Commercial institutions and private agencies. Libra, as well as JP Morgan, which earlier announced that it would issue settlement currency for the B-end, are private agencies.
(3) Central Bank. The People’s Bank of China already has a clear plan, and the European government also has expressed its intention to issue digital currencies instead of Libra within the European Union
To sum up, perhaps the most appropriate way to issue digital currency is that it’s created by technology geeks, explored by private agencies, and finally issued by central bank.
Thirdly, the use of digital currency.
When paying all public and private debts in the territory of the People’s Republic of China in cash, no unit or individual may refuse to accept them, but the bank currency does not have this function. In the United States, the deposit insurance limit was $100,000 before 2008 and $250,000 after the financial crisis. Therefore, it’s safer to use assets as collateral fully, such as Libra. If 100% of the reserve is in the central bank, that would be perfect, while if managed by a third-party market, it would be defective because of the risks.
As Dr. Zou Chuanwei mentioned earlier, digital currency is a special, not a common currency, which does not have all the general functions of currency. It must be a currency that combines scenarios, specific needs, and specific uses.
Why did Internet payment come into being instead of Banks providing services? The reason is very simple. If two people use bank transactions for buying or selling on the Internet, it may take three to four steps to complete the payment. Customer conversion rate on the Internet will drop from 80% to 2% after more than three steps. If there are so many purchase behaviors that cannot be achieved due to the cumbersome process of payment and transaction, the commercial feasibility of e-commerce will disappear. The payment must be combined with the scenarios and can be completed at any time, anywhere on demand, so that e-commerce can be made.
Similarly, the promotion of digital currency issued by central bank may also encounter difficulties if it is not done with commercial institutions that can combine scenarios, flows and needs of customers.
II. From the Perspective of Finance
Libra is known to build a new generation of financial infrastructure. Why can we say that? Because it’s based on the blockchain. The three things at the bottom of the blockchain are used to build a new generation of financial infrastructure: a new bookkeeping method, a new system of accounts based on encrypted digital wallets, and a new unit of bookkeeping based on encrypted digital currency.
Libra is To Customer, claiming to build a personal payment system for 2.7 billion people. JPM is To Business, targeting to build inter-bank clearing system. They are all based on new bookkeeping methods, new accounts, new bookkeeping units. In order to understand Libra is the new generation of personal payment system, I’ve divided the evolution of the personal payment systems.
Banknotes are the first major reform and innovation in personal payment systems. Personal payment is very inconvenient before the banknotes appear, especially cross-regional payment. If we want to ship the silver coins from Shanghai to Beijing, we need to find an establishment which provides escorts for a fee. It is much more convenient when we have the banknotes.
Banknotes, as a more convenient form of currency, are actually related to the development of science and technology. The technology of Paper making and printing in Song Dynasty are mature enough. It is the continuous development of technology that meets the demand of lower cost and higher efficiency of payment.
The second generation of personal payment system is an electronic payment system based on bank card. It is difficult for banknotes to circulate across border, but bank cards are more convenient to pay around the world. Similarly, the electronic payment system based on bank card also benefits from the development of communication network.
The third generation personal payment system is Alipay, Wechat pay, etc. This is a mobile payment system based on Internet wallet. In the background of the Internet, the payment system based on bank card can no longer meet the need of real-time point-to-point payment, so the Internet payment came into being. The bank card does not complete the transaction directly with the customer, but through the Internet wallet.
The fourth generation personal payment system is a digital money payment system created by Libra based on blockchain and cryptographically generated addresses.
It can be seen that in these four generations of payment system, except for the second generation which directly uses the bank account and payment network, banks are not directly involved in transactions. The concept of open bank has existed long ago.
Under the impetus of new technology, banks will not play no role, but not be involved in transactions directly. Banks export account capacity, payment capacity, etc. through the API, or use a whole banking system to support other customers.
From the perspective of finance, Mr. Yao talked about the relationship between digital finance and digital assets yesterday, so I won’t talk more about it. The new generation of digital financial system needs blockchain and digital currency, in other words, the digital financial system is built on the financial infrastructure of blockchain digital currency.
How to understand the digital economy from the perspective of enterprises? Fuel is the driving factor of industrial economy and data is the driving factor of digital economy. How does data drive business? My summary is to model the data by computer, organize the data by algorithms, and computerize the business processes of enterprises, or turn them into intelligent contracts. This digital economy is not the digital economy in the economist’s view. Internet, Internet of Things, Cloud Computing, Artificial Intelligence, Blockchain and a series of digital technologies help enterprises to complete the organization of digital economy and digital business.
These digital technologies have three characteristics:
Data can span time and space. Data naturally has a penetrating instinct. Data flow is borderless without the limitation of time, space and organization. At the same time, data can penetrate the market level and realize the point-to-point transaction vertically. There is no need for intermediaries between buyers and sellers. Furthermore, data can shorten the industrial chain horizontally.
Because the transaction is point-to-point, it must be settled in real time. It’s not a point-to-point transaction when you use a bank card to buy something in the mall, because it takes time for the businesses to receive the money. However, the businesses need not worry, because the bank provides credit guarantee. But what if there are no intermediary guarantees like banks? Then it must be settled in real time. The blockchain is the network of transaction, liquidation and settlement completed synchronously.
Due to the characteristics of digital technologies, the intermediate links of digital finance are removed, and the core features are point-to-point payment and settlement and non-guaranteed transaction. Blockchain and digital currency are the best technical solutions to meet these requirements.
III. From the Perspective of Business
The feature of blockchain technology is that it is sufficiently digital, cross-border, cross-temporal and cross-organizational, as well as distributed, self-organized and decentralized. Being decentralized doesn’t mean the decentralization of social governance, but of business activities. To a certain extent, the applications truly based on blockchain should embody the above two characteristics.
There have always been two paths for any new applications based on disruptive technology.
Route 1: Take the new technology as a tool to improve the traditional business model and achieve an increase of marginal benefits.
Route 2: Take the new technology as a system to reconstruct the underlying logic of business.
There are many cases. For example, a few years ago, when Internet companies talked about “Fintech”, many people in traditional finance liked to talk about “technology finance”. Technology is a tool to improve the existing business model, which the “Fintech” is to use the Internet and digital technology to reconstruct the underlying logic of finance.
Why do Libra adopt the “association” structure? Why doesn’t Facebook control it? It is also based on the technical characteristics of blockchain. If Facebook builds Libra around itself, it’s likely that no one will use it, because it’s hard to trust completely.
The characteristics of digital technology have made the de-centralization of business activities inevitable. Now let’s talk about the development of business. There are two things:
1. Economic Globalization 2.0. Because of the Internet, it’s no longer an era of corporate globalization, where a company turns itself into a multinational, but any individual can conduct point-to-point transactions. Economic globalization has developed into personal globalization, and the solution of point-to-point transactions and the realization of point-to-point services have become prominent issues. The real-time clearing of blockchain technology and the settlement of point-to-point transactions can be used to facilitate the globalization of individual business activities.
2. Economic Digitalization. When the data are collected to a certain extent, its flow is basically across time and space, which makes the demand for financial payment for many business activities needed at anytime and anywhere. If it can’t provide payment and settlement services to meet the demand in a scenario, it will be eliminated by the market. The best case is the comparison between NFC’s near-field payment and the scanning payment supported by Internet companies.
Therefore, the new needs of life, business and finance brought by new technologies must be met by distributed and decentralized methods.
Blockchain rewards, whether it’s paid in 10 minutes or 1 second, are actually payments to the person who did the work for the blockchain in that 10 minutes or 1 second.
I have read a piece of information that about 34% of people in the United States do odd jobs, who are not affiliated with any enterprise, and not employed by anyone, but provide services through the Internet. The best way to calculate the salary of workers who do odd jobs is to pay by time. If we can make good use of the mechanism of labor remuneration in the blockchain, then the gig economy can be realized globally. For example, in China, Brazilians are employed to work for you without intermediaries, and the friction coefficient is zero. What a good thing!
Sharing economy is the same. How do you get paid for renting something for someone to use for 10 minutes? Via bank transfer or smart contract of blockchain? If you use smart contracts, you’ll get paid immediately. Obviously, the future sharing economy and gig economy are both based on blockchain and digital currency. There is no better solution than this one, which is nearly zero cost and can efficiently and timely solve the incentive problems of gig economy and sharing economy, as well as the payment problem.
Today, Zou Chuanwei has just introduced a white paper on distributed economy whose ecology can cycle endlessly and indefinitely. It won’t be like gambling in which you may lose or win everything.
This reminds me of what Jack Ma, the founder of Alibaba, once said: “customers first, employees second and shareholders third”, which is a simple concept of distributed economy. Not long ago, the American Business Roundtable, a group of nearly 200 prominent American entrepreneurs, issued a new mission for corporate managers — “enterprises cannot regard maximizing shareholders’ interests as the primary goal”, instead, it should maximize social welfare, which means that the welfare of all parties concerned in the enterprise should be compatible with incentives and taken care of, instead of highlighting only one party, especially the maximization of shareholders’ interests. Blockchain makes incentive compatibility for all the shareholders, not only for some or any of them. Neither Bitcoin nor Ethereum has shareholders, so all participants can be incented.
The old problem of “incentive compatibility” in economics has been solved best based on the blockchain. Yesterday I was asked how to value the public chain. I explain that the valuation of public chain is totally different from that of PE. When discussing the valuation of a company in VC mode, if valuation is $100 million, I would like to take 10% of the equity for financing, and the remaining $90 million belongs to the founding team. It is only to discuss the valuation of the company at the shareholder level, which is a matter between shareholders and investors. When the blockchain project was valued at $100 million, 20% was kept by the founding team, 20% by the foundation, 20% by the development incentive fund, 20% by the ecology fund, and 20% by other investors through private placement. The $100 million is distributed to all stakeholders involved in blockchain, not just shareholders. This truly achieves incentive compatibility, which leads to the “Pareto Optimality” in the infinite-loop game.
This is some thoughts on Libra. Thank you again for attending the summit today!