Partnered With:

In Search of Eternity in the Digital World: What Makes Blockchains Cross Financial Cycles?

Read this article in 22 Minutes

We are not the architects of human society, we are the weavers of an autonomous web of rules

The intrinsic value of crypto beyond The financial cycles

Originally written by Felix Xu (ARPA & AMP; Bella Protocol CEO)

Origin: Trisolarian and Wall-faced

I still remember that afternoon many years ago when I read all of Liu Cixin's Three-Body Trilogy in one sitting in my small apartment on NYC 40th Street. In the years since, I have rereaded the Three-Body Problem many times, and its cosmic sociology, dark forest, water droplets, and wisdom son have left a deep impression on my mind.

Liu's Trisolaran is a transparent-minded alien with technological capabilities far superior to those of humans. The thought black box became the only weapon left, and the Face Wall Project was born. In 2017, when I was investing in Fosun, I came into contact with blockchain for the first time. I was amazed by the beauty of its mathematics and naturally associated blockchain with the projection of the three-body society in human society. In early 2018, several partners and I leaped into the blockchain world and haven't looked back.

In the past three years, we have been thinking deeply about blockchain. What do these obscure terms, such as decentralization, immutability and fairness and transparency mean to human society? Share it with you in this article today.

Faith: Search for digital eternity

Our mission is to seek the immortality of the digital world. The quest for wealth, companionship, achievement and fame is part of being human. Anticipation for the future makes humans creative, but it is also associated with uncertainty and unreliability. Blockchain and smart contracts represent unbreakable rules, which abandon the changeable characteristics of human nature and transform the non-transparent game between people into a transparent game based on rules. If the blockchain infrastructure could be fully decentralized, the impact on the form of human organization could be profound.

Here we introduce the first concept: blockchain is the infrastructure of added value to society. Trust is based on the idea that an individual cannot change the system to create consensus. The decentralized nature of blockchain makes social consensus possible. As a "company" without a CEO, Bitecoin carries a market value of trillions of dollars, precisely because no one can decide its parameters. To some extent, Bitcoin is a kind of religious existence, where the body of the leader has been burned to ashes, and the text of the scroll lives on.

Illustration 1, Bible (left), Bitcoin white paper (right)

Second concept: code governance is a path back to natural law. The laws of nature, the jungle of nature, the dark forest of the universe (to be verified), are natural laws. There is no ambiguity, no middle ground. There is "gray scale" in human society, because many things in interpersonal communication are not black and white. Similarly, human law is advisory and there is a cost to breaking the law, but that does not mean it is "impossible" to break it. The rules in the blockchain world are mandatory, changing the rules from subjectively choosing not to be evil to objectively not being evil. At the same time, in the design of blockchain protocol, it is necessary to simulate the behaviors of all parties, and finally make them fully compete in the transparent rules to reach the equilibrium state. Similar to nature, participants with different purposes will increase the diversity and sustainability of the agreement.

The third concept: the boundary between the virtual and the real is gradually blurred, the value of property rights will be redefined. The spread of computers and mobile phones has turned people into cyborg s and digitized the vast majority of work. Now that entertainment and consumption have moved online, the proportion of digital consumption will increase in the foreseeable future. The paradox of pricing digital assets is that two entities cannot be identical at the atomic level, but two images are identical at the bit level. Digital assets are hard to price because of the low barriers to copying and the absence of a distinction between true and false. Blockchain NFT provides uniqueness and legitimacy for digital property rights. We believe that the concept of copyright of digital products (such as pictures, audio, video, games) will weaken, and the value of property rights will increase with the spread of digital assets, and eventually condense into memes with consensus.

The total value of the lock in Defi (Image Credit: Defi Llama)

Fourth concept: incomplete decentralization will lead to complete centralization. Over the past year, Defi's smart contract liquidity (TVL) has exploded from $670 million at the beginning of 2020 to $120 billion by June 2021, a rate rarely seen in any industry.

Behind the terrifying growth is the closed loop of the entire chain of business, complete with cryptocurrencies and smart contracts. In the case of Defi mortgage lending, the user's cryptocurrency deposits, borrowings, collateral settlement and redemptions are all executed through smart contracts, with no centralization. Compared with DEFI, the asset-on-chain and STO security tokens are relatively close to the existing financial system on the asset side and advance at a slower pace. In the long run, the next flashpoint will be where assets rise up the chain from issuance, circulation, and cash abortions. We believe that only the digital native products can eventually be combined with Crypto.

The fifth concept: bi-directional prosperity on the asset side and the capital side. Defi currently serves a cryptocurrency market of more than $2 trillion. In the middle of 2020, we predicted that the growth rate of stablecoin would substantially exceed the overall growth rate of Crypto, and even exceed BTC several times in the future. The data proves that we are right. In the case of USDT, from the beginning of 2020 to June 2021, USDT stablecoin issuance increased tenfold, from $6 billion to $58 billion.

Market capitalization size of mainstream stablecoins (Photo: Coingecko)

Stablecoins can be seen as a link between cryptocurrencies and the real world. In DEFI and exchanges, stablecoins are on the capital side, while more similar assets like Bitcoin and Ethereum are on the asset side. With the prosperity of the blockchain ecosystem, DEFI's yield will be much higher than that of traditional finance for a long time, and the capital capacity it can carry will also increase. In the long run, a stablecoin market cap of $5 trillion with an annualized return of 4% would require an annual value of $200 billion to be generated by stablecoin businesses. This value will come from more frequent institutional level trading, increased use of DeFi, more asset classes, and the emergence of cryptocurrencies.

Daily stablecoin transfers (Photo: Dune Analytics)

Sixth concept: the butterfly shift from narrow cryptocurrencies to broad digital assets. There is no denying that most of the current cryptocurrencies in Bitcoin and Ethereum have the functions of medium of exchange, equity and store of value. The appearance of stablecoin weakens the property of crypto's transaction medium, but strengthens its financial property. In the broad sense, digital assets include all valuable goods generated in the digital world, from infrastructure such as data, storage and computing power, to communicable media such as pictures and videos, to usable assets such as game props and virtual goods. Digital assets do not have financial attributes, but as assets, they can be confirmed and circulated by blockchain.

Combined with concept 3 and concept 4, we believe that digital native things are better linked objects. The reason is that in the real world, it is difficult to confirm the rights of digital assets, the issuing end has nothing to do with the existing financial system, and it can be efficiently circulated around the world. The issuance, circulation, usage and consumption of digital assets are expected to form a closed loop through blockchain and smart contracts. NFT's current foray into IP peripherals, digital art, and game props is a baby step. As the blockchain infrastructure iterates, more weak trust scenarios will be moved onto the chain, and the variety and layout of dApps will expand, creating more cash-flow generating application scenarios.

Seventh concept: spiraling infrastructure and applications, continuous innovation with low switching barriers. It took more than 20 years for the Internet to go from the earliest Arpanet to dial-up access, text reading and email, and a decade for the browser to reach Facebook. It has been 12 years since the launch of Bitcoin and 6 years since the launch of Ethereum. From the initial transfer, to token issuance, and then to the outbreak of DEFI last year, the functions of Bitcoin have gone through 20 years' journey of the Internet. It is reasonable to believe that the rule-based infrastructure of blockchain will be applied to all strong trust scenarios (such as assets) and some weak trust scenarios (such as data) in the future.

Internet (50 years)

1969 - ARPANET

1982 - TCP/IP (Infrastructure)

1994 - Web browser (Killer platform)

1995 - Amazon, Yahoo

1998 - Google

2004 - Facebook

Mobile (20 years)

2003 - 3G Mobile Network (Infrastructure)

2007 - iPhone (Killer platform)

2008 - App Store (Killer app)

2012 - 4G Mobile Network

Crypto (12 years)

2009 - Bitcoin Launch

2013 - CEXs, wallet

2015 - Ethereum Launch

2018 - Stablecoins

2020 - DeFi

2021 - DeFi, NFTs, and CBDC

Eighth concept: Go to the crowd, long live the Meme. We think there are two types of users of Crypto, one is the coin holder, the other is the product user. Crypto is the attention economy, and having a certain Crypto is the recognition of its concept, as the proof of community members. Therefore, in the operation of Crypto project, both viral transmission and product growth should be attached equal importance to the tonality of the brand. Dogecoin, for example, was originally intended as a parody of Bitcoin, but after years of inaction, its founders cashed out and left the scene, becoming a cultural icon for young people. Despite the horror of the rise, this is essentially the spirit of rebellion. Bitcoin Core and the Ethereum Foundation, while down-to-the-ground, are alienated from the currency community, and the perception that there are so many vested interests makes young people feel uncool. As a result, the young generation of new coinage has an innate sense of distance to the high price of Bitcoin, and has no resistance to the cute head and cheap unit price of Dogecoin. "I bought it for fun anyway." Just as Buffett doesn't understand bitcoin, Dogecoin isn't understood by many of the blockchain practitioners who emphasize the application scenario. Meme can be impressive and contribute incremental users to Crypto. But given a longer time frame, how many memes will survive in an era of rapidly changing user preferences?

Outlook: Convergence of Humanism and Machine Rules

The blockchain world is a lot different from the human world. It's a paranoid, rule-driven trust machine. In theory, blockchain should be the underlying driver of all digital native assets, including financial activity, virtual assets, and even social and generalized data and information flows. Admittedly, the current performance of the blockchain is barely enough to support applications like Defi, but we believe that the application and infrastructure is spiraling upward. Over the past 50 years, the Internet has changed people's way of life in many ways. Blockchain will be the portal from human governance to code governance. All human efforts are in search of eternity. The ultimate destination of all science, philosophy and theology is the unchanging truth. Computers have been around for only a few decades, a glimpse of carbon-based life into a silicon-based world. The world, the rules, the religion, are new. We believe that a society with highly developed humanism and completely clear rules is slowly unfolding.

We are not the architects of human society, we aim to be the weavers of an autonomous web of rules.

Conclusion: Be a partner of believers

At the beginning of 2018, my partners and I co-founded ARPA, which is dedicated to using cryptography to develop applications such as private data sharing, on-chain random number generation, and BLS aggregate signature. Along the way, ARPA has been involved in the establishment of several international standards for privacy computing, setting several firsts. At the same time, our verifiable random number, BLS aggregation threshold signature architecture is industry leading.

At the beginning of 2020, we saw a trend toward decentralized finance. Combined with the team's deep experience in Crypto and finance, we invested in the incubation of Bella Protocol. Bella's mission is to dramatically increase the penetration of decentralized digital asset management. We were fortunate to receive early funding from Binance Labs and TechCrunch founder Michael Arrington, and became the first Defi product to launch in Launchpool.

Three years' journey seems very short, but in the industry of Crypto, which develops at the speed of light, it is enough to experience the transformation of bull and bear and witness the changes of the situation. In the long journey, there are more and more aspirants to join the industry, together to promote this big change. Therefore, we decided to launch a $20 million crypto fund to invest and connect believers. The fund, which is being managed by me and my partner Noki, will focus on investing in innovative projects, mainly in DEFI and NFT, with a single investment size of $100,000 to $500,000. The Fund is an Evergreen Fund with no fixed investment and exit period. If possible, we want to fight side by side with like-minded people for forever.