Dialogue with Distributed Capital's Huang Lingbo: Opportunities for Blockchain Applications and Investment in the New Cycle

This article was first published on April 12, 2020, on the Chain Catcher WeChat official account, by author Gong Quanyu.

1. Breakthrough Opportunities in Blockchain Applications

Questioner: Recently, various sectors of society have been paying close attention to the concept of new infrastructure. As an emerging digital technology, what position can blockchain technology occupy in various aspects of new infrastructure?

Huang Lingbo: New infrastructure mainly includes three networks: information network, transportation network, and energy network. I believe the information network, centered around 5G, has a higher relevance to blockchain technology.

In the industry, 5G applications are generally summarized into eight major modules: energy saving, human tracking, mobile big data, Internet of Things, real-time services, business system upgrades, high-speed network applications, and high-reliability network applications. Among these, human tracking, business system upgrades, and high-reliability networks are more closely related to blockchain technology.

From the functional perspective of blockchain technology, it can play three roles in the 5G information network. First is to ensure data and network security. In the future, the 5G network will be a data-centric infrastructure, and human society's dependence on data will become stronger, with increasing demands for data security. Blockchain technology will play an important role in this.

Second is to solve data interaction issues. In the electronic process of modern society, the data interaction between different institutions has not been fully realized. For example, various government departments have separate data systems, and most data from departments like the tax bureau and real estate bureau are not interconnected. Each hospital's data is also disconnected, creating data silos. Blockchain technology can promote internal collaboration through asymmetric encryption schemes, allowing data inference results to be derived without needing to know the data itself.

Third is to promote the development of the digital economy, which is a way for blockchain to have a relatively disruptive effect. Abroad, there has been gradual progress based on stablecoins or other mainstream tokens, but domestically, significant development will require the emergence of DCEP.

In the future, most physical rights or assets may be tokenized, and many business models will emerge based on asset confirmation and smart contracts.

Questioner: How do you think the blockchain industry should seize this opportunity of new infrastructure?

Huang Lingbo: Currently, most blockchain projects are not performing well in terms of overall industry growth, and their connectivity with external industries remains weak. Therefore, I believe the inspiration from this new infrastructure for blockchain projects lies in the combination of blockchain and traditional scenarios, which is a good opportunity to create incremental data and an important chance for the real application of blockchain.

To seize this opportunity, I think project parties should collaborate more with government, financial institutions, or large enterprises, focusing on some vertical fields, but they need to have a deep understanding of the industry.

Questioner: You previously mentioned the concept of securitization of physical rights, which has been discussed by many for the past five or six years. Where do you think the breakthrough in this direction lies?

Huang Lingbo: The biggest core issue is quality assets. Previously, this industry lacked quality assets that could be securitized, but now such assets are gradually being put on-chain. Quality assets refer to verifiable and confirmable assets, such as assets linked to real estate certificate data from the real estate bureau, which are truly confirmable quality assets.

This year’s data increment is a great opportunity because government and enterprise institutions are beginning to develop electronic certificates for quality assets in real life, which will all be assetizable in the future. Traditional entities will increasingly connect with blockchain.

For example, many hair salons in modern society may run away after collecting customer prepayments. If in the future customers use stablecoins like DAI to purchase prepaid cards, the prepayments collected by merchants will be locked in smart contracts, releasing a portion of the assets for each service, and the profit-sharing mechanism among all parties will be transparent, preventing merchants from taking the money and running.

Questioner: But if a merchant intends to infringe on user rights, they may not adopt blockchain payment methods from the start. Additionally, recently Alipay has developed a similar product called "Zhima GO" based on Sesame Credit, allowing users to enjoy first and pay later based on credit scores. How do you view these issues?

Huang Lingbo: Some merchants may not have such intentions initially and may choose to run away only after their funding chain breaks. In this case, blockchain-based payment methods have higher transparency and higher default costs, serving as a risk control method to protect consumer rights and also as a marketing tool.

Alipay is actually solving this problem in a relatively centralized way, while blockchain aims to address it through a more transparent and open-source approach, but there is still a long way to go.

Questioner: You mentioned that data on-chain will experience a major explosion. Over the years, there have been doubts about data accuracy, security, and compliance regarding data on-chain, and progress has been slow. What breakthroughs do you think have been achieved in this direction?

Huang Lingbo: In the past, the accuracy of data on-chain was insufficient, mainly due to the immaturity of Oracles, leading users to question the authenticity of the data. However, the current trend of data on-chain is driven from the top down by the government, and the data from government and financial institutions already has credit backing, thus possessing high credibility and value, leading to a major explosion in practical applications.

Truly decentralized data on-chain through game-theoretic mechanisms is still very difficult at present; only after the widespread adoption of Machine to Machine might this become more feasible.

Questioner: In many application scenarios, the value of blockchain mainly lies in breaking down data barriers between different entities. Is the value of blockchain technology irreplaceable in this regard? Can government departments solve this through internal system optimization and enhanced collaboration without blockchain?

Huang Lingbo: Breaking down data barriers is not that simple. Different institutional entities are often unwilling to share data, which is more evident in the commercial system where data is a core business secret that they are reluctant to disclose.

By using blockchain technology to encrypt important data, data sharing can be achieved without public disclosure, and a series of data analysis results can be shared through methods like MPC computing.

However, for government-related departments with internal credit mechanisms, administrative directives have a strong effect. Many data barriers can indeed be broken without blockchain, but the issue is that even if data is shared, it can still be modified. The government can use blockchain technology to make internal data more credible and transparent, achieving traceability and accountability while preventing internal corruption issues.

Questioner: Although many blockchain projects have been implemented across various sectors of society, they have not garnered widespread attention and importance. What stage do you think blockchain technology needs to reach to gain higher recognition from society?

Huang Lingbo: Even in the most widely applied supply chain finance scenarios, blockchain technology remains primarily a supportive module rather than a core module. I believe that only after 5G is truly implemented can blockchain achieve larger-scale breakthroughs and recognition.

5G can drive the rapid development of the Internet of Things, which in turn can promote the development of Machine to Machine and a significant increase in the number of machines. Machines, like humans, can serve as data carriers, but their advantage lies in the fact that the processes of data collection, storage, and interaction are secure and transparent.

Blockchain facilitates data interaction under a certain governance mechanism. There are many challenges in governance mechanisms oriented towards humans, but due to the aforementioned advantages, the design of mechanisms oriented towards Machine to Machine is simpler and more convenient. It can actively collect human data, then interact and integrate this data on the underlying blockchain network, and incentivize nodes to jointly maintain the platform's security, ultimately promoting the development of the digital economy based on blockchain technology.

2. Investment Logic and Future

Questioner: In your view, what changes has the domestic blockchain investment industry experienced in the past few years?

Huang Lingbo: I entered the blockchain industry in 2017. At that time, projects focused more on community financing, with over 50% of shares belonging to the community, and there was a strong community aspect. Most projects had private placement shares of less than 10%.

From the second half of 2018 to now, the entire industry has begun to show a traditional VC investment model, with very little community participation. Most projects now primarily use private placements as their main financing method. For example, the community's share has shrunk from over 50% to possibly less than 10% now, while private placement shares have increased from initially not exceeding 10% to now often accounting for 30-40% or even more.

In my personal view, this is not an ideal financing method because the core spirit of blockchain lies in community. It requires achieving various community consensus (technology, funding, governance, applications, etc.) to promote its development, rather than relying on investment institutions, which does not significantly benefit the blockchain industry.

Questioner: Can you share the investment directions that Distributed Capital is currently optimistic about?

Huang Lingbo: There are mainly three directions. First is native blockchain projects, which are our most important long-term investment direction. Good projects in this area are currently emerging at a low frequency due to high requirements in technology and other aspects. We are currently researching blockchain database indexing projects and privacy computing projects, which are quite interesting.

Second is blockchain ecosystem projects, such as exchanges, wallets, and media. The market for these projects exhibits a clear 80/20 rule; once a project succeeds, the market structure becomes relatively stable and mature. We are currently focusing on blockchain financial derivatives and mining-related projects.

Third is enterprise service projects. Since October last year, there has been a significant increase in such projects in China, and we are closely monitoring them.

Questioner: Many people believe that the DeFi industry is currently one of the most innovative and practical directions in the blockchain ecosystem. Do you agree with this view?

Huang Lingbo: In fact, we believe that DeFi is still in a very early stage, with its implementation limited to within the circle and not strongly related to everyday life and traditional finance.

At the same time, DeFi has not achieved financial innovation. True financial innovation comes from projects like Bitcoin, which revolutionized the traditional financial system and changed production relationships, while DeFi remains within the financial system of digital currency, such as digital currency collateralized lending, which is an innovation of financial assets but does not qualify as overall financial innovation.

Moreover, after the black swan event in early March, more and more DeFi developers have realized the issues within the entire DeFi system and its product mechanism design, including underlying performance and governance mechanisms. In the long run, the DeFi industry also needs to experience such financial storms or hacking incidents, which will greatly help its system's integrity and stability, potentially leading to financial innovation.

Questioner: Regarding the future development of blockchain, what do you think are the most important questions to consider?

Huang Lingbo: I think there are two key questions to consider. The first is disintermediation, which is a profound subject. Most people do not have a sufficient understanding of disintermediation mechanisms, including myself. There is much to learn, and it can lead us to rethink how to innovate business models and truly change production relationships. Most industry insiders do not think deeply about this, so there are few projects that can genuinely achieve this.

The second point is that most people in the industry focus solely on blockchain technology itself, but its real development will be closely related to 5G, artificial intelligence, cloud computing, and other emerging technologies. Therefore, everyone should not limit themselves to blockchain technology but spend more time understanding the development of other emerging technologies, broadening their horizons, which will help clarify the future paths and trends of blockchain.