LooPing Protocol founder Wang Dong: I am not optimistic about NFTs and I will not engage in DeFi

This article is from Mars Finance, with the original title "Loom Network's Wang Dong Guests on Mars Video Live: I Am Not Optimistic About NFTs and Will Not Play DeFi."

NFTs are on fire!

From NBA Top Shot's sales exceeding $200 million, to the world's top auction house Christie's completing its first NFT auction, to Twitter's CEO's tweet NFT auction price reaching $2 million, the popularity of NFTs is undeniable.

Amidst the market frenzy, Loopring CEO Wang Dong expressed in his social circle, "I am not optimistic about NFTs, and neither I nor Loopring will get involved in NFTs. Most NFTs now are just hype, fooling the gullible and harvesting the naive." This statement sharply contrasts with the booming NFT market. Why does Wang Dong "denounce" NFTs, and what are the underlying reasons?

On March 11 at 4 PM, Wang Dong appeared in the Mars video live stream, responding for the first time to why he is not optimistic about NFTs. He also shared insights on recent Ethereum scaling, Layer 2 solutions, and DeFi topics. Of course, regarding investor concerns about how to analyze sectors and how to conduct value investing, Wang Dong also provided very insightful advice during this live stream. Below is the transcript of the live stream, highly recommended.

Mars Finance: When did you first start paying attention to NFTs? Do you remember your first impression?

Wang Dong: It might have been two or three years ago, but at that time, I was more focused on Security Tokens.

Mars Finance: We know that it was "CryptoKitties" that initially popularized NFTs. Recently, NBA Top Shot has been selling well, and the news of Twitter's CEO's tweet NFT auction price reaching $2.5 million has reignited the market. Do you think these high prices can represent the value of collectibles? Are speculators inflating scarcity to drive up prices?

Wang Dong: My view on NFTs is quite straightforward. In the short term, I am very pessimistic about NFTs and do not recommend anyone to invest. In the long term, NFTs have enormous value, but this requires legal support.

First of all, what is an NFT? For example, if you turn the ownership of a house into a Token, the person who receives the Token can move in, while those without the Token will be kicked out. In the future, if this can be realized through NFTs, its value would be immense. This indicates that the ownership of any item or asset in the real economy can be traded and recorded through NFTs, and it would not be an exaggeration to say that its value covers the human economy.

Why am I not optimistic in the short term? In the short term, many NFTs lack legal support, and many are tied to artworks or gaming equipment. Is there value in this? Of course, there is value, but from an investment perspective, NFTs are a very unreliable investment target.

Mars Finance: What do you consider to be reliable investment targets?

Wang Dong: A reliable investment target must first have broad consensus. For example, there are currently many Bitcoin holders in the market who all believe that Bitcoin is worth its current price; otherwise, it would crash.

When the consensus foundation is large enough, its value or price support is also strong enough. Conversely, a current NFT oil painting or artwork has only a few people's consensus; without a broader consensus foundation, its true value is not easily reflected, or the relationship between price and value is unstable.

Secondly, good investment targets must have liquidity. When you want to sell it, you should be able to cash out quickly. But what about current NFTs? They lack sufficient liquidity; when you want to sell, you can't.

Finally, historical prices of NFTs have no reference significance. For example, when Twitter's CEO posted a tweet, the auction price reached over $200,000. This does not represent any value of that NFT tweet; it is merely a mutually agreed transaction. If someone buys the NFT tweet for $250,000, it would likely be very difficult to sell it again.

Historical transaction prices can be easily manipulated. For instance, I could paint an abstract painting and then trade it back and forth between my left and right hands, with costs essentially being zero. After trading it a dozen or twenty times, the price could rise from $100,000 to $1 million. At that point, if someone suddenly buys it, they could easily fall into a trap. Therefore, historical transaction prices for NFTs have no significance from an investor's perspective; they can be easily manipulated. Some investors believe that someone made money through NFTs, but they may not realize who is actually conducting the trades; it could just be a left-hand-to-right-hand relationship.

Thus, without legal support, without a sufficiently strong consensus foundation, without good liquidity, and without historical reference prices, such investment products cannot truly meet investment needs; they are mostly speculation. I am firmly not optimistic about short-term investments in NFTs. In the long term, there is value, but that is a matter for a long time in the future.

Mars Finance: How long do you think it will take for the public to establish a consensus foundation on NFTs?

Wang Dong: This is not a matter of timing. For example, with gaming equipment NFTs, gaming enthusiasts may quickly reach a consensus that a particular set of equipment is worth a few dozen or twenty dollars. The experience of the equipment can be reflected in the game; once you buy it, you can use it; it is not an investment product.

In the real economy, if NFTs are applied to real estate, they have value attributes, but this requires legal support and depends on the legislation of various countries. This is not about technical support; technology can only support purely virtual NFT assets and cannot support any physical assets.

Mars Finance: You just mentioned the issue of poor liquidity in NFTs. In fact, I have noticed that many wallets cannot view NFTs after receiving them, and there is also no way to trade them. In your opinion, is there a good solution to the liquidity problem?

Wang Dong: There is no solution. From the traditional market perspective, some people may spend hundreds of millions on a painting, but this is not necessarily to buy the painting itself; it may be for another purpose, such as transferring money out.

A few years ago, postal currency cards were quite popular in China, but their liquidity was also poor, yet trading volume was still high. Why? Because there were market makers. If you compare the situation in the traditional market to the current NFTs, you will find that the liquidity problem of NFTs cannot be solved.

Why? Because there is no demand. Smart people will not treat it as an investment product and will not constantly buy and sell. If there is no constant buying and selling, it indicates a lack of demand, which leads to no trading volume and no liquidity. Does a painting need 1 million people to buy it? That is unrealistic. So, NFTs should have poor liquidity; this is not a problem of solutions but a lack of demand.

Mars Finance: Most of your discussion has focused on art and collectible NFTs; do you think music NFTs might have stronger liquidity?

Wang Dong: I don't think that counts as NFTs. NFTs represent unique items; they are transfer, not copy. For example, with music copyrights, you can sell them to ten people or ten thousand people, but that does not mean everyone gets an NFT; only those who hold the rights have the NFT. It merely sells the "right to listen to music for a period" to someone, and the selling process is also a copying process, which diminishes the value of these NFTs.

So, this indeed raises the question of how to define NFTs, and perhaps everyone has different definitions; I haven't researched it too deeply.

Mars Finance: After discussing NFTs, let's talk about Loopring's recent developments and issues related to Layer 2. I noticed that Loopring has launched version 3.6; what is the core change in this version? What problems does it solve?

Wang Dong: Let's first talk about our version 3.1, which was a bold attempt and the world's first complete implementation of ZK Rollup. However, we had some assumptions at that time that later proved to be incorrect. For example, we thought that generating zero-knowledge proofs might require very high costs and a lot of hardware. But in reality, the costs are very low, even negligible.

So, when we made the first version, some assumptions were proven wrong, and we updated our understanding based on these errors, removing many incorrect assumptions, making it more perfect and usable, and we feel that the space for real changes is not particularly large.

Based on this optimization, we also added new features. For example, we introduced an automatic market maker mechanism in Layer 2. Overall, it is both a result of optimization and an addition of new features and redesign. We are still very optimistic about version 3.6. However, it does not support NFTs; it supports Utility Tokens and high liquidity trading between coins.

In summary, it should be the only ZK Rollup trading protocol that can operate on the Ethereum mainnet. In fact, our competitors are also doing well with Layer 2, but there is currently no one that can conduct transactions on the mainnet.

Mars Finance: Ethereum is expensive and congested, and 2.0 is unlikely to land in the short term, so Layer 2 is highly anticipated. However, as we shift our focus to Layer 2, the issues become more complex. In the future, as more and more DeFi adopts Layer 2 solutions, will the composability of DeFi still exist?

Wang Dong: DeFi relies on composability. With Layer 2, composability may become more challenging.

From a technical implementation perspective, composability will not be eliminated. For example, Optimistic Rollup fully supports the Ethereum Virtual Machine, so if two protocols are deployed on the same Rollup, composability will be preserved.

There is also another solution, known as cross-Rollup, which spans two different Layer 2s. A few days ago, Vitalik proposed a new technical solution called Cross Rollup, which is about how to achieve composability between two Rollups. This is indeed feasible, but it is technically more challenging and differs from Layer 1's composability. Specifically, it involves a transition process, which is not the same as original composability. Therefore, in terms of user experience, its composability is indeed not as strong as Layer 1.

But overall, blockchain scalability is all about trade-offs. If you choose speed, you have to sacrifice capital efficiency; if you choose composability, you may have to sacrifice performance. Therefore, when you migrate to Layer 2, you are actually making certain sacrifices in terms of composability and performance. As Rollups become more refined, each Rollup's composability can be preserved.

Mars Finance: Can Ethereum really solve the scalability problem?

Wang Dong: In the short term, it is unlikely to be fully resolved. For example, ZK Rollup scalability multiplies Ethereum's capacity by 1000 times. In the future, if Ethereum is to be used by many users from various countries, a 1000-fold increase is far from sufficient. Therefore, Ethereum needs to solve the scalability problem from different dimensions. One of these is sharding technology.

Sharding can multiply the capacity by several tens or hundreds on top of that 1000-fold. Then, the implementation of PoS can further multiply it by several times. So through continuous accumulation, the network could expand by tens of thousands or hundreds of thousands of times; this is a comprehensive scalability solution. Before the overall solution is realized, Rollup is the most feasible and effective solution in the short term. So, the road to scalability is still quite long and will not be solved in a year or two.

Mars Finance: Regarding the recently popular Rollup solutions, we have noticed that Synthetix, Uniswap, and Chainlink have also publicly stated they will integrate. If Uniswap connects to L2, what is Loopring's differentiated advantage?

Wang Dong: From a comparative perspective, there are two points worth discussing. First, comparing Optimistic Rollup and ZK Rollup. If you step outside your own project and objectively look at these two solutions, ZK Rollup has a relatively high capital efficiency, while Optimistic Rollup has a relatively low efficiency, as it requires a long challenge window period; this is the most fundamental difference between the two solutions.

Regarding another difference, I will speak from Loopring's perspective. Loopring views Layer 2 as a solution to achieve commercial goals; our ultimate goal is to create exchanges and wallets, unlike some other teams using Rollup to build platforms and ecosystems. We are actually focused on B2C. Whether it is Optimistic Rollup or ZK Rollup, these are just means, not our goals. In the future, if Optimistic Rollup develops well and Loopring can perform better on it, providing greater value to users, we will not hesitate to migrate there. If in the future any ZK Rollup develops well, we can also migrate to someone else's Layer 2 to create a Dapp. We are not trying to showcase how advanced our technology is; we want to deliver products, which is different from some others. We do not build ecosystems.

Mars Finance: What are the latest developments at Loopring? What is the roadmap or development plan for 2021?

Wang Dong: We also face some challenges because this circle is too easy to make people restless, and we often get lost, not knowing what to do. For example, yesterday we were discussing how the project should proceed internally. Our final conclusion is to create value and produce products that satisfy ourselves.

Currently, I believe Loopring's solution is still quite good; we are confident in our technology and overall direction, but I think the product experience is not good enough. Therefore, our main goal this year is to provide a very user-friendly APP and also improve the web version, refining the user experience so that users stay after they come, rather than just coming for short-term benefits like airdrops or bonuses. Attracting users is one aspect of operations; we are not very willing to develop things just for the sake of operations.

There are many different voices in the crypto circle, and we do not want to listen too much to how we should do things. Everyone has their own set of theories, systems, or values. We just need to focus on doing our own thing and not care too much about how others view us. If we cannot succeed, we hope our lessons are worth learning from. Making money is not our measure of success; this is a consensus we have reached internally.

Our goal this year is quite ambitious; we hope that the Loopring wallet can not only support Ethereum but also be deployed on Layer 2 with costs close to zero. At the same time, we aim to better achieve interactions between Layer 1 and Layer 2, as well as interactions between Layer 2s. These solutions are currently under development, and I believe we should be able to deliver them this year. So, overall, I hope to provide some valuable technologies and services, which may also be our future goal.

Mars Finance: Next, let's talk about DeFi. In your opinion, what stage is DeFi currently in? In 2021, in which directions might DeFi continue to break through? Where does the momentum come from?

Wang Dong: To be honest, I do not know the answer to this question. The development of DeFi has exceeded many people's expectations, with many innovations. For example, it has implemented some mature products from traditional financial markets through smart contracts. However, there are also some unreliable projects that simply copy others' code. Currently, we have not researched DeFi too deeply. To be honest, researching projects and their teams is very time-consuming, and we do not want to do that.

Regarding value capture in DeFi and NFTs, I believe small investors do not need to rush to the front. You see, in traditional markets, it is usually VCs who rush to look at new projects and conduct various background investigations. Then, so-called retail investors or small investors can simply choose stocks from mature stock markets that have already been filtered by VCs.

If NFTs become popular quickly and DeFi experiences a new wave of enthusiasm, I advise small investors not to take risks at the front. After all, not everyone is a qualified investor. Moreover, if DeFi and NFTs become very popular, their value capture will ultimately be transferred to Ethereum, and then the overall value of the blockchain will be captured and transferred to Bitcoin. In fact, as long as you hold ETH and BTC, you are basically guaranteed to make a profit. There is no need to buy an NFT painting or participate in mining; if many people take risks, I estimate that many projects will exploit the naive. Because the so-called naive are those who lack cognitive ability but still believe they are capable.

In summary, I also do not understand DeFi, so I am not rushing forward. I will not invest in things I do not understand. Therefore, early investments should be left to professionals; just avoid being overly greedy.

Mars Finance: Let's discuss something a bit lighter. What have you been most focused on and thinking about recently?

Wang Dong: That’s a good question. I didn’t sleep well last night, and I was thinking about this question, pondering what the Loopring team should really do. From a purely financial perspective, we are not in a hurry to make a lot of money. Some may not want to hear this, thinking I am pretending. But we truly do not want to be Copycats, nor do we want to showcase value through operations.

In the past, many early internet companies in China grew through copying and leveraging operations to build projects. There are also people in the blockchain industry who copy others' work and then use Chinese-style operations to build projects. We do not want to do that; we hope to create something that others have not done, something fresh.

Of course, there will be people in the community saying, "You don't market, that's terrible. Your team is like this." I acknowledge their feedback, but I choose not to follow the crowd. We choose our own path, and others can choose whether or not to hold our tokens; it’s that simple, a mutual choice.

In the entrepreneurial process, I have not spent much time studying how competitors are doing because we have a very clear roadmap and do not always focus on others. This approach has its pros and cons. If you always focus on others, you will fall into "local optimal solutions," always trying to surpass others a little, but you will never achieve a longer-term "optimal solution." Therefore, I do not pay much attention to what other blockchain projects are doing. We just need to focus on a sector and cultivate it. However, being overly focused can also lead to losing sight of opportunities. Currently, we are focused on smart wallets and exchanges based on ZK Rollup. We hope to do our best with these two products.

Mars Finance: What do you think are the key words for industry development this year? How do you understand them?

Wang Dong: I think the first keyword is "inflation." As inflation intensifies, more people from traditional industries or traditional finance will enter the blockchain space, which will open up larger capital inflows and support the bull market.

The second keyword is "scalability." Over the past few months, everyone has seen that gas fees are too high; it is impossible not to scale, which should be a phenomenon and problem everyone agrees on. Basically, these two are the core keywords I believe in. Of course, you mentioned NFTs are also very hot; although I am not optimistic, many people are discussing them, even more than those discussing Layer 2. One reason is that many people find NFTs easier to understand, while Layer 2 is not as easily comprehensible. How to market? NFTs are easier to market, which is why they are so popular.

What else? Is smart wallets one of them? Smart wallets may not have sparked a big wave yet, but I know many teams are quietly working on smart wallets.

Additionally, there is "multi-chain," or "multi-ecosystem." In the absence of a solution to the Ethereum gas problem, many project parties may not choose Layer 2 solutions but rather opt for other chains. These chains may incentivize them, or they may believe it is easier to issue tokens on new chains. As a result, other chains will thrive, which is also a phenomenon. But this does not solve the problem; it is merely avoiding it. Therefore, I am not optimistic about this. In summary, solving scalability is a major trend; if the scalability issue is not resolved, other trends are merely "temporary trends." If we can solve the scalability problem and provide a better user experience, we will be in an unbeatable position; this is something we firmly believe in: creating value and solving problems.

Mars Finance: Imagine if the blockchain world solves the scalability problem, what will the future market look like?

Wang Dong: I believe that the value flow of blockchain also involves a larger issue, which is how to securely cross-chain. From what I understand, most cross-chain solutions are relatively centralized. Currently, there is not much discussion in the market about this issue, and how to solve it has not been put on the agenda. How to achieve secure value flow between heterogeneous chains may be a trend in the next two to three years. So far, I have not seen any good solutions.

Mars Finance: The biggest feature of the crypto market is the constant emergence of new things. I believe that after NFTs, the market will see more new species that need to be learned and understood. For investors new to the market, what aspects can they analyze to understand the value of emerging sectors? Please share your personal advice.

Wang Dong: Actually, my advice is quite simple. I do not intend to undermine anyone's self-esteem, but I want to say: before investing, it is best to calmly ask yourself, "Why should I make money? What justifies my making money?" Did you invest a lot of money based on your educational background, or do you have unique analytical abilities? Or do you have first-hand information? You need to ask yourself, "Compared to so many people, why should I make money?"

If you do not have a clear answer, then you are gambling. Sometimes I ask myself why I should make money from this project. If I cannot answer that question, I will give myself a question mark.

Sometimes, people make a little money and become inflated, thinking that since they made money before, they should continue to make money. The rules of the game are not like that. You may have made money before due to luck, not ability. Most people in this circle make money by luck, not by ability. Investment is the realization of cognition; when you lack cognition, yet still want to realize it, that is a bit too high an opinion of oneself.