Dialogue with Lu Yang: The Early Development History, Business Model, and Three Historic Choices of VeChain

Original Title: "Distributed Capital Exclusive Interview | VeChain's Lu Yang: The Product Thinking of Blockchain People"

Author: Youfei

Looking at the history of the crypto industry, it is not difficult to find that blockchain entrepreneurship cannot escape these three narrative logics. First, entrepreneurship around the Bitcoin network. This refers to the early forks of the Bitcoin network, such as LTC, BCH, etc. Second, entrepreneurship around Ethereum, whether it is applications built on Ethereum or solutions aimed at scaling Ethereum. Third, entrepreneurship around Ethereum killers, such as EOS and Polkadot, BSC, etc. Overall, entrepreneurship around these three narrative logics has almost become the main theme of the industry.

Entrepreneurship based on these three narrative logics is driven by technology to promote applications. First, a powerful (performance), secure (security), and widely accepted (decentralized) network is needed to promote the development of applications on it. However, the industry leader Ethereum meets the requirements for security and decentralization but struggles with performance. Therefore, current entrepreneurship is dedicated to solving Ethereum's performance issues and finding alternatives to Ethereum. Although applications such as DeFi and NFTs are also developing simultaneously, the logic of technology driving applications in the industry is indisputable.

Of course, there are also those who go against the tide. This entrepreneurial thinking is application-driven technology. Entrepreneurs first think about how blockchain technology can be applied, and then solve the potential technical problems. In the cases invested by Distributed Capital, VeChain is a typical example that fits this entrepreneurial thinking. This pragmatic style born for applications is closely related to the experience of founder Lu Yang.

The Product Thinking of LV People

Lu Yang, the founder of VeChain, was one of the earliest people in China to learn about Bitcoin. At that time, Lu Yang was the CIO of LV Greater China and learned about Bitcoin in 2013. At that time, Bitcoin experienced a massive drop from $1,000 to $150. Compared to the extreme volatility of Bitcoin's price, Lu Yang was more interested in the technology and logic behind it. After research, he felt that the prospects of the distributed ledger and blockchain technology behind Bitcoin were bright, and he wanted to participate in this industry.

Lu Yang often attended various crypto industry meetups during business trips. At that time, so-called blockchain entrepreneurship was not well-established. Many entrepreneurs' thinking was simply to copy Bitcoin's code, change the logo, rename it, adjust the block size, and block time, thus creating a new chain and coin. Lu Yang's impression of the industry at that time was that most people in this field were technical, had a geek mentality, but lacked product thinking.

Once, at an event organized by IBM in San Francisco, a developer showed him a project, and all he saw was a screen full of code. Most developers only thought about writing beautiful code and did not consider where to apply it and how to present it. At that time, Lu Yang's job as LV's CIO was to connect technology with business scenarios, such as digital marketing, turning traffic into sales. In that era when WeChat had just emerged, this digital awareness was ahead of its time. Years of experience told Lu Yang that the blockchain industry lacked talents with product thinking, which happened to be his advantage.

By 2015, even though there were technologies like colored coins, they were still too primitive and rough to be applied to more complex scenarios. However, Ethereum's innovations with EVM and smart contracts brought a glimmer of hope to the industry. The establishment of VeChain was due to Lu Yang's acquaintance with Vitalik. At the end of 2015 and the beginning of 2016, Lu Yang met Vitalik through Shen Bo, who was then looking for investment partners in China. After talking with Vitalik, Lu Yang realized that the technology architecture of smart contracts and EVM was groundbreaking. Therefore, in the early stages of entrepreneurship, VeChain was built on the architecture of Ethereum, establishing its own consortium chain and began looking for relevant clients.

Lu Yang's deep resources in the fashion industry played a role, and VeChain's first client was a luxury brand where his former boss worked. The VeChain team combined NFC chips with the consortium chain platform to provide supply chain management and anti-counterfeiting traceability. By the end of 2019, 100% of the global supply chain management for that brand's leather goods adopted VeChain's solutions. VeChain's initial exploration proved that a blockchain based on Ethereum's architecture was feasible, and this long exploration journey had just begun.

Three Historic Choices

During the consortium chain period, VeChain accumulated clients in fields such as luxury goods, wine importers, and logistics. These cases made Lu Yang vaguely feel that blockchain would definitely have strong applications in the future, but how to use it was still unclear. There is a saying in the entrepreneurial circle: "Be the first to eat the crab," which roughly encourages entrepreneurs to always be at the forefront of innovation. Little did they know that in the early stages of industry development, when there was no successful model to refer to, such an entrepreneurial journey would inevitably be bumpy and lonely. Fortunately, every choice VeChain made was very correct.

The first time, incorporating an IoT team. At the beginning of the startup, Lu Yang found that having only chain technology was not enough; the application scenarios needed to integrate other technologies, the most important of which was the Internet of Things (IoT). The chain is like a virtual world, and the IoT would play a role in connecting this virtual world with the physical world. At that time, the team sought cooperation with many IoT companies but received no responses. This was partly because IoT companies mainly undertook government projects and were not very familiar with blockchain technology.

In the absence of cooperation, Lu Yang made a bold decision—incorporating an IoT team. Although this decision was controversial internally, it now seems to be a wise move, as blockchain and IoT are a perfect match. Coincidentally, the leader of that IoT team, Gu Jianliang, later became VeChain's CTO—he not only mastered IoT but also the chain, and later built the ToolChain platform with the team.

The second time, creating an enterprise-friendly blockchain platform. After accumulating a certain number of cases, Lu Yang realized that developing a private chain/consortium chain from scratch for each enterprise was not feasible, as it was equivalent to reinventing the wheel. The urgent task was to find a chain that could stably support business operations. To this end, he gathered dozens of corporate executives for a meeting at Qiandao Lake to seek an ideal blockchain platform. The feedback was that most public chains on the market at that time did not meet the requirements.

First, governance structure. For enterprises, it is hard to imagine a software system that does not upgrade for ten years in a decentralized environment. Once the software is upgraded, a group of people starts voting, arguing, and then forking. Second, economic model. Ethereum's transaction fees are volatile and can be expensive during network congestion. Many enterprises cannot accept that the costs of running their business are unpredictable. Third, compliance. Due to compliance issues, enterprises cannot temporarily own digital assets. So how can digital assets be treated as production materials and accounted for? When enterprises use smart contracts to give up digital assets, what should they do then?

Since there was nothing on the market, they decided to create it themselves.

VeChainThor Blockchain, as the first blockchain platform based on PoA (Proof of Authority) consensus, not only introduced a fee payment mechanism and multi-party payment protocol but also included the ability to set transaction parameters. Previously, transactions on Ethereum could result in wasted fees. However, VeChainThor Blockchain allows for transaction configuration; if a transaction does not succeed within 60 seconds, the fee will be refunded. Many technical details of VeChainThor Blockchain, including consensus mechanism, governance structure, and economic model, are very friendly to enterprises. After more than a year of development, VeChainThor Blockchain went live on its mainnet on June 30, 2018.

The third time, launching the VeChain ToolChain™ platform. Although the most suitable underlying blockchain platform for enterprises had been developed, the application-building part on top of it was still homogeneous. Enterprises have a demand for blockchain applications, but they are unlikely to build their own technical teams and will rely on existing mature services. Therefore, the VeChain team decided to simplify the process, and since 2018, they have independently developed the VeChain ToolChain™ platform, making it faster and cheaper for enterprises to develop applications. Enterprises can choose different levels of platform services based on their needs, which is also the origin of SaaS-PaaS-BaaS. BaaS (Blockchain as a Service) refers to enterprises choosing a specific chain to build applications. When enterprises want to mint NFTs, develop proof contracts, or run smart contracts, two situations may arise: first, when enterprise needs converge, they only need to call public smart contracts; second, when enterprises have customization needs, they need to develop their own smart contracts. At this point, VeChain will develop customized smart contracts without enterprises worrying about deployment and maintenance. In the future, what is provided to customers is that enterprises can directly call APIs in their platform systems to use smart contracts on the blockchain or even some components (browsers, blockchain wallets, etc.).

PaaS (Platform as a Service) refers to using a low-code development environment to build applications, which are mostly used in multi-party collaboration scenarios. When enterprises embrace blockchain technology, they encounter this problem: when business processes change, existing business systems need to be modified. At this time, enterprises need a platform independent of existing systems, which is the PaaS layer of VeChain ToolChain™. PaaS can help enterprises collaborate among multiple parties while protecting data privacy. In this application environment, data from multiple parties can be aggregated and interacted with, thus unleashing greater value from the data, which can manifest on the blockchain as food safety, carbon reduction, ocean plastic waste recycling, and more.

SaaS (Software as a Service) refers to the front end that enterprises present to end users. VeChain will provide some templates, and enterprises only need to slightly modify the UI to form a complete digital product. "Although the market is always changing, we still stick to our path, empowering the real economy and creating practical blockchain applications. Our goal is to make it increasingly simple and fast for enterprises to deploy applications. We also hope that there will be more valuable applications or valuable transactions on this chain," Lu Yang said.

Those who gain the way will have more help

As VeChain explored the path of blockchain applications, many like-minded partners joined in. Distributed Capital initially recognized VeChain's pragmatic spirit and became its angel investor, VeChain was also the first project that Distributed Capital invested in domestically. Later, DNV GL and PwC gradually recognized VeChain's business model and acknowledged Lu Yang and his team during their cooperation, upgrading from partners to investors.

On the lonely entrepreneurial road of VeChain, they finally encountered comrades-in-arms who could fight alongside them. The relationship between VeChain and its investors is a long-term relationship of mutual assistance, mutual benefit, and common growth. "DNV GL is the most authoritative in the global TIC (Testing, Inspection, and Certification) industry, and the effects of blockchain applications in this area are the most obvious. Currently, all digital products (My Story™, My Care™, and MyBaby) developed by DNV GL use VeChain's blockchain platform. We have truly achieved go to market together. Moreover, PwC's deep industry resources complement VeChain, which is strong in technology, and truly enhances VeChain's business expansion capabilities. In the future, PwC will also focus on new businesses in digital solutions, which will be a great help for VeChain," Lu Yang said.

Thanks to two global partners, VeChain's business is currently spread all over the world. Currently, the field of enterprises quickly building blockchain applications with low code is an undeveloped blue ocean, and VeChain will work with its partners to expand and empower more industries with blockchain technology.

It is difficult to determine which entrepreneurial thinking is better, whether technology drives applications or applications drive technology. But one thing that can be believed is that entrepreneurship is never about looking around or going with the flow, but about following one's own logic, adhering to one's intuition, and sticking to one's original intention.

Looking at VeChain's entrepreneurial journey, it resembles an internet company focused on making good products. From the very beginning, Lu Yang was determined in his entrepreneurial direction—starting from applications, using blockchain technology to help enterprises achieve digital transformation and upgrading. Quantitative changes lead to qualitative changes; after accumulating a certain number of cases, Lu Yang began to ponder how to modularize and platformize this enterprise service through technological means, deploying applications for enterprises at low cost. This application-driven technology and technology-exploding applications model has proven to be successful. VeChain's unhurried and down-to-earth style has also attracted many followers, giving a strong boost to the development and growth of enterprises.