Dialogue with dForce Founder Yang Mindao: The Present and Future of Web3 and DeFi

Source: MarsBit

If we do not define bull and bear markets by the rise and fall of the overall market, the performance of the crypto market in this cycle is completely different from the past. The "deep bear theory" seems somewhat forced and negative.

The widespread layout of crypto/traditional VCs, the continued enthusiasm of investors for NFTs, the emergence of new technologies and narratives, and the global wave of Web3… all of these indicate that, to some extent, the price of coins no longer profoundly affects practitioners' confidence in the crypto market. On the contrary, after experiencing the booms of DeFi, NFT, and GameFi, they have more confidence in building the industry and are more optimistic about the future of Web3.

MarsBit has always focused on the development of the crypto market and Web3 practitioners. Recently, we invited dForce founder Yang Minda, a deep practitioner in DeFi (Twitter: @mindaoyang), to share his thoughts on DeFi and his predictions for the Web3 market.

Yang Minda started engaging in cryptocurrency and blockchain investment in 2013, participated in the early investment of Ethereum in 2014, and subsequently took part in over 30 blockchain project private placements. Before founding dForce in 2019, he worked at Hony Capital and Standard Chartered Private Equity, with over ten years of experience in private equity, alternative investments, and venture capital.

The following is a transcript of the conversation:

MarsBit: How do you view the current crypto market?

Yang Minda: Since around November last year, the market has entered a downward channel. There are two main reasons for the market downturn: first, the combination of a weak macro economy, escalating geopolitical tensions, and the Federal Reserve's interest rate hikes has led the market into a cooling phase;

Second, after the "Summer carnival" of DeFi projects, we have entered the token release period, with a large number of tokens being sold off, making it difficult for coin prices to hold. From the perspective of market supply and demand, I think this is quite similar to the ICO phase in the last cycle. At that time, new projects were launched and received high valuations, but as investors unlocked their tokens, prices fell.

If you ask me how long this market downturn will last, it's hard to judge. Each bull and bear cycle is different. However, it is certain that although there is a positive news like the Ethereum merge in the market, there is still a lot of uncertainty on the macro front, so the market will remain sluggish this year.

Fortunately, besides DeFi, the market has seen the emergence of GameFi and NFT-related use cases since last year, which is quite encouraging. Because beyond purely financial applications, we can gradually see new applications emerging in the gaming and NFT sectors, which is where I find my confidence that the market will eventually emerge from its slump.

MarsBit: Compared to the DeFi Summer of 2020, after two years of ups and downs and narrative changes, can the current DeFi market be said to have undergone a "qualitative change"?

Yang Minda: If we compare it to the 2017/2018 cycle, the market has indeed undergone a qualitative change, as we see DeFi applications being implemented. However, if we start counting from 2020, although concepts like DeFi 1.0, 2.0, and 3.0 have emerged, the essence of DeFi hasn't changed much; it is still primarily the foundational protocols of the 1.0 stage that dominate the market narrative. Uniswap's introduction of the AMM mechanism has influenced the DEX market, and after two years of development, it still holds the top position in the market. In the lending sector, protocols like Compound still occupy a core position. From this perspective, there hasn't been a qualitative change in the DeFi infrastructure layer, but its connectivity and composability have improved.

For example, multi-chain and sidechain integrations have brought together a large number of DeFi protocols, and projects like Uniswap have achieved multi-chain development. The multi-chain infrastructure is also much better than before; although there have been many hacking incidents, communication between chains can now be well integrated. Is this a qualitative change? I think it is more like the infrastructure has become more complete.

However, the improvement of infrastructure may promote qualitative changes. Perhaps in the next bull market, we will see DeFi combine with NFTs and GameFi, giving birth to a whole new market. Therefore, the "qualitative change in DeFi" may occur in the next bull market.

MarsBit: Has the development of DeFi over the past two years matched your initial expectations?

Yang Minda: It has been quite different. Although I initially determined that DeFi would be a major direction, I did not expect its development speed to be so rapid, nor did I anticipate that DeFi mining would be so popular. Initially, the TVL of the DeFi market was less than $1 billion, but as the market expanded, the TVL peaked at $160 billion, growing by several times. Of course, the speed of DeFi's retracement also exceeded my expectations, dropping from $160 billion to over $70 billion, with a very rapid decline.

MarsBit: As a deep practitioner, you have experienced the first peak period in the history of DeFi development. Looking back over the past two years, what do you think is your biggest gain (in terms of understanding or project creation)?

Yang Minda: My first insight is that I underestimated the momentum of development in each cycle. I entered the space in 2013 and did not anticipate how crazy the ICO would be in 2017; when I created a lending project in 2019, I also did not foresee how quickly DeFi would develop, leading to so many composable mechanisms two years later; nor did I expect it to impact traditional finance to the extent that regulators began to pay attention to this field.

My second insight is that, from an internal market perspective, the overall development of the industry presents a spiral upward trend, with each spiral change moving upward.

Additionally, unlike previous bull markets, this bull market has validated the industry. Before 2018, the stories that could be told in the market were more ideological, such as non-sovereign currencies and liberalism. After 2019, DeFi was born and generated use value, bringing practical scenarios to the industry, with an incredibly optimistic outlook.

MarsBit: For the crypto market, although there have been no hot tracks this summer, discussions about Web3 are increasing, and there are many interpretations of Web3. I would like to hear your understanding of Web3. If you had to define Web3 in one sentence, what would your answer be?

Yang Minda: From the perspective of narrative reconstruction, the term Web3 is actually quite clever. How to define Web3 may no longer be important; the key point is why the concept of Web3 was proposed. The founder of Polkadot first proposed Web3, but he did not define it. The venture capital firm a16z has been the one actively promoting the concept of Web3 as a public strategy, or PR strategy.

The intention behind a16z is not hard to understand, as cryptocurrencies have not left a good impression on the outside world over the past seven or eight years, often associated with scams, Ponzi schemes, and money laundering, leading to the stigmatization of crypto.

Conceptually, Web1 was the "read-only" era, Web2 supports reading and writing, while Web3 advocates for users to have ownership of their data and to tokenize that ownership. This is a16z's definition of Web3.

From the perspective of data ownership, I believe Web3 represents a significant advancement over Web2. In the Web2 era, the data and social relationships generated by users were essentially controlled by Web2 companies. For example, Facebook would sell users' social data to advertising companies for profit. However, users contribute data without receiving any benefits from it. In contrast, Web3 reverses this relationship, supporting users in owning their own data.

In fact, the original intention of the internet was to create a decentralized infrastructure, but at that time, there were no so-called financial protocols or asset layers, so the internet only played the role of information transmission. Due to the lack of native currency, data ownership could not be realized at that time.

If we were to rebuild the internet, how should we construct it? By giving tokens to HTTP. To some extent, early Web3 can actually be understood as internet currency, and as it continues to develop, it can expand the ownership of monetary finance to all types of data. Therefore, the essence of Web3 is to realize the original vision of the internet: decentralization. Web2 companies no longer control data; instead, we own data ownership ourselves.

MarsBit: You once tweeted that the current Web3 = Web2 + Token. How significant is "tokenization" to Web3 products?

Yang Minda: How significant is tokenization to a product? Currently, there is no complete conclusion. What is certain is that the core demand of Web3 products is to turn data/behavior ownership into financial assets. Take STEPN as an example; it is a typical Web3 narrative that incentivizes people to run through tokens. To some extent, the act of running itself should not be driven by financial incentives; it should be completed under intrinsic motivation. It shouldn't be that if you have money, you run, and if you don't, you don't run, as that loses the essence of the product itself.

Therefore, the impact of tokenization on Web3 products should be viewed from two sides. On one hand, it does play a significant role in early marketing and promotion of products. The storage project Filecoin is a great example. Operating a storage project requires building large data centers and investing a lot of money upfront. Filecoin cleverly incentivized miners to participate in building and operating the network through token subsidies.

In the Web2 world, what is the usual approach? First, raise funds and then spend money to create network effects. For example, ofo used VC investment money to buy bicycles and then promoted the brand. However, even if the project succeeds, users do not receive any benefits. This is what I see as an unreasonable profit distribution structure in the Web2 world.

In contrast, Web3 projects generally do not seek too much money from VCs; instead, they allocate over 50% of tokens for mining, incentivizing users to build the network. This way, users contribute to the network and become owners of the network, aligning profit distribution.

Additionally, the main difference between Web3 and Web2 is that the number of players in the market has increased. In the Web2 world, project operations are priced in fiat currency; for example, if you raise a million dollars, that money can buy a certain number of bicycles. In Web3, the project side distributes tokens to users, and the money in users' hands may be $100 today and could become $50 or $300 tomorrow, increasing the number of trading counterparts. The market shifts from a single-party game to a multi-party game.

Regarding the negative impacts of tokenization, I believe it can lead to certain behaviors being distorted. For example, as I just mentioned, if you pay someone to run, they will run; if you don't pay, they won't, or if the token price drops, they might plan to run for an hour but only end up running for half an hour. The P2E game Axie is another typical example; during high return periods, many gold farming factories emerged, and when token prices fell, no one was interested. I believe this goes against the basic principles of gaming. Games should prioritize fun, not financial attributes. Currently, many GameFi projects face the issue that people play to earn rather than for fun. Therefore, tokenization may lead to product alienation, changing the true demand of the product itself.

MarsBit: Based on policies and market conditions, some opinions suggest that Web3 will not happen in China. What do you think?

Yang Minda: Before answering this question, we need to redefine what Web3 means. The Web3 we are discussing now may not be the same as the definition of Web3 in China. For instance, what we now call NFTs are referred to as digital collectibles in China. The Web3 being discussed domestically is a controllable, private, and regulated network. Such a highly permissioned Web3 could potentially occur in China. Although recent policies have begun to tighten, a controllable, partially open financial ecosystem may develop based on the digital currency of the renminbi.

MarsBit: In your view, what would "Chinese-style Web3" look like?

Yang Minda: It resembles more of a Web2.5; it does not exist in a non-permissioned form and is somewhat like a local area network. What products might such a network generate? They may be no different from current Web2 products. The premise of Web3 is an open network; without openness, it is a permissioned network. So, what is the point of building Web3? We might as well revert to Web2; aren't Alipay and WeChat quite usable now? Therefore, what people refer to as Chinese-style Web3 is essentially the current Web2. In this case, there is no need for Web3.

MarsBit: "Involution" seems to have become another synonym for Web3, with practitioners becoming more elite and younger. Are you anxious about the rapid pace of industry changes?

Yang Minda: I am not anxious; I actually think it's very good. If an industry is not becoming more elite, it indicates that the industry is on a downward trend. In the past, where did graduates from top schools in China go? Initially, they went to the Big Four, then to management consulting firms, and then to investment institutions/internet companies. Therefore, "elitism" indicates that the income and returns in the industry are relatively high, which is also a very important sign that the industry is on the rise.

Returning to the cryptocurrency market itself, before 2013/2014, the industry had a low barrier to entry, with a mixed bag of participants who might not have been able to succeed in mainstream industries and ended up in the crypto field. After 2017, Wall Street teams, academic scholars, and researchers began to enter the market.

The changes in Chinese investment institutions can also reflect the process of industry evolution. In the past, one or two people could form an investment institution without any operational structure. These VCs were often funded by wealthy individuals, and the investment projects were quite random. Currently, whether in the public chain or DeFi sector, more and more professionals are entering the market. In China, if you do not understand English, it is quite difficult to start a business in the crypto industry. Before 2017, most participants were localized.

The recently popular new public chain Aptos has team members from Meta—one of the top companies in Web2—demonstrating this "elitism." Previous public chain teams were mostly newcomers to the field.

In fact, the process of elitism is also a process of competing for discourse power. In the past, many Wall Street elites entered U.S. government departments. It can be said that key positions in the U.S. Treasury have been monopolized by Wall Street practitioners. For example, former Goldman Sachs executive Paulson entered the U.S. Treasury and later served as Secretary of the Treasury during the financial crisis. It is not hard to see that once elites enter a certain industry, some will eventually flow into the government. Because, to some extent, policies can channel industry dividends into vested interest groups. This is why Wall Street has such powerful lobbying power.

Another point is that "elitism" means high opportunity costs and high income. The elitism in crypto will ultimately drive mainstream integration.

MarsBit: As a veteran of the crypto market, do you have any advice for "newcomers"?

Yang Minda: Before 2013, even people from the lowest social strata could seize opportunities in the market. If you enter the crypto industry now, although the opportunities available are somewhat greater than in the traditional Web2 field, the market opportunities like those in 2013 are clearly becoming fewer. Whether in GameFi, DeFi, or NFT sectors, the barriers to entry are much higher than before. Therefore, you must possess certain professional skills. Of course, if your professional skills are a bit lacking, you can still participate as a community contributor, but the market opportunities will increasingly diminish.

If you are entering as an entrepreneur, my advice is not to think of some fanciful ideas and not to pitch stories to VCs that you might not even believe in yourself.

As an entrepreneur, you must understand what long-term value is and recognize that time cost is the highest. If you go in the wrong direction and consume a lot of time, it is actually not worth it.

In fact, many tracks in the current market have already been tried by others, so entrepreneurs can think more about why some projects did not succeed and why others did. Entrepreneurs should study previous failure cases and summarize experiences from them, which is very important.

MarsBit: What Web3 projects are you currently paying attention to? Or what new questions are you thinking about?

Yang Minda: Currently, we need to think about which scenarios are most worth focusing on in the next 2-3 years. I personally believe that the new public chain track still has some new experimental space. Because if there are a large number of consumer-grade applications in the future market, such as games or NFTs, there will inevitably need to be sufficiently powerful sidechains or public chains to help project parties achieve scalability. Therefore, public chains that can provide higher performance at the infrastructure level are worth paying attention to.

The storage track is also worth watching. Because all content needs to be stored, including NFTs or videos, the market needs some decentralized storage infrastructure.

In addition to public chains and storage, financial infrastructure DeFi is also worth focusing on. The focus on DeFi lies in how it can break through traditional paths, no longer limited to building trading and lending applications, but how it can integrate with NFTs and how various DeFi protocols can connect. This is a direction worth considering.

MarsBit: In 2021, you successfully predicted that many Web2 companies would transition to Web3 this year. So, as this "prophet," can you make another prediction? What will be the opportunity that triggers the explosion of Web3 in China?

Yang Minda: It is difficult to predict Web3 in China because it is not a market issue but a political issue. Even if Web3 develops in China, it will essentially be different from the Web3 we are discussing, making it quite challenging to predict.

If we discuss the broader Web3 market, I believe the next bull market will definitely explode at the consumer end. Consumer applications like games and NFTs will see significant growth, and the underlying infrastructure and storage tracks will also make great strides, potentially driving the industry from a $20 trillion to a $100 trillion level.

However, during this process, regulatory uncertainty will still play a role, especially as DeFi project parties and regulators are currently in a hard confrontation phase. Regulatory policies not only affect DeFi but may also impact the explosion process of Web3.

The timing of the market explosion is hard to predict, but the next step will definitely be towards the consumer end, with the market no longer limited to native crypto users. The explosion of NFTs is one such sign. We find that NFT users are completely different from the previous DeFi users, indicating that NFTs have a very strong ability to reach beyond their original circles. In the next bull market, I believe consumer applications and protocols will experience an explosion similar to that of DeFi.