Octopus Network Louis: Discovering the Business Value of Web3

Author: Louis Liu, Octopus Network

On August 26, 2022, the "Web3 Great Navigation Era Forum" hosted by Chain Catcher invited Mr. Louis, the founder of Octopus Network, to share insights on the theme "Discovering the Commercial Value of Web3," engaging in an in-depth discussion around the industry's long-awaited "next killer application of Web3."

The following is the full text of Louis's speech:

Regarding the commercial value of Web3, there are two extreme viewpoints: one believes there is no commercial value, that it is all hype, or only acknowledges Bitcoin as valuable, viewing it as a super-sovereign cryptocurrency. Since the advent of Web3, there has been no value beyond Ethereum; the other extreme believes that Web3 is the next mainstream phase of the internet, meaning that Web3 will eventually become the protagonist of the internet, replacing the Web2 platform economy and becoming the main coordinator of the internet's digital economy.

In reality, the situation usually lies between extreme optimism and extreme pessimism, and Web3 is no exception. My view is that Web3 already has significant commercial value and is rapidly developing. However, the development of Web3 also faces very serious and obvious bottlenecks. We still do not see a way for Web3 to replace mainstream internet platforms. For example, platforms we use daily for our needs, like WeChat, Taobao, Facebook, and Google, remain unchallenged by Web3.

To discuss Web3, we must start with Crypto, beginning with Bitcoin. Bitcoin is the most well-known achievement of the cypherpunk movement, which aims to protect personal privacy in the electronic age through widely accessible cryptographic technology.

In the cypherpunk movement, electronic cash can be considered the crown jewel. The purpose of electronic cash is to eliminate intermediaries in the internet age, removing banks as intermediaries and allowing value to be transferred directly between individuals. It protects personal privacy and shields individuals from government and corporate scrutiny and surveillance.

Cash is an invention of liberalism; as long as two people meet face-to-face, they can complete a transaction using cash without the need for a third party, and the privacy exposed between the two can be controlled and minimized. However, in the electronic age, the premise of face-to-face transactions no longer exists, and we can only transfer value through intermediaries.

Bitcoin provides a peer-to-peer electronic cash system or a decentralized means of payment, or currency.

Inspired by Bitcoin, Ethereum established a state space and a Turing-complete virtual machine on a PoW network. It was precisely around the birth of Ethereum that its then-CTO, Dr. Gavin Wood, proposed what we now refer to as the concept of Web3, making Web3 an extension of Crypto.

The inspiration Web3 gains from Crypto is: since individuals can transfer value on the internet without intermediaries, why can't other types of transactions be conducted in the same way? For instance, interactions like those on WeChat or transactions like those on eBay or Taobao could also be coordinated over the internet through decentralized cryptographic protocols, without relying on centralized platforms. Thus, Dr. Gavin Wood foresaw the future of Web3.

From the inception of Ethereum to the emergence of various application layer protocols on Ethereum, we also learned something from Bitcoin: Incentives. All crypto networks, whether at the application layer or the infrastructure layer, are networks with network effects: as the number of participants increases, the value of the network grows for users.

When a decentralized protocol first appears, there are no participants; how can we attract them? Therefore, we need to find a way to verify and quantify the contributions of protocol participants to the network effect and reward them with tokens within the protocol. Moreover, tokens need to be used within the network to create demand for tokens, or in other words, tokens must capture the value of the network economy.

This is somewhat circular reasoning: you recognize that tokens have value, so you come in, and your participation increases the network's value, which in turn enhances the value of the tokens. It resembles a self-fulfilling expectation in finance. During the era of Bitcoin, because people were unsure whether this thing would have value, it was impossible to conduct public or private offerings with Bitcoin, leading to a very slow network startup. It took nearly two years from the start of the Bitcoin network to the first transaction (the pizza transaction). Only then did people gradually begin to believe that Bitcoin had economic value, with some starting to mine Bitcoin for profit rather than for fun. This formed a positive feedback loop: the more miners there are, the greater the computing power, and the more secure the Bitcoin network becomes.

People recognize that using Bitcoin to store or transfer assets is reliable. Moreover, as its market capitalization grows, the trading system becomes increasingly refined, and liquidity continues to improve, enhancing Bitcoin's utility as a value-storing currency. With the advent of Ethereum's virtual machine, we can develop application-layer crypto networks. The first to truly emerge was DeFi, with liquidity mining at its core.

Asset trading protocols are meaningless without liquidity. It's like trying to build a centralized exchange that cannot compete with Binance, which has immense liquidity. People need to come in to trade, and their trading brings liquidity. Thus, early on, trading mining was a way to kickstart liquidity.

In the DeFi Summer, starting with Compound.finance, liquidity mining emerged. Liquidity mining should be referred to as Proof of Liquidity Providing; you provide liquidity, and this contribution can be proven on-chain, allowing you to earn tokens that share in the future value of the network. Conversely, the liquidity you provide benefits other users, completing the cycle mentioned earlier.

Crypto has evolved from Bitcoin to Ethereum, marking the dawn of Web3. Even if we currently only have DeFi, I still believe Web3 has value. DeFi is a more open financial system parallel to the existing financial system. Of course, it also faces two main issues.

The first issue is the increasing regulatory scrutiny of DeFi. In fact, over the past few years, regulators in major countries have clarified their stance on DeFi. The technology you use is not important; what matters is the business you conduct. Depending on the type of business you engage in, you should be subject to corresponding levels of regulation. This means that DEXs and CEXs are treated the same, both being ATS (Alternative Trading Systems), with consistent regulatory standards, although implementing regulation will take time.

Therefore, in the coming years, regulation of DeFi will undoubtedly become stricter. Ultimately, the type of business must meet the corresponding regulatory requirements. For an industry that has grown wildly in its early stages, there will inevitably be growing pains during the regulatory acceptance process, affecting people, teams, and users.

Another significant issue is that we can establish a parallel financial system on-chain. However, the purpose of a financial system is to allocate capital for social production. If the assets or capital in DeFi are merely flowing back into itself, as Vitalik mentioned, we are always creating tokens, yet their function is to trade other tokens. All assets are circulating within the system, which can only lead to a bubble because capital is not entering productive enterprises that create useful things for people.

These are the two issues with DeFi. At the infrastructure level, there are already many public chains with Turing-complete virtual machines that can theoretically execute any application on-chain. At the application layer, there is a parallel financial system. More importantly, there is a vast, global Crypto Asset Market, composed of thousands of centralized exchanges, thousands of decentralized exchanges, and countless bots, with daily trading volumes reaching hundreds of billions of dollars, which is quite substantial. The current question is how to leverage the existing foundation to drive Web3 into broader fields.

I have listed several areas on the slide; the solid lines represent areas I believe have already generated commercial value, while the dashed lines indicate areas that still face obstacles and require validation.

The first area to discuss is Blockchain-based Games. Do not underestimate games; they represent a massive market. I believe that it won't take long—perhaps 5 to 10 years—for the gaming industry to be completely transformed by Blockchain. Blockchain-based games do not need to change existing gameplay; they only need to turn in-game assets, whether fungible coins or non-fungible items, into on-chain tokens, connecting them to the aforementioned vast global Crypto Asset Market to gain better liquidity and investment value.

Mainstream online games have a platform nature. The more players there are, the more enjoyable the game becomes. Tokenization of game assets will be increasingly utilized by game developers. Of course, there are additional benefits, such as the ability to limit the number of NFTs or FTs on-chain. This way, game assets are guaranteed to have scarcity. Scarcity assurance is a prerequisite for investment or speculation. The expectation of investment or speculation is a new means of rapidly launching player communities in games.

The second area to discuss is Crypto Native Art, generally referring to PFP NFTs. Crypto/Web3 has formed a subcultural circle that will have its own artistic expression. As long as Web3 expands, the influence of this subcultural circle will grow.

The third area I want to mention is Tokenization, which involves turning off-chain assets into tokens. The benefit is still connecting off-chain assets to the global, highly liquid crypto asset market to gain liquidity premiums, especially for assets that were previously difficult to trade, such as apartments. Tokenization already has significant commercial value, with the best example being fiat-backed stablecoins. USDC essentially represents the tokenization of the US dollar, transforming it into a stablecoin with excellent global accessibility. Anyone with an internet connection can hold and trade USDC. Fiat-backed stablecoins have already surpassed a total market capitalization of hundreds of billions of dollars, attracting the most regulatory attention in the Web3 space.

The above three areas are developing well, but they do not exceed the scope of Asset Trading. Essentially, they still involve generating some form of asset and connecting it to a global integrated market to reap the benefits of liquidity. What I want to emphasize today is CSC Service, a term I coined because there isn't a suitable one yet. CSC stands for Computing, Storage, and Communication services, which I will elaborate on shortly.

The next three areas—Social Network, Creator Economy, and DAO—each have thousands of projects underway. However, overall, they have not achieved substantial breakthroughs, each facing some fundamental obstacles.

The biggest problem with decentralized Social Networks is the lack of widely used self-sovereign identities. Additionally, the database structure of Blockchain is very unsuitable for data-intensive applications. The latter issue is expected to be resolved with the development of new-generation decentralized databases like Ceramic and OrbitDB.

The core issue of the Creator Economy is how to efficiently form micro-communities around a specific Creator. Therefore, the Creator Economy is dependent on Social Networks. If the Web3 Creator Economy can only rely on Web2 Social Networks, it faces significant limitations. Aside from Twitter, other mainstream Web2 Social Networks are not friendly to Web3. In other words, it is impossible to form communities and engagement in a Crypto Native environment. This is the greatest limitation faced by the Creator Economy.

Although many projects are working on DAOs, DAOs are actually the most challenging. The experience of human social development is to explore how to collaborate and what methods can enable people to cooperate and create value together. DAOs aim to promote collaboration in a completely open and anonymous environment, placing human collaboration issues in a new context. I believe that only Crypto Native DAOs, which address governance issues of Crypto Protocols, are realistic. Because when a protocol reaches a certain scale, participants have vested interests, so they must sit down to resolve issues; not participating in the interests will lead to losses. At least there must be a serious motivation to participate in the DAO before addressing issues like fairness and transparency. I am relatively pessimistic about other types of DAOs.

Earlier, I mentioned the basic model of Crypto: cryptographic protocols define decentralized cryptographic networks, which coordinate certain economic activities and must have network effects. Therefore, networks need participants, especially in two-sided market-type networks, where one side is usually harder to acquire. For example, in an e-commerce network, merchants are difficult to attract. In a ride-hailing network, drivers are the harder-to-acquire side. In the early stages, subsidies are needed for merchants/drivers to join; once enough merchants/drivers enter the network, it naturally attracts buyers/passengers to join. Web2 uses revenue to subsidize drivers/merchants, while Web3 uses tokens, which represent ownership, to subsidize.

Thus, Web3 needs to verify participants' contributions on-chain and then reward participants with tokens through the protocol, allowing them to share in long-term benefits, thereby kickstarting the network. The core of this process is how to verify participants' contributions to the network's value on-chain. When entering Crypto or Web3, you often hear about Proof of XXX, such as Proof of Work, Proof of Stake, etc. This is precisely because these methods of verifying contributions are at the core of Web3. In other words, every time a new proof of contribution method is developed, it can push Web3 into a new domain.

At the same time, proof of contribution is also a bottleneck for Web3, as the types of contributions that can be proven on-chain are still very limited. The easiest contributions to verify are those that already exist on-chain, followed by those that are online. Online contributions can be proven through off-chain calculations and then submitted as proof. There are two main types of proof: valid proof and fraudulent proof. Valid proof demonstrates that I have done something good. Fraudulent proof indicates that I cannot prove I have done something good; I can only claim I have done something good. If no one proves my fraud within a certain period, the system will reward me accordingly.

Currently, all networks based on fraudulent proof are trapped in a centralization dilemma. The challengers of each network (also known as fishermen) are run by the project team. This creates a paradox, which I call the "No Thief Paradox." It means that if no one commits wrongdoing in the network, challengers cannot earn money and thus cannot survive. Over time, challengers will exit the network. But if all challengers exit, wrongdoers will emerge, creating a paradox. You can imagine establishing a small town and hiring a group of police officers. We do not pay these officers a salary; they can only earn bonuses by catching criminals.

Under current social conditions, police officers will not come because the crime rate is too low. However, in the past, the American West operated this way, where there were many criminals, leading to the emergence of professional bounty hunters. Therefore, to achieve truly decentralized fraudulent proof, further design mechanisms are needed. For example, can we randomly generate wrongful behavior on-chain at irregular intervals to sustain the challengers' existence and encourage competition among them?

From here on, we will no longer distinguish between valid proof and fraudulent proof; it simply needs to be verifiable contributions on-chain. Earlier, Mr. Song mentioned that complex calculations can be performed off-chain using ZK methods. As long as the calculations can be solved, they can ultimately be verified on-chain through ZK, so the development of ZK will open new doors for Web3, which is very promising.

CSC Services provide some homogeneous services. These services are online but not on-chain. Because they are homogeneous online services, Web3 entrepreneurs have found ways to prove participants' contributions, enabling them to kickstart networks through decentralized cryptographic protocols. Below, we will introduce several typical CSC Services projects.

Livepeer is focused on video transcoding. Users upload videos and specify the format and bitrate required. The network automatically coordinates and assigns tasks to nodes. These nodes complete the transcoding and upload the results. The verification of the results is done through the Truebit Protocol, which requires breaking the transcoding results into small segments and randomly selecting a few segments for Truebit to judge whether they meet the transcoding requirements. If they do not meet the requirements, the node will be slashed. Livepeer network users pay in ETH, and the more LPT tokens the nodes stake, the higher their chances of receiving tasks, thus earning more service fees.

Render Network gained significant attention last year, with Multicoin investing in it. This project focuses on rendering and currently operates in batch processing mode. Users submit rendering tasks through a web portal, which calculates the price. Users pay with RNDR tokens, and the network assigns rendering tasks to nodes. The role of RNDR tokens is as a medium of exchange, functioning as currency, but the value capture is not very effective. The project team is not particularly crypto-native, and currently, there is no on-chain verification mechanism.

In the storage sector, Filecoin is the largest. Filecoin's service is contract-based. Users submit storage needs to the network, specifying the size, number of copies, and duration. The network calculates the price, and after payment, it finds nodes to execute the contract. Nodes must prove they are faithfully fulfilling the contract through replication proofs and space-time proofs. Replication proof is a complex calculation, using stored data and the node's public key as inputs, intentionally designed to be very complex.

After the computation is completed, the hash of the result submitted by the node to the network can be verified to confirm that the data has been stored. During the contract period, the network periodically challenges the nodes; if a node has not stored the sealed data, it cannot respond to the challenge in time because sealing requires extensive computation. If the node can correctly respond to the challenge, it indicates that the sealed data is still stored, which is known as space-time proof.

Arweave offers permanent storage, and its proof method is simpler. It operates on a mining mechanism; each time a block is mined, the network randomly selects a block from the block history. Miners can only compute the result and earn mining rewards if they have stored this block. If the stored blocks are incomplete, they will proportionally lose mining opportunities. This is known as Proof of Accessibility.

Helium is a decentralized wireless access network. Currently, the LoRaWAN network has reached a certain scale. Anyone can purchase hotspot devices, connect them to their home WiFi, and provide wireless network coverage for surrounding areas. LoRaWAN is a low-speed, wide-coverage network, and well-placed hotspots can cover a radius of several kilometers. Each device has GPS, reporting its location while also proving coverage with surrounding hotspot devices. Each hotspot reports who is nearby, ultimately proving coverage for the corresponding location, hence the name Proof of Coverage (PoC).

The last two networks, The Graph and Pocket Network, are key infrastructures for Web3, enabling decentralization and reducing reliance on centralized service providers.

The data structure of blockchain is very unsuitable for querying. If you want to create a blockchain explorer or a complex frontend, you typically need an indexer to transform on-chain data into a two-dimensional table. The Graph is a decentralized indexer network. Anyone can run a node to join and become an indexer. The proof method is Proof of Index. To index a subgraph (an on-chain data view), it is necessary to arrange the transactions related to the block and this view into a Merkle Tree and submit the root to the chain. Challengers can challenge an indexer to prove that their proof is incorrect, and the indexer will be slashed.

Pocket Network provides decentralized RPC services. In the Web3 space, many clients rely on RPC services, and they typically do not deploy their own nodes but use public services. Pocket Network attempts to decentralize RPC services. Anyone can join the network to provide RPC relays for a specific chain. Proof of Relay is relatively easy to implement; clients sign requests, nodes sign responses, and then compress and submit them to the chain using a Merkle Tree.

In summary, various Proof of Contribution methods are at the core and forefront of expanding new fields and realizing commercial value in Web3.