Dialogue with Tian Hongfei from Yuanwang Capital: 60% of traditional VCs still do not understand Bitcoin

Author: Yuanwang Capital iVision

In the traditional internet sector, VCs play a crucial supportive role in the early development of startups. Companies that receive VC funding are like seedlings regularly watered by a gardener, well-nourished; while those entrepreneurial teams that cannot rely on capital for initial accumulation are like branches growing in remote fields, unnoticed, needing to rely on their own strength to grow upward.

However, the somewhat "dependent relationship" between VCs and startups is being disrupted by blockchain. In the Crypto market developed by blockchain, the influence of VCs on projects is diminishing, and the distribution of interests is beginning to reshape.

Recently, MarsBit invited Tian Hongfei, co-founder of Yuanwang Capital, to discuss his personal insights on the development of the blockchain industry and how VCs view the evolution of the blockchain sector.

Tian Hongfei first encountered Bitcoin in 2012 and has experienced the cyclical changes in the Crypto market. He has authored several blockchain articles that have garnered market attention and discussion, including "The Madness Behind Blockchain is the Collective Anxiety of the Internet." He previously worked at Oracle and SIG Asia, and founded the first domestic social media marketing SaaS company, Le Ah Technology, which was later acquired by Sina. He currently serves as a partner at Yuanwang Capital.

Yuanwang Capital was co-founded in 2018 by Cheng Hao, the founder of Xunlei, along with Tian Hongfei and Jiang Ping. Within the team, Tian Hongfei is primarily responsible for investments in the application of artificial intelligence in fields such as big data, enterprise SaaS, internet finance, and blockchain, with over 17 years of industry experience in technology, finance, and SaaS sectors.

The following is the dialogue content:

MarsBit: You encountered Bitcoin in 2012; how did you view this new phenomenon at that time?

Tian Hongfei: Previously, I worked in digital identity management at Oracle in Silicon Valley, and the working principle was exactly the same as that of Bitcoin. Therefore, Satoshi Nakamoto's Bitcoin white paper was very easy for me to understand. Out of curiosity, I bought some BTC at that time.

However, I did not hold onto BTC for long because I could not imagine it exceeding 10,000 RMB, nor did I anticipate it would later rise to 100,000 RMB.

MarsBit: Looking back, how do you evaluate Bitcoin's development over the past decade?

Tian Hongfei: Although predicting coin prices is difficult, the industry development path of BTC is relatively clear. Before 2015, people mainly speculated on BTC, LTC, and altcoins. Although there were many altcoins in the market, their market capitalization was very small. Most altcoins forked from Bitcoin, and people could mine them using mining machines and computers. Essentially, the way to participate in the market at that time was limited to speculation.

This explains why I created a Bitcoin wallet project back then, but the user base was relatively small. There was no compelling reason for people to transfer assets from their digital wallets to exchanges. Although MtGox was hacked and exchanges often ran away, for most people, transferring assets from wallets to exchanges daily was still cumbersome. Because the demand for wallets was not strong enough, the number of wallet users was particularly small at that time.

After the arrival of ICOs in 2017, the need for wallets to participate in ICOs and receive tokens led to an increase in wallet users. In fact, before the ICO boom, ConsenSys designed a token issuance template that could issue assets based on Bitcoin, but it was not as simple as Ethereum.

The ICO boom propelled Ethereum into the spotlight, and many Ethereum competitor chains emerged. These public chains completed financing after 2017 and gradually went live around 2020. Therefore, we can see that the market capitalization of public chain tokens was very high in 2020.

From the overall market perspective, the crypto ecosystem has evolved from initially having only Bitcoin to generating new applications—"token issuance"—and later giving birth to DeFi, NFTs, and so on. In terms of public chains, the market has expanded from just Bitcoin to include Ethereum and subsequently a large number of public chain projects. The crypto ecosystem is becoming increasingly rich.

MarsBit: I understand that you stepped back from the Crypto market in 2015 but later began writing articles about blockchain and have recently been frequently discussing Web3, which I believe is related to the maturation of the market. Can you share your feelings about the market changes?

Tian Hongfei: When I was raising funds for the Bitcoin wallet project in 2015, most VCs did not know what Bitcoin was, making it difficult to secure investment. Due to low market user demand and my lack of interest in transitioning to exchange business, I chose to bid farewell to the blockchain industry and entered the equity investment field.

However, even though I transitioned to the investment field, friends in WeChat groups and moments were still in the blockchain industry, so I still paid some attention to it, as significant innovations occur in the blockchain industry every few years.

MarsBit: Why did you have a positive outlook on blockchain at that time but did not establish any Token Fund?

Tian Hongfei: There are many reasons for not establishing a Token Fund. Firstly, based on the reasons mentioned earlier, the entire blockchain industry was not sufficiently rich. For example, if a fund had been established in 2015, it could only invest in Bitcoin or exchanges, which was not enough to justify a standalone fund; although projects began to diversify in 2017, the market capacity was still very small, with most investments being small; it wasn't until after 2018 that more influential digital currency funds began to emerge; additionally, our RMB fund (Yuanwang Capital) was performing well and focused on specific investments, so we wanted to concentrate our efforts on the RMB fund. Moreover, whether participating in Web3 investments or establishing a Token Fund, the compliance challenges are significant, and we need to establish a compliant investment framework for fund investors.

However, I believe that cryptocurrency funds are gaining momentum, and the "Sequoia Fund" of digital currencies is being born.

MarsBit: From your initial understanding of Bitcoin to witnessing the development of the Crypto market a decade later, which sub-sector has excited you the most during this period?

Tian Hongfei: Every market cycle has new stories, but regardless of how the stories evolve, the main line has always been very clear: it is becoming increasingly decentralized. Before 2015, basically 99% of trading volume occurred on CEX, while now over 20% of trading volume is completed on DEX.

Although DEXs like Uniswap still have a significant gap compared to CEXs, the growth rate of DEXs is very rapid. With advantages such as openness, transparency, permissionless, and composability, the development momentum of DeFi cannot be underestimated.

MarsBit: You have personally experienced the Web2 wave and witnessed the entire internet development cycle. How significant do you think the cyclical patterns of the Web2 market are for predicting the development of Web3?

Tian Hongfei: In 1994, the birth of the Netscape browser greatly lowered the barrier for users to access the internet, marking the first turning point in internet history; in 2000, a wave of internet companies emerged, and four years later, some of these companies gradually grew into giants, marking the second turning point in internet history; after 2016, the internet market formed a monopoly pattern, drawing the attention of regulators and initiating an antitrust process.

The development of blockchain over the past decade is somewhat similar to the evolution of the internet. 2017 and 2020 were turning points in market development, with the former giving birth to ICOs and the latter witnessing the emergence of DeFi. Before 2015, I advised many traditional traders to enter the market, but they all felt that the blockchain industry had no future.

However, after 2017, many entrepreneurs and investors flooded into the market, and the expansion of market participants led to a qualitative change, resulting in the birth of DeFi. After 2020, more Wall Street traders and entrepreneurs entered the Crypto market, significantly raising the level of industry competition.

Although in every cycle of market advancement, many excellent Web2 talents and large companies participate, each new development and trend in the market is driven by Crypto Native projects. I believe that in the next cycle, more decentralized projects or protocols will develop very well.

Additionally, we need to distinguish between Web3.0, Web3, and Crypto. The term Web3.0 was originally proposed by Tim Berners-Lee, who introduced the concept of the Semantic Web, which was later largely forgotten until Gavin Wood, the founder of Polkadot, popularized the term Web3 to promote his network, making it known to the public again. However, the technical routes led by Tim Berners-Lee's W3C and the DID concept are fundamentally different from Vitalik's SBT and Polkadot's Web3, as the former's technical design revolves around URIs, while the latter two's designs revolve around blockchain. Apart from Polkadot calling itself Web, neither W3C nor Vitalik claims to be Web3, yet most people mix these concepts together for ease of distinguishing from Web2, referring to them collectively as Web3.

Today, Tim Berners-Lee no longer labels himself as Web3.0, while Jack Dorsey has proposed the concept of Web5, which aims to solve Web2 problems using Web3 principles (see the article "The Knight of the Next Generation Internet: Discussing Web5, Solid, and Personal Vault"). Although they are all mixed into the Web3 discussion, they share a common and distinct characteristic: this force is driven by individuals with internet backgrounds like Tim Berners-Lee and Jack Dorsey, who advocate for user control over their data based on URI links, selectively utilizing blockchain and encryption technologies, but the projects themselves do not issue tokens. Another force is driven by Crypto circle individuals, who advocate for issuing tokens based on a token economy to establish projects.

MarsBit: This year, as the enthusiasm for Web3 continues to rise, classical VCs like Sequoia have started to rush into the market. How do you view this phenomenon? What is your evaluation of a16z, which is "braving the current" in the Crypto market?

Tian Hongfei: a16z entered the Crypto market very early, investing in many projects in 2014 and losing quite a bit of money. For example, they participated in the investment of Blockstream in 2014, which gathered many star programmers from Bitcoin development teams, with a seed financing amount reaching 21 million USD. Although this company still exists, its influence and contribution to the industry are actually quite small; I estimate a16z probably did not make money. Another company, 21st Century, which had seed financing of 70 million USD, also did not succeed. Overall, a16z paid a lot of tuition in the early days and has gone through a learning accumulation period to reach where it is today.

Additionally, the founder of a16z is also the founder of Netscape and has a programming background, making him sensitive to technological development trends. Most programmers are very excited about blockchain because it is the first time they can directly see opportunities for technology monetization. In the internet market, most companies monetize through advertising. For example, more than half of ByteDance's employees are in advertising sales, but many programmers are unwilling to do this.

Selling ads requires a trade-off between user experience and business models; if you want to maintain a good user experience, you cannot earn more money through ads. Especially after a company goes public, it faces pressure from shareholders and financial reports, leading to a continuous compromise of user interests for business benefits. Whether it's the founders of Google or Twitter, they feel that their companies have deviated from the dreams they had when they founded them and have become what they did not want.

Why are more and more VCs entering the blockchain industry? In my 2016 article "The Madness Behind Blockchain is the Collective Anxiety of the Internet," I mentioned that the internet market had entered a period of innovation bottleneck. Since starting investments in 2015, our team decided to focus solely on ToB companies and not pay attention to ToC companies because we believed that small internet companies had no opportunities in this monopolized industry.

Looking back at the internet companies established after 2015, there are very few unicorns that can be named, and users are basically monopolized by giants. It can be said that the trend of centralization has developed to an extreme, which has triggered the prosperity of decentralization. VCs and entrepreneurs are like two sides of the same coin; without entrepreneurs, there would be no VCs. When entrepreneurs cannot find new opportunities in the internet, VCs will ultimately turn their boats around.

MarsBit: From what you understand, how has the perspective of classical VCs on the blockchain industry changed compared to 2018?

Tian Hongfei: Classical VCs' understanding of Bitcoin can be divided into three levels:

The first level (60%): This group of VCs is still struggling with whether Bitcoin has any value, equivalent to the understanding level before 2015. They will ask what Bitcoin is, whether there is cash flow valuation support, and then turn to look at other things, showing little interest in thinking further;

The second level (30%): 30% of VCs are torn between investing in Bitcoin or blockchain-related companies; some believe that while Bitcoin may not have value, blockchain technology does, and they choose to invest in consortium chain technology; others are just beginning to accept the view that Bitcoin has value but do not yet understand the sub-sectors of blockchain well enough to assess project value, so they are conflicted about whether to invest in Bitcoin or projects for better returns;

The third level (10%): The remaining 10% of VCs focus on popular sectors, such as the leading DID and ZK projects in this cycle. These investors have entered the depths of the blockchain industry, can sensitively perceive industry dynamics, filter out noise through industry analysis, and bet on excellent projects to establish brand advantages.

MarsBit: What is the biggest difference between crypto VCs and classical VCs?

Tian Hongfei: Crypto VC teams are very young, and the investment pace is also very fast. Unlike the classical VC approach of investing in projects with more than 10% equity, crypto VCs typically invest small amounts in many projects, generally not exceeding 500,000 USD.

In summary, the characteristics of crypto VCs are: youthful teams, fast investment pace, and small investment amounts.

MarsBit: When evaluating projects, what investment logic do you apply to Web2 and Web3 projects respectively? What is the primary criterion for screening projects?

Tian Hongfei: Classical investment differs from Bitcoin investment. The former focuses on whether a project has platform advantages, monopoly advantages, and whether it has reached scale, while the latter is completely reversed. In today's blockchain industry, open-source has become a default requirement. When I was designing the wallet, I had a lot of discussions about whether to open-source it, but now, not open-sourcing is almost impossible.

Due to open-source, projects find it difficult to establish intellectual property advantages or monopoly advantages, and users can easily be diverted. In the past, internet companies equated user information with their assets. If user information was stolen, it would cause significant harm to the company. In fact, around 2019, there were already instances of user information and data being sold from one exchange to another. Nowadays, even users have open-sourced themselves, so all DeFi protocols use wallet logins like MetaMask as their user systems.

Additionally, the development cycles of internet companies and blockchain projects are also different. Taking ByteDance as an example, it took at least five years for the company to grow to scale. Typically, it may take ten years for an internet company to go from establishment to becoming a super unicorn and ultimately going public.

In contrast, the development cycle of blockchain projects is particularly short; if a project can succeed, it may emerge as a super unicorn in 3-4 years; otherwise, the project will quickly disappear from the market. Therefore, this presents a greater challenge for VCs in early-stage investments, with a narrower window of investment opportunities.

MarsBit: In your opinion, is it harder to start from 0 to 1 or to capture a unicorn through investment?

Tian Hongfei: Starting from 0 to 1 is easier and more interesting. I have told entrepreneurs that the first three months after a company is established are the happiest times for them because they only have dreams at that point, without facing setbacks or pressure from investors. However, after three months, they may encounter setbacks, and pressure begins to build. Once they receive investment from investors, they may expand and hire more employees, facing dual pressures from both investors and employees. Regardless of whether the startup succeeds, you will certainly look back fondly on that time.

In comparison, investing is very procedural. When you enter a specific investment field, you need to learn new content, build an investment knowledge framework, and then proceed with investments. This is a more systematic and procedural task, lacking the happiness of starting from 0 to 1.

MarsBit: After 2018, the market has recently begun to reconsider the implementation and commercialization of blockchain. What do you think is the key to achieving blockchain commercialization?

Tian Hongfei: The first use case of blockchain is Bitcoin, which is essentially an account system that allows users to transfer assets from one address to another. Although derivatives trading and DeFi emerged later, it fundamentally remains about on-chain asset transfers and has not generated the "data economy" that Jack Ma mentioned. For example, when a user sees a painting or a bag, it indirectly promotes e-commerce sales, and consumer purchasing intentions can be fed back through data.

Of course, blockchain has potential advantages that facilitate efficient and transparent collaboration, but in the current environment where centralized entities can collaborate freely, it is challenging for blockchain to completely replace traditional work forms.

How can blockchain enter the real economy? Firstly, it needs to have DID and digital identity support to achieve integration with the real economy. Just as Alipay was born to promote e-commerce prosperity, and WeChat Pay's development benefited applications like Meituan.

DID is a catalyst for blockchain's entry into the real economy; only when the virtual blockchain account system and the real account system are combined can blockchain technology potentially impact the real economy. We may see blockchain commercialization in the next cycle.

MarsBit: Is excessive financialization the main factor preventing blockchain technology from being widely implemented?

Tian Hongfei: It is certainly harmful, but it does have some benefits. Whether entrepreneurs or investors, their primary goal in entering the market is to make money. Each cycle of the market rotation attracts investors, which is akin to "buying users to enter the market." In the early days, Satoshi Nakamoto mentioned that Bitcoin bought users through PoW. The current market issue is how to achieve user conversion.

MarsBit: DID is an important component of the Web3 world and is still in its early development stage, with many issues needing resolution. How do you think about the inconsistency between off-chain behavior and on-chain identity?

Tian Hongfei: Discussing ID in isolation is meaningless; all IDs only have significance when associated with their usage context. For example, when going abroad, you need a passport; when graduating, you receive a diploma; when driving, you get a driver's license, etc. These usage scenarios ensure the uniqueness of the ID. When an ID is applied in a usage context and associated with behavioral data, it forms identity credibility, which is essentially a credit score. These credit scores become the starting point for establishing trust between individuals. For instance, when you know I come from Yuanwang Capital, the brand image that Yuanwang has built over the years becomes the foundation of our trust relationship.

Currently, some on-chain behavioral data is valuable. For example, if I participate in a DeFi protocol and deposit a lot of assets, my credibility score may be higher. However, compared to that, off-chain behavioral data is richer and can be reflected through the use of more applications. In summary, DID must be associated with behavioral data and usage scenarios.

Regarding the inconsistency between off-chain behavior and on-chain identity, this is actually the biggest challenge for DID. In a centralized world, you verify your identity by scanning your ID card at a high-speed rail station, and the ID information is linked to the public security database, validating your identity. In a decentralized world, the ID is self-issued; how do you establish that connection? If you claim your Sesame Credit score is 650, but Sesame Credit does not cooperate with you for verification, then identity verification becomes an issue. This is essentially the key problem that DID needs to solve and the value of DID companies.

So, what are the potential solutions? One could refer to a method similar to PoS. For example, if you want to prove you are an employee of a certain company, you can ask ten people to sign for you. Although this cannot 100% prove your identity, it has a 99% probability of verifying it. How to prevent malicious actions? Users need to stake tokens before participating in verification, and if they are questioned by others and found to have committed fraud, their staked tokens will be forfeited.

Additionally, it is important to clarify that narrow DID refers to the DID standards published by W3C, advocating for projects to operate via internet connections, where one user represents one node, and users can control nodes through public-private key pairs, connecting with external nodes via internet protocols, all without token involvement. In contrast, Vitalik's SBT is based on token design. Therefore, due to the lack of friction and barriers, SBT designs will first gain traction in the crypto circle, but in the integration of blockchain and the real economy, narrow DID's design scheme has more advantages.

MarsBit: If strictly categorized, do you think the Crypto market is "technology-driven" or "finance-driven"?

Tian Hongfei: Market innovation is driven by technology, while market enthusiasm is driven by finance. Initially, Uniswap gained popularity not because of token issuance but due to technological innovation. Although it was eventually forced to issue tokens due to SushiSwap, its rise was fundamentally rooted in attracting a large number of users through technological innovation.

In the early stages of DeFi, Compound issued tokens through mining to capture a large user base, subsequently leading more other protocols to issue tokens. Although market enthusiasm arose from this, there was no technological innovation involved.