Founder of Wanwu Island, Xiao Feng: 11 Truths About Web3

Source: Wanwu Island Three Dao

On September 22, the second episode of "All Things Live" was broadcast, led by Dr. Xiao Feng, co-founder of Wanwu Island and founder of the Wanxiang Blockchain Laboratory, who answered the confusions of Web3 entrepreneurs face to face.

Lucia from the Wanwu Island community specially organized 11 key insights from Dr. Xiao Feng regarding Web3 for this interview. The following content is exclusive, enjoy ------

1. The Ethereum merge is not for performance improvement

As the mainnet and main chain, Ethereum only undertakes two tasks: first, to ensure the security and robustness of the entire network; second, to serve as the final value settlement layer. After completing tasks on L2, it is packed back to the main chain for registration and settlement. Then, efficiency can be improved through sharding, layering, side chains, and sub-chains to enhance TPS and scalability. For example, after the merge, if Ethereum is divided into 64 shards, with each shard processing 15-20 TPS per second, performance is improved, although it may still not be enough.

Many new public chains are trying to improve TPS on the mainnet and main chain using new technologies, but often at the cost of some decentralization. Decentralization is very important; as long as it is sufficiently decentralized, the network is secure. However, if decentralization is sacrificed, the network is actually insecure.

2. There are two major entrepreneurial opportunities after the Ethereum merge

The first entrepreneurial opportunity is protocols for L2, L3, or even L4. Vatalik recently mentioned L3, believing that L2 is still a universal network concept, while L3 is a concept for specialized networks, such as algorithms specifically providing privacy computing for others to call.

The second opportunity is in the application layer. Friends from large companies have excellent operational experience in good business scenarios, which is what Chinese people excel at, making them unbeatable globally. You can recreate the business scenarios you are familiar with in Web3.

3. Web3 is not about overthrowing Web2, and don’t worry too much about Web2 giants seizing Web3 opportunities

The biggest difference between Web2 and Web3 is: Web2 is enterprise holder, shareholder capitalism, pursuing maximum shareholder value. Web3 is stakeholder capitalism after the use rights are securitized into staking holders. In Web3, there are no companies, only DAOs, and there are no shareholders, only stakeholders, which are the participants. Large companies are determined by shareholders, operating in a top-down structure, and their interests are already formed, making it impossible to transition from enterprise holders to staking holders.

Large Web2 companies cannot engage in Web3 activities, but that does not mean they have no future. Web3 is something new; it does not aim to eliminate Web2; rather, it creates something new, such as Bitcoin and Bored Apes. It does not compete with large companies; it creates entirely new things.

Web3 returns the rights of companies and platforms to individuals, allowing each person to have more capability and greater space to create more things.

4. Entrepreneurship in Web3 is fundamentally different from Web2 in two major ways

If you are starting a business in Web3, you must remember that you are not a founder; you are merely an initiator. A founder is an owner; you have the final say, even if your shares are diluted to 10%, you still hold 60% of the voting rights, which is the Web2 way.

But Web3 has no founders, only initiators. This project is initiated by you, but it does not belong to you, although you can have significant influence. For example, Ethereum is not Vatalik's, but he has a substantial influence on the Ethereum community and development process, leading many to believe it is centralized. However, neither he nor the Ethereum Foundation can decide what to do today or tomorrow; everything is determined by the community. Legally, Ethereum has never been registered anywhere, has no employees, no board of directors, and no assets.

Web3 will also bring about significant changes in work methods. Friends working in large internet companies all have their own skills. When you receive a salary and options there, you can only serve that company. However, the rewards for serving one company cannot compare to those for serving a thousand companies.

Web3 does not belong to anyone, meaning anyone can come in and work without permission. If you come in to work, you can earn token rewards, but no one can monopolize your work experience and abilities. You can accumulate your work achievements through DID or soul-bound tokens (SBT). When you reach a certain level, all DAOs and application layer initiators worldwide will think of you when they want to find experts in that area. They will give you tokens, and you can serve thousands or tens of thousands of projects, and I believe the rewards you receive will definitely exceed what large companies offer.

5. Every bear market in the crypto market gives birth to something new, which then ignites the next bull market

Over the past decade, the cryptocurrency market has experienced a bull-bear cycle every four years, typically three years of bull markets followed by one year of bear markets.

Each four-year cycle also has a narrative mainline. The mainline in 2013 and 2014 was Bitcoin; everyone suddenly discovered how great Bitcoin was and rushed to support it, creating a bubble. After the bubble burst, something great was born: Ethereum. The Ethereum white paper was written in 2014, and funds were raised to develop it.

Ethereum's ICO blew up the bull market in 2017. The ERC20 protocol allowed anyone to issue assets, completed in 10 minutes. The ICO technology was good, but it was misused by too many scammers.

The bear market in 2018 gave birth to Ethereum's second application, DeFi, which led to the bull market that started in 2019. DeFi was highly sought after, creating another bubble, which was later accelerated by NFTs. This year, DeFi has collapsed, with many companies either going bankrupt or suffering massive losses.

What new thing will emerge in the bear market of 2022, gaining popularity and forming a bubble? I personally believe it will be DAOs, which may ignite a new bull market but could also lead to a bubble.

Bitcoin and Ethereum's recent performance has been misjudged by the market. They inherently possess anti-inflation functions and, as super-sovereign assets, naturally have the ability to hedge against geopolitical turmoil. However, these two functions have not yet manifested; for instance, they both dropped significantly after the Fed raised interest rates. But I believe the market is smart and will recognize this eventually; I am confident it will be reflected in six months.

6. Web3 is like the electrification era of the Industrial Revolution, while Web2 is like the mechanization era of the Industrial Revolution

The largest Chinese DAO, pandaDAO, recently announced its dissolution. The initiators complained that a lot of time was spent on project coordination and management mechanisms, which were inefficient, and that many community opinions swayed many decisions. This has sparked reflection on DAOs: whether this decentralized operational method sacrifices efficiency compared to the refined organizational operations of Web2.

DAOs certainly have both successes and failures. There are successful DAOs, such as Bitcoin and Ethereum. But there are also many failed DAOs, just like companies; not every company can succeed.

DAOs are not a cure-all; they are not a panacea. They have five characteristics: on-chain, using smart contracts, decentralized governance mechanisms, open-source, and permissionless. There is also an economic model involving tokens and NFTs; if not designed well, it can also fail. If economic incentives are not correctly aligned, the system cannot operate and cannot balance the incentives for all participants.

Web3 and Web2 are not the same; you cannot evaluate Web3 using Web2 methods. It is inefficient; does everything need to be efficient, and does everything need to be done with a 996 work schedule to succeed? Ethereum has already proven that 996 is not necessary; Bitcoin has no employees and has created a trillion-dollar asset.

Web2 is not bad; it is somewhat similar to the mechanization phase of the Industrial Revolution, while Web3 resembles the electrification phase.

The British invented the steam engine and the textile machine, leading to an industrial revolution. Later, the Americans invented the light bulb, telephone, and radio, marking a pattern shift between electrification and mechanization.

There are several companies with trillion-dollar valuations in Web2, while Ethereum has several hundred billion; it has hundreds of thousands of developers thinking 24/7 about how to create something on Ethereum, without salaries, bonuses, or performance evaluations, bringing their own food. Would you say its vitality is stronger or that of large internet companies?

Web3 is a network for large-scale collaboration among strangers; it allows a Chinese person and an Argentine to work together on a project. This is a trustless network; once the rules are written into smart contracts, no one can change them. I do not care who you are, nor do I need to conduct due diligence or audits on you, making transaction costs frictionless.

We believe that more and more businesses do not necessarily need to pursue efficiency but should pursue fairness. Not everything needs to be done efficiently; some things may be better suited to be done fairly, using consensus methods.

When looking at Web3, you must forget the past; do not view the present from the past, but rather view the present from the future.

7. Web3 should be digitally native

In China, many digital collectibles are digitizing objects from the real world and putting them on-chain as certificates. I believe this is the wrong direction. They are merely replicas and lack meaning. IP is the IP of the real world, not the IP of NFTs. What you should do is create digitally native IP, prove it is yours with NFTs, and then take it offline for operations, just like Li Ning buying the Bored Ape image to make T-shirts. Bored Apes have fully proven this point; everyone must not get the direction wrong; all of Web3 should be digitally native.

8. Creators in Web3 find it easier to monetize

For creators, Web2 operates on a traffic model, first acquiring a massive user base and then gradually converting them. In contrast, Web3, as Kevin Kelly said, only requires you to have a thousand loyal fans willing to pay.

Currently, the internet operates on a tipping model, where the payment system is external and controlled by the platform. However, Web3's payment system is built into the chain, allowing readers to pay directly with its tokens.

Where do tokens come from? Tokens actually existed before the internet; they are access passes or tokens for logging into computer systems. Now, why are digital assets also called tokens? When you log into a certain internet system, you need a permission, which is a token. Once you have it, you gain the right to use that internet system. After the use rights are financialized, they become digital assets. Tokens represent the asset of use rights, not ownership. Having ETH does not mean you own Ethereum, but having ETH allows you to use Ethereum.

In Web3, your rights are tokens, and tokens ultimately have a centralized trading market, with both centralized and decentralized exchanges providing a mechanism for monetizing use rights.

9. The incentive mechanism in Web3 must be well designed

Web3 is self-organizing, differing from the top-down incentive mechanisms of enterprises. Its incentive mechanism has two points, and two tools are essential: one is NFTs, which record the contributions, activity levels, and capabilities of all participants. The other is the token model, which rewards you with tokens based on the capabilities and contributions recorded by NFTs. In Web3, there are no HR, no finance, and no management; performance evaluation is simply presenting NFTs.

The token model must be well designed; we have seen many failed cases. A public chain was halted just one hour after its launch due to a huge vulnerability; the incentives were misaligned, and the chain could not operate.

10. GameFi is a premature child of blockchain

GameFi is a premature child of blockchain; when it emerged, the chain's performance was insufficient. However, playing games requires constant calculations, and the chain could not support this due to performance limitations, leading to the transformation into financial games, which were not fun.

As the chain's performance improves, the enjoyable aspects of games can be realized. Games will have two wings: one is the numerical model, and the second is the token model. Previously, there was only a numerical model, with rules controlled by centralized companies. Now, with smart contracts, the generated items are NFTs, guaranteed by the chain, ensuring they cannot be taken away, revoked, or misissued.

With the addition of the token model, games can be both fun and profitable. When blockchain performance reaches tens of thousands or even a million transactions per second, the issues with GameFi will be resolved.

11. Consortium chains are at most Web2.5; chains are public chains

In 2015, many people worldwide were talking about creating consortium chains. Four to five dozen banks formed a consortium chain, and IBM also established a consortium chain, while Ethereum created an enterprise consortium chain, all of which ultimately failed. This indicates that consortium chains are not a viable path; they are more aligned with the internet and at most can be considered Web2.5, while chains are public chains.