Xiao Feng's latest speech: New Capitalism Based on Tokens and Usage Rights

Author: Wanxiang, Dr. Xiao Feng from HashKey Group

Source: PANews

Hello everyone, thank you very much for the invitation from Professor Li Guoquan. I am also honored to have the opportunity to share at Singapore's Singapore University of Social Sciences. The theme of my presentation today is "Digital Economy Era and Digital Asset Center."

I want to clarify one point: just as the industrial economy gave rise to the stock market, the digital economy will also create a market system for virtual assets or digital assets. In the next 20 or 30 years, the market system for digital assets and virtual assets may have the same scale and value as the current stock market. To illustrate this point, we first need to look at a unique value law of the digital economy, which determines that the digital economy era will definitely adapt to a digital asset market. As we know, digital products and services have a value law characterized by high fixed costs and low marginal costs, which is not present in the industrial economy. In the manufacturing economy, fixed costs are high, and marginal costs are always increasing. The marginal cost of producing one car versus one hundred cars gradually increases. However, for digital products and services, fixed costs are high, but marginal costs approach zero, or even equal zero. For example, developing a software requires significant investment. But once the software is developed, whether one person uses it or one hundred million people use it, the marginal cost is almost zero.

This value law of digital products and digital services leads to two significant characteristics of the digital economy. First, due to its low marginal cost, or even zero marginal cost, digital products and digital services in the digital economy will never face the problem of diseconomies of scale. At the same time, this easily leads to the phenomenon we see today, where global internet platforms often achieve winner-takes-all outcomes, resulting in monopolies. This is why regulatory authorities in various countries are introducing different laws to regulate internet platforms and eliminate the adverse effects of monopolies.

In addition to this characteristic, the value law of high fixed costs and low marginal costs means that the way to maximize the value of digital products and services is for these products to be widely used; the more widespread, the better, and the greater the value. In this path of value maximization, the right to use becomes more important than ownership; you want more people to use it. The right to use is more important than ownership, and how do we achieve this? Through software. When software engineering began to emerge decades ago, we started to see a new phenomenon: open-source software organizations. The reason for the existence of open-source software organizations, which abandon ownership while allowing everyone to access all source code and permitting further processing and development based on the source code, is based on this new characteristic of digital products and digital services: high fixed costs, low marginal costs, and the phenomenon where the right to use is more important than ownership. In the blockchain era, this new value law of usage rights has been taken to the extreme.

All blockchain protocols must be open-source and permissionless. When you join the Bitcoin network or the Ethereum network, or even other blockchain networks or systems, you do not need anyone's consent to join freely. The code you use is also completely open-source, allowing for permissionless sharing, which makes it perfectly suited to the digital economy's high fixed costs and low marginal costs, following the best path for maximizing product value. The huge difference between usage rights and ownership is that their values are also vastly different; the value law of usage rights can form what is called the "fax machine effect."

What is the fax machine effect? This is a value effect unique to usage rights. This morning, I personally spent 2000 yuan to buy a fax machine, which is the cost I incurred to use this fax machine. However, the fax machine I bought for 2000 yuan actually allows me to join a network composed of 10 million fax machines, which has a value of 10 billion dollars. I spent 2000 yuan to join a fax machine network worth 10 billion dollars; I do not own this fax machine network. The value of this 10 billion dollar fax machine network means that by buying one fax machine, I can join this network and have the tool or right to use this network. At the same time, if one of you in the audience buys a fax machine this afternoon, you also join the fax machine network we share, and you have the tool and permission to use this fax machine network. Your joining increases my value because I now have another possibility to send a fax. This is the value benefit of usage rights, which we describe as the fax machine effect. The term "fax machine effect" was not coined by me; it was invented by Kevin Kelly 20 years ago when he referred to the economic laws of these digital products and digital services.

Therefore, based on the value law of digital products and digital services, we find that the importance of usage rights surpasses that of ownership. Usage rights and ownership are two different things; although they both belong to a type of right, they are different. Ownership is indivisible and has exclusivity. If you hold shares in a listed company, you cannot say that I can also hold them. A 100% share of a listed company cannot be infinitely subdivided, and ownership of shares is exclusive. Moreover, under the capital system of ownership, the pursuit is the maximization of shareholder interests, which are two characteristics of ownership.

Usage rights, on the other hand, can be granted infinitely in a cyclical manner. You use it once, and I can authorize you to use it twice. As we mentioned earlier, the fax machine effect shows that when one person joins and uses this system or product or service, it often has a fax machine effect that increases the value of another user, granting them more possibilities. Therefore, on one hand, usage rights can be granted infinitely, and on the other hand, usage rights can mutually benefit each other. Your joining increases my value, and my joining increases your value because it has a sharing nature. Moreover, since usage rights are not exclusive, there is an incentive compatibility among stakeholders. We know that incentive compatibility is a very hot topic in economic research, focusing on how to achieve it so that all participants can benefit and their interests can be balanced. This is a topic that is continuously researched and discussed; it is an eternal topic and also an economic issue that has better solutions in the digital economy.

The distinction between usage rights and ownership in the context of blockchain or distributed ledger technology leads us to often refer to digital assets and virtual assets as tokens. Whether they are fungible tokens or non-fungible tokens, they are all tokens. How did the term token come to represent usage rights in the digital economy?

In my personal view, when computer systems began to emerge in the 1960s, whether you had the right to log into a computer system depended on whether you had a token. In the programming of that time, a token was a permission to use the computer system. The usage permission token of computer systems in the 1960s gradually evolved through the internet phase to the blockchain phase, standardizing, fractionalizing, and financializing usage permissions, leading to the emergence of what we call tokens. We can turn them into standard financial products for trading. This is the subject of trading in the virtual asset center or digital asset center. It must be based on a blockchain distributed ledger. There are many explanations for blockchain's distributed ledger. If we look at it from the perspective of tokens, from the standardization, fractionalization, and financialization of usage rights, we can conclude that the blockchain distributed ledger is used to help us extract usage rights separately from digital products and digital services. How do we extract them? It relies on this distributed ledger. After extraction, we standardize and fractionalize it, forming a digital asset or virtual asset market.

Now, as a side note, we all know that governments around the world are formulating different systems and rules to counter the monopoly of internet platforms or to dismantle the economic monopoly of internet platforms. I believe that tokens may be the best solution against the monopoly of internet platforms, obscuring ownership and extracting usage rights. As we mentioned earlier, ownership has exclusivity, while usage rights are shared. By extracting shared elements and making them more important, we create a system for capturing the value of products and services. In this case, the monopoly of internet platforms will naturally dissolve.

We have discussed that the trading of digital asset markets or virtual asset markets is standardized, fractionalized usage rights, represented by tokens, which have real value. It is not a Ponzi scheme, nor is it a market speculation with no value. This standardized token representing the usage rights of digital products and services has very real value. Or, to put it another way, these virtual assets have real value. The real value is reflected in several aspects.

First, the issuance of tokens relies on a set of algorithmic models, which are very clear in advance, and the issuance quantity and speed are predetermined. This issuance discipline is much stricter than that of most sovereign countries' treasuries or central banks. The quantity is predetermined, and the issuance speed is also predetermined, relying on a set of algorithms to build trust among us. This limitation on quantity and the algorithmic specification of issuance discipline establish a consensus and trust among us.

Second, we say that tokens represent a usage permission. Only by possessing a token for a certain system or network can you use it. For example, to use the Bitcoin network, you must first have Bitcoin; to use the Ethereum network, you must first have ETH. Since you can only use this system or network if you own the token, a natural demand for tokens arises. If a system like Ethereum has more and more applications and users, the demand for ETH will naturally increase. This is a real demand; when you use this network, you will definitely need to have a usage permission.

Third, in the process of using this network or system, each time you use it, you will consume a little bit of the token, so the overall supply is designed to be deflationary. We know that one important reason for the value of currency is that if you want to keep the currency strong, you need to design a deflationary model for its supply. This is a solid foundation for the value of currency. For example, in the Ethereum network, the gas fees consumed daily have already exceeded the new ETH generated daily, which is a solid value support for Ethereum, known as a deflationary model.

In some application layers, as we mentioned earlier, Ethereum is a foundational blockchain protocol with only one token, ETH, which is a functional token. When some application layer protocols of blockchain have a founding team and equity, they also have a functional token. After these functional tokens are issued, the founding teams and equity holders often make a commitment to use a portion of the project's cash flow or profits to repurchase the tokens they have issued. Essentially, this is a transfer of a portion of rights and interests from shareholders to users. For example, typically, all these application layer projects will have their founding teams and shareholders repurchase the tokens they issued with no less than 20% of the project's revenue or profits. This means that shareholders and founding teams have transferred 20% of their equity to more users. This is also a solid foundation for the value of tokens, giving them real value.

Fifth, within such blockchain systems and networks, there are often communities or decentralized organizations that grant some rights of community autonomy. However, to govern or vote within the community, you need to own tokens, which serve as proof of your voting rights. Therefore, owning tokens gives you a portion of governance rights over the project, which is also where the real value of tokens lies.

Thus, virtual tokens actually have real value. This real value comes not only from their issuance discipline but also from the necessity of purchasing such tokens to use the system. Additionally, the overall supply of tokens is designed to be deflationary. Furthermore, at the application layer, the founding teams and shareholders of these application layers will use a portion of their project’s profits to repurchase the functional tokens they issued, which also broadens the support for real value. Moreover, owning tokens grants you partial governance rights over the project, including voting rights. These five points collectively constitute the real value of tokens.

Therefore, the tokens traded in the virtual asset market and digital asset market are not Ponzi schemes or speculative trading; we are trading their real value, which represents the real value of virtualized products and virtualized services, reflected in the price of tokens through these five aspects.

At the beginning, I mentioned that just as the industrial economy era nurtured a stock market, the digital economy era will nurture a virtual asset or digital asset market. These two markets do not replace each other. As we enter the digital economy era, we still need the grains and cereals that have existed since agricultural civilization; we still need them. These two markets, the stock market and the digital asset market or virtual asset market, trade different things, so they do not replace each other. The stock market, birthed from the industrial economy, is an ownership market that trades ownership and equity, with its institutional foundation being shareholder capitalism. Under the foundation of shareholder capitalism, we use a corporate structure to solidify shareholder rights. Based on the corporate system, we fractionalize the rights of all shareholders and list them for trading on stock exchanges, which is based on the capital market system formed by ownership in the industrial economy.

In the digital economy era, as we mentioned earlier, the importance of usage rights surpasses that of ownership; usage rights are more valuable than ownership. The basis for usage rights is a new capital market system, a new capital system called stakeholder capitalism. The legal framework for fixed usage rights under stakeholder capitalism has become what? It has become open-source organizations, non-profit organizations, or decentralized autonomous organizations. In these legal frameworks of open-source organizations, non-profit organizations, and decentralized autonomous organizations, ownership diminishes or becomes insignificant. In these three types of organizations, usage rights are the most important and valuable part. Therefore, usage rights clearly cannot be fractionalized; they are tokenized. After tokenization, usage rights become standardized and fractionalized, leading to the digital asset market, which fundamentally differs from the stock market, or we can call it the virtual asset market.

Thus, we predict that in the next 20 to 30 years, this virtual asset market or digital asset market, the market for issuing and trading usage rights, may grow to be as large as the existing stock market. If we accept this premise, for Singapore, as an already established and significant international financial center, the tokenized digital asset market based on usage rights is the core content of building Singapore's International Financial Center 2.0 version. This is indispensable for Singapore, or it is a crucial aspect that we cannot afford to miss as an international financial center.

We know that the digital economy formed based on blockchain and digital technology is inherently a virtual economic system that transcends judicial regions and geographical constraints. In the digital world, there are no borders or restrictions from any judicial region. This presents a tremendous opportunity for Singapore; we can bypass the geographical constraints of Singapore and the limitations of its population base, targeting global users, global markets, and global developers to establish a tokenized digital asset market based on usage rights.

We can look at two cases. One case is Coinbase, which is a licensed and compliant digital asset trading platform in the United States with 120 million registered users, 80% of whom are non-U.S. users. Given that the U.S. has a total population of only 300 million, it is impossible for one-third of the population to be registered users of Coinbase. So why does Coinbase have around 80% of its registered users from outside the U.S.? Does the New York Stock Exchange have 80% of its investors and clients from outside the U.S.? Not at all, especially the Nasdaq, which almost never opens registration to individual investors outside the U.S. But Coinbase has achieved this. Why can Coinbase do this? Because Coinbase serves the digital asset market that represents the usage rights of the digital economy in this digital world, which is not constrained by geographical environments or judicial regions; it can serve globally. By complying with different local regulations in various regions, it allows individual users to register directly as Coinbase users without needing to go through a securities broker like Nasdaq or the New York Stock Exchange.

The biggest difference between Coinbase and the Nasdaq is that Coinbase can directly accept individual registrations as users of its exchange. The Nasdaq must expand its retail market through its members and securities brokers. This new system, this new digital market's capital market system, is crucial for the 2.0 version of Singapore's international financial center. Due to time constraints, I will stop my sharing here. Please feel free to criticize and correct any shortcomings. Thank you all.