Shen Yu discusses Bitcoin halving: Can it become the starting point for the next bull market?

Guest: Shen Yu, Co-founder and CEO of Cobo

Host: Colin Wu, Founder of Wu Says Blockchain

Original link: “Shen Yu Talks About Bitcoin Halving: Can It Become the Starting Point for the Next Bull Market?”

Colin Wu (Host): Hello everyone! Although people in the industry are quite familiar with each other, we have some audience members from outside the circle, so could you please introduce yourself briefly, Shen Yu?

Shen Yu: Hello everyone! My name is Shen Yu. I consider myself an old investor and miner. I officially participated in the early development of blockchain in China in 2011 and launched the first Chinese mining pool in 2013, which at one point became the largest Bitcoin and Ethereum mining pool in the world. At its peak, we had over one-third of the Bitcoin hash rate. There was a small episode where we were the only team in the world to successfully execute a double-spending attack on Bitcoin.

After 2017, I noticed that blockchain began to have many applications, but there were many risk exposures related to security and private key management. As a company that is good at building infrastructure, we established Cobo, which focuses specifically on private key management and its derivative risks. Our company has been operating for over six years, mainly focusing on underlying security and wallet custody, ranging from fully centralized and semi-centralized MPC co-management to completely decentralized on-chain smart contract multi-signature product forms.

Colin Wu (Host): Let me briefly introduce ourselves. If you read the news, you can search for "Wu Says Blockchain" on Twitter, Telegram, or public account platforms.

Shen Yu is one of the most willing to share individuals in the Chinese crypto community. He has shared many news articles in various interviews and articles, and you can search online for some of his past views. To some extent, he should be considered one of the earliest big shots in the Chinese-speaking industry who is eager to share with everyone.

The crypto circle can be divided into several stages. The earliest stage consists of industry participants who joined before 2015, mainly miners in China. Please share with us what prompted you to enter the industry and what the atmosphere was like back then. Many early articles are very interesting; for example, everyone was in a QQ group, which was quite a fascinating phenomenon. You can search for some articles, and I remember Shen Yu also participated in video interviews; could you share that with everyone again?

Shen Yu: My entry into the circle was quite accidental. At that time, I was in college, and one boring afternoon while reading and browsing the internet in the library, I suddenly came across news about Bitcoin twice, possibly about Bitcoin breaking the $1 mark. I was curious and searched for what Bitcoin was, and I discovered Satoshi Nakamoto's white paper. After reading the white paper, I was deeply shocked. I then spent three months basically lying in bed reading Bitcoin forums and community discussions, hardly getting out of bed, and even my meals were brought back by my dorm mates.

After spending more than three months browsing the forums, I found that the Crypto world at that time was still a group of crypto geeks, each with various imaginative ideas that seemed unfeasible at the time, but the underlying logic seemed to make sense. The core issue of cryptocurrency is that after the digitization of money, it can circulate freely around the world without being double-spent. Although these were all very mature technologies, they were combined very well.

As an engineering student, I was deeply attracted by these technologies and discussions, so I didn't focus on my studies in college and instead engaged in building and exploring within the Bitcoin community. Initially, I translated foreign technical articles into Chinese and made many friends in the domestic community. The early domestic community was centered around QQ groups as a means of communication. For example, some groups that you might still see and hear about, like "Peace Hotel" and some very mysterious groups, in my impression, had about 40,000 to 50,000 people. On one hand, there were a bunch of crypto geeks, and on the other hand, there were many people in China who coincidentally had a lot of GPU resources. These people initially cracked Nokia phones and when the iPhone became popular, the market for those phones disappeared. They had a lot of idle GPUs and suddenly discovered Bitcoin, entering the space to mine using GPUs. Essentially, during the 2011-2013 period, the Chinese crypto ecosystem consisted of these two groups: one filled with idealistic crypto punks and the other with practical miners secretly mining with GPUs.

Fortunately, China hit the core mining field in the crypto track very early on. At that time, there weren't many things to do in the crypto ecosystem; there were only two: trading and mining. After 2013, many exchanges with Chinese backgrounds began to emerge because people had experienced a round of group buying wars in the Web2 world, and some companies transitioned into the crypto exchange space, becoming the well-known crypto exchanges we hear about today. That was basically the state of things, where everyone was discussing various exciting ideas and thoughts every day. But more than ten years later, many ideas and concepts have now become a reality, such as the stablecoin concept and early decentralized exchange ideas that are now being realized.

Looking back from today, many seemingly incredible innovations and ideas from back then can be realized, and we have now reached a better stage with a wealth of on-chain infrastructure and applications, making the future increasingly clear.

Colin Wu (Host): Thank you, Shen Yu, for sharing your early experiences, including the QQ group "Peace Hotel" you mentioned. If anyone is interested, you can search on Baidu or Google for many interesting stories about how the early Chinese Bitcoin community was formed, as well as many video interviews, including those with well-known figures like Bao Er Ye and Xing Zhang, which can be found in search engines.

2017 was a mid-generation year, welcoming the largest bull market in the industry. Many well-known figures became more prominent during that time, such as Sun Ge, who has been quite popular these days, CZ Zhao Changpeng, and many Chinese public chains like Neo and Quantum Chain, but many also felt that it was filled with the chaos of ICOs.

Looking back at the significance of the industry during the 2017 era, what is worth reflecting on and sharing?

Shen Yu: Looking back from today, the ICO market in 2017 had significant meaning that is often overlooked. There were many ICO bubbles in 2017, with a surge of speculation and even outright fraudulent projects. Looking back from 2020 and 2021, it brought a wealth of on-chain asset categories to the Ethereum ecosystem, which is also a factor in the DeFi explosion over the past two years, as the absolute number of assets increased significantly. In just one year in 2017, there were hundreds of thousands of ICO projects born. Comparing ICOs to IPOs, it is unimaginable to have such a large number of IPOs in the real world, even over a decade. Although there were many scams at that time, after a year of sedimentation, good projects and protocols still emerged and continued to iterate, with new innovations surfacing from the ruins. The industry goes through cycles of bubbles.

At the core is a set of infrastructure driven by the underlying performance of blockchain and the interaction between application layers. Once there is a large bubble, it leads to a surge in applications, which in turn forces the underlying blockchain infrastructure to improve itself. However, at the peak of the bubble, it becomes clear that the underlying blockchain infrastructure cannot support the technological development of applications, leading to the bubble bursting and entering a period of sedimentation. Many various geeks will iterate on the underlying infrastructure to lay the groundwork for the next explosion, which is also an intrinsic driving factor for the industry's rapid and continuous iteration. Bubbles can be a good thing, but every individual within the bubble needs to maintain a certain level of calm and engage in logical actions. From the perspective of long-term industry cycles, this is a good thing.

Colin Wu (Host): That makes a lot of sense. Ordinary people might feel that 2017 was filled with bubbles and that the entire ICO state of the industry was very chaotic. Looking back, many projects that emerged in 2020 and 2021 were actually started in 2017 and 2018, whether it was Uniswap or more DeFi-related protocols and public chains like Polkadot and Filecoin, which all began during that time. The protocol layer itself is not as efficient as centralized institutions and still needs some time to improve. Many projects were invested in during 2017, but by 2020 and 2021, we saw thousand-fold and ten-thousand-fold returns, and looking back, they were originally the so-called quality projects invested in during 2017 and 2018.

You also mentioned DeFi earlier. The most significant events in 2020 and 2021 were the rise of DeFi, and you yourself were one of the most famous DeFi miners, transitioning from physical mining to DeFi mining. At what stage did you develop a strong interest in DeFi? After a few years of sedimentation, what new perspectives do you have on the DeFi industry?

Shen Yu: I personally got involved with DeFi at the end of the bull market in 2018 and the beginning of the bear market in 2019, when some DeFi protocols began to emerge, particularly on EOS and Ethereum. At that time, DeFi had not yet achieved large-scale application due to a lack of driving factors. I spent some time exploring it and found that I was losing money, so I didn't continue. In 2020 and 2021, DeFi clearly reached a turning point, with a new wave of liquidity incentives represented by Compound.

I have a good habit of being willing to spend time, energy, and costs to experiment and observe on the frontiers of the industry. I set a metric, and when that metric reaches a turning point, I will invest more time and energy to further study it. In 2020 and 2021, I noticed that when DeFi data improved and users began to flood in, I spent a few days observing, and the market was completely different. It grew spontaneously, and later I invested a lot of energy and assets into DeFi, calling on friends and people in my groups to take a look at the qualitative change that had occurred in DeFi. I was fortunate to catch this wave of DeFi and successfully transitioned from being a miner.

Transitioning from a physical world miner to an on-chain DeFi player reduced the constraints of the real world. For a long time, I had been struggling to find electricity and mine, dealing with various physical world issues, which put a lot of pressure on those focused on technical aspects. After DeFi, I discovered that the industry had undergone a lot of early technical accumulation, with many advantages and a relentless pursuit of private key management and underlying security, which could be better leveraged in the on-chain world. So I continued to build various internal infrastructure in DeFi to improve efficiency. We will gradually open up our internal tools for public use, and everyone is welcome to experience them.

Colin Wu (Host): 2020 was the "Summer of DeFi," and in 2021, we entered the era of NFT explosions, surrounding NFTs, various small images, and games. To some extent, the momentum seems to surpass that of DeFi, as DeFi faces regulatory challenges, especially after the Terra incident. However, NFTs seem to have a clearer connection with the mainstream.

I remember Vitalik once said that he was most surprised by the explosion of NFTs; he never expected NFTs to explode to such an extent, especially in terms of certifying, trading, and circulating digital collectibles, which has significantly changed the demand for necessities.

Shen Yu has a characteristic of loving to play with everything; there is basically nothing he doesn't engage with, and he also plays a lot with NFTs. From your current perspective, do you think NFTs have a very promising future? And do you have any thoughts or suggestions for NFT entrepreneurs?

Shen Yu: Although I personally play a lot, I have also lost quite a bit.

The NFT market is a very interesting and fun market. It has very large characteristics, being relatively decentralized and different from others. For example, DeFi has a very strong head effect, with high-value transactions on-chain, as blockchain space is precious. But the NFT market is different; there are many fragmented communities, each with its own native characteristics and cultural traits, making it easy to find a sense of identity within such communities. When NFTs first started emerging in 2021, many friends would call us at 3 or 5 AM, excitedly discussing NFTs, saying how great this protocol was and how it resonated with people's hearts, discussing cultural values, and talking all night long. We saw a lot of values emerging that could resonate with various cultural groups' emotional needs, including social capital.

From this perspective, the success and existence of NFTs have certain value and significance.

For many young friends, the entry barrier to the NFT field is much lower compared to the crypto world. You don't need to understand a lot of cryptography or have a large amount of capital; as long as you have some artistic appreciation ability and a humanistic spirit, you will see different scenes and experiments. In the NFT world, especially with the influx of many post-00s, in the early stages, everyone was trying to create IP and build communities, so the entry costs were generally very low. We also saw many stories of overnight wealth in the NFT market, bringing in a lot of fresh blood.

Looking at it now, the NFT cycle may be quite short, around three months of emotional cycles, and it may have gone through three or four rounds of rapid cycles. Today, in a relatively bear market, NFTs combined with many IPs and traffic make the crypto world more diverse, which is particularly important because the future still belongs to the younger generation. Under these conditions, NFTs have brought many new forces to the industry. Although I personally lost a lot of money, I still firmly believe in the fresh blood that the NFT market brings to the future of crypto.

Additionally, we can see that many assets in the real world are non-standardized, and these assets are difficult to express on-chain through standardized tokens. NFTs are a great asset class that can carry many real-world assets. From this angle, the future NFT market still has great potential, not just the PFP collectors we see now; there may be many values combined with the real world. However, this requires more effort to promote better integration between the industry and the real world. The road may be a bit long, but it should become a reality in the not-too-distant future.

Colin Wu (Host): Continuing along the historical timeline, we arrive at 2022, a very painful year for the crypto industry, even the year with the largest amount of losses in history. From the small exchanges in China, like Huobi and AEX, to the massive shock caused by Terra, which then triggered the collapse of Three Arrows Capital, one of the top venture capital firms in crypto, and subsequently led to the downfall of the largest conglomerate in the industry, DCG. People realized that the seemingly glamorous giants were so fragile. Just when everyone thought this was coming to an end, the most ferocious events of the second half of the year arrived. The founder of FTX, Sam, who was at the pinnacle of the industry, donating to politicians and religious leaders, engaging in altruism, and attending various prestigious meetings, was found to have misappropriated user assets and was insolvent, engaging in a series of absurd transactions.

With a simple news report and a tweet from Zhao Changpeng, a multi-billion dollar empire could collapse in an instant. The year 2022 will certainly be remembered as a painful yet thrilling year in the history of cryptocurrency, leaving many lessons behind, including many well-known companies in the mining sector going bankrupt, with many issues unresolved. Of course, Shen Yu remained relatively stable in 2022. From your perspective, what were the most profound lessons from 2022, or what lessons do you think the industry needs to learn?

Shen Yu: 2022 was indeed very brutal; many old friends around me could no longer have meals together due to various issues.

Over the past year, the overall volatility in the industry was immense, with various incidents occurring one after another. However, looking back at the more than ten years since Bitcoin's inception, the underlying logic of various unknown security incidents has been the same; it fundamentally comes down to human nature. Although the industry is widely criticized for its high volatility and filled with uncertainties, the past two years have shown a strong degree of certainty in the industry. Many individuals with impressive backgrounds entered the space, and a lot of Wall Street capital came in, leading to the emergence of native applications, DeFi, NFTs, and GameFi, making it no longer just air. In such a flourishing environment, a significant pitfall suddenly appeared, the bubble burst, and many things disillusioned. Long ago, we experienced one round after another of such events, where the underlying issue was that people became increasingly inflated about themselves, their companies, and their decisions became less rational. They firmly believed that prices would not fall below a certain range, and leverage increased, leading to substantial deviations from the original intent of blockchain. Blockchain has given us a lot of freedom, providing us with the technical means and tools to create a more transparent and open world.

However, the power was ultimately transferred to centralized institutional owners, which, while appearing glamorous and participating in various political events, meant that every user failed to grasp the technology that the industry had endowed us with. They handed over the strongest sword to a third party to manage for us, which is a significant challenge the industry currently faces. Those managing our keys find it hard to resist their inner greed.

From a different perspective, as a manager, it is easy for them to use everyone’s keys. Many people are unaware of this, and in an environment of high volatility and abundant quality information, it is easy to make a significant profit. When the industry is in a state of rapid expansion and flourishing, there is a certain probability that individuals cannot resist the temptation and secretly use these keys. Using it once might yield profits, which further inflates their ego, leading to more frequent use, ultimately resulting in an extreme black swan event where a sudden incident causes assets to vanish.

Thus, I believe 2022 was a year of disillusionment, providing very important lessons. Everyone must deeply realize that any company can go bankrupt. What can we trust? We should not trust human nature; we should trust mathematics and the underlying technological principles. Everyone must master the technological means that blockchain grants us in this new era and hold onto the keys in our hands.

After experiencing a year of extreme events, the industry is also exploring and actively thinking about how to enable everyone to better use blockchain technology, increase industry transparency, and avoid those counterintuitive issues. We are now seeing the rapid development of keyless technology based on MPC (Multi-Party Computation), believing that in the near future, everyone will be able to have a key that is ready to use out of the box. However, your counterpart and service provider may only possess one key, and all transaction processes and assets will not be held by any one party; they will be publicly transparent and visible, fully utilizing the underlying characteristics of blockchain and mathematics as foundational guarantees. Although we may have learned painful lessons in 2022, with about 40%-50% of centralized institutions disappearing for various reasons, this has strengthened our determination on the decentralized side. It is evident that the industry has reached a consensus on the MPC-based keyless solution, significantly improving decentralization and transparency.

We can see a clear example: large hedge fund teams are actively requesting to use MPC technology to assist in asset management instead of placing assets in centralized exchanges. Additionally, we have seen the trading volume of decentralized exchanges (DEXs) and derivatives, which are inherently decentralized and transparent, rapidly growing. From this perspective, while we learned significant lessons in 2022, industry practitioners, these crypto geeks, have taken the lessons to heart. We are emerging from the trough, and in the next 2-5 years, we will undoubtedly be equipped with more technological means, granting us greater freedom.

Colin Wu (Host): To add, 2022 was indeed very painful, but the industry has also seen many improvements. For example, centralized exchanges have begun to implement on-chain proof of reserves (PoR). Although there are many criticisms and issues, this is still a very important development. For those watching our video and the novice users present, if the exchange where your coins are located has not published a PoR proof, please decisively withdraw your coins. If an exchange is unwilling to prove its PoR, why should it operate as an exchange? Where has the users' money gone? It has become a very straightforward choice.

Looking ahead to the future, next year will see Bitcoin's next halving, which is generally accompanied by market fluctuations. Many people now believe that Bitcoin's price may have a deeper relationship with the Federal Reserve and is no longer influenced by the Bitcoin halving cycle. Please, Shen Yu, reiterate your thoughts on next year's Bitcoin halving and its impact on price and market trends, based on your personal judgment, not as financial investment advice.

Shen Yu: First, I want to clarify that I am not very suited for secondary investments. I realized this within the first three months of entering the industry, which is why I chose the path of mining instead of trading cryptocurrencies. Since 2017, the correlation between cryptocurrencies and macroeconomic factors has been very high, especially since the interest rate hikes this year, the correlation has become even stronger, although there may be some event-driven results stemming from industry-native factors.

From this year’s short-term perspective, there are two major driving factors: first, the macroeconomic aspect. We are a small pond, and the water level of the pond depends on whether the macroeconomic environment will loosen. Currently, it seems that the macroeconomic situation may improve, and with the significant failures of many American banks in March, people have once again viewed Bitcoin as a safe-haven asset. From this perspective, the macroeconomic situation is improving, at least neutral.

Second, there are endogenous driving factors within the industry. From an economic perspective, the halving currently does not have a significant impact, but it serves as a good narrative logic, and everyone frames it within that narrative. There is a high probability that there will be another halving market from Q4 of this year to next year. Currently, the mainstream mining machines in the world are still the S19 miners. If the price does not stabilize above $30,000 after next year’s halving, these mining machines will have to shut down. Historically, such situations are rare, and even if they occur, they are usually short-lived. Therefore, I personally believe that the halving market from Q4 to next year is worth looking forward to.

Colin Wu (Host): Shen Yu is the founder of Cobo. Please introduce Cobo to us. Cobo mainly focuses on custody services, which require significant long-term investment. Could you please share Cobo's future development direction and how it plans to compete with mainstream custody institutions in the West to gain an advantage?

Shen Yu: We have discussed a lot about the early development path of the industry, and we can see that there are currently two core issues in this industry: first, the TPS (Transactions Per Second) issue, which is a performance issue. Every round of industry development is application-driven, ultimately leading to applications not keeping up, resulting in bubble bursts and the need to iterate on infrastructure, with TPS being the core issue.

The second issue is providing a set of solutions for end users that are simple and easy to use while ensuring user security, allowing users to access blockchain without relinquishing their rights to manage their keys to third parties. These are the two major issues in the industry.

Currently, the performance issue should be solvable in the near future. After 7-8 years of exploration, the industry has been addressing this through second-layer and third-layer networks.

The next issue is the security of private keys. Since 2017, Cobo has noticed a plethora of security incidents in the crypto world. As more people began to interact with the chain, many helpless individuals who lacked technical knowledge were exposed to hackers. We attempted to build a solution centered around the underlying risk security of private keys and their management. The underlying logic is to identify the core application scenarios at different stages of the industry and provide a set of private key solutions within those scenarios.

The first stage is represented by Bitcoin, where the core blockchain applications are sending, receiving, storing, and transferring Bitcoin digital assets. In this stage, we developed Cobo Custody, a purely centralized custody solution, treating blockchain wallets as a SaaS product, creating Wallet as a Service. This allows users with needs for sending, receiving, storing, and transferring to easily use APIs, which is very suitable for the current situation in Hong Kong, where many compliant funds and emerging trades need a compliant, secure, user-friendly product with a Web2 experience. This is the service provided by Cobo Custody and Wallet as a Service.

In the second stage, we found that users began to interact extensively with the chain, necessitating chain capabilities and contract account management. We encapsulated the capabilities accumulated in the DeFi field into the Cobo Argus product, which is based on on-chain multi-signature technology and has extensive interaction capabilities with various blockchain DeFi protocols, along with a series of risk management modules and automation programs to better support 24/7 on-chain responses and handle extreme situations.

In the third stage, in the post-FTX era, people are increasingly aware of the importance of managing keys. Many large institutions began to ask if they could have transparent, separately isolated asset pools, where all assets require their authorization to be used. Therefore, based on the early centralized custody, we iterated the underlying technology to MPC technology, where end users hold one key, and we hold another key to assist in asset management. Our key is mainly used for risk control, while another key is kept in cold storage with a third party, which could be a security company or an insurance company. Many companies have found this solution very effective, and they have iterated on our solution to provide products for end users. End users can quickly access the blockchain with just their account password, and many gaming companies use our solutions to allow end users to enter the crypto world with a Web2 experience. When end users reach a certain level, they may suddenly acquire high-value assets on-chain, such as rare NFTs in games. At that point, we can allow account upgrades, granting the third key to the user, who will then have the willingness and motivation to learn and understand the basic concepts. Once they receive this key, they can use it more effectively.

We basically provide three different products around these three stages: a purely centralized custody solution based on encryption machines, a multi-signature solution for on-chain smart contracts, and an MPC solution for decentralized co-management. These three solutions target different scenarios, with the core still being to ensure asset security and private keys, as well as risk management in various scenarios involving private keys.

We hope that through the company's efforts and iterations, we can enable more users to safely, easily, and confidently enter the blockchain and explore the exciting on-chain ecosystem.