Cobo God Fish: The blockchain industry is emerging from the trough

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

Host: Colin Wu, Founder of Wu Says Blockchain

Source: Cobo Global

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

Shen Yu: Hello everyone! My name is Shen Yu, and I consider myself an old veteran and miner. I officially participated in the early construction of the blockchain in China in 2011. In 2013, I launched the first Chinese mining pool, F2Pool, which at one point became the largest Bitcoin and Ethereum mining pool in the world, accounting for over one-third of Bitcoin's hash rate at its peak. There’s a little anecdote: we are also the only team in the world that has successfully executed a double-spend attack on Bitcoin.

After 2017, the blockchain began to see a lot of applications, but many risks related to security and private key management were exposed. As a company that specializes in infrastructure, we established Cobo, a company focused on private key management and its associated risks. Cobo 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 anyone reads 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 writings, and you can search for some of his past views online. To some extent, he should be considered one of the most willing early leaders in the Chinese-speaking industry to share with everyone.

The crypto circle can be divided into several stages. The earliest stage includes industry participants who joined before 2015, primarily miners in China. Shen Yu, could you share 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 fascinating. You can search for some articles, and I remember Shen Yu also participated in video interviews. Please share that with everyone.

Shen Yu: My entry into the circle was quite accidental. At that time, I was in college, and on a boring afternoon in the library, while reading and browsing the internet, 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 lying in bed reading Bitcoin forums and community discussions, hardly getting up, and my dorm mates brought me food.

After spending over three months browsing the forums, I found that the Crypto world at that time was still a group of crypto geeks, all 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 digitization, it can circulate freely globally without being double-spent. Although Bitcoin was based on 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 construction and exploration 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, there were some groups like "Peace Hotel" and other mysterious groups, which I remember had about 40,000 to 50,000 people. On one hand, there were a bunch of crypto geeks, and on the other hand, many people in China fortuitously had a lot of GPU resources. These people initially cracked Nokia gray market phones, and when the iPhone became popular, the market for gray market phones disappeared. They had a lot of idle GPUs and happened to discover Bitcoin, entering the space to mine using their GPUs. Essentially, from 2011 to 2013, the Chinese crypto ecosystem was made up 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 of the crypto track very early on. At that time, there were not 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, after experiencing a round of group buying wars in the Web2 world, some companies transitioned to the crypto exchange track, becoming the well-known crypto exchanges we know today. That was basically the state of affairs; everyone was discussing various exciting ideas and thoughts every day. However, more than ten years later, many of those ideas and concepts have now become a reality, such as the stablecoin concept and early decentralized exchange ideas, which have all been realized.

Looking back from today, many seemingly incredible innovations and ideas from back then have been achieved, and we have now entered a better phase with a wealth of on-chain infrastructure and applications, making the future increasingly clear.

The Legacy of the Bubble

Colin Wu (Host): Thank you, Shen Yu, for sharing your early experiences, including your mention of the "Peace Hotel" QQ group. Those interested 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 familiar figures like Bao Er Ye and Xing Zhang, which can all be found in search engines.

2017 was the middle generation. The year 2017 saw the largest bull market in the industry, and many well-known figures became more prominent during that time, such as the recently popular Sun Ge, CZ Zhao Changpeng, and many Chinese public chains like NEO and Quantum Chain. However, many people felt that it was more filled with the chaos of ICOs.

Reflecting on the significance of the industry in 2017, what is worth revisiting and sharing?

Shen Yu: Looking back today, the ICO market in 2017 had significant meaning that has been overlooked. There were many ICO bubbles in 2017, leading to a lot of speculation and even direct scams. Looking back from 2020 and 2021, it brought a wealth of on-chain asset types to the Ethereum ecosystem, which was also a factor in the DeFi explosion over the past two years, as the number of assets increased significantly. In just one year, there could have been 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 many scams occurred at that time, after a year of filtering, good projects and protocols still emerged and continued to iterate, with new innovations surfacing from the ruins. The blockchain industry is a cycle of bubbles, driven by a set of underlying infrastructure, where the performance of the blockchain and the application layer interact and drive each other.

Once there is a lot of bubble, it leads to an explosion of applications, which in turn forces the underlying blockchain infrastructure to improve itself. However, at the peak of the bubble, it becomes apparent that the underlying blockchain infrastructure cannot support the technological development of applications, leading to the bubble bursting and entering a period of consolidation. 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. From a long-term industry cycle perspective, this is a good thing; bubbles are not bad, but every individual within the bubble needs to maintain a certain level of calm and engage in logical actions.

The Summer of DeFi

Colin Wu (Host): Very reasonable. Ordinary people may feel that 2017 was filled with bubbles and that the entire ICO state of the industry was very chaotic. Looking back, the projects that emerged in 2020 and 2021 were also initiated in 2017 and 2018, whether it’s Uniswap or more DeFi-related protocols, as well as public chains like Polkadot and Filecoin, which all started 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 the emergence of thousand-fold or ten-thousand-fold coins, and looking back, they were originally the so-called quality projects invested in during 2017 and 2018.

You just mentioned DeFi; the most important thing in 2020 and 2021 was the rise of DeFi. You were also one of the most famous DeFi miners at that time, transitioning from a physical miner to a DeFi miner. At what stage did you specifically engage with and 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, when some DeFi protocols began to emerge on EOS and Ethereum. At that time, DeFi had not yet been widely adopted and lacked driving factors. I spent some time exploring it but ended up losing quite a bit, so I didn’t continue. In 2020 and 2021, DeFi clearly showed 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 frontier of the industry’s trial and error. I also set a metric, and when the 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 found that the market had changed. It had grown spontaneously. Later, I invested a lot of energy and assets into DeFi to conduct a series of operations, urging friends around me and people in the groups to take a look at how DeFi had undergone a qualitative change. I was fortunate to catch this wave of DeFi and successfully transitioned into a miner.

Transitioning from a physical world miner to an on-chain DeFi player reduces the constraints of the real world. For a long time, I had been struggling to find electricity and mine, dealing with various physical world challenges, which put a lot of pressure on those with a technical background. After DeFi, I discovered that the entire industry had undergone significant early technological accumulation, with many advantages and an extreme pursuit of private key management and underlying security, which could be better leveraged in the on-chain world. Therefore, I have been building various internal infrastructures in DeFi to improve efficiency. We will gradually open up our internal tools for public use, and everyone is welcome to experience them.

Firmly Optimistic About NFTs

Colin Wu (Host): 2020 was the "Summer of DeFi," and 2021 ushered in the explosion of NFTs. Surrounding NFTs, various small images and games have gained momentum, arguably even surpassing DeFi, as DeFi faces regulatory factors, especially after the Terra incident. However, NFTs seem to have a clearer connection with the mainstream.

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

Shen Yu has a characteristic of loving to play with everything; there’s basically nothing he doesn’t engage with, and he has also played a lot with NFTs. From your current perspective, do you think NFTs have a very bright future? There are also many entrepreneurs in this space. What are your 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 these communities. When NFTs first started emerging in 2021, many friends would call us late at night, unable to sleep, happily discussing NFTs, talking about how great this protocol was, how it resonated with people, and what cultural value it had, often chatting all night long. We saw a lot of values emerging that could resonate with the emotional needs of various cultural groups, including social capital and other values. From this perspective, the success and existence of NFTs hold certain value and significance.

For the vast number of 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 lot of funds; as long as you have a certain level of artistic appreciation and humanistic spirit, you can see different scenes and experiments. Especially in the NFT world, many post-2000s individuals have entered, and in the early stages, the cost of entry was very low as everyone aimed to create IP and build communities. 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. In today’s relatively bear market, NFTs combined with many IPs and traffic have made 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 remain very optimistic about the NFT market's potential to inject fresh blood into 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, but there may be many values connected to the real world. However, it 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.

The Year of "De-Mystification" in 2022

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 very beginning with 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 industry's largest conglomerate, DCG. People realized that the seemingly glamorous giants were actually quite 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, who was at the pinnacle of the industry, donating to politicians and religious leaders, advocating altruism, and attending various high-end meetings, turned out to have misappropriated user assets and was insolvent, engaging in a lot 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 very painful yet thrilling year in the history of cryptocurrency, leaving many lessons for everyone. The mining sector also saw many well-known companies go bankrupt, and many issues remain unresolved.

Of course, Shen Yu remained relatively stable in 2022. From your perspective, what were the most profound lessons you learned in 2022, or do you think the industry needs to learn any particular lessons?

Shen Yu: 2022 was indeed very brutal; many old friends around me could no longer gather for meals 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, the underlying logic of various unknown security incidents in the more than ten years since Bitcoin's birth is fundamentally the same; it is essentially a human nature issue.

Although the industry is widely criticized for its high volatility and various uncertainties, the certainty in the industry over the past two years has been very strong, as many individuals with impressive backgrounds have entered, along with a significant influx of Wall Street capital. The industry has begun to see native applications, with DeFi, NFTs, and GameFi emerging, making it no longer just air. Amidst this flourishing environment, a huge pitfall suddenly appeared, the bubble burst, and many things were disillusioned. Long ago, we experienced one round after another of such events, where the underlying issue was that people, companies, and individuals became increasingly inflated. After reaching a certain psychological state, many decisions became less rational, firmly believing that prices would not fall below a certain range, and leveraging became higher, deviating from the original intention of blockchain.

Blockchain has given us a lot of freedom, providing us with technical means and tools to create a more transparent and open world. However, the power was ultimately transferred to centralized institutional owners, who, although they appeared very glamorous and participated in various political events, did not manage the technology that the industry had bestowed upon us properly. They handed over the strongest sword to a third party to keep for us, which is a significant challenge facing the industry today. Those who help us manage this key 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. In a situation where many people are unaware, the industry is highly volatile, and there is a lot of 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 their inner temptations, secretly using this key. Using it once may yield profits, and their inner self-inflation grows, leading to more frequent use, ultimately resulting in an extreme black swan event where a sudden incident causes assets to vanish.

Therefore, I believe that 2022 was the year of "de-mystification," 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 technical principles. Everyone must master the technical means that blockchain grants us in this new era and hold onto the key in our hands.

After experiencing a year of extreme events, everyone is also exploring and actively thinking about how to enable everyone to better use blockchain technology, increase industry transparency, and avoid those actions that go against human nature. Now, we see that the technology based on MPC multi-party computation is rapidly developing. I believe that in the near future, everyone will be able to have a key that is ready to use right out of the box, but your counterpart and service provider may only hold one key. 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 a foundational guarantee.

Although we may have learned very painful lessons in 2022, with approximately 40%-50% of centralized institutions in the industry disappearing for various reasons, this has strengthened our resolve on the decentralized side. It is evident that the industry has reached a consensus that MPC-based keyless solutions are becoming mainstream, significantly improving transparency in decentralization.

We can see a clear example: large hedge fund teams are actively requesting to use MPC technology to assist in asset management rather than placing assets in centralized exchanges. Additionally, we have also seen the trading volume of on-chain native decentralized exchanges and derivatives trading rapidly developing. From this perspective, 2022 has taught us significant lessons, but industry practitioners and crypto geeks have taken these lessons to heart. We are emerging from the trough, and in the next 2-5 years, we will undoubtedly be equipped with more technical means, granting us greater freedom.

Colin Wu (Host): To add, indeed, 2022 was very painful, but the industry has also seen many improvements, such as centralized exchanges beginning 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 cannot even prove its PoR, why should it operate as an exchange? Where has the users' money gone? This has become a very simple choice.

Looking ahead to the future, next year will be Bitcoin's next halving. Generally, halving events are accompanied by market fluctuations. Many people now believe that Bitcoin's price may have a deeper relationship with the Federal Reserve rather than being influenced by the halving cycle. Please share your thoughts on next year's Bitcoin halving and its impact on price and market trends. Your personal judgment is not to be taken 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 coins.

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 a short-term perspective this year, there are two major core driving factors: First is the macroeconomic factor. 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. Additionally, with the recent 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, the endogenous driving factors within the industry. From an economic perspective, the halving currently does not play a significant role, but it is a good narrative logic, and everyone is within that narrative framework. There is a high probability that there will be another halving market from Q4 this year to next year. Currently, the mainstream mining machines in the world are still the S19 miners. If the price of Bitcoin does not stabilize above $30,000 after the halving next year, these mining machines will have to shut down. Historically, this rarely happens, and even if it does, it is usually for a very short time. Therefore, I personally believe that the halving market from Q4 to next year is worth looking forward to.

Cobo Makes Private Keys Safer

Colin Wu (Host): Cobo primarily focuses on custody services, which require significant investment and are relatively long-term. Could you please introduce Cobo's future development direction and how it plans to compete with mainstream custody institutions in the West to gain advantages?

Shen Yu: We have discussed a lot about the early development path of the industry, and we can see that the industry currently faces two core issues: First is the TPS issue, the performance issue. Every round of industry development is application-driven, ultimately leading to applications not keeping up, resulting in bubble bursts, and continuing to iterate on infrastructure, with TPS being the core issue.

The second issue is providing a set of solutions for end users. This solution must allow users to easily and safely access blockchain technology 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, as the industry has undergone 7-8 years of exploration, making significant strides with layer two and layer three networks.

The next issue is the security of private keys. Since 2017, Cobo has observed a plethora of security incidents in the crypto world, as more people began to interact with the chain, exposing many helpless individuals who lacked technical knowledge to hackers. We aim to build a solution around underlying risks, secure private keys, and private key risk 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 involve sending, receiving, storing, and transferring Bitcoin digital assets. In this stage, we developed Cobo Custody, a purely centralized custody solution, and we positioned the blockchain wallet as a SaaS product, creating Wallet as a Service, allowing users with needs for sending, receiving, storing, and transferring to use our API. This is very suitable for the current state in Hong Kong, where many compliant funds and emerging trading entities 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, as users began to interact extensively with the chain, there was a need for chain capabilities and contract account management. We packaged a lot of capabilities accumulated in the DeFi field into the Cobo Argus product, which is based on on-chain multi-signature technology, providing extensive interaction capabilities with various blockchain DeFi protocols, along with a series of risk management modules and automation programs to better support on-chain 24/7 responses and handle extreme situations.

In the third stage, post-FTX, there is a growing awareness of the importance of managing keys. Many large institutions have begun to ask if they can have transparent, separately isolated asset pools, where all assets require their authorization to be used. Therefore, based on the early centralized custody foundation, we have iterated our underlying technology to MPC technology, allowing end users to manage their keys while we hold one key to assist in asset management. Our key is mainly used for risk control, while another key is used for cold storage managed by a third party, which could be a security company or an insurance company. Many companies later discovered that this solution was very effective, and they iterated on our solution to provide products for end users, allowing them to quickly access the blockchain with just an account password. Many gaming companies have used our solutions, enabling end users to enter the crypto world with a Web2 experience. When end users reach a certain level, they may acquire high-value assets on-chain, such as rare NFTs suddenly obtained in a game. At this point, we can upgrade their accounts and grant them the third key, as they will have the willingness and motivation to learn and understand the basic concepts. Once they have 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 HSM, 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 for various scenarios involving private keys.

We hope that through our 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.