Meng Yan: DeFi is the value layer protocol of Web 3.0

【Web3.0 Dialogue Marathon】

For a concept with a very grand narrative, rich content, and extremely flexible connotation, the definition and characteristics of Web3.0 are always in rapid dynamic change. The WebX Lab hopes to explore the boundaries of Web3.0 by launching a long-term dialogue marathon, which will also be an important project for the continuous iteration of the Web3.0 technology and ecological development research report.

This episode's guests

Meng Yan: Vice President of Digital Asset Research Institute, Co-founder of Youzheng Liantong Original title: "Web3.0 Dialogue Marathon | Exclusive Interview with Meng Yan: Web3.0 is a return to the original intention of the Internet"

Teacher Meng, can you share with us what areas you are focusing on recently?

I have always focused on the research of digital assets and DeFi. Recently, our team is designing and developing a decentralized algorithmic banking protocol, and considering how to put compliant assets on the chain in this protocol. Unlike general asset on-chain, our project is more inclined to the STO category. The core difference is that STO itself must meet a series of compliance requirements, including qualified investors, KYC certification, anti-money laundering, etc. These requirements will impose certain technical restrictions on STO itself, resulting in a lot of resistance and friction when the general existing DeFi directly connects to STO. At this time, DeFi may need to make some adjustments, but generally speaking, these are minor problems, and they are mainly part of the off-chain asset on-chain. The more troublesome part of the token economy is that different legislative districts or jurisdictions have different regulations, certifications and tolerance levels for Tokens, and DeFi is a global market, so there are indeed some gray areas or risks. So in fact, there is some controversy as to which jurisdiction's regulations we should follow to design our token economy model. Of course, China is relatively strict in this regard, but even under strict circumstances, there is room for the development of token economy in China.

Whether it is to put assets on the chain or to build a token economy model, external constraints should be given at the beginning of the design. New constraints should not be added when the design is almost completed, otherwise the original design may be completely invalidated. Therefore, the regulations and tolerance of the jurisdiction for tokens should be considered as important initial conditions.

In fact, is NFT also solving this problem now? Is it different from what you are doing?

What we are doing now is related to NFT. To be precise, we want to make "bills" for digital finance, but we believe that traditional financial bills are not suitable for digital finance, so we need to reinvent "bills" based on the specific needs of DeFi and digital finance. This kind of thing is definitely NFT, but it is different from the popular NFTs we have now. The popular NFTs in the direction of collectibles such as artworks and CryptoKitties also have a certain market, but we still care more about making the DeFi part solid first, because this part is an important infrastructure for the entire Web 3.0.

I would like to ask you to share with us, from your perspective, what is the essence of the core of Web3.0?

Different organizations and people use this term to describe completely different things. For example, the semantic web, as well as intelligent agents, etc. But in fact, the Web3.0 we are discussing today comes from Dr. Gavin Wood, the co-founder of Ethereum . There are many different names for this direction now, such as the value internet and the open web. I prefer to call it the decentralized internet because this term more accurately summarizes its essence or key features. No matter what it is called, it represents everyone's consensus. Ethereum 2.0, Near, Filecoin, Polkadot and other projects are obviously moving in a very clear direction.

I think Web3.0 is a new Internet platform and a new computing paradigm. In a sense, it is a return to the original intention of the Internet. The decentralized Internet must be similar to our current Internet. It is a multi-level comprehensive system from hardware to software, to network services, to network protocols, to value layer protocols, and then to the application layer. We call it a technology stack. Blockchain spans multiple different levels in this system and plays a core role in the storage layer, the computing layer, and the value incentive layer. Therefore, blockchain is a core infrastructure for Web3.0 and a real game changer. This is my view on the relationship between Web3.0 and blockchain.

I think it is not yet time to summarize the essence of Web3.0, but I would like to point out 5 characteristics of Web3.0:

• Decoupling of computing and specific computing devices: Web3.0 constitutes a new computing paradigm, where computing and storage are separated from specific devices, and computing and services will not be shut down due to problems with specific devices. The service is real and you can access and use it, but there is no specific machine to support this service.

• Identity authentication and data rights confirmation based on cryptographic technology: Different from the traditional Internet that relies on centralized institutions and databases for authorization and authentication, identity will inevitably become a sovereign asset. This identity is not only the identity of a person, but also the identity of terminals such as machines in Web3.0.

• Data is recorded and stored in an unalterable way: In Web3.0, data storage tends to never be deleted or modified, but data is continuously accumulated. However, the premise of this model is that the storage cost is extremely low and the scale is extremely large.

• Resource allocation and collaboration are carried out through a token-based market mechanism: Different from the previous centralized authorization and allocation method, both parties optimize resource allocation through token transactions.

• Decentralization and transparency in equity distribution.

On a deeper level, I think Web3.0 is actually the infrastructure of the era of ubiquitous machine intelligence. I personally think that Web3.0 and blockchain are not for people in the long run, but for ubiquitous machine intelligence. They are the basic tools and mechanisms for large-scale mutual transactions and collaboration between machines. We are currently using the thinking framework of carbon-based civilization, while blockchain, including Web3.0, represents a new paradigm of silicon-based civilization, which is not well understood by everyone.

In your opinion, which category of Web3 does your current work or field belong to, or what is its relationship with Web3.0?

What we are doing is DeFi, which is actually the value layer protocol of Web3. DeFi is equivalent to Http. It has certain application value itself, but it is mainly an infrastructure and a protocol used to support upper-layer applications. Only after DeFi is consolidated, will a large number of decentralized applications such as TikTok, Twitter, Amazon and Taobao appear on it.

What do you think about the current DeFi idle problem?

This is true at present, but in fact it is just building a great infrastructure by idling, waiting for the upcoming explosion of Web3 applications, and providing financing, payment, issuance, listing, circulation, and mortgage lending infrastructure for these Web3 applications. Only when Web3 applications emerge in large numbers and use such infrastructure to subvert the traditional financing model, will everyone realize that DeFi is prepared for these applications.

In other words, the upper layer that DeFi serves is not yet perfect, so its value has not yet been truly reflected?

Yes, I think DeFi will be worth $10 trillion in the future, because Web3 decentralized applications are actually intelligent entities that automatically conduct large-scale transactions and liquidations in the DeFi world. Users' use of the Internet will not be much different from now. They only need to protect their digital identities to use various services without logging in.

We see that the current DeFi is still copying the gameplay of traditional finance. What valuable innovations do you think DeFi itself has?

In fact, open finance and DeFi are not completely equal. Open finance is a value proposition, and DeFi is the most resolute technical realization of this value proposition. If the central bank and commercial banks can be very open and open up their infrastructure, many financial services will no longer need to be licensed, and the proposition of open finance can be realized. But in fact, it is impossible. Traditional finance does not like openness.

DeFi uses a very decisive technical means to make it open only in this form, which is very extreme, but I think it is necessary. Therefore, the most important feature and value of DeFi comes from its openness.

Secondly, the most important contribution of financial infrastructure or financial institutions is to provide liquidity for the entire economy. DeFi's mechanism can provide liquidity better than traditional enterprises, partly due to trust, openness, and transparency, and partly due to its programmatic execution, which builds liquidity logic into code.

But now there is a question: where will the liquidity finally flow to?

Yes, this problem is because DeFi has not yet been integrated with the real economy, so what everyone sees is liquidity speculation. I personally think this is inevitable at this stage. Frankly speaking, the stock market was also like this in the early days. Everyone should have a certain degree of tolerance and patience for this matter. The evolution of the DeFi world will be a hundred times faster than the traditional stock market. We may see it in a few years, but it still takes time.

Moreover, when DeFi is combined with the real economy, it will not be connected with the real parts of the real economy such as manufacturing, real estate, and processing industries in one step, but will be combined with the real economy within the digital world, such as advertising, games, and media. I have both confidence and patience in this matter. The core issue at present is indeed how DeFi can be combined with the real economy. There are many ways to combine this. I am more optimistic about asset combination and putting offline data assets on DeFi.

What do you think are the connection points between DeFi and offline real assets? Or which direction will be implemented first?

The reason why I think DeFi is a good entry point for many offline assets is that the connection point is relatively simple, and money is their connection point. For example, a company turns its own stocks into tokens and issues them on the chain with regulatory approval. These tokens can be appropriately circulated with digital assets in the DeFi world, such as raising assets such as Bitcoin. If combined with the token economy, the company itself and the raised digital assets can be used to incentivize the community and users, completing the entire business closed loop.

At this stage, we avoid using blockchain to directly transform users and corporate processes, such as decentralizing systems such as ERP and CRM. This is actually still a long way off and may never happen. However, it is most reasonable and has the least friction for us to directly open up the relationship between offline assets and online data assets at the value level.

In other words, the connection between DeFi and offline real assets requires more digital credentials as a buffer, rather than a direct relationship?

Yes, at the current stage, we are exploring through digital assets rather than more business logic, because in the end it is not blockchain that will transform the business logic of the enterprise. I have never been particularly enthusiastic about this idea, because I think it is unnecessary to put a large amount of business logic within the enterprise on the blockchain, and blockchain was not created to do these things. Blockchain was created to connect machine intelligence.

We are actually seeing some synthetic asset projects now, where users invest some digital currencies and use this platform to invest in real assets such as stocks and bonds. Does this fit your current vision?

First of all, this practice is illegal in China and is also very vague internationally. Some of these platforms are actually gambling platforms based on the prices of certain assets, and are not real investment platforms at all, so I am mostly reserved about this type of application, or even negative. The direction we are most concerned about is actually the digitization and chain-up of assets with real value and incentives from enterprises, offline institutions or communities, and how such assets participate in the DeFi ecosystem. Such assets often have the characteristics of low liquidity, high risks, and prone to non-compliance issues, and DeFi provides a solution. We often say that the chain is governed by the chain. In a sense, some algorithms of DeFi play a regulatory role. It must ensure that assets have sufficient collateral when obtaining liquidity, have strong liquidability, and so on.

In fact, when talking about DeFi, people will worry about whether this openness will bring chaos to the order?

We will definitely go through such a process at the beginning. When the entire industry slowly communicates with regulators and some infrastructure is gradually completed, people will find that infrastructure such as DeFi is far beyond the reach of existing platforms in terms of its ability to eliminate and manage chaos such as speculation and gambling.

What people are more confused about is who ultimately establishes the order in DeFi?

First of all, governance behaviors related to people can and should be combined with traditional centralized authority. For the governance of human society, centralization is still a governance method that is difficult to bypass. But in addition to this sense of reality, there must also be idealism. In the long run, when most of the mobile Internet, Internet of Things, and artificial intelligence are integrated with DeFi, a large number of transactions and collaborations between machine intelligence are mutually defined by audited and time-tested code combinations.

You have also seen that there are a lot of terms such as DeFi, digital finance, and open finance on the market now. Can you tell us about the relationship and differences between these terms?

I understand it as a series of links. The outermost link is digital finance, followed by open finance. Open finance is actually a proposition with values. It believes that since the digital economy provides a complete set of code-driven identity authentication and data asset confirmation mechanisms, many reasons for the privileged operation and closed operation of traditional finance are invalid. Everyone has the right to participate in finance, and the information available to the supply and demand sides of finance is symmetrical. Its liquidity and efficiency will obviously far exceed that of existing finance. DeFi is just an extreme means of realizing open finance, because there is no way to discount the use of DeFi to realize open finance, it must be 100% open.

You have been studying token economy and have previously mentioned the value of token economy in DeFi. Do you think token economy has value in other applications in the field of Web 3.0?

The value of the token economy is very large. In essence, it is a mechanism for a protocol or community to quickly aggregate resources, form scale and complete self-starting through tokens representing value. The vitality and significance of this mechanism are transcendent in human society, including in the future machine society. Maybe in the future we will not use blockchain but quantum computers, but token incentives will continue to exist. The token economy is a collaborative mechanism that conforms to the laws of the market economy, but the design of tokens is indeed more difficult. Generally speaking, the benefits should be distributed according to contributions, and the entire environmental constraints must be considered in advance during the design, including compliance, technology and people.

When talking about the characteristics of Web3.0, you also mentioned decentralized storage. Storage is still lagging behind in development compared to other sectors. Do you think there is a better technical route to achieve the kind of low-cost, large-scale distributed storage that we really want?

Some people have also talked about reusing the existing low-cost distributed cloud storage that the Internet has done very well, and adding token economy on top of it, such as encrypted storage and multi-redundant backup, which seems to be possible for blockchain, including Filecoin. But I think we can still give it more time to observe and not jump to conclusions. It doesn't necessarily mean that blockchain can't catch up with traditional cloud storage.