Xiao Feng: Blockchain - the new world of digital alternative assets

About the author : Xiao Feng (PhD in Economics from Nankai University, Vice Chairman of China Wanxiang Holdings Co., Ltd., Founder of Wanxiang Blockchain Lab and Distributed Capital.)

Author: Xiao Feng

You must know Yale University, a famous American university. If you know a little bit about it, you must have also heard of the Yale University Foundation. If you know a little bit about fund investment, you must have seen the impressive investment performance of the Yale University Foundation over the past few decades. As a university endowment fund, due to the long-term nature of the funds, its investment goals are first to beat inflation, second to beat the benchmark, and third to strive for absolute returns. Fortunately, the Yale University Foundation has achieved all three of these goals! Especially the first and second goals, which have been greatly exceeded!

Research has long shown that more than 90% of investment performance comes from asset allocation, not from the selection of individual stocks or bonds. The Yale University Foundation's decades of impressive investment performance comes from their bold innovation in asset allocation models. According to the Yale University Foundation's 2015 annual report, as of June 2015, commodities accounted for 6.7%, private equity accounted for 32.5%, and real estate accounted for 14%, which together accounted for more than 50% of the asset portfolio. In the classic textbooks of the global asset management industry, we generally classify stocks, bonds, and cash as traditional asset categories, while commodities, hedge funds, PEVC (PE, Private Equity, private equity investment; VC, Venture Capital, venture capital), and real estate are classified as alternative asset categories. People call this new model of allocating alternative assets as the core assets of the portfolio the "Yale model" to distinguish it from the asset allocation model that allocates traditional assets such as stocks, bonds, and cash as the core assets of the portfolio. Most of the secrets of the Yale University Foundation's surpassing its peers and benchmark targets lie here.

From the case of the Yale University Foundation, we can get three insights: First, to get a higher return on investment than others, you can't just stay in the traditional asset class, you have to find a new way; second, asset classes are not static, new technologies, new economies, and new models will create new asset classes, so you need to have a unique vision; third, how to evaluate and analyze new asset classes and conduct risk pricing requires a new framework and new methods. Whoever masters the new method faster and better than others will be the first to get the "first taste"!

We know that the geographical discoveries of the 15th and 16th centuries laid the foundation for the leading position of the European continent in human society in the past few hundred years, and created considerable material wealth for the European continent. Since the maturity of Internet technology in the early 1990s, human society has started a new geographical discovery movement. This time it is no longer a great discovery of physical space, but a great discovery of digital space. In the mid-1990s, Negroponte, the head of the MIT (Massachusetts Institute of Technology) Media Lab, published "Digital Living", which was the action declaration of this digital geographical discovery. The traditional model of creating wealth by relying on land, equipment, and labor is no longer sustainable because of the limited resources. The infinite scalability of digital space, the infinite replicability of bit structure, and the multi-dimensional plasticity of the virtual world may mean that the wealth to be developed in it will be dozens of times that of the physical world.

The manifestation of this new wealth is digital assets.

What are digital assets? I think digital assets have five attributes:

First, digital assets are assets registered on blockchain ledgers or distributed ledgers. Equity registered with the Industrial and Commercial Bureau and real estate registered with the Real Estate Bureau are definitely not digital assets.

Second, digital assets are virtual assets that exist in a bit structure, not physical assets with an atomic structure like gold;

Third, digital assets are a computer program, not a line of digital symbols. They can be programmed, and the exchange of assets is the exchange of codes, not the increase or decrease of numbers.

Fourth, due to the programmability of digital assets, they can be traded autonomously and autonomously on a blockchain through the programming of smart contracts, without the need for human intervention.

Fifth, digital assets exist in the form of "Coin" (digital tokens) in most cases. Digital assets have skipped the stage of asset securitization and directly reached the stage of asset monetization.

Bitcoin, Ethereum and other digital currencies are the most familiar digital assets. There are about 300 kinds of digital currencies with a market value of about 12 billion US dollars. But the scope of digital assets is much larger than this. Almost all mainstream financial institutions in Europe and the United States have established their own blockchain laboratories, and are experimenting with the use of blockchain technology in various financial scenarios to create and issue smart stocks and smart bonds. The so-called intelligence is actually to use the immutability and programmability of blockchain data to register and issue stocks or bonds on the blockchain, so that these digitized stocks or bonds can rely on smart contracts for peer-to-peer autonomous transactions and self-settlement. On another track, there are many technical geeks who advocate complete decentralization and hope to establish a completely free, autonomous and self-governing system in the digital world, and are also trying to launch various digital assets. According to the IoT white paper "Device Democracy" released by IBM (International Business Machines Corporation) in 2014, it is predicted that by 2050 there will be 100 billion devices connected to the Internet. By then, under the management of blockchain, device-to-device financial transactions (M2M) will be possible, which will be a greater opportunity to create, issue and trade digital assets.

Here, I can make an optimistic outlook: in ten years, the overall market value of digital assets is expected to reach one trillion US dollars! By then, digital assets will surely become an important category in alternative assets. Whoever ignores digital assets and does not include digital assets in his asset portfolio will find it difficult to surpass the benchmark and his peers in terms of performance returns. We may be able to make a bold prediction: from the perspective of asset portfolio returns, in the next ten years, if you do not include digital assets in your portfolio asset allocation, you may really lose at the starting line!

I think we will definitely see digital assets added to the fund’s asset portfolio as a new category of alternative assets in the Yale University Foundation’s annual report sometime in the next decade.

Gong Ming (The Runaway Prince Gong)

Mr. Gong Ming (netizen "暴走公亲王子") is one of the earliest researchers and practitioners of digital currency and blockchain technology in China. In recent years, he has been committed to promoting, disseminating and training theoretical knowledge, industry information and entrepreneurial information of blockchain in China. He has made outstanding contributions to the development of China's blockchain industry! He also founded China's first media focusing on blockchain technology - Blockchain Pencil, becoming one of the entrepreneurs in China's blockchain industry. His courage is admirable!

I am very happy to hear that his book "Blockchain Society: Decoding Global Applications and Investment Cases of Blockchain" will be published by CITIC Press soon! I am fortunate to have read the manuscript in advance while writing the preface for this book. This may be the world's first book that provides a panoramic introduction to the blockchain industry, especially the situation of startups; this may be the world's first book that provides a panoramic introduction to the investment situation of the blockchain industry. Mr. Gong Ming has unreservedly revealed his observations and research on the global blockchain industry in the past few years. Therefore, this book can help us understand the nature and content of digital assets, see the formation process of digital assets, grasp the investment opportunities of digital assets, and form investment methods for digital assets.

Here, as a Chinese believer in blockchain technology, I would like to thank him for his contribution!

Here, I solemnly recommend this book to everyone!