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Op-Ed: The Possibility of $5 Trillion Value of Public Blockchains

On July 19, 2018, Dr. Feng Xiao, the chairman of Wanxiang Blockchain, led his core team to release a next-generation global computing framework known as “PlatON” at the Distributed 2018 conference in San Francisco. At a small meeting, he talked about his latest thoughts on the development of blockchain technology and the prospects of the industry, including new business boundaries, possible breakthroughs and the value of public blockchains.

The Physical World vs. the Digital World

Blockchain technology represents the new-era Columbus ship sent to discover the "new world."

Some people said that blockchains would subvert something, but I don't think so. I think blockchains create a new world. It's just like Columbus going to discover a new continent, which brought Europe the accumulation of wealth over hundreds of years and consequently created the modern Europe.

Blockchain technology is like Columbus' ships, but what it brings us is neither a new discovery of the physical space nor a new America; instead it’s a new discovery of the digital space. Here, the relationship between digital space and physical space is neither substitution nor subversion. They are parallel universes. We can create and explore new wealth in the digital space that is much larger than the wealth of the entire human society in physical space. That is, of course, referring to digital assets.

Blockchain Technology vs. "Blockchain Plus"

Blockchain technology has not yet reached the stage of "blockchain plus."

People often ask, “What are the functions of blockchains?” My point is that it's too early to ask this question at present. It should be understood as follows: Blockchain technology comes first and then comes "blockchain plus." The original, pure application of blockchain technology comes first, and then the technology will be used in various industries in the physical space to bring respective transformation in the future.

Observing the development of the internet in China from 1999, when Jack Ma founded Alibaba, to 2010, when the Chinese government began to officially launch the national policy of "internet plus," it's hard to imagine a traditional department store in 1999 or 2000 reinventing itself with internet technology. However, in the internet era, e-commerce enterprises such as Taobao have expanded to the current scale, which has exerted great pressure on the offline traditional business. Only then do they realize the power of the internet.

Blockchain technology is the same. Our current work is to develop blockchain technology and explore the original business mode.

Blockchains vs. Distributed Business

Blockchain technology brings a new frontier of business.

As I've already said, blockchains are not about subverting or replacing offline businesses or businesses in physical space. Blockchains bring a new business boundary, which we call "distributed business.”

The business intermediaries we are familiar with now will be replaced in the blockchain era, and people will experience the point-to-point, decentralized and reorganized business forms. I call it “the distributed business mode.” In distributed business, intermediaries will not disappear. They take other forms instead. Mathematical algorithms have replaced all business intermediaries, trust intermediaries and credit intermediaries.

Compared with 100 million people, the marginal cost of applying a mathematical algorithm by one person is zero, which brings infinite possibilities for business development.

We can see that great changes have taken place from the industrial economy era to the information era. In the stage of the industrial economy, any enterprise has its boundaries and when it grows to a certain scale, uneconomic phenomena will occur. Because, in an industrial economy, the marginal cost increases as business expands, an uneconomic and cost-ineffective boundary is increasingly reached.

Facebook, the famous social media company, serves 2 billion people while Tencent serves 1 billion people. Under the industrial society and economy, it is hard to imagine that any business entity can serve so many people and the company will collapse in the end. But the internet can help a company or a business entity to serve 2 billion people because its marginal cost is close to zero.

Blockchain technology is very different from the internet. After all, the internet has a centralized business organization and part of the cost should be extracted. No matter Google or Didi in China, the intermediate cost between the two sides of the transaction will be extracted, which is still the cost.

When blockchains remove this intermediary, the marginal cost is closer to zero. In theory, when the development of public blockchain technology is mature, there may be a business organization or a public blockchain that can serve 7 billion people. Everyone only earns a penny. Unlike in the industrial economy period, it is no longer necessary to improve profit margin as far as possible to ensure that a company is in a comfortable living state. Blockchains bring us infinite possibilities for business development.

App vs. DApp

The internet turns business modes into platforms while blockchain technology does not.

In the internet era, we call application “apps” while the application in the era of blockchains is called a “DApp.” App and DApp fully illustrate the very important difference between the internet and blockchains.

Originally, a centralized organization charged intermediary fees, while DApps had no intermediary fees charged by any centralized organization at all.

Not long ago, I saw a travel writer who built his own DApp on Ethereum and published his own book about European tourism. He has issued 10,000 tokens, each of which costs only $1.

Tencent has a listed company called China Literature, which is an internet reading platform. Many authors put their works on this platform and then readers pay to read. After all, China Literature is a commercial company or an intermediary organization, which draws a large amount of money. The money originally is for the authors paid by readers. This mode of operation is called an app. Meanwhile, what the European writer did on Ethereum was to create a DApp. That illustrates the big difference between the internet and blockchains in business.

The internet has brought platform-based business organizations such as IBM and Weibo, while blockchains deconstruct all businesses, which finally becomes a completely de-neutral business model.

Information vs. Energy

The information economy is "the conversion between energy and information."

In the design of a blockchain consensus mechanism, energy conversion is indispensable. Without the conversion between energy and information, the security of the system will be reduced, so the existence of the proof-of-work (PoW) consensus algorithm is reasonable.

If a consensus mechanism has nothing to do with energy, but only information, a lot of security problems will appear.

In the real economy, the energy consumption of any financial system is very high. The annual energy consumption of a country's financial system is no less than that of a blockchain system. Blockchain technology does not rely on any intermediary, but the offline financial system needs laws, law enforcement, police, courts and even prisons. We have a whole set of things to make sure that people trust banks and trust intermediaries.

When we talk about the energy consumption of PoW, we forget to compare that the real financial system and the real social system also use energy.

Governance vs. Algorithms

Any management over a blockchain through human interference or an election campaign is not considered connected with blockchain.

Blockchain technology opens up a new world, a digital world. Blockchains construct the underlying technical framework of the digital economy. In the digital economy, the only universal language is code. The governance mechanism in the digital world can only be the mathematical algorithms.

It's hard to believe that, in the digital world, machines and machines, or people and machines, can communicate in English and Chinese. Therefore, any management over a blockchain through human interference, election campaigns or the separation of powers, is not considered connected with blockchain.

Blockchain governance relies on mathematics instead of human inteference.

Blockchains vs. Killer Apps

"Killer" apps may never occur in the blockchain industry.

Some people ask whether there are killer apps for blockchains? My answer is no.

Blockchains shouldn’t manage applications with hundreds of millions of registered users and tens of millions of daily active users. However, blockchains focus on point-to-point applications, so that everyone can issue tokens and do what they enjoy — different applications than those aforementioned applications based on the internet.

There are 100 million DApps on each public blockchain. Each DApp creates a value of $100,000, so that the total value of the whole public blockchain is $10 trillion.

Killer apps can’t occur on a blockchain, and they don't require the speed of TPS performance as high as 200 KB per second.

If someone asks which blockchain will become the future, Alibaba, Facebook or Google, I answer that this level of market value can only be created by the public blockchain, which means there’s no DApp that can become a company like Google, Facebook, Amazon, Alibaba or Tencent.

DApps vs. Public Blockchains

A company of $5 trillion value may emerge in the blockchain industry.

GE, the most typical representative of industrial manufacturing companies around the world, was excluded from the Dow Jones Index in the past few weeks. GE has a market capitalization of around $70 billion.

Companies with a market value of $1 trillion in the field of internet are appearing, while industrial companies hold values of only about $500 billion.

After 10 or 20 years, blockchains will definitely have some projects with $5 trillion value. Why? I reckon it's because of the extensibility of the business. The industrial enterprises serve up to 50 million people, which is the capacity boundary. In addition, internet companies serve up to 1 billion people, while blockchains may serve up to 5 billion people.

From industrial manufacturing to the internet and then to blockchains, the market value of enterprises will show a trend of rapid growth.

Digital Economy vs. Digital Currency

Digital accounting is needed in the digital economy era.

Why do companies with a value of $5 trillion appear? Go back to the fundamental question of why blockchains are needed.

With the increasing digitalization of human beings and the rapid development of the digital economy, the digital world and the real world will become completely different worlds. In the digital world, the digital economy needs a whole set of digital accounting methods whose core is a set of digital account systems.

In digital accounts, the unit of account can only be digital currency, not legal tender. The digital wallet on the blockchains cannot record legal tender, because legal tender is not programmable, which means we cannot program USD, RMB or Euros to run them automatically by intelligent contract.

Some people believe that the circulation of bitcoin or other digital currencies is predetermined, so it may cause deflation. The person who holds this view does not know what digital currency is at all. They still have a mode of thinking based on legal tender.

We know that legal tender currencies have their denominations and any issuance of new currency will add to that number. Whereas bitcoin do not have denomination; rather, there are 21 million of them in total, with each coin potentially divided into one million-trillionths. The issuance mechanism of digital currency is different for that of legal tenders because it won't cause deflation. With the price of each bitcoin rising to $100,000 or even $1 million, you can still buy your pizza with it by dividing the coin into smaller parts.

Digital currency takes the rise of currency prices and the increase of currency values as the issuing mechanism, thus driving the development of economic activities on the public blockchains.

So there are 100 million DApps on a public blockchain, and each DApp creates an economic value of $100,000. Therefore, the entire public blockchain is a $10 trillion economic entity. How much money does it need? It must be several trillion dollars.

The currency value of a public blockchain depends on the total economic value created by the DApp. The currency value of the public blockchain should be matched with the economic value in accordance with a mature currency theory.

So, my conclusion is that there will be a public blockchain worth $1 trillion or even $5 trillion.

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