Meng Yan Reflection on the Blockchain Industry in the Past Decade How to Generate and Spread Trust Without Relying on Authority?

Meng Yan's reflection on the past decade in the blockchain industry Generating and spreading trust without relying on authority.

Does blockchain have a future? What should be the next step?

In November 2013, Vitalik Buterin published the first version of the Ethereum whitepaper. People often regard this as the symbol of the beginning of the “Blockchain 2.0” era. However, at that time, it was the emergence of Ethereum that separated “blockchain” as a separate technology from “digital currency”. In other words, Bitcoin, as “Blockchain 1.0”, was retroactively defined, and the true independent field of blockchain should be counted from November 2013, which is exactly ten years ago.

Blockchain and digital currency should be regarded as two different industries because their goals and value propositions are very different. The digital currency industry, or the so-called “crypto circle”, created a self-contained parallel world, created virtual digital assets in this world, built a free financial market, and conducted profitable transactions within it. Due to its rules and values that are incompatible with the real world, the crypto circle rarely or completely ignores the impact on the real world or the physical economy. The blockchain industry, on the other hand, is completely different. Its goal is to transform the physical economy and influence the real world. Therefore, people in this industry call themselves the “blockchain circle” to distinguish themselves.

Blockchain was once regarded as a disruptive technology that was expected to be on par with AI. But honestly, over the past ten years, the achievements have been disappointing, and it can be said to be a typical case of starting strong and ending weak. Not only have there been no shocking achievements, but some projects that were once highly anticipated, such as the supply chain management system co-developed by IBM and Maersk, and the blockchain-based stock trading system of the Australian Securities Exchange (ASX), have all ended in dismal failure. Some well-known projects that were originally based on blockchain have also abandoned it and returned to traditional architectures. These failures undoubtedly severely undermined people’s confidence in blockchain.

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Where is the problem? Does blockchain still have a future? What should be the next step?

I started learning and researching blockchain in 2015 and initially identified myself as part of the blockchain circle. Since the end of 2017, I have gradually shifted my focus to digital assets. However, personally, I identify more with the value proposition of the blockchain circle and hope to see this new technology have an impact on a broader real world, create visible value, and gain recognition from more ordinary people. So, on the occasion of the tenth anniversary of blockchain as a field, I would like to briefly share my views.

Let me begin with understanding. Blockchain is still in a very early stage. Many people compare blockchain with AI, electric vehicles, and cloud computing, which were technologies in the limelight ten years ago. You can see how much progress others have made, while blockchain seems to have achieved nothing. But this comparison is unfair because those fields are actually the result of building on existing technologies, while blockchain is truly a nascent and completely new field. Specifically, blockchain is actually an algorithmic solution to a theoretical problem in the field of distributed computing and social collaboration. The problem is: how to generate and propagate trust without relying on authorities? This problem has plagued humanity for thousands of years, but it was not until the Bitcoin whitepaper was published in 2008 that a feasible solution suddenly emerged. This means that the blockchain industry is still in the first decade after the theoretical breakthrough. If we take a look at the now hottest technology industries such as chips, the internet, AI, electric vehicles, and new energy, we will know that their theoretical breakthroughs were decades or even hundreds of years ago. When they were teenagers, they may not even have products, or even qualify to draw lessons. In comparison, blockchain has at least made something, accumulated some lessons. Therefore, blockchain is indeed still in its infancy, and we should treat it with more patience.

However, despite this, there have been many unsatisfactory aspects and detours in the development of the blockchain industry in the past decade. If these detours were not taken, the blockchain industry could have developed better than it is now. Some of these problems are objective and cannot be solved solely by the blockchain industry itself, but there are also many subjective problems that are worth summarizing and learning from.

The first problem is that the blockchain industry blindly adopted the technical tools and concepts from the cryptocurrency industry, leading to severe “rejection” when it comes to practical applications.

There is no doubt that the cryptocurrency industry has always been at the forefront of blockchain technology applications. However, technologies like Bitcoin and DeFi are extreme means to solve extreme problems. The environment in which they exist, the libertarian digital jungle of the “cypherpunks,” is vastly different from the real world: everyone is anonymous, but everything else is open and transparent, digital identities can be created and abandoned at will, code is law, and there is no law beyond the code. These rules and concepts not only do not fit with the real world today, but they are also unlikely to be accepted by mainstream society in the future. Unfortunately, these rules and concepts have permeated various aspects of blockchain technology. When the blockchain industry brings these technologies into the real world, there was a lack of serious research and discussion throughout the industry to determine which aspects can be learned from and which aspects need adjustment. As a result, there were significant obstacles encountered in the practical implementation.

The second problem is that the focus of value proposition was misplaced, and the tone was set too high, without finding the right position.

The core ideology of the cryptocurrency industry is decentralization and consensus. When the blockchain industry started, it uncritically adopted this value proposition and propagated it everywhere, making “decentralization” an unrealistic and major value proposition. It immediately adopted a revolutionary stance to replace and disrupt traditional architectures, creating enemies on all sides, and making it difficult to gain user understanding and support. The value proposition of decentralization and consensus can only achieve widespread resonance under the condition that central authorities are malicious and widely known. In the field of digital currency, this condition is partially met, but in most industries, this condition does not hold true. In other words, the traditional trust mechanism based on trusted third parties has not exposed serious problems in most cases; on the contrary, it is more trusted by users because of its flexibility and maturity. In this case, users naturally will not buy into the idea of exaggerating the risks of centralization and attempting to fully replace traditional architectures with an immature new architecture.

In addition to practical considerations, from a logical standpoint, “decentralization” and “distributed consensus” should not be the core value proposition of the blockchain industry. As mentioned earlier, the essence of blockchain is to solve the problem of how to confirm facts and generate and disseminate trust without relying on authoritative trusted third parties. In the context of digital currency applications, facts are determined through voting where the majority rules. However, in most industry applications, facts are determined through negotiation among relevant parties or by authorized institutions, and it is almost never the case that a group of unrelated people are called upon to vote and determine facts. Therefore, the core value proposition of the blockchain industry, which aims at industry applications, should not be “decentralization” or “distributed consensus”.

The third issue, being preoccupied with the basic question of “to have coins or not,” has wasted a lot of time.

For a long time, the blockchain community has been debating whether pure blockchain applications must have coins. This is a meaningless debate because the conclusion is very obvious and has long been discussed: blockchain applications must have coins.

Why is this the case? Firstly, blockchain applications are essentially about solving trust issues. In the business field, 99% of applications related to trust are related to money. If there is no money on the chain, then there is no need to solve any trust issues, let alone the necessity of using blockchain. Secondly, a core capability of blockchain is programming payments. With this ability, many application scenarios become complete and meaningful. If this capability is removed, the value of using blockchain is greatly reduced. Thirdly, blockchain needs to solve the incentive problem, and there must be money on the chain to achieve this.

All these are obvious reasons. However, because in some countries and regions, governments and the public are very averse to activities such as “issuing coins,” many people in the blockchain community have been trying to cater to the idea of a “coinless blockchain” under the constraints. They have actively weakened blockchain into a slow and expensive crippled database, resulting in no achievements after a long time of effort.

In fact, having coins on the chain does not necessarily mean “issuing coins.” We can introduce CBDC or compliant stablecoins, which can also unleash the value of blockchain. Instead of wasting time exploring the impractical concept of a “coinless blockchain,” it is better for everyone to work together to communicate fully with the government, regulatory authorities, and the public, clarify the interests, and achieve the on-chain implementation of compliant digital currencies as soon as possible.

The fourth issue, not fully exploring the potential of “tokens.”

“Tokens” is a term coined by Mr. Yuan Dao and me in 2017, corresponding to “token” in the blockchain. At that time, our observation was that although blockchain could do other things, the one thing it was best at and excelled in was the management and programming of tokens. Therefore, the expansion and exploration of blockchain applications largely reflected the expansion and exploration of the potential of token applications. From another perspective, the core value of blockchain is to solve trust issues, and trust needs a credential as a carrier. In the real world, licenses, seals, badges, signatures, bills, currencies, and contracts are all carriers of trust. In the digital world, blockchain tokens are the best carriers of trust at the current technological level. Tokens on the chain have advantages that other trust carriers cannot compare with in terms of verification, circulation, transaction, and programmability, which can well demonstrate the value of using blockchain. Therefore, tokens should be the core of blockchain applications.

However, looking at the practice in the blockchain community over the past few years, this has not become a widespread consensus. Many blockchain projects have a serious lack of understanding and application of tokens, resulting in the use of only a few very basic token standards, such as ERC-20 and ERC-721, and then making the business logic very complex. This reduces the comprehensibility and functionality of the solutions.

The fifth issue, no industry practice addressing data privacy concerns.

In the cryptocurrency industry, users are anonymous, but all the data and behavioral history behind each address is publicly transparent. This is the opposite of the real world. In the real world, users need to provide their real identity to participate in business activities and comply with regulations. However, their business data and activities are considered private and do not need to be disclosed to the public unless there are special circumstances. This creates a contradiction between the blockchain technology originating from the cryptocurrency industry and the needs of the real world regarding privacy. How to deal with this contradiction in the industry blockchain applications is a fundamental question for the successful implementation of blockchain. However, there are some projects in the blockchain industry that not only fail to address this issue directly but also attempt to persuade users to accept the cryptocurrency industry’s concept of data privacy. This is both unreasonable and impossible. Of course, I am also aware that some projects are dedicated to solving this problem, each with their own methods. However, there is no industry-level standard practice, and there is even little horizontal exploration of this issue. It can be said that without solving this problem, the implementation of blockchain in the real economy is absolutely impossible.

There are definitely other reasons why the application of blockchain in the industry has not been able to land for a long time, but I believe the above five issues are the most significant.

Based on the above analysis, if the blockchain industry wants to make a breakthrough in the future, I have the following suggestions:

First, consider blockchain as a solution to specific and concrete problems rather than a “blockchain revolution.” It should integrate and coexist with traditional architectures instead of trying to replace and disrupt them aggressively. It should realistically analyze the real needs for trust in application scenarios and not exaggerate the risks of centralized wrongdoing. Problems that can be solved by centralization do not necessarily have to be put on the blockchain. Problems that can be solved with cryptography do not necessarily have to use blockchain. Allowing blockchain to play a role in critical areas is more conducive to its healthy development than letting it dominate everything.

Second, actively promote the on-chain implementation of central bank digital currencies (CBDC) or compliant stablecoins. This is a crucial step for the application of blockchain. Do not focus solely on the value debates surrounding CBDC. Recognize that the promotion and adoption of CBDC will lead to billions of users establishing and accepting their sovereign identity, and it will drive the integration of regulatory technology and blockchain. This is the most important foundation for the widespread application of blockchain. If this is achieved, it will lead to further success. If not, the blockchain industry will stagnate in the long term.

Third, deepen the understanding and research of tokens and unlock their potential as soon as possible. Developers in the domestic blockchain industry need to overcome the misconception brought by the term “token” through learning. They need to recognize the expressive ability and programmable potential of tokens as trust carriers while also preventing the extreme view that “everything can be tokenized.”

Fourth, in the short and medium term, financial, trade, and payment-related applications will continue to be the core breakthrough point, with asset expression, circulation, transaction, programming, and regulation as the main value proposition, highlighting efficiency advantages and weakening ideology, striving to achieve breakthroughs in these areas as soon as possible. Without breaking through these directions, it is difficult to develop blockchain applications in other fields.

Fifth, how to solve the issue of privacy information protection will be one of the most important topics, and discussions will be held across the industry to develop relevant standards, practices, and tools.

Sixth, serious consideration should be given to how to incentivize users to adopt blockchain solutions. Blockchain is a new tool, and compared to mainstream technologies at present, the benefits brought to users by blockchain solutions are not initially obvious. It is necessary to achieve network effects before the huge advantages can be demonstrated. For this type of technology to develop well, it is necessary to think clearly about “who are our friends, who are our enemies” and try to gain support from as many people as possible, such as learning from the internet and the cryptocurrency community, and considering subsidies for early adopters.

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