APRA Co-Founder Felix: In Pursuit of Eternity in the Digital World
The Intrinsic Value of Crypto Beyond The Financial Cycles
Jul 2, 2021·11 min read
Author: Felix, ARPA & Bella Protocol CEO
"We are not the architects of human society; we are the weavers of the rule-autonomy network."
Origins: The Trisolarans and the Wallfacers
I still remember the afternoon many years ago when I read Liu Cixin's Remembrance of Earth's Past trilogy in one sitting in my tiny flat on 40th Street in NYC. I reread the trilogy many times in the years that followed, and the cosmic sociology, the dark forest theory, the droplet, and the Sophon have left a deep imprint on my thoughts.
The Trisolarans in Liu's book are aliens with transparent minds, technical abilities far beyond those of humans, and advanced surveillance operations. The black box of thought became the only weapon left for human beings; thus, the Wallfacer Project was born. I first came across blockchain when I was an investor at Fosun Group In 2017. Marvelling at its mathematical beauty, I naturally saw it as a projection of the three-body society in human society. The next year, I took a leap into the world of blockchain with a few partners and never looked back.
Over the past three years of operation, we have done in-depth reflection on the blockchain and its applications. What do these obscure terms like decentralisation, immutability, fairness, and transparency mean for human society? We share our thoughts with you today in this article.
Faith: In Pursuit of Eternity in the Digital World
Our mission is to pursue the eternity of the digital world. Human beings are diverse in their pursuits; the desire for wealth, companionship and fame is part of human nature. The anticipation of the future helps make humans creative, but with it comes uncertainty and unreliability. Blockchain and smart contracts represent unbreakable rules that do away with humans' fickle nature, transforming a non-transparent game between people into a transparent game based on rules. If the blockchain infrastructure could be completely decentralised, the impact on the human organizational form would be revolutionary.
Here we introduce the first concept: blockchain is an infrastructure for added value in society. Trust is based on the fact that one individual cannot change the whole system alone, thus allowing for consensus models. It is the decentralised nature of the blockchain that makes social consensus possible. As a "company" without a CEO, Bitcoin carries a trillion-dollar market cap precisely because no one person can determine its parameters. To a certain extent, Bitcoin is akin to a religion, where the physical body of the leader has gone up in smoke, and the words on the bible live on.
The second concept: code governance is a pathway back to the laws of nature. The law of the jungle in nature and the (still unverified) dark forest theory of the universe are natural laws with neither ambiguity nor middle ground. There are "shades of grey" in human society because many things in human interaction are not simply black or white. Similarly, human law is advisory, and there is a price to be paid for breaking it, but that does not mean it is "impossible" to break it.
The rules in the blockchain world are mandatory, adapting the practices from a subjective choice not to do evil to an objective inability to do evil. At the same time, blockchain protocols need to be designed to simulate the behaviour of all parties so that they eventually compete sufficiently in transparent rules to reach a state of equilibrium. Similar to nature, participants with different purposes will enhance the species diversity of the protocol, thus increasing sustainability.
The third concept: the boundary between virtual and real is gradually blurring, and the value of real rights will be redefined. The proliferation of computers and mobile phones has turned people into cyborgs and digitised the vast majority of work. Human entertainment is increasingly shifting online, and the share of entertainment consumed digitally will continue to increase for the foreseeable future. The paradox of pricing digital assets is that two entities cannot be identical at the atomic level, but two images are identical at the bit level. Since it costs almost nothing to replicate, digital assets are difficult to price. Blockchain NFT provides uniqueness and legitimacy to real digital rights. We believe that the concept of copyright for digital products (e.g., images, audio, video, games) will be weakened, and the value of real rights will increase as the digital assets spread, eventually condensing into a consensus meme.
A Word on NFTs
Artists and authors are issuing non fungible tokens (NFTs) for their work. The market price of these has exploded and…
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Total Value Locked in DeFi (Source: DeFi Llama)
The fourth concept: Incomplete decentralisation will lead to absolute centralisation. In the past year, DeFi smart contract total liquidity locked (TVL) has exploded from $670 million in early 2020 to $120 billion in June 2021, a growth rate uncommon in any industry.
Behind the spectacular growth is a closed loop of business services done with cryptocurrencies and smart contracts. In the case of DeFi, secured lending, deposits, collateral liquidation, and redemption of cryptocurrencies are executed through smart contracts with no centralised link. In comparison to DeFi, asset on-chain and STO (Security Token Offering) are relatively close to the existing financial system on the asset side and advance more slowly. In the long run, where assets are issued, circulated, and cash flow generated on-chain will be the next breaking point. We believe the only thing that can ultimately be combined with crypto is the digital native product.
The fifth concept: mutual prosperity on the asset end and the capital end. The current market that DeFi can serve is worth over $2 trillion. In mid-2020, we predicted that the growth rate of stablecoins would significantly outpace the overall growth rate of crypto and even exceed BTC by several times. The data proved us correct. In the case of USDT, from early 2020 to June 2021, USDT stablecoin issuance has grown tenfold, from $6 billion to $58 billion (source: CoinGecko)
Major Stablecoins by Marketcap (Source: Coingecko)
Stablecoins can be seen as the link between cryptocurrencies and the real world. In DeFi and trading, stablecoins are on the capital end, while Bitcoin, Ether, and the like are akin to the asset end. As the blockchain ecosystem flourishes, DeFi yields will be much higher than those of traditional finance in the long run, and the value of funds that can be carried will increase. In the long term, if the market cap of stablecoin is $5 trillion and the annualised yield is 4%, then the value generated by the commercial activity of stablecoin would be $200 billion per year. This value would come from more frequent institutional-level transactions, the increased use of DeFi, and the emergence of more asset classes and cryptocurrencies.
Daily Stablecoin Transfer Volume (Source: Dune Analytics)
The sixth concept: the stunning transformation from a narrow sense of cryptocurrencies to a broad definition of digital assets. There is no denying that most of the current cryptocurrencies, such as Bitcoin and Ether, combine the functions of a trading medium, an equity stake, and a store of value. The emergence of stablecoins has weakened the role of crypto as a medium of exchange but strengthened its financial properties. Digital assets in a broad sense include all valued items that arise in the digital world, from infrastructures such as data, storage, and computing power, to distributable media such as images and videos, to usable assets such as game items and virtual goods. Digital assets do not have financial properties but are rather assets that can be authenticated and circulated using blockchain.
Combined with concepts three and four, we believe that natively digital items are better subject matter to be uploaded on-chain because digital assets in the real world are not easily identified, the issuing side is not related to the existing financial system, and they can be efficiently circulated on a global scale. The issuance, circulation, use, and consumption scenarios of digital assets are expected to form a closed loop through blockchain and smart contracts. The current attempts to use NFTs in IP peripherals, digital art, and game objects are baby steps. As blockchain infrastructure improves, more weak trust scenarios will be moved on-chain. The variety and scope of dApps will expand, creating more application scenarios that generate cash flow.
The seventh concept: infrastructure and applications are spiralling upwards, low switching thresholds lead to constant innovation. The internet took over 20 years to move from the earliest ARPANET to providing dial-up service and email. It was another ten years between the first browser and the founding of Facebook. The current infrastructure of the blockchain world, Bitcoin, was released 12 years ago. In the six years since the launch of Ethereum, the blockchain has gone from its initial transfer to token issuance to the explosion of DeFi. It has achieved what the traditional internet industry took 20 to accomplish. There is reason to believe that blockchain, a rules-based infrastructure, will be applied to all strong trust scenarios (e.g., assets) and some weak trust scenarios (e.g., data) in the future.
Internet (50 years)
1969 — ARPANET
1982 — TCP/IP (Infrastructure)
1994 — Web browser (Killer platform)
1995 — Amazon, Yahoo
1998 — Google
2004 — Facebook
Mobile (20 years)
2003–3G Mobile Network (Infrastructure)
2007 — iPhone (Killer platform)
2008 — App Store (Killer app)
2012–4G Mobile Network
Crypto (12 years)
2009 — Bitcoin Launch
2013 — CEXs, wallet
2015 — Ethereum Launch
2018 — Stablecoins
2020 — DeFi
2021 — DeFi, NFTs, and CBDC
Eighth concept: To the masses! Viva la Meme! We believe that there are two types of crypto users: holders and product users. Crypto is an attention economy, and holding a coin is a way to identify with its philosophy and serve as a credential for community membership. Therefore, in the operation of crypto projects, viral marketing that fits the brand's tone and product growth should go hand in hand. For instance, originally intended as a spoof on Bitcoin, Dogecoin was not expected to become a cultural symbol for young people after years of inaction and the founders cashing out and leaving the market. While down-to-earth, Bitcoin Core and the Ether Foundation are distant from the speculative community and give the impression of having a considerable vested interest, making it feel less cool to young people. Because the younger generation of new cryptocurrency users has an innate distance from the high-priced Bitcoin and no resistance to the dogecoin with its low price and cute avatar. "It's just for fun anyway." Just as Warren Buffett doesn't understand Bitcoin, many blockchain practitioners who emphasise application scenarios don't understand dogecoin.
Memes can make a big impression and attract new users to crypto. But in the long run, how many memes will endure in the face of rapidly changing user preferences?
https://twitter.com/AndreCronjeTech/status/1390916920694673414
Looking Ahead: The Fusion of Humanism and Machine Rules
The blockchain world differs from the human world in many ways; it is a paranoid rule-driven trust machine. In theory, blockchain should be the underlying driver for all natively digital assets, encompassing financial activities, virtual assets, and even social and broader data and information flows. Admittedly, the current performance of blockchain can only barely support limited applications such as DeFi, but we believe that applications and infrastructure are spiralling upwards.
The past fifty years of the Internet's evolution have changed every aspect of human life; blockchain, on the other hand, will be a portal for humans to move from human governance to code governance. All human endeavours are in pursuit of eternity. The ultimate destination of all science, philosophy, and theology is an unchanging truth. A few decades ago, carbon-based lifeforms got their first glimpse into a silicon-based world with the advent of the computer. The world, its rules, and its religions were brand new. We believe that the curtain is slowly opening on a society where the philosophy of humanism is highly developed, and the rules are unambiguous.
We are not the architects of human society; we are committed to being the architects of machine society.
Conclusion: Be a Partner of the Believers
At the beginning of 2018, I co-founded ARPA with my partners to work on using cryptography to develop applications such as private data sharing, on-chain random number generation, and BLS aggregated signatures. Along the way, ARPA participated in establishing several international standards for privacy computing, creating many firsts. We also have an industry-leading architecture for verifiable random numbers and BLS aggregated threshold signatures.
In early 2020, we saw that decentralised finance was the next big trend. Combining the team's deep experience in crypto and finance, we invested in the incubation of Bella Protocol, whose mission is to increase the penetration rate of decentralised digital asset management dramatically. We were fortunate to receive early investment from Binance Labs and TechCrunch founder Michael Arrington and were the first DeFi product to launch on Launchpool.
Three years may seem like a short journey, but in a crypto industry that is growing at the speed of light, it has been enough to see the bulls and bears shift and witness the storm. The long journey has seen more and more aspiring individuals join the industry to drive this significant change. As a result, we have decided to set up a $20 million crypto fund to invest and link the believers. This fund, which is currently managed by myself and my partner Yemu, will focus on investing in innovative projects, primarily DeFi and NFT, with a single investment size of $100,000 to $500,000. The fund is an evergreen fund, with no fixed investment or exit period. If possible, we want to work alongside like-minded people for as long as it takes, even if that is forever.
We are looking for you to join this vast revolution. To seek investment or to join the investment team, please email felix.xu@arpachain.io and yemu.xu@arpachain.io.
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