On October 31, Dr. Xiao Feng, Chairman and CEO of HashKey Group, delivered a keynote speech titled "On-chain" and "In-chain" at SmartCon 2024 hosted by Chainlink. The following is the full text of the speech, organized from on-site shorthand, with some edits that do not affect the original meaning.
Hello everyone, I am very pleased to be at SmartCon 2024 hosted by Chainlink. Chainlink is a decentralized oracle network that connects blockchain with off-chain data, so going on-chain is clearly one of Chainlink's core businesses. Today, I would like to share with you the theme of "On-chain" and "In-chain."
Traditional Financial Market vs. Crypto Financial Market
Looking back over the past decade of blockchain development, we are actually building a new financial market system, namely the Crypto Financial Market.
Unlike the traditional financial market system, which uses distributed ledger technology (DLT) where bank accounts record all economic activities of users, with fiat currency as the accounting unit, since the birth of Bitcoin in 2009, blockchain has adopted distributed ledger technology based on digital currency, with the corresponding accounting unit in the form of cryptocurrency.
Clearly, these are two financial market systems. However, these two systems are gradually beginning to show trends of interconnectivity.
2025: Interconnectivity
The interconnectivity of these two markets can be achieved through the following five channels.
The first is Stablecoins. Currently, the market predicts that by 2024, the trading volume of Stablecoins will reach $6 trillion. PayFi, which tokenizes fiat currency, is the largest channel connecting fiat and cryptocurrency.
The second is ETFs, the off-chain securitization of crypto assets, which involves taking on-chain digital native assets and converting them into ETFs off-chain. Currently, the total on-chain holdings of the U.S. spot Bitcoin ETF are close to $70 billion. This method allows traditional investors to allocate cryptocurrency assets without needing to manage their private keys.
The third recently discussed new asset class is RWA (Real World Asset Tokenization). RWA refers to traditional assets that are brought on-chain through mechanisms like Chainlink Oracles, but going on-chain is not their ultimate goal; the Oracle is merely a channel, with the aim of tokenizing the assets after they are on-chain.
The fourth channel is STO (Security Token Offering), which has been discussed for the past five to six years, but so far, we have not seen many practical cases. I believe that in the next six months, we will see many Web3 businesses financing and going public directly using tokens for equity, possibly no longer needing to follow the traditional IPO path.
The above four channels all require compliance, licensing, and regulation by financial institutions, so licensed financial institutions are clearly one of the channels to help connect the two financial markets.
"On-chain" and "In-chain"
All assets exist in two states: one is called on-chain, where all real-world assets and all digital twin assets are recorded on the DLT (Distributed Ledger Technology). The biggest difference between distributed ledgers and all previous ledger systems is that it is a publicly transparent global public ledger. When data information or assets can be recorded on the DLT, they gain global liquidity.
The other state is digital native assets, which occur on-chain. For example, Bitcoin is a digital native asset that exists on the blockchain. Securitization is required to move from on-chain to off-chain, providing a very convenient channel for traditional financial market investors to share in the significant returns offered by cryptocurrencies without needing to manage their private keys.
Three Ways to Go On-chain
The methods for going on-chain are becoming increasingly diverse and are undergoing some changes.
First is data going on-chain. From the perspective of Chainlink, it involves moving some data from the Web2 world onto the chain via Oracles, allowing this data to become an asset or data recorded on a global public ledger.
Second, DePIN (Decentralized Physical Infrastructure Network) is a very hot topic recently. What DePIN aims to do is to put hardware devices on-chain. The ultimate goal of DePIN is not just to go on-chain; devices can go on-chain because it enables RWA, allowing the tokenization of real-world hardware devices.
The third method of going on-chain is asset tokenization, also known as DeFi (Decentralized Finance), which involves tokenizing many financial assets from the real world.
Regardless of the method used to go on-chain, the ultimate goal, or the business loop we hope to create, is tokenization. This is to ensure that assets can gain liquidity globally and be easily accessible to global investors. Whether the assets are in China, the United States, or Argentina, as long as they are on the blockchain and recorded on the DLT ledger, any global investor can invest in them on the blockchain.
Two Layers of Value in DLT
Using DLT at two levels, one is that we can use DLT to improve some mature business models in the real world marginally.
For example, the Bank for International Settlements (BIS) promotes the use of DLT for bank fund settlement and clearing, which can reduce costs and increase efficiency, but it does not change the existing business models of clearing and settlement.
In addition, if we use the existing model for cross-border payments, it may require paying intermediary costs of 3% to 6%. If we use DLT, the intermediary fee may drop from 3% to 3‰. Therefore, traditional banks are also discussing how to use DLT to improve internal processes, deposits, loans, and remittances. The Hong Kong Monetary Authority is also encouraging the tokenization of deposits.
However, only by viewing DLT as a complete mechanism and a systemic transformation can we innovate business models. Bitcoin has created a brand new business model on DLT, and within this new business model, a new asset class is created, which is the token.
The value of tokens on DLT actually comes from computer systems and is a form of usage license. After the advent of ChatGPT, in the AI era, tokens serve as a unit of data and a unit of valuation. The fees charged to users are essentially based on the number of tokens input or output by the user.
Token: Crypto Asset
In DLT, the scope of tokens has evolved significantly, transforming into a class of financial assets. With DLT and blockchain, a new asset has been created, namely crypto assets, which represent a brand new asset class.
From the perspective of assets, tokens are based on cryptography, blockchain as a distributed ledger, and self-managed digital wallets. HashKey Exchange helps users handle transactions and investments in crypto (virtual currency). The biggest difference between HashKey Exchange and traditional stock exchanges is that all crypto or tokens traded on HashKey Exchange are self-managed by users, allowing them to withdraw virtual currencies purchased on HashKey Exchange to trade on other virtual asset exchanges, and vice versa. This is also the biggest difference between Web2 and Web3.
DLT that Meets Compliance Requirements
When the era of interconnectivity arrives, and when traditional finance and crypto finance markets become interconnected, new demands arise for distributed ledgers. This demand includes compliance, KYC (Know Your Customer), AML (Anti-Money Laundering), and CFT (Counter Financing of Terrorism). Because whenever finance is involved, whether in traditional finance or crypto finance, deposits, remittances, loans, and investment transactions all have significant externalities. Externalities require independent third-party regulation, so licensed, compliant, and regulated entities will become increasingly important after interconnectivity.
Over the past decade, there has been an emphasis on decentralization, self-organization, and distribution because, from an infrastructure perspective, it must be decentralized. However, when it comes to the application layer, it must inevitably face specific scenarios, judicial jurisdictions, users, and needs, which may lead to negative externalities, thus requiring third-party regulation.
Therefore, HashKey plans to launch HashKey Chain in December, based on Ethereum's Layer 2 protocol. We welcome everyone to collaborate with us. What sets HashKey Chain apart from other chains is that we will provide different levels of financial services and products, from KYC, AML to CFT, with varying requirements for KYC, allowing everyone to safely engage in blockchain applications under compliance and regulation, especially those involving virtual currencies and tokens.
"Customers Want the Hole in the Wall, Not the Drill in Hand"
Finally, I would like to conclude this speech with a quote from the CEO of Bosch, "Customers want the hole in the wall, not the drill in hand."
DLT and chains are the drills; users do not want blockchain; they want many applications based on blockchain and the new assets created from distributed ledgers, which can become an indispensable part of their asset allocation.
That concludes my sharing for today. Thank you all.
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