Companies no longer exist in the era of blockchain- Dr. Xiao Feng

By Dr. Xiao Feng

EliteX Exchange
9 min readJun 28, 2020

Translators Andy, Hedy @EliteX Media

This article is some parts from Dr. Xiao Feng’s speech in 2019, translated to share with readers who have the interest on blockchain technology and new creative ideas beyond the tech. It is about his ideas on the importance of economic model and the centralized corporation system’s future.

Dr. Xiao Feng, Vice chairman and executive director of China Wanxiang Holding Co., Ltd., chairman and general manager of Shanghai Wanxiang blockchain Co., Ltd., founder of Wanxiang blockchain Laboratory; Doctor of economics, Nankai University

Dr. Xiao Feng — Image from Baidu

Let’s start with the conclusion: Blockchain is not only a technology or a tool. If we really want to make the blockchain system work, the key is not tech itself, but whether the economic model is well designed.

A few months ago, Silvio Micali, a professor at MIT and a Turing Award winner, hired an economist at the MIT who almost win the Nobel Prize in Economics as his chief economic adviser.

It was originally planned to auction tokens twice a month in the next two years. As a result, after the mainnet launched, the aution was done just one time. There is no second auction due to imperfect system design.

Why? It’s not technical issue. Micali’s consensus algorithm can make large-scale strangers work together, which is very advanced. The distributed network technology of blockchain is not complicated. Why did the whole system crash when they have the token? Because of the problems in the economic model, people who participate in token auction at different levels play zero sum game with each other.

Image from Baidu

Blockchain is by no means a “yes or no” game, and zero sum game is not allowed in economic way. So far, most blockchain projects in China talk about technology at the craftsman level, not how to build a good system structure from the perspective of economic model.

This is also the difficulty of blockchain tech. How to design game architecture? How to make all stakeholders take what they need, make them willing to participate in the self-organized, community-based architecture continuously and positively, and become a game of infinite cycle expansion, rather than a casino. As soon as the casino goes down, there are only winners and losers, the game is over.

It is very important to design ecology as infinite cycle, but few people know the importance, and few people can design a sustainable economic model.

How to understand the importance of blockchain?

Human society has experienced from industrial revolution to the present. In the past, the industrial revolution has transformed the atomic structure and the physical structure. Now we have transformed and reconstructed the digital structure and the same as the bit structure.

During this process, there are a series of tools to help us complete the transfer from industrial society to digital society to information society. Internet, Internet of things, cloud computing, AI and blockchain are all tools to help us complete this transfer.

For the first time, the Internet allows us to collect massive data at a low cost and on a large scale. In the future, the Internet of things can also collect the data of machine occurrence. But it’s not enough to just collect, but also have low-cost and efficient data storage and analysis, which can be solved by cloud computing and AI.

The bottom technology logic of all Internet companies is the same: collect customer behavior data, accurately portray customers, and then match the content.

ByteDance match information; Baidu matches search; Tencent matches social networking. The difference between them is just the service they provide and the content they match.

The discovery of America has suddenly expanded the physical space of human society. Now we have another space: digital space.

Image from www.ngchina.com.cn

The migration of human society from physical space to digital space is the second great geographical discovery we are completing right now, which is more significant than what Columbus and Magellan called the great geographical discovery.

In such a digital migration process, blockchain constitutes an important part: providing low-cost and efficient way for trusted data.

When we collect a certain amount of data through the internet, the data will have a qualitative change and become the new petroleum of the digital economy.

Why can blockchain become a low-cost and efficient trust solution?This is determined by the database structure of blockchain and the method of recording data.

From a technical point of view, the database of blockchain is designed as a linked database in which the owner can only add data, and no one has the right to modify and delete data. For example, Zhang borrowed money from Li and it was told to everyone in the village by the radio. Everyone remembers this. After that, Zhang cannot cheat because the whole village people know that.

In this way, we can easily believe that the data on blockchain is true.

In the real world, in order to ensure the authenticity of corporation accounts, there is a strong system in operation. We have many laws and many institutions including Ministry of Finance, Public Security Bureau, court, prison, etc. All of these are for not making false. If you do so, you should take the criminal responsibility and end in prison.

Some people say that bitcoin mining cost lots of energy. But compared the system the society already built, which one cost more? It is not sure about the true cost actually.

There are two different systems. The real world system is a set of system that do not do evil, and the blockchain system is a system that cannot do evil. Which one is more realistic?

Google’s new slogan: Don’t be evil. From my view, the slogan for blockchain company is Can’t be evil.

How does blockchain impact the business world?

The most suitable rule for digital economy is the blockchain which cannot be evil.

Google’s slogan

That’s why blockchain will bring great changes to our future business system, even so-called social system and even go further. And What are the great changes? The business project structure of blockchain is totally different from that of the companies like corporate finance we are familiar with. There is no company and property protection in the blockchain world.

On January 3,2009, someone wrote bitcoin whitepaper and put it on the internet which has no shareholders and equity, no directors and board of directors, no management and employees, no office space and servers, no operation and maintenance personnel, and no legal registration anywhere.

Such a system has been in operation for 10 years. Every second someone uses bitcoin system to trade, transfer and pay. In the past 10 years, this ownerless network has not experienced a second of downtime and a wrong account.

The system checks every ten minutes and pays every ten minutes to the people who work for it.

So this is the mining. Mining is the act of competing to account for bitcoin systems.

Why is called that blockchain is the most suitable for digital economy?

This is determined by the characteristics of the digital economy:

1. The property rights of the digital economy are extremely difficult to confirm and protect. Data mobility is very high, so the protection of property rights is extremely difficult, and the cost of protection may be higher than the benefits of non-protection.

2. Digital assets are not exclusive, the more they are shared, the more valuable they are. Unlike physical assets, I can’t drink this bottle of wine after I finish it. But the more numbers and data are shared, the more valuable they are.

All the code of the blockchain project is completely open-source and does not need a license.

We often read from new media that China’s blockchain technology is leading in the world, because how many patents a company has applied for. From my view, it is against the spirit of blockchain industry.

Without the protection of property rights, how to protect the interests of engineers? The token economy design on blockchain can do.Whether bitcoin or Ethernet, or tokens on many other blockchain projects, all represent the value that contributors deserve.

The cost of creating a song is fexed. But in the era of industrial economy, to share a song with 10000 people, 10000 records need to be suppressed and the marginal cost will be increased for each additional one.

But the marginal cost of sharing it to 10000 people through the Internet is zero, and economic transactions become frictionless.

It also raises the question: Why use companies to organize the economy?

“The reason why a company exists is that the cost of organizing economic activities within the company is lower than the cost of the market,” said Professor Coase, winner of the Nobel Prize in economics.

Image from StartupNation.com

If the friction coefficient of the economy becomes zero or approaches zero, we don’t need a top-down centralized decision-making mechanism to make business decisions, which is the root of decentralization.

The characteristics of the digital economy and the degree of digital economy determine that the business model will be impacted. Token financing replaces equity financing, and the structure of equity distribution has changed fundamentally. In general, projects distribute benefits among shareholders, while blockchain projects distribute benefits not among shareholders, but among participants.

For a typical blockchain project: 20% of the tokens will be reserved for the founding team to set up the structure, launch the main network; a non-profit foundation with 20% of the tokens to maintain the operation of the main network; a developer and fund with 20% of the tokens, and then take 20% of the tokens to private equity to encourage more developers to develop applications on the system or optimize the network for investors. The person who holds the token is not a shareholder, but a share holder.

Image from Dr Mark van Rijmenam https://vanrijmenam.nl/token-financing-tokenization-will-change-economy/

This has brought about a huge change.

In the era of industrial economy, enterprises need scale effect to reduce costs and make the most money. This method is additive effect.

In the Internet era, Internet companies are pursuing network effect.

On top of the network effect, blockchain has taken a new step: ecosystem effect. In order to the decentralized system, anyone can join the network without permission, and the business boundary is boundless.

In the future, most blockchain applications will not appear in the form of companies, but in the form of mutual association, non-profit foundations, alliances, etc.

In fact, commercial projects are not all realized by limited liability companies or joint-stock companies.

Up to now, at least five of the top ten insurance companies in the world are operating in the form of mutual insurance.

EliteX Media:

In an ecosystem that anyone can enter like Dr. Xiao Feng said which is boundless, how to stimulate the potential of those who join, how to master or control the level of contributors, whether there is a barriers to entry for each ecosystem of different public chains or second layer or whatever categories, and how to connect or link between them, seem to be the problems easily ignored.

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