On October 31, Dr. Xiao Feng, Chairman and CEO of HashKey Group, delivered a keynote speech entitled "On-chain" and "On-chain" at SmartCon 2024 hosted by Chainlink. The following is the full text of the speech, which was compiled from the on-site shorthand, with some deletions that do not affect the original meaning.
Hello everyone, I am very happy to come to SmartCon 2024 hosted by Chainlink. Chainlink is a decentralized Oracle network that links blockchain with off-chain data, so on-chain is obviously one of Chainlink’s core businesses. So today I want to share with you the topic of "on-chain" and "on-chain".
Traditional Financial Market VS Crypto Financial Market
Looking back at the development of blockchain over the past decade, we are actually building a new financial market system, namely the Crypto Financial Market.
Different from the traditional financial market system, which uses distributed accounting, bank accounts record all economic activities of users, and the accounting unit is legal currency. Since the birth of Bitcoin in 2009, blockchain has adopted distributed accounting, based on digital currency accounting, and the corresponding accounting unit is in the form of cryptocurrency.
These are obviously two financial market systems, but these two financial market systems are gradually beginning to show a trend of interconnection.
2025 : Connectivity
The interconnection between these two markets can be achieved through the following five channels.
The first is Stablecoin. The current market forecast is that the transaction volume of Stablecoin will reach 6 trillion US dollars in 2024. PayFi, which is tokenized by fiat currency, is the largest channel for connecting fiat currency and cryptocurrency.
The second is ETF, the off-chain securitization of crypto assets, which puts the digital native assets on the chain off-chain to become ETFs. At present, the total holdings of the US spot Bitcoin ETF chain are close to 70 billion US dollars. This method makes it convenient for traditional investors to allocate cryptocurrency assets without having to manage their own private keys.
The third is the new asset class that has been discussed a lot recently, which is RWA (tokenization of real assets). RWA is a traditional asset that is put on the chain through Chainlink Oracle, but the chain is not their ultimate goal. Oracle is just a channel, and the purpose is to tokenize the asset after it is put on the chain.
The fourth way is STO (Securities Token Offering), which has been discussed for the past five or six years, but we haven’t seen many actual cases so far. I believe that in the next six months, we will see that many businesses engaged in Web3 will directly raise funds and go public in the form of tokens, and may no longer need to take the only IPO path.
The above four channels actually need to be carried out through compliant, licensed and regulated financial institutions. Therefore, licensed financial institutions are obviously one of the channels to help connect the two financial markets.
“On-chain” and “On-chain”
All assets exist in two states. One is called on-chain. All real-world assets and all digital twin assets are on-chain, which means that the asset data is registered on DLT (distributed ledger). The biggest difference between distributed ledger and all previous ledger systems is that it is an open, transparent, global public ledger. When data information or assets can be registered on DLT, global liquidity is obtained.
Another state is digital native assets, which occur on the chain. For example, Bitcoin is a digital native asset, which occurs on the Blockchain. It needs to be securitized from the chain to the off-chain, which is a very convenient channel for traditional financial market investors to share the huge returns brought by cryptocurrencies without having to manage their own private keys.
Three ways to “go on the chain”
The ways of chaining will become more and more diverse, and some changes are also taking place.
The first step is to upload data to the chain. For example, from the perspective of Chainlink, some data in the Web2 world is moved to the chain through Oracle, making this data an asset or data registered on a global public ledger.
Secondly, DePIN (Decentralized Physical Infrastructure Network) is a very hot topic these days. What DePIN wants to do is to put hardware devices on the chain. DePIN on the chain is not its ultimate goal. The device can be put on the chain because only after the chain can RWA be realized, and the hardware devices in the real world can be tokenized.
The third way to put assets on the chain is to put assets on the chain, which is the so-called DeFi (decentralized finance), tokenizing many financial assets in the real world.
Regardless of the method used to put assets on the blockchain, the ultimate goal, or the business closed loop that is hoped to be created, is Tokenisation. It is to enable assets to obtain global liquidity and facilitate global investors. Whether the asset is in China, the United States or Argentina, as long as it is on the blockchain and registered in the DLT ledger, any investor in the world can invest in it on the Blockchain.
The two layers of value of DLT
DLT is used at two levels. One is that we can use DLT to improve the marginal benefits of some very mature business models in the real world.
For example, the International Settlements Organization (BIS) promotes the use of DLT to settle and clear bank funds, which can reduce costs and increase efficiency, but it does not change the current business model of clearing and settlement.
In addition, if you use the existing model for cross-border payments, you may need to pay 3% to 6% of the intermediary costs. If you use DLT, the intermediary fee may be reduced from 3% to 3‰. Therefore, traditional banks are also discussing how to use DLT to improve internal bank processes, deposits, loans, and remittances. Therefore, the Hong Kong Monetary Authority is also encouraging bank deposits to be tokenized.
However, only by viewing DLT as a complete set of mechanisms and a systemic change can we innovate business models. Bitcoin is a brand new business model created on DLT. In a new business model, a new asset class will be created, which is Token.
The value of the Token on DLT actually comes from the computer system and is a license to use. After the birth of ChatGPT, in the AI era, Token is a unit of data and a unit of measurement. The fees charged to users are actually the number of Tokens input or output by the user.
Token: Crypto assets
In DLT, the scope of Token has evolved further, and it has become a type of financial asset. Because of DLT and blockchain, a new asset has been created, namely Crypto Asset, which is the newest asset category.
From the perspective of assets, tokens are based on cryptography, distributed ledgers such as blockchain, and self-managed digital wallets. HashKey Exchange helps users deal with Crypto (virtual currency) trading and investment. The biggest difference between HashKey Exchange and traditional stock exchanges is that all Crypto or all tokens traded on HashKey Exchange are managed by users themselves. Users can withdraw virtual currencies purchased on HashKey Exchange and trade them on other virtual asset exchanges, and vice versa. This is also the biggest difference between Web2 and Web3.
DLT that meets compliance needs
When the era of interconnection arrives, when traditional finance and crypto-financial markets are interconnected, new demands for distributed ledgers will arise, and these demands are compliance, KYC, AML and CFT, which means knowing your customer, anti-money laundering and anti-terrorist financing. Because as long as it involves finance, whether you are in traditional finance or crypto-finance. Deposits, remittances, loans and investment transactions all have very large externalities. Externalities require supervision by independent third parties, so licensing, compliance and supervision will become increasingly important after interconnection.
In the past ten years, we have emphasized decentralization, self-organization, and distribution, because from the perspective of infrastructure, it must be decentralized. However, when it comes to the application layer, it will inevitably face specific scenarios, specific judicial regions, specific users, and specific needs, which may produce negative externalities, so third-party supervision is needed.
Therefore, HashKey plans to launch HashKey Chain in December, a second-layer protocol based on Ethereum. Everyone is welcome to cooperate with us. The difference between HashKey Chain and other chains is that we will provide different levels, different financial services, and different financial products from KYC, AML to CFT. The requirements for KYC may be different, so that everyone can safely engage in blockchain applications under the premise of compliance and supervision, especially those involving virtual currency and tokens.
“ Customers want a hole in the wall, not a drill in their hands ”
Finally, I would like to end this speech with a quote from the CEO of German company Bosch: What customers want is a hole in the wall, not a drill in their hands.
DLT and Chain are both electric drills. Users don’t want Blockchain, but many applications based on blockchain, many new assets created based on blockchain and distributed ledgers. These assets can become an indispensable part of user asset allocation.
That’s all for today’s sharing. Thank you everyone.
