The Concept of Data Credit Will Become the Next Hot Topic of DeFi

Recently, Bishijie held a grand event called ‘DeFi Frontline: Trend Analysis and Investment Opportunities’. In this event, Elastos co-founder, Sunny Feng Han, discussed the development history of the blockchain and his perspective and future outlook on DeFi. The talk focused on the subject: The concept of data credit will become the next hot topic of DeFi. This is a transcript of his talk.

Sunny Feng Han: I am very happy to be here today. 798 is a meaningful place. Di Deng set up Satoshi Nakamoto Plaza, in 2014,which later became the earliest arena in the cryptocurrency circle. Vitalik’s first event in China also took place in Satoshi Nakamoto Plaza. When Vitalik delivered his speech at that time, the audience was less than half of what it is today. At that time, smart contracts and Ethereum were still an abstract and niche concept.

As of now, the cryptocurrency circle has gone through two rounds of bear and bull markets. The bull market in 2017 greatly promoted the entire industry, which led to more and more people entering the cryptocurrency circle. As for myself, I entered the cryptocurrency circle in 2013 because of Di Deng. To be honest, the one sentence I’ve heard the most since 2013 is that the crypto space is a bubble, which is also a common thought proved by what many people have experienced — we are ready to go bankrupt and disband any time. When the bear market came, many people disappeared. Even Xiaolai Li (BTS and EOS angel investor) disappeared, let alone others. However, it seems that a lot of people have returned during the bull market. Cryptocurrency circles are expanding, and so are the businesses surrounding them. Most likely, 2021 will continue its bull market. A lot more people have just entered the cryptocurrency circle, including some mainstream funds in the USA. As far as I know, some local governments have also entered this industry and invested in some mining farms.

In 2018 I went to the USA as a visiting scholar at Columbia University. For almost two years, I read a lot of books, conducted extensive research, and communicated with many experts from Wall Street. In the end, I completed the book titled ‘The Wealth of Quantum Era.’ It’s easy to tell from the title of this book that I pay a large tribute to ‘Wealth of the Nations’ by Adam Smith. I hope this book can be as influential in the crypto space as Wealth of the Nations is for the traditional world. The famous economist, Jiaming Zhu, wrote the preface for my book, and the printed version will be released soon.

The subject I am going to talk about today is DeFi. Please note that there are actually theoretical foundations for what is happening in the field of DeFi and what we are working on now. Why did DeFi soar last year and reach a market value of $20 billion? In the 2020 bear market, it was indeed a remarkable achievement to reach a total market value of $20 billion, which is also an important sign of the bull market. I have repeatedly stated that the market value of $20 billion last year might expand to more than $200 billion at the peak of the bull market. A lot of people don’t know why it would expand and might use conspiracy theories to explain this financial phenomenon, believing there are manipulators behind the scenes. I oppose these kinds of conspiracy theories. Are there manipulators behind the scenes? Yes, they may exist and affect the market to some extent, however, the fundamental logic has nothing to do with these manipulators. DeFi will still develop and prosper without these manipulators. The first and most important concept we need to understand is why some financial events, including cryptocurrencies, have occurred and what will happen next. Otherwise, if I also stand here talking about conspiracy theories, there is not nearly enough information to explain our financial history as humans.

Next I would like to talk about the main opinions of ‘The Wealth of Quantum Era’. Actually, the logic in this book is not difficult to understand. The reason that the book title contains ‘The Wealth of Nations’ is to pay tribute to Adam Smith. Why does Adam Smith deserve my tribute? No doubt he is the originator of modern economics. If you search the rankings of the financial books on the internet, you will find that his books are usually ranked in the top 3 or 5. ‘The Wealth of Nations’ has been published for 300 years and is a groundbreaking achievement. After I finished this book, I realized Adam Smith is indeed the first person in human history to analyze the entire economic development history without using conspiracy theories.

What is the most fundamental point of view in ‘The Wealth of Nations’? He discovered the simplest and most well known principle — equal exchange. As long as equal exchanges are carried out freely, a market would be formed, which can bring further division of labor for mankind, thereby leading to the emergence of human civilization. The whole society will advance in this way. If you understand the theory of evolution, this will be easier to grasp. What did the theory of evolution discover? It was not God who created humans, but the simplest of rules such as genetic mutations, and survival of the fittest. These rules are called environmental algorithms. As long as the algorithms of our environment on our earth can continue, successful species would emerge and continue to develop. In comparison, other less successful species have been eliminated. In fact, all the evolutionary things we see today, including living species and human beings, have evolved and been calculated in this way. We now call it a distributed computing system. Therefore, although Adam Smith was more than 200 years earlier than Turing, he did not propose the concept of the Turing machine like Turing did, but he has actually told us that distributed computing (free equal exchange) can result in the most complex phenomenon of commercial civilization. All in all, it is an epoch-making discovery that does not use emperors, leaders, or gods to explain why human civilization continues to develop. Adam Smith’s preliminary conclusion in ‘The Wealth of Nations’ is that the free market mechanism can lead to the upgrading of civilization for the entire society.

Business activities in ancient civilizations were basically carried out by the lower-level people, and they were all the objects of satire. The nobles disdain it just as Sherlock satirizes Shakespeare. In fact, what Sherlock did is no different from DeFi. Borrowing after collateralization and repaying the loan in time is totally reasonable. However, this business was very disrespected and even banned in ancient civilizations and religions. Those who had loan businesses in ancient China were always the objects of belittlement, blame and criticism. This was once a very common mentality. However, Hayek said, it was discovered by accident that civilization would continue to prosper as long as business activities are supported. This discovery started in Greece. Greece is a maritime civilization, and maritime civilizations must rely on trade to enable island nations to survive, so frequent trade occurred in Greece. When the Italian Renaissance broke out, followed by the Industrial Revolution, Adam Smith appeared in England. It is not accidental that this world made Adam Smith, nor did he accidentally discover that the civilization of the entire country, and all of the societies, depend on the operation of the entire free market.

China’s reform and opening up over the last 40 years have proved that, without this, or without a market economy, China would be a completely different country. The whole of China has been implementing the fundamental protocol of the free market, the core of which is the exchanges of needed goods at equal levels. It sounds simple but it is actually difficult to execute. The earliest example is to exchange goods. Bartering for goods is very difficult because one person’s items may have different values from the items that another person needs. Moreover, mutual pricing is impossible. Even if the two parties can negotiate the price, the transaction rate will be very low. Later, humanity experienced a cognitive revolution.

There is a book called ‘Sapiens: A Brief History of Humankind’, which shows that all human genes originate from a grand canyon of East Africa. The most fundamental point of view in this book is that humans have extracted abstract concepts, which is a revolution in cognition. For example: the Egyptian sphinx, the face of the snake god of the Chinese Nuwa, many abstract totems, the concept of gods, and the earliest myths and legends of various races — these things do not exist in real life. These are phenomena that only emerge after the cognitive revolution.

Creating abstract concepts beyond specific use value enables people to collaborate with more than 150 people, which is referred to as ‘Dunbar’s Number’. The traditional number of 150 people means that you can only acquaint up to 150 people. If you rely on acquaintances for collaboration, the number of people in a tribe cannot exceed 150. However, after the cognitive revolution, the social circle of Homo sapiens broke this number because they shared the same beliefs and spiritual leaders. It was known that other Neanderthal cavemen and other races contributed to less than 5% of modern human genes, which meant that these races had become extinct, but Homo sapiens had survived. Therefore, the book ‘A Brief History of Humankind’ has a great global influence because of the concept of cognitive revolution. After reading this book, I immediately realized that the reason the whole world is able to cooperate on a global scale depends entirely on the market. But what exactly is the cognitive revolution behind this global cooperation? Humans abstracted a universal concept of credit on top of the use value of commodities. In other words, it is wealth.

Wealth is actually a credit consensus reached by mankind. In the past, if you asked a person what wealth is, they would definitely say that wealth is something they can use, eat and wear, including the house/apartment where they can live. In fact, the concept of real wealth is actually abstracted from the use values of these items and has become a consensus, later turning into a credit resource for exchange.

With reference to human archaeology, you can immediately understand how credit consensus was used in the earliest Chinese civilization — this was in the form of shells. Most finance or wealth related characters have 贝(shell) as their radical. When you visit the Financial Museum in Suzhou, you will find a wall with 88 Chinese characters with 贝(shell) as their radical. Chinese characters are the living fossils of Chinese civilization. This shows that we once had such an advanced Chinese civilization, that China might be considered as the first civilized society in the world that reached an abstract credit consensus. Shells are typically useless items. It is precisely because shells have no use value that makes it a major cognitive revolution. If the abstracted concept beyond the use value is what everyone collectively believes, it is a credit consensus. Everyone can rely on this credit consensus to participate in large-scale market exchanges.

Zhu Jiaming clearly wrote in ‘China’s Currency Economy in 2000’ that China is the only uninterrupted currency economy in the world. This is precisely because China established this wealth consensus for the first time in ancient times, and China was one of the most developed countries at that time. The wealth consensus evolved from shells, to copper coins, to silver and gold. Later, banknotes also originated in China. Over a long period of time, China had the most developed market economy in ancient times, especially during the Ming Dynasty, where China’s GDP ranked first in the world. All in all, this is the process of constantly creating a credit consensus.

It is well known that the earliest concept of wealth in history is that of gold and silver. Why can gold and silver be regarded as a credit consensus? Gold and silver have several characteristics that other metals do not have. They are able to be cut relatively easily, and they have stable physical and chemical properties, which mean they are not easily oxidized. Its deposits are relatively scattered geologically, and most importantly, it is rare and hard to extract. However, after the Industrial Revolution, while the new wealth consensus algorithm was running, gold alone could not meet the demand for more credit consensus, because the industrial revolution brought a big surge in production. This meant that products were manufactured on a much larger scale in factories, which necessitated a much higher frequency of global trade than ever before. What if the credit consensus is not enough? This is when banks appeared. The bank’s algorithm is actually extremely simple. Assume that the bank has 100 taels of gold, so it lends someone a check. However, it secretly lends to 5 other people at the same time. This is how the bank actually operated, and it is essentially the same way today.

Historically, bank credit has often collapsed. For any innovative wealth consensus, the probability of collapse in its early stages is very high. For example, Hu Xueyan, the former richest man in China, once opened a Qianzhuang (this is what Chinese banks were called back then) and then went bankrupt. It was said that Li Hongzhang spread rumors that his bank was insolvent. But really, which bank is not insolvent? If banks conduct their business in the current way, their loan will always exceed their assets. The original mission of the bank is to establish more credit consensus for the free market. Therefore, including the current banks, it is inevitable that banks issue more loans. Something worth noting is that the king of Italy once banned banks. Over the past 100 years, banks have experienced many twists and turns, but later on, they finally stabilized their credit by binding with national credit.

The entire development process of digital currency, including Bitcoin, is just a repeat of the evolution of wealth consensuses that previously occurred in human history. Bitcoin’s wealth consensus imitates gold in all aspects. Like gold, Bitcoin has a limited supply, it is produced through mining and is globally distributed. Bitcoin’s algorithm is literally a gold algorithm that anchors natural scarce resources through its computing power. It is natural that Bitcoin’s consensus is expanding because it is much easier to use on the internet than gold.

In addition, the future world needs a new consensus on wealth. When I was in New York, I visited Alan Greenspan. I was struck when he said: “Why did Bitcoin emerge? Compared to over-issued fiat currencies, it is a complement. It is designed to have a limited supply like gold.” He showed me a chart about gold. As everyone knows, President Nixon announced that the U.S. dollar will no longer be linked to gold in 1971. This was necessary at the time because the algorithms are completely different between gold and USD, and it was logically unreasonable to be linked to each other. After this news was released, the U.S. dollar became a truly unbridled mustang. According to data provided by Mr. Greenspan, gold has inflated 26 times in the past 20 years. Once the economy encounters a crisis, the first thing all governments do is print money.

Therefore, just as Bitcoin’s algorithm imitates the gold algorithm, it is easy to deduce what algorithm DeFi imitates. It imitates the bank’s algorithm and contributes to reaching a new wealth consensus. Where did the market value of $20 billion come from? If you understand the bank’s algorithm, you will naturally deduce that it relies on liquidity and smart contracts. Like banks, DeFi is also contributing to the new wealth consensus.

This is exactly what the global market really needs. We live in a world where all governments are flooding the money supply, and some government credit will collapse sooner or later. Obviously USD and RMB are among the currencies that have good performance. If you analyze the charts of some of the currencies of other countries, you might be shocked. For the worst-case scenario, some currencies could go through inflation up to thousands of billions of times and obviously they are not a reliable wealth consensus. Therefore, the global market needs a new wealth consensus.

As of now, DeFi’s algorithm is staking and lending which is the basic part of the bank’s algorithm. Currently, compared to the bank’s business, DeFi is still in its infancy. What is the core algorithm of the bank that creates wealth consensus? The core concept is credit. Speaking of credit, it was anchored with big enterprises at the beginning. The larger the enterprise, the higher the credit. To some extent, banks only serve large enterprises. Even small and medium-sized enterprises are not included in their service. Using China as an example, measuring the credit of an enterprise is extremely simple. First, see if it has any connection with the government. It is best to have a connection with the central government, because state-owned enterprises always have the highest credit. Second, check if it is linked with the real estate industry. As far as I know, Jiayin Xu borrowed more than $1 trillion. Actually, Mr. Xu’s greatest contribution was to assist the central bank in issuing the banknotes. Otherwise, how could the central bank issue so many banknotes? The bank actually issued the money through loans. If you understand the bank’s algorithm, you will understand the logic behind the scenes.

The core concept is indeed credit. So we need to consider how to create and verify credit. In fact, Ant Financial created the biggest innovation in the digital economy era. What is its innovation? I once discussed with Alibaba’s vice president Gao Hongbing about what the credit should be anchored to. If the credit cannot be anchored to fixed assets such as houses or buildings, as large companies do, what else can it be anchored to? Let us put it another way. When you use Alipay, data about you will be generated. Yes, anchoring with data is the biggest innovation of Ant Financial. Ant Financial should be marked as a watershed in the world’s financial history because it created something truly innovative. For the first time in human history, we find that big data on the platform can provide people with credit. Hundreds of billions of loans have been issued, which proves that this logic can work very well. This is actually a great expansion and innovation after the traditional bank’s wealth consensus algorithm. Everyone’s data, especially transactional data, has created a new consensus for wealth. It has injected new liquidity into the market, and promoted the prosperity of China’s internet economy.

There is essentially no difference between owning customer data and owning a giant gold mine. In fact, the prosperity of the entire internet market depends on user data. Of course, Tencent is also engaging in other businesses to make profits, but the profiteering model of using big data is coming to an end. It relies on centralized operations, which results in many isolated data islands being formed, which in turn prevents users from managing their own data to create wealth, and hinders national supervision. Now the government has released signals to stop this situation from happening. This profiteering model is facing huge financial risk, and centralized manipulation will encounter huge resistance in the future. Looking ahead, we would own our data ourselves by using private keys on the blockchain. With the help of Elastos technology, we would provide our own credit which is initially created on top of our own data and then is evaluated and rated using decentralized smart contracts. This is the finance scenario I imagine in the future.

As I previously stated, the market value of DeFi this year could soar to hundreds of billions. This is not a joke. Imagine what would happen if everyone could participate in the global wealth consensus by using their own data. I once chatted with Hongbing Gao, Alibaba’s vice president, and did a simple mathematical calculation with him. If all Chinese citizens can control their own data and provide credit on top of their own data, then every citizen can contribute up to 100k RMB of wealth. Comparatively, it can be likened to the gold mine that was discovered in California. What is the historical significance of California’s gold mines? California’s gold mines have injected huge liquidity into the US economy and increased the wealth consensus, because gold is a globally recognized wealth consensus and requires no proof. After the discovery of California’s gold mines, the prosperity of the US economy lasted 20 years. The United States’ national tax revenue doubled. This is how history unfolded. So when I chatted with Hongbing Gao in 2016, I came to the conclusion that China’s economy will usher in the next explosive growth — where everyone can easily own their data and manage their own ‘credit’ mine.

This is the logic behind why we are developing the Credit Oracle. Later, more people will participate in the Credit Oracle platform, and more government data will be linked to it. At this point, the government has a large amount of data that has not yet been cultivated, and there is no solution to use this data to create more profits. If the ownership of the data is returned to users and associated with the Credit Oracle, then you can imagine how much wealth will be produced. In fact, for all of us, collectively mining a new gold mine that we have never discovered is a common global mission. In this way, we will see a more prosperous future.

According to the analysis and conclusions of my book, the United States has now relied on Wall Street to create the world’s major wealth consensus. But despite China’s high GDP and the fact that China has manufactured a large number of products, China is now marginalized on the stage of the global wealth consensus. Producing a lot of products definitely does not equate to having a lot of wealth.

Moderator: Can you please briefly introduce your project?

Sunny Feng Han: FilDA, at its core, is a lending and borrowing platform with a TVL of about $450 million. However, FilDA is just where we start, and this is the first step in my strategy. Next I am going to launch a Credit Oracle project called CreDA. CreDA will be linked with off-chain data, where we are in deep talks with UnionPay to provide credit for everyone using both off-chain data and on-chain data. Please note that we are just linking with off-chain data. We will not be another Alibaba and we will not control users’ data.

A lot of people may not yet know why blockchain is such a great technology. The great thing is that users can control their data. On the blockchain, you control all your assets without a third party. This is the core concept and where the new reform begins. Once blockchain technology (such as Elastos’ web3.0) is developed more maturely, users can provide their own credit on top of their own data. I believe we will obtain a new impetus to create new wealth.

DeFi will be much more prosperous than it is now because there is huge room for innovation to construct different money legos on its platforms.