Institutional View: Oracle, NFT, and Incremental Market Projects to Experience a Big Boom in 2020

2019 was a year for cryptocurrency funds to reflect calmly. In 2018, blockchain was booming, and "gold" was everywhere, leading many cryptocurrency funds to invest heavily. However, after experiencing a sharp decline in coin prices and the bursting of the bubble, many projects and investors withdrew from the gold rush scene.

By Wang Ye, Edited by Hao Fangzhou

Produced by Odaily Planet Daily (ID: o-daily)

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Nevertheless, some top cryptocurrency funds are quietly positioning themselves (for details, see the Odaily Planet Daily article, While many cryptocurrency funds fail, these ten are still active). Among them, Distributed Capital, as an active and insightful player in the primary market investment, stands out. According to public information, Distributed Capital made a total of 12 investments in 2019, with an average investment amount per project exceeding tens of millions of RMB. In the latest CB Insights report on the blockchain industry, Distributed Capital ranks among the top five most active venture capital institutions and is the only Chinese venture capital on the list.

Recently, Odaily Planet Daily had the privilege of discussing investment opportunities in the 2020 blockchain market with Huang Lingbo, a partner at Distributed Capital. The discussion covered Oracle, NFT, tokenized projects, privacy layers, blockchain games, middleware, derivative exchanges, staking, and secondary markets, offering insights and inspiration. The interview content is summarized below, enjoy:

Odaily Planet Daily: You mentioned in a speech that 2020 is a year of great explosion for Oracle, why is that?

Huang Lingbo: First, let's talk about the classification of Oracle. Oracle itself is divided into three categories: the first category is data generated natively on the chain, which is the native on-chain database Oracle; the second category of Oracle is collaborating with traditional institutions, granting credit to traditional institutions, allowing them to act as nodes on public or consortium chains to output data to the chain; the third category of Oracle verifies the data itself and uploads it to the chain through governance mechanisms.

Before this year, many Oracle projects were decentralized, governance-type Oracles, but these Oracles are actually difficult to implement. It may require the overall development of M2M (machine-to-machine) before there is a chance, so many Oracles have transformed to become the second category, collaborating with traditional institutions, partnering with trustworthy nodes through credit.

Through continuous practice from 2017 to 2019, we found that the first category of Oracle (on-chain natively generated data) has limited development space due to poor landing applications on the chain, and these Oracles did not receive good validation in the end. Therefore, I personally think that in 2020, everyone may shift their focus outside the circle, more inclined to develop the second category of Oracle, cooperating with many traditional institutions as nodes to upload traditional world data to the chain, rather than confining the development of this data on the chain.

In addition to the impact of technology and market factors mentioned above, there is also policy support.

Odaily Planet Daily: What specific difficulties have you encountered in implementing governance-type Oracle?

Huang Lingbo: I personally think there are two reasons. The first reason is the governance mechanism. In the blockchain world, governance is a very difficult thing. Originally, many Oracles carried out governance through multi-party verification, such as unifying more than 50% of the votes, and the system defaults to this result as true. During this verification process, the system incentivizes the nodes participating in verification with tokens. However, this method still has a lot of room for manipulation, and to encourage nodes to participate in verification, the premise is that the tokens themselves have value. Once the token loses its value, the system cannot attract nodes to participate in verification, making the system's ecosystem difficult to sustain. Therefore, I believe governance itself is a very difficult thing.

Moreover, governance structures between people are very complex, involving game theory and many other complex theories. Because human motivations are complex, the system finds it difficult to fully determine people's motives and behaviors, making it challenging to design a perfect governance mechanism to make on-chain data verifiable.

Therefore, I believe that governance-type Oracles may only be achievable when machine-to-machine (control devices effectively through mobile communication, without human participation) matures. In the future, this type of Oracle will upload data obtained from machines, rather than humans. Because many data generated by people are uncontrollable, untrustworthy, and opaque, but machines are different. If the data generated by machines has not been tampered with, then the data generated by the machine is completely transparent, trustworthy, and without any personal gain.

Therefore, if Oracle is based on machine-to-machine, only the verification of data authenticity is required, and there may be no need to design complex governance mechanisms.

Odaily Planet Daily: If the machine you mentioned is ultimately controlled by humans, would this theory still apply?

Huang Lingbo: It depends on what the underlying layer of the machine is. The data stored by the machine has two types: active data and passive data. Many of the data we have encountered before are still active data, written by humans into the database. However, in the future, much of the data we encounter may be passive data, such as smart bracelets that measure human health, which can directly record people's health data without human input. This data is objective. If it is securely recorded and immediately uploaded to the chain, the system only needs to verify the hash value itself to ensure that it has not been tampered with.

Odaily Planet Daily: According to the projects you have been involved in, how is the current development status of these three broad Oracle projects you mentioned earlier?

Huang Lingbo: Currently, it is true that some projects have already landed and achieved income. Some technical service projects in China have generated tens of millions of RMB in revenue in 2020. They provide technical services to governments and financial institutions. Some governments and financial institutions in China are also significantly increasing their budgets for blockchain business.

There are relatively fewer broad Oracle projects at the consumer level, but there is a shift happening now. There are some interesting ideas emerging, such as NFT (non-fungible tokens). NFT is very suitable for applications that require uniqueness, such as tickets and IP. There have been successful cases of tickets, such as AlphaWallet, but there are still few other examples.

Another category I see emerging is tokenize projects, which involve the transfer of dividend rights and benefits. These projects are more suitable for some consumer industries, such as catering and lifestyle services like hairdressing. The revenue and cash flow in these industries are actually quite good, and their cash flow can be used directly to incentivize their users, employees, or dividend holders.

For example, I have the dividend rights to this table, so when consumers pay for meals at this table, the funds can be immediately transferred to my account and to the employees serving this table through smart contracts. These projects operate through smart contracts + tokens, where the token represents the dividend rights that users have for this table, and the smart contract specifies the distribution ratio, allowing for direct cash flow distribution.

We have noticed that these tokenize projects have begun to land. These projects are closely tied to people's real lives, directly linking to cash flow, and data is starting to be uploaded in this process. Overall, NFT and tokenize projects on the consumer level are likely to have good development in 2020.

Odaily Planet Daily: It seems that the transfer of dividend rights you mentioned is similar to STO?

Huang Lingbo: That's a sensitive point, many people were not optimistic about STO before, and I personally was not very optimistic about STO. However, if the nature of the STO project is similar to that of stocks, then it would not be very meaningful. But if it involves dividend rights, I think it could be meaningful. This opens up a new capital market, a new equity circulation.

Odaily Planet Daily: Many big names say that privacy protocol projects will explode in 2020, how do you view privacy layer projects?

Huang Lingbo: We categorize protocol layer projects into data, finance, and governance categories, and we classify the privacy layer under data.

We have been looking at privacy layer projects since 2018, and the earliest ones we saw were privacy coin projects. Generally, they create their own public chains, and there are already many of these projects, from the earliest Monero to Zcash, and then to Grin and Beam. However, the directions where these privacy coin projects can be applied are actually quite limited, mostly involving trades and payments in a gray area. Therefore, since 2018, we have believed that the privacy layer might be a better investment direction.

The privacy layer is different from privacy coins. It can combine the payment systems of various public chains, making it more flexible. For example, Aztec, which we have been quite optimistic about, is one of its nodes. Compared to privacy coin projects, Aztec is more flexible and can achieve functions that many privacy coin projects cannot.

Privacy also involves a very important issue, which is compliance. Why is it difficult for privacy coin projects to have a large market? Because they are treading on thin ice, operating in a gray area, and are easily exposed to compliance risks. However, the privacy layer is different; it can set new privacy features and restrict open privacy conditions. For compliance, auditability is very important.

Therefore, we believe that the privacy layer can be integrated with compliance in the future, meeting various privacy needs. Therefore, we are currently looking at many privacy layer projects.

Finally, I personally think that the privacy layer track will not have many leading companies, but many people will work on privacy layer projects, and only a few will eventually be recognized by everyone.

Odaily Planet Daily: How do you view the development of blockchain games in 2020?

Huang Lingbo: Ah, blockchain games have been talked about for a long time, but there haven't been any good cases yet. Many blockchain games currently tend to have gambling and speculative characteristics, and a perfect combination of entertainment and speculation in blockchain games has not yet emerged. In fact, we have seen various blockchain game projects in the past. Recently, inspired by some game project parties, I've had some new thoughts.

Many blockchain projects have taken the wrong approach to games; they always want to embed blockchain technology or concepts into games. I think this direction should be reversed. Because games already have props, tokens, points, and other assets within the game system that can be traded, there is no need to use blockchain to create proof and then upload it. It's unnecessary to use a blockchain platform.

As everyone knows, games often involve intellectual property (IP) concepts. Blockchain companies should approach these IPs first and create unique collectibles for these IPs in the form of NFT. Then, when other games featuring these IPs are released in the future, players can use these collectibles to obtain props or points for these games, etc. This is the reverse approach to developing blockchain games, and this approach is also the approach of the third category of broad Oracle projects. In general, blockchain games can try to focus on IP design, rather than game-centric approaches.

Odaily Planet Daily: How do you view the middleware track? I understand that many institutional investors are very optimistic about this track.

Huang Lingbo: I think the term "middleware" has become popular in the industry recently, and it's quite interesting. In fact, last year at DevCon held in Tokyo and Osaka (Ethereum's annual developer conference), I noticed that a term was frequently mentioned, "composability," the combination of various module components. I understand that middleware is a derivative of this concept. This is actually very similar to some of our previous concepts. We believe that the core of the application layer is the combination of the protocol layer. Middleware is the plug-and-play combination of various protocol modules. Middleware allows application developers to more conveniently use the blockchain to achieve their goals, providing a more user-friendly environment for application developers, without a deep understanding of blockchain technology itself. However, the core of middleware is still various component modules, and currently, in the field of native blockchain projects, there are still few modules that can achieve perfection.

In my view, many projects that work on the protocol layer have not implemented their decentralized protocols very well. Apart from early open finance projects like MakerDAO and 0x, other decentralized protocols are still very immature.

But there has been progress. Originally, everyone's understanding was that the application layer and the protocol layer were two independent entities, but we have felt a progress in the market. People are starting to understand that the application layer is derived from the protocol layer. Middleware might be the process of this combination and upgrade. I think being aware of the concept of "combination" is already a market improvement, but the process of building this combination is not easy.

Odaily Planet Daily: Do you focus on investing in the protocol layer track?

Huang Lingbo: We have always attached great importance to investing in the protocol layer. In fact, our earliest investment logic was "public chain + protocol layer," and DApps are not a particularly important part of our investment logic, as projects at the application layer are still in their early stages.

Odaily Planet Daily: We have discussed many specific sub-fields, can you briefly summarize Distributed Capital's investment logic?

Huang Lingbo: In summary, our investment tracks can be divided into three categories. The first category is enterprise service projects, where we generally invest in equity; the second category is blockchain ecosystem projects, such as exchanges, wallets, media, etc.; the third category is native blockchain projects, including public chains and protocol projects. Within the protocol category, there are data (web3), finance (open finance), and governance (DAO) subcategories.

In 2019, the native blockchain projects were our heaviest investment track, and Distributed Capital was originally founded by investing in ETH. We were also early investors in Polkadot, so this track is certainly a long-term focus for us. However, in 2019, there were not many projects in this track, and the overall quality was not particularly good, with high prices. Therefore, our investment in native blockchain projects in 2019 was relatively limited compared to before. But we will continue to search for interesting protocol layer projects within this track, with new consensus mechanisms. We will continuously search for these projects in the long term.

In 2019, we had relatively more investments in blockchain ecosystem projects, such as derivatives exchanges and wallets. We also invested in or paid attention to some interesting protocol layer projects, such as Tokenscript, on-chain data indexing protocols, economic model simulations, privacy computing protocols, and staking derivative protocols.

Odaily Planet Daily: In terms of derivatives, many exchanges announced the layout of options businesses in 2019. How do you view the development of the options business in 2020?

Huang Lingbo: I have long been optimistic about the options business; I saw the potential of options in the second half of last year. However, typically, options are not a B2C business; they are a B2B business used by institutional organizations for risk hedging. In traditional finance, options are used as a risk hedging tool in the commodity industry chain. In the token field, besides mining machines, there seems to be no such upstream and downstream, so I am more optimistic about options with mining attributes.

In fact, we have also invested in wallets, such as Math Wallet and Torus. From an internet perspective, wallets are a traffic entry point. From a blockchain perspective, wallets could potentially transform themselves into a protocol layer. For example, an aggregated wallet protocol that empowers other projects with this wallet protocol. This approach is from an internet perspective, where wallets are a traffic entry point. In the blockchain field, wallets can potentially transform themselves into a protocol layer, such as an aggregated wallet protocol that can empower other projects.

Odaily Planet Daily: Similar to imToken's current practice, users can directly exchange ETH for some ERC20 tokens, along with other services like staking.

Huang Lingbo: Speaking of staking, I am quite optimistic about staking derivatives; staking will definitely lead to derivatives in the future. Staking is somewhat similar to debt concepts; you earn profits by locking up assets. It will inevitably lead to asset securitization. Therefore, staking is also an important track for our investments.

In 2020, we will continue to focus on this track. There have been many projects in 2019 in trading, wallet layers, staking, and in 2020, it will be a year to verify their strengths, and market patterns will slowly take shape.

Odaily Planet Daily: Lastly, could you talk about Distributed Capital's investment plans in 2020?

Huang Lingbo: In the long run, Distributed Capital will always focus on investing in native blockchain projects (the third category mentioned earlier), including Web3, Open Finance, DAO, etc. However, based on market opportunities, we are likely to lean towards investing more in the first category of enterprise service projects and the second category of blockchain ecosystem projects in 2020. Exchanges, for example, will become more prominent in 2020, and prices will not be too cheap. We will focus on early-stage projects that reduce user thresholds, focusing on incremental markets, such as keyless wallets and intelligent investment advisory services.

However, Distributed Capital is currently raising a new larger fund, so we welcome both early-stage projects and later-stage projects that are more mature. In summary, it's still about the track, the team, and timing. In 2020, we may invest more in the secondary market, as there should be significant opportunities in the secondary market this year.

This article is from the blockchain industry media "Odaily Planet Daily," written by Wang Ye, authorized for republication by the author

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