HCM Capital Li Renjie: Programmable infrastructure will be a supplement to the existing financial system


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Li Renjie, partner of HCM Capital Management, explained the advantages and application potential of digital assets and programmable financial infrastructure.

Original title: “Li Renjie | Advantages of Digital Assets and Programmable Financial Infrastructure”
Written by: Li Renjie, HCM Capital Management Partner Source: Zero One Finance, Hengqin Financial Research Institute

Good afternoon everyone. The topic I share with you today is “The advantages of digital assets and programmable financial infrastructure.”

What is a programmable financial infrastructure? The so-called bits is the smallest atomic unit of data. Today, in the financial field, if it can be programmed with the smallest unit and used on the public chain, everyone can verify it.

Why should we talk about this concept first? Everyone knows that we are going to talk about the possibility of the new finance in the future. We must first understand that today’s Internet has changed. It is already in an era of digital economy, and we are living in a digital economic society. From a financial point of view, transferring money means transferring data. If financial data becomes programmable and the programmable process is on the public chain, everything will be different. Because the public chain does not need to be approved, and everyone is verifiable, this will prevent the process from being led by any organization, and everyone is in a relatively equal state. We often talk about the fact that blockchain can achieve universal benefits, which is especially beneficial to countries that are relatively backward and do not have banking services. After currency is programmed today, there is an opportunity to build a more equal social form.

Why is a programmable financial infrastructure needed? According to statistics, one out of every two adults does not enjoy the necessary banking services-the size of the population reaches 2.3 billion. The construction of programmable financial facilities can benefit many backward regions around the world, and people without banks to serve can achieve fairer and more inclusive finance. So the demand is very broad and obvious.

But what effect does this process have on the already “banking” world?

First, it helps to upgrade the existing system and reduces friction and unnecessary intermediate costs and delays. According to statistics, 43% of U.S. banks are still using the Cobol system invented in 1959, which causes service delays and is expensive. At present, the Internet has changed our human lives, but it is relatively backward in terms of financial services. There are many problems that can be solved through technical means and programmable financial infrastructure. Just imagine, if developers can transfer money to social software like Facebook and other social software for timely and programmable transfer, great changes will occur in the future, and there is still a lot of room for financial reforms.

The current social phenomenon is: the bank acts as an intermediary, even if you use WeChat Pay or Alipay to pay, you will end up with the bank that binds both the payer and the payer. For example, digital renminbi provides a more efficient solution. Traditional financial institutions around the world still serve as intermediaries, but the efficiency is not high. Many services in life are time-efficient and do not require money, such as e-mail, but financial services are still relatively backward. Software swallows the world, and the financial sector is no exception, but the process is slower.

Yesterday, I heard from Teacher Huang Jiangnan that in the past, money transactions were bartering. In the future, trust will be replaced by technology. Therefore, there is no need for a trusted third party, such as the endorsement of financial institutions such as banks, to rely on technical means to improve efficiency, lower the cost. I believe that the new paradigm of the future-through a global, scalable infrastructure, users interact with verifiable smart contracts, thereby eliminating the risk of counterparties. In China, there are three main banking services: deposit, loan, and remittance. Assuming that international virtual currency transfers can be done without the help of financial institutions, Alipay, or third-party peer-to-peer, the cost will be greatly reduced. In these three traditional financial services, virtual currency has brought a dawn-peer-to-peer remittance without third parties, especially deposits and loans based on Ethereum. In the past, financial institutions acted as intermediary deposits and lenders. Later, Internet finance (in fact a third party) also required a bank license to grow, which is no different from the previous financial institutions. The vigorous development of the DeFi field in the past two years shows that the deposit and loan foreign exchange we have used in the past dozens of hundreds of years must also be prepared for reform.

Based on the background we understand, the current situation, and the future paradigm that we can see. Because of the open finance of Idea Maze (I myself translate it as “fantastic labyrinth”), infrastructure can be increased. A few years ago, everyone was discussing how to scale BTC and other POW blockchains, and Bitcoin Cash appeared. Despite rising opposition, Bitcoin still “wins.” Expansion can only enable people with more resources to master its network, and cannot achieve true decentralization. There are tens of thousands of Bitcoin nodes running around the world. This is a Dao. Without a centralized organization, it will be the future development period. No one talks about expansion and forks anymore. The most likely success is that the second layer of virtual currency solutions, in the part of virtual currency, is mainly the Lightning Network-there are many APPs that allow you to reduce costs and make virtual currency Currency transmission is instant. For public chains like Ethereum, layer 2 solutions such as zero-knowledge rollups provide the same effect.

In the future, this scalability will definitely come. I have gone through the Internet bubble of 90 years. Technology will definitely solve these problems. But this direction can be seen and can be determined.

Second, use virtual currency as the settlement layer. Startups like Strike are using virtual currency, the network can settle remittances on a global scale. Using the international liquidity of the virtual currency network, the market can be opened for 7 days and 24 hours and instant lightning payments can be made. This will cause traditional settlement/remittance methods such as SWIFT to become obsolete. According to statistics, in 2019, 11,000 financial institutions still have to make 30 million payments via SWIFT every day. Therefore, we believe that this reform in the future is inevitable.

Innovation is ahead of regulation, law and politics. In the United States, there is such a model-first use the bank as the currency channel, then the bank as the custody, and finally the fiat currency as the data exchange channel, using this method to gradually incorporate supervision. For example, Uber and Didi, the reason why illegal black cars can be converted into legal online car-hailing is the needs of people’s lives. Because it is more convenient to use, the government will legislate, and investors will assist in the legislation and solve the problem through legal channels.

From an international perspective, I provide you with such a perspective. Compliance Services, the provision of more compliant services will increase the adoption rate. The Cash App recently allowed its users to use only its “$ cashtag” to send and receive virtual currency for free. In the future, it will be a fairer and more reasonable financial service. Fair financial services, new technologies such as DLC will play an important role in the construction of virtual currency financial services in the future. The Ethereum ecosystem already provides a wide range of financial services, such as loans and insurance. New applications such as PoolTogether and Flash loans are not available in the traditional financial world.

How will the business model of the Internet evolve? If you don’t pay for the service, then you are the product yourself. Advertisers have an incentive to underestimate the number of conversions, while ad networks like Google do the opposite. An open and transparent blockchain network can solve this problem. There will be two ways in the future. In the past five years, many of them have become subscription models. In the past, I bought a software for a few thousand yuan. Now it is how much you pay a month to listen to what you want. Think about the concept of live broadcast now. In the past, it was for video. You see, it’s live streaming now. You can collect money in seconds when you use its services. Applications like sphinx chat on virtual currency and Sablier finance on Ethereum are working to develop a solution that directly provides people with money flow. In the past, many of the lock-ups issued by various virtual currencies and other tokens were paid monthly, and every time these investors would fry with the sales company, why did you not pay, you kept dragging it, and there is a payment streaming like Sablier ( Streaming) service, for example, 12 months can be cut into every second, and payment can be streamed directly on the chain. The composability of DeFi allows developers to focus on core business logic and access critical infrastructure without any permission. Financial products “Lego” can be connected in innovative ways to create application scenarios and financial products that were unimaginable before.

The conclusion is summarized into three points:

First, programmable infrastructure will complement the existing financial system, making it more robust and efficient.

Second, no matter where you are, any future payments or remittances should be sent by email, text or video, and live broadcast. They will be “instant” and “completely free.”

Third, the programmable financial product “Lego” will open up space for new application scenarios.

Finally, I use this sentence to summarize today’s speech. This is what Musk said in a tweet on January 29, “In retrospect, it was inevitable” (in retrospect, this is inevitable). In fact, the things we are talking about today can use his words to outline the future imagination. I believe this trend should and is really inevitable.

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