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• The current state of Web 3.0 technology development. In the "Understanding Web 3.0" module, I will explain the combination of public chain, account, and identity authentication technologies, and guide you on how to build a new infrastructure for Web 3.0, aiming to achieve the goal of understanding the fundamental logic of Web 3.0 technology.

• Exploration: New gameplay and new species of Web 3.0. Here, you can learn how DeFi achieves further expansion through its integration with traditional finance; how NFTs, as a new data rights confirmation system, create a "digital Disney"; how new decentralized applications innovate business models in fields such as gaming, commerce, and social networking; and how DAOs create a new business form of "tools + communities."

• Insight: Future application trends of Web 3.0. Beyond blockchain, how do data technologies like artificial intelligence and the Internet of Things combine with Web 3.0 to bring new development space to the internet? How will traditional internet companies, government departments, financial institutions, and investment agencies integrate into Web 3.0 for self-upgrading? In the "Risks and Opportunities" module, you will gain insights into the main paths to "getting on board" and several logics to avoid pitfalls through my analysis.

Decentralization is essentially a coordination mechanism, and it varies in degrees.

To understand what has driven the birth of Web 3.0, we need to revisit the development history and current state of the internet. We know that the development of the internet is a prerequisite for humanity to enter the information society. After the internet emerged, on one hand, a vast amount of information could be recorded at low cost; on the other hand, information only impacts social and economic activities significantly when the total amount reaches a certain magnitude. In the 1990s, the birth of the internet created a brand new communication channel beyond print media, giving rise to a batch of professional content production platforms (PGC), similar to Geek Time, which primarily focuses on content production. However, the internet during this period was unidirectional, and the data generated by the internet had little relationship with users. This was the Web 1.0 era. As time went on, users began to be dissatisfied with the "input without output" state, and the desire to express themselves led to a surge of platforms that provided opportunities for users to create and express, such as Facebook (Meta) and Twitter. Additionally, e-commerce platforms, video sites, and tech companies like Apple and Microsoft, which provided terminals and infrastructure for these activities, also emerged. At this point, we were gradually transitioning to the 2.0 era.

• User behavior generates a large amount of data, but the characteristic of this data is "storage equals ownership," rather than "who creates owns." This leads to the problem that internet companies, by collecting and utilizing data, become "wealthy enough to rival nations," while the conflict between their private interests and public welfare becomes increasingly evident. For example, by the end of 2021, the internet giant Facebook, which had rebranded as Meta, reached a market value of $1 trillion. If this value were ranked among the GDPs of various countries that year, it would likely place in the top 15 globally. Behind Facebook's trillion-dollar valuation are 1.9 billion daily active users and 2.9 billion monthly active users, accounting for as much as 36% of the global population. However, within the Facebook-dominated internet, if you want to send a message to a friend or express a personal opinion about an event, you must strictly adhere to the various written or unwritten rules set by Facebook; if you dare to "test the waters," you might be silenced like Trump during his re-election campaign, or face "social death." Even if you leave Facebook, the situation is similar in other areas; for example, if you want to initiate a payment, you essentially have to contact a financial institution to execute the transaction on your behalf. If it's outside that institution's business hours, your transfer cannot be completed; if an institution is willing to offer you free transfer services for part of the year, you will certainly continue to receive advertisements recommending loans from that institution.

• The space hijacked by internet companies needs to be more free and open. Recently, global media have focused on Musk's acquisition of Twitter, with the main concern being how the change in Twitter's equity structure might affect its operational style. However, the influence of internet companies dominating the internet goes far beyond this.

• On one hand, massive data leaks have caused significant distress in users' lives, while the online violence and dangers associated with "cyberbullying" stemming from data leaks have increasingly drawn societal attention. In May 2022, Facebook publicly admitted that a data analytics company named Cambridge Analytica had illegally obtained information from 50 million Facebook users and used this information for the campaign of former U.S. President Trump. On the other hand, the operational behavior of internet companies may directly conflict with a country's government or the general public. For example, in February 2021, the Australian government announced the implementation of the "News Media and Digital Platforms Mandatory Bargaining Code," which primarily aimed to charge fees to news media, including internet platforms, for using various information released by the Australian government, but Facebook was unwilling to bear this cost.

• As a result, without reaching an agreement, Facebook blocked the ability of various Australian institutions, including government agencies, to publish information on its platform. During the blocking period, even the meteorological bureau, fire department, and hospitals could not release information, and urgent information related to COVID-19 prevention could not be published, effectively cutting off Facebook's connection to the Australian government and all Australian citizens.

• Web 3.0: A bottom-up internet revolution! And this is what Web 3.0 aims to do! To open up the internet, achieving a form of openness from the level of technical architecture, and to change its "spiritual temperament" through the reconstruction of technical logic. However, so far, there has not been a universally accepted definition of Web 3.0, but many versions of descriptions reveal thoughts that are highly similar or close to the above ideas.

• For example, Gavin Wood, the former CTO of Ethereum and founder of Polkadot, proposed that Web 3.0 is a set of inclusive protocols that can build modules for applications; these modules replace traditional web technologies such as HTTP and MySQL, while providing a brand new way to create applications. Another example is the well-known Silicon Valley venture capital firm A16Z, which defines Web 3.0 as "a set of technologies that include blockchain, cryptographic protocols, digital assets, decentralized finance, and social platforms."

Web 3.0 is the protocolization of internet functions, where protocols operate according to the limited rules reflected in code, with no further profit motives or social value propositions projected; protocols can achieve functional superposition through mutual combinations, reflecting a spirit of openness and collaboration.

In the Web 3.0 network, the role of Alipay is no longer borne by a specific institution, but by a protocol, allowing parties that do not trust each other to safely conduct transaction settlements without a third-party intermediary. This protocol is called HTLC, which stands for Hash Time-Locked Contract, and it can also create a fairer competitive environment for other financial institutions (I won't elaborate on the specific principles and execution steps of this protocol here; if you're interested, you can check out this link).

Web 3.0 "full stack": From creation to ownership to incentives. Of course, the protocolization of functions is only the first step in building Web 3.0. Behind these protocols, a distributed computing network that supports protocol execution as a "hardware system" is needed, along with a universal economic system centered around user identity verification, data recording, and usage authorization and incentives as a "software system." The hardware system provides technical support for protocol execution, implementing functions such as communication, computation, storage, and interaction from the bottom layer to the application layer, and reflecting a sense of "replaceability" at each stage. This means that these functions do not rely on any specific institution or organization to be realized, but the logic of the functions is accurate and trustworthy. This characteristic is also known as "trustless trust."

• For example, in the current internet, all our programs must solve the availability, reliability, and authorization issues of inputs on their own when executing computational tasks, and they also need to spend additional resources to address various incompatibilities and security risks.

• The IC protocol is based on the blockchain consensus mechanism, constructing a virtual subnet that includes multiple physical nodes between the TCP/IP protocol and the application layer; nodes within the subnet reach consensus on inputs and outputs and can mutually verify computational results; multiple subnets can communicate and significantly enhance computational capacity through mutual combinations. In fact, similar design concepts to IC have also been explored in fields such as communication, computation, and storage. These protocols create a complete chain for the generation, storage, invocation, and privacy protection of data without relying on any specific institution, thus enabling the internet to possess a basic architecture that overcomes "single points of failure."

Economic System#

Beyond the "hardware system," a set of economic systems targeting identity verification, data recording, and usage authorization and incentives is also needed around users. This system needs to be embedded in the execution process of the protocols, and the implementation of the protocols does not require the participation and assistance of any third-party institutions. Based on this economic system, different protocols can superimpose and combine with each other, achieving the coordination of economic interests.

From the perspective of the functions of the "hardware and software" systems, blockchain is a technology that Web 3.0 highly relies on. Blockchain can achieve trustless collaboration without relying on any third-party institutions and can incentivize system members through a token system.

However, blockchain is not all of Web 3.0, as its main role is to establish a trusted shared ledger and cannot provide solutions for all the problems that Web 3.0 needs to address. Web 3.0 will also gain greater development space through the combination of blockchain, privacy computing, artificial intelligence, and even IoT technologies.

Although we have discussed many combinations of "hardware and software," from the user's perspective, Web 3.0 may not be significantly different from Web 2.0. However, you should see that Web 3.0 will create a brand new business model, a highly connected, borderless digital economy, and generate numerous bottom-up innovation opportunities through the construction of distributed technology architecture and economic systems.

• The emergence of Web 3.0 reflects a transformation of underlying technology that brings new functional divisions at the industrial chain level, and new functional divisions often mean new business models and new industrial opportunities. Therefore, Web 3.0 is a "disruptive innovation" of the existing internet based on technology, and through this innovation, we have gained the opportunity to create, own, and be incentivized for our data for the first time. Web 3.0 endows the internet with a spirit of openness from a technical perspective, creating a brand new business model, a highly connected, borderless digital economy, and generating numerous bottom-up innovation opportunities through the construction of distributed technology architecture and economic systems.

The main issue is that data resources are monopolized, and development has become a castle in the air. I believe the opportunities for Web 3.0 entrepreneurship are far greater than before, especially in the early window period.

1. Web 3.0 seems to conflict with the vested interests of some internet giants. Will it face significant obstacles from them?

2. One of the core technologies of Web 3.0 is blockchain. Who provides these underlying infrastructures? How do infrastructure providers benefit? The author's response: For the first question, it will definitely face obstacles, but the trend will not change! For the second question, for example, the business model of public chains is...

We will delve into the internal structure of the Web 3.0 world and take a detailed look at its main structure. In the last lesson, we also mentioned that Web 3.0 mainly promotes internet upgrades by breaking horizontal monopolies through vertical layering. Today, we will start from the most basic layer of Web 3.0 structure, which is the computing layer that provides general computing services.

• The computing layer of Web 3.0 is open and accessible to everyone. It does not operate on dedicated servers like the vast majority of websites we log into today. In Web 3.0, the computing layer is separated, similar to the 5G network, water supply system, and power grid we currently use. So why must Web 3.0 emphasize the independence of the computing layer? It mainly aims to avoid data monopolies through this layered approach, allowing data to be publicly available in the form of a public ledger. Of course, the openness of data is not the end goal; returning data to its creators is the ultimate goal, but everything must start with breaking free from data monopolies. Ethereum serves as such a foundational infrastructure that provides general computing services. Since Ethereum's computing network can be accessed at any time without restrictions, it does not affect the output of computing functions, so we generally refer to networks like Ethereum as "public chains." Today, we will start from Ethereum to see how this public chain provides computing services.

Starting from Bitcoin, however, to introduce Ethereum, we must first talk about Bitcoin. Because Bitcoin was the first to achieve a deterministic computing service based on a decentralized network. Although people refer to this computing result as "digital gold," from a technical perspective, Bitcoin is actually a "state transition system," where the transaction information of Bitcoin serves as input and is converted into a new Bitcoin ledger for output. This process looks very similar to the banking process, where the ledger states of Bitcoin at different times correspond to the balance sheets of banks at different points in time, and the "state transition function" corresponds to the bank's accounting processing system. For banks, they only need a software system to complete accounting processing. However, for Bitcoin, it requires combining "state transitions" with "consensus mechanisms" to endow Bitcoin with all the attributes of "trustless digital gold."

The "digital gold" model of Bitcoin is destined to not go far because Bitcoin's architecture is too tight and lacks necessary scalability. You may know that Bitcoin's scalability mainly manifests in scripts, but scripts can only implement some simple contract functions. For example, it does not support complex loop operations, making it unable to achieve Turing completeness.

Furthermore, in the Bitcoin system, the UTXO representing unspent balances can only perform binary logic functions like 0 or 1, which leads to Bitcoin being able to construct only simple one-time contracts and not being able to implement multi-stage option contracts or decentralized trading quotes. Ethereum, therefore, established an alternative framework on the basis of Bitcoin, allowing client computing performance to be more powerful, making development easier, and allowing applications to share the security of the blockchain.

Why is Ethereum the "world's universal ledger"? Ethereum has a built-in Turing-complete programming language, allowing anyone to write smart contracts based on Ethereum, develop decentralized applications, and freely set ownership rules, transaction forms, and state transition functions. However, if we analyze Ethereum from the perspective of Bitcoin's "state transition system," we find that Ethereum's state is no longer reflected through "ownership" but is represented as "accounts." "Accounts" not only contain asset balances but can also interact with contracts. With "accounts," the execution of smart contracts becomes lighter and faster, thus creating conditions for its scalability.

Therefore, based on the above design, Ethereum can achieve more refined control.

For example, in terms of transfer functions, Bitcoin can be set to require three out of five accounts to initiate a transfer payment, while Ethereum can be set to require signatures from three out of five accounts to withdraw up to 80% of the amount in the contract. If only two signatures from the five accounts are obtained, then a maximum of 10% of the amount in the contract can be withdrawn daily.

Additionally, Ethereum can provide computing support for many decentralized applications, especially those that require rapid development, high security, and frequent interactivity between protocols, such as financial applications, which can offer users services like token issuance, savings, lending, and financial derivatives. A typical example is DeFi. It can be said that Ethereum is the foundational layer providing general computing functions for decentralized applications, and due to its emphasis on strict synchronization of account states, Ethereum is also referred to as the "world's universal ledger."

IPFS: Reconstructing the file retrieval system based on content. OK, let's take a look at this structural diagram. If Ethereum provides the general computing layer for Web 3.0, then decentralized storage projects represented by IPFS provide the general storage layer.

IPFS stands for InterPlanetary File System, which is a file storage and retrieval system based on content addressing. Based on the IPFS protocol, we can break the files we need to store into 256KB units and store them separately. At the same time, IPFS generates a hash value for each file, which, when bundled with the file, forms a complete index structure that is uploaded by nodes to the entire network for user retrieval. From this basic process, it can be seen that, based on the IPFS protocol, there is no direct correspondence between the stored content and the storage nodes. For already fragmented files, encryption can also be used to encrypt the file content, and miners will only find the corresponding file in the IPFS index structure after a user issues a retrieval request.

We know that the basic characteristic of data is "storage equals ownership." When we store our behavioral data on the servers of internet companies, we also implicitly "assign" the usage rights of that data to the internet companies. To obtain the qualification for "assigned" data usage rights, internet companies are willing to provide free services to attract users. The design of IPFS clearly breaks this model. Based on the IPFS protocol, we users can retrieve data based on the content of the files, detaching the storage of data and files from specific service-providing websites, and also making the retrieval of data no longer dependent on the continuous operation of these websites. We will no longer be unable to download data due to website failures, attacks, or IP address deletions, nor do we need to worry about data being tampered with during storage. At the same time, IPFS can also integrate and utilize storage spaces distributed in different regions, thus finding an economic monetization opportunity for personal and decentralized storage spaces.

If these images were still stored on centralized websites' servers, theoretically, the images could be tampered with or permanently disappear at any time; however, if the images are directly uploaded to Ethereum, the gas fees might be very expensive. Therefore, many NFT projects choose to use IPFS to store these images. Another example is that on April 1, 2022, Ethereum announced that its official website, ethereum.org, had been deployed on IPFS, allowing users to browse the etheretherum.eth website through ENS. Such news dynamics also illustrate the composability of different protocols in Web 3.0.

Internet Computer: A public chain born for Web 3.0 applications. Now let's take a look at another public chain, Internet Computer. If decentralized storage focuses on data storage, it can be seen as a "side branch" compared to "general computing services." Internet Computer continues to advance on the main battlefield opened up by Ethereum.

Now we know that Ethereum achieved Turing-complete smart contracts based on Bitcoin, theoretically supporting any form of decentralized application, but theory and practice are different. In fact, Ethereum can only support a limited number of decentralized applications. Why does this happen?

The main reason is the famous CAP theorem. In other words, in a distributed system, among the three characteristics of consistency, availability, and partition tolerance, only two can exist at most. Simply put, consistency (C in CAP) refers to whether all nodes' data remains consistent. Based on the different degrees of data consistency, we can classify it into strong consistency, weak consistency, and eventual consistency. Here, strong consistency means that after all nodes complete write operations, the data is completely consistent; weak consistency can tolerate partial or complete inconsistent data after write operations; and eventual consistency only requires that the data is consistent after a period of time.

Next is availability (A in CAP), which refers to the system being able to respond to requests sent to non-crashed nodes every time. This means that nodes are in a responsive state and can complete the computational tasks that need to be processed in a timely manner. As for partition tolerance (P in CAP), it refers to the ability of nodes to transmit information with possible errors or delays without affecting the overall operation of the system.

For blockchains, partition tolerance is a prerequisite. Therefore, different blockchains can only make trade-offs between consistency and availability. For example, Bitcoin and Ethereum are representatives that pursue strong consistency at the cost of sacrificing some availability.

For instance, Bitcoin. From a data structure perspective, every node and every transaction verification in Bitcoin requires traversal operations. This means that before initiating a transfer, we first need to verify whether the person has enough Bitcoin to transfer. So how do we determine whether this person has enough Bitcoin? Bitcoin's setting requires checking whether the person sending the transfer has enough Bitcoin, and following this method, every transfer must trace back to which block this Bitcoin was mined from and how many transfers it underwent before it reached our name. Only after verifying this can we confirm whether the transfer is valid. Therefore, this query method is very inefficient.

From a data storage perspective, every node in Bitcoin needs to download the complete data package, so as transactions increase, the storage space of nodes becomes another bottleneck for blockchain processing efficiency.

From a computational perspective, all transactions in Bitcoin can only be processed through serial computation without parallel computation, meaning all nodes need to perform repeated calculations for all tasks, thus significantly affecting computational efficiency.

Now let's look at Ethereum. First, although it has set up "accounts," from a data query perspective, it no longer requires "traversal" operations. However, Ethereum's block storage space is only 1MB, and the limitation of block size is still very evident. Moreover, Ethereum also only supports serial computation and does not support parallel computation. Therefore, Ethereum still belongs to a public chain with strong consistency and low availability. Strong consistency is very important for financial-related applications, but it is insufficient for other types of applications. Currently, applications based on Ethereum often adopt a "hybrid structure," where asset-related operations are executed on-chain, while non-asset-related businesses are executed off-chain. The advantage of this approach is economic in terms of cost, but the drawback is that decentralized applications still rely on centralized nodes to some extent, and issues such as "single points of failure" and "data leaks" remain unresolved.

Now we are going to discuss Internet Computer (IC), which aims to build an "internet computer" to provide a full-stack development and operation system for decentralized applications, extending decentralized applications to broader scenarios.

IC consists of a set of cryptographic protocols that connect independently operating nodes to a blockchain network. At the same time, it overcomes the limitations of traditional blockchains regarding the speed, storage costs, and computation of smart contracts, allowing smart contracts to run at speeds close to centralized networks.

Additionally, unlike Ethereum's ecosystem, which often leans towards financial attributes, IC establishes a "full-stack" decentralized application, where everything from the front end to computation to the back end can be realized through different containers based on IC, achieving a "no single point of failure" operational state. Moreover, based on IC, we can not only realize various applications that have already appeared on Ethereum but also build a complete node for Bitcoin and Ethereum, enabling atomic-level interoperability between IC, Bitcoin, and Ethereum.

However, although IC's technical architecture is more suitable for decentralized applications, it is still in the early stages of ecological development, and various infrastructures need to be improved. For example, the atomicity of transfers has not yet formed a unified technical standard. Therefore, from this perspective, it also lacks sufficient security for financial-related applications.

Ethereum remains at the forefront of the competition. However, if other public chains' innovations aim to surpass Ethereum, Ethereum's self-breakthrough has not stopped. As early as 2018, Ethereum proposed a clear "upgrade roadmap," which involves transitioning from the PoW consensus mechanism to the PoS consensus mechanism and comprehensively expanding through sharding technology. The main idea of this sharding technology is to support Ethereum in achieving parallel computation to enhance computational efficiency.

Beyond Ethereum 2.0's roadmap, Layer-2 solutions have also emerged. The idea of Layer-2 is to move some computational work off-chain and achieve shared security between on-chain and off-chain through some mechanism. Currently, technologies such as ZK Rollup (ZKR) and Optimistic Rollup (OP) have emerged, but they have not yet entered a large-scale application state. You should also be cautious of risks when using them, but from another perspective, this could also be an investment opportunity.

In summary, the evolution of technology has no endpoint, but the evolution of public chain technology must revolve around the core goal of providing general computing services. In this lesson, we learned that in Web 3.0, to avoid data monopolies, a general facility is needed to provide computing services, and this general facility is the public chain. We adopted a general framework to describe the main problems that the public chain track needs to solve, as well as the solutions provided by various public chains such as Bitcoin, Ethereum, and IC. However, we must also be clear that they each have problems that still need to be solved.

In addition, I also introduced you to the latest developments in this track, namely Layer-2 and sharding. I hope that through today's lesson, you can gain a deeper understanding of the public chain track and also propose your own ideas for the continuous improvement of the public chain track, at least not to remain in the cognitive state of "the faster the public chain, the better."

Identity refers to your background and social status, which is the specific carrier you use to communicate or interact with others. In Web 3.0, identity refers to the specific carrier you use as a user to participate in various activities, which is your account. Incentives, whether in the real world or Web 3.0, refer to guiding organizational or individual behavior through institutional design. From the perspective of the Web 3.0 ecosystem, various decentralized applications differ greatly in function, but every application relies on the role of accounts and economic incentive mechanisms.

Next, let's take a look at how identity and incentives play a role in the world of Web 3.0.

DID: Universal Independent Identity!

First, let's talk about identity. Users in decentralized networks need a brand new, "independent" identity. An "independent" identity is one that can identify oneself without relying on any third-party institution. This identity is different from the "identity card" in the real world because an identity card is an introduction letter issued by a government agency, valid only within a country. This identity is also different from accounts registered on various internet platforms or social media, such as "Big V" accounts or Twitter accounts in daily life. Although a popular "Big V" on social media has significant influence and some can earn a lot of money, this "identity," like an identity card, also relies on the "recognition" of the internet platform to continue existing. Once restricted by the platform, no matter how influential the identity is, it may "disappear."

Web 3.0 users need a universal personal identity that is independent of the platform they use, which is the decentralized identifier, or DIDs (Decentralized Identifiers). So what exactly are DIDs? According to the World Wide Web Consortium (W3C), DIDs are a new type of identifier for verifiable decentralized digital identities, designed to enable the issuer of the DID to prove control over a personal identity independently of any institution, including registries or certificate authorities.

On July 19, 2022, the W3C Distributed Identifiers Working Group's specification "Decentralized Identifiers (DIDs) v1.0" officially became a W3C recommendation standard, granting DIDs a foundational status in international technical standards equivalent to HTTP and CSS. This also indicates that DIDs will play a more direct role in promoting the development of Web 3.0.

From the background information on DIDs, we can now take a closer look at the specific structure and functional applications of DIDs. This part is directly related to the issuance and use of DIDs. If you also hope to have your own DID and navigate the world of Web 3.0, you must pay special attention to the following content.

• First, from a structural perspective, DIDs mainly consist of a foundational layer and an application layer. The foundational layer includes the DID identifier and DID document. The DID identifier is a standard expression form for identifying DIDs, including the identification method and identification content. As of the first half of 2022, approximately 100 identification methods have been registered, with institutions such as Microsoft, IBM, and Tencent registering relevant identification methods, and public chains like Ethereum also being one of the identification methods. The DID document is a description document written for specific DIDs.

The foundational layer of DIDs mainly constructs the DIDs themselves, but it does not specify personal information. Therefore, we need to fill in specific content for DIDs through the application layer. The application layer of DIDs mainly consists of DID resolvers and Verifiable Credentials (VCs).

Through professional verification institutions, such as public chains and dedicated apps, the encrypted information of the issuing institution is verified, and explanations of personal identity are provided. In fact, from a technical principle perspective, VCs are the application of asymmetric encryption technology in file management systems. Asymmetric encryption algorithms involve knowledge of information security and cryptographic principles, which we will not elaborate on in this course. If you need, you can refer to this link for further understanding.

From the above content, it can be seen that DIDs are a comprehensive system that links the real world and the virtual world through technical means, and it also requires the collaboration of different participants to achieve the system's goals.

The ecological architecture of DIDs. Regarding this system, we can refer to the summary of the DIDs ecological architecture by the internationally renowned crypto fund Amber Group. They divide the DIDs ecosystem into four levels: the standard layer, infrastructure layer, integration layer, and application layer.

The standard layer is at the most basic position of the DIDs ecosystem. In the standard layer, international organizations such as W3C and DIF (Decentralized Identity Foundation) serve as the global technical standard setters and promoters, responsible for formulating standards related to DIDs and promoting the integration and fusion of DIDs with other related standards, while also providing a basic framework for the research and development of various technologies. Starting from the standard layer, the second layer is the infrastructure layer, which includes various institutions and projects that provide services for DID identification and verification, such as Ethereum, Hyperledger, and Ontology, which focuses on DID integration, as well as ENS, which provides domain name services based on blockchain. The issuance, verification, and data storage functions of VCs are mainly realized through the infrastructure layer. Here, we will focus on ENS. ENS is the domain name service system of the Ethereum ecosystem, which can be compared to the DNS of Web 2.0.

It can integrate with decentralized storage IPFS, and we can also use ENS to store files in the IPFS system, thus building a layered decentralized network. Compared to DNS domain names, the biggest feature of ENS is that users own their domain names, and ENS has no authority to revoke any domain names. Additionally, although ENS only provides domain name services, its profitability is quite considerable. ENS charges annual membership fees based on different levels of domain names, and within just over a year of going live, it has already achieved over $50 million in revenue, with a team of only a dozen people.

So you see, Web 3.0 is still full of many "bottom-up" entrepreneurial opportunities. The third layer is the integration layer, which mainly realizes functions such as off-chain identity verification, on-chain identity aggregation, and on-chain behavior proof through various technical means, and then integrates off-chain and on-chain data into DID identifiers and identification documents.

For example, BrightID verifies identity through personal photos and videos, achieving the goal of "one person, one account" to help various decentralized applications prevent "Sybil attacks." However, it should be noted that off-chain identity verification does not strongly bind real people to on-chain accounts but only unifies "on-chain accounts" based on personal biometric information to prevent one person from opening multiple accounts to initiate "Sybil attacks." However, we also need to know that based on on-chain accounts, there is no direct correspondence to specific individuals in the real world. For instance, Spruce (a heavyweight project in the DID identity track) helps users directly use Ethereum accounts to register and log in to Web 2.0 applications. By sharing accounts between Web 2.0 and Web 3.0 applications, we can merge traffic from Web 2.0 social media with Web 3.0 traffic. In this way, those "Big Vs" on Twitter can expect to obtain lower loan interest rates on DeFi platforms. Additionally, Spruce has also set up a dedicated SpruceID, which can not only realize functions such as signing, verifying, and sharing messages but can also be applied in cross-product and cross-chain scenarios.

The fourth layer is the application layer, which mainly refers to various applications realized based on DIDs, such as credit scoring and lending, social networking, access control, DAOs, and donations.

Let's look at a few examples. For instance, based on Guild, access conditions can be set in Discord and Telegram communities, such as requiring ownership of a certain NFT to join a specific Discord channel. Another example is ARCx, which can conduct credit ratings based on on-chain data, such as accounts that have borrowed from Compound, Aave, or MakerDAO for a long time without being liquidated being regarded as "creditworthy." Accounts that receive good evaluations can obtain loans at more favorable "collateral rates."

Currently, the development of DIDs has gained widespread attention from various sectors of society, and among many large tech companies, Microsoft stands out for its emphasis on DIDs. As early as 2018, Microsoft announced that DIDs would be the entry point for the company's blockchain business. On May 13, 2019, Microsoft released the Identity Overlay Network, or ION test version, allowing anyone to create their own DID through ION. Furthermore, to strengthen technical coordination, Microsoft joined DIF and collaborated with institutions such as Consensys and Transmute, which are also members of DIF, to develop a protocol called sidetree that supports the large-scale creation of DIDs. ION is built on sidetree.

So why is Microsoft so enthusiastic about DIDs? In fact, in its published book "Decentralized Identity," Microsoft candidly stated that its primary goal in developing DIDs is to apply them on Microsoft's cloud computing platform, making it the unified identity identifier for all cloud computing users. In this way, Microsoft can use DIDs to provide users with data authorization functions.

Token System: A More Refined Incentive Tool. Now, after discussing identity, let's look at incentives. First, we need to know that tokens are the main tools for exerting incentives in decentralized networks. So what are tokens? Tokens are rights certificates that exist in digital form. From a morphological perspective, tokens are similar to passwords; they both signify a type of right in a specific scenario, but passwords are used in centralized scenarios, while tokens exist in decentralized scenarios.

From a property perspective, tokens are rights certificates that can represent any digitizable rights. For example, equity can exist in the form of tokens, but not all tokens represent equity; tokens can also represent debt rights, voting rights, usage rights, and so on. Let me give you a simple example. In the previous public chain course, we introduced a type of project called decentralized storage, such as Filecoin. The main goal of this type of project is to establish a user-shared storage market, so the token FIL in Filecoin represents the right to use a certain amount of storage space. Anyone holding FIL can use other people's storage space to save their files. In the case of Filecoin, the token FIL only represents usage rights and has no relation to equity, dividend rights, or bonds. Therefore, as a rights certificate, the nature of the rights represented by tokens is highly dependent on the scenario.

To understand the essence of tokens, we need to start from two properties.

• First, tokens are formed based on specific blockchain ledgers and smart contracts, and the laws of cryptography are the technical foundation that allows tokens to serve as rights certificates. Secondly, programmability is a prominent feature of tokens. Programmability allows tokens to simulate various digital scenarios through their combination with smart contracts and can represent various complex rights. Based on the technical properties of tokens, they possess the basic functions of confirming, pricing, and trading digital rights. Because tokens are essentially rights certificates, the quantity of tokens represents the quantity of rights, and the demand for rights manifests as the demand for tokens. This is the supply and demand balance of tokens, and the balance of token supply and demand forms the price of tokens.

Based on the technical and economic properties of tokens, tokens, when serving as digital rights certificates, will also evolve into a form of digital asset. This is an important characteristic of blockchain among a series of digital technologies. Blockchain can create a sense of scarcity for data, allowing data to become an asset. In the real world, tokens as an asset have been widely accepted by governments and laws. The asset properties of tokens stem from their natural attributes, which are not subject to the will of any person or institution. However, apart from small economies like El Salvador (the first country to make Bitcoin and cryptocurrencies legal tender), tokens cannot yet be considered currency. Although Bitcoin was launched with the goal of establishing a "peer-to-peer electronic cash payment system," currency still belongs to the realm of social governance. Before gaining recognition from the monetary authorities of various countries, tokens are unlikely to become currency.

Of course, every coin has two sides. Tokens have significant advantages as digital rights certificates, and they can also exist as assets independent of the rights behind them. However, tokens also face significant risks in both technical and economic fields.

Moreover, the extreme volatility of token market prices undoubtedly poses a "negative impact" on the use of tokens. The fact that Bitcoin is not accepted by the monetary authorities of various countries is a prime example.

Token Economy. With tokens, there will be a token economy. The main characteristic of the token economy is the coordination of creation and consumption based on tokens. Although tokens are not currency in essence, they play a role similar to currency in the token economy, especially serving as a means of circulation and storage.

In terms of technical aspects, code risks and contract risks will have a significant impact on the security of tokens.

• In economic terms, tokens can exist independently of the rights they represent, which leads to the inability to judge the existence of such rights through the tokens themselves, resulting in various "air coins" in the market. If you are not familiar with the background of the assets, it may cause significant confusion.

• The design of the token system is a very important task in the token economy. However, just like economists from different periods and schools have significant disagreements about whether monetary policy has long-term effects on macroeconomic development, there are also different opinions on the role of token design in the token economy. Some believe that the design of the token system is crucial for Web 3.0 projects because the design of the token system will directly affect the behavior patterns of various groups in the project community. Others believe that the token system only plays an auxiliary role in the development of Web 3.0 projects and will not have a decisive impact, as "monetary neutrality" suggests that in the long run, excessive issuance of currency will not stimulate "social effective demand."

Regarding the value of the token system, we can conduct further analysis through the specific content of the token system design. In fact, the main content of the token system design is to manage the supply and demand of tokens, which is concentrated in the "three distributions" of tokens.

The first distribution refers to the design of the token scheme. The design of the token scheme needs to specify the total amount of tokens, whether it is a single-token or multi-token system, distribution ratio, release rhythm, and other indicators. The total amount of tokens reflects the expected total economic scale, but since tokens generally have 18 decimal precision, the specific data of the total amount of tokens does not have much practical significance. Therefore, for the total amount of tokens, what is more important is whether the upper limit of the total amount is fixed. However, whether to set a fixed upper limit for the total amount of tokens mainly depends on the functional positioning of the project. For example, Bitcoin simulates the properties of gold, so it has set a fixed upper limit.

However, for most public chains, since we need to continuously incentivize miners, we often design an inflation rate to incentivize miners through annual issuance. For example, after ETH transitions to the PoS consensus mechanism, the annual inflation rate is about 5%. For non-public chain projects, it is often set to a fixed total amount.

• From the main content of the first distribution, we can see that it mainly involves the management of token supply. The second distribution refers to the distribution of tokens according to the project's business logic. The demand for the rights behind the tokens is the most critical factor determining the demand for tokens. If the project itself does not have any external value output, then there is no way to talk about the demand for rights, and thus the demand for tokens cannot be established. Therefore, business logic represents the most basic demand for tokens. If the token design is limited to the token level and cannot play a role in establishing token demand, we can conclude that the design of the token system is actually auxiliary to the token economy.

• As for the third distribution, it refers to the adjustment mechanism at the token level. For example, various staking mining mechanisms, destruction mechanisms, and dividend mechanisms related to token design. It is important to note that the adjustment mechanism at the token level is not directly related to business logic, so for most projects, the design at the token level is quite similar. Its main form generally sacrifices the short-term liquidity of community members to obtain more community token rewards. Therefore, the stimulating effect on token demand is relatively limited.

In fact, the design of the token system is a complex topic, and this content will be an important perspective throughout our analysis of various tracks. In the subsequent course content, we will continue to analyze it in conjunction with the characteristics of various tracks.

First, the most basic trust: how can you prove that the materials you provide are not forged? If it is only between internal enterprises or enterprise alliances, based on unified certification, there is no problem at all. But to prove oneself through an ID on the internet, it still requires authoritative departments to verify, but this no longer belongs to DID, so I understand that DID is just a pseudo proposition. Instead, we can look at the digital identity ID (EID) from the Public Security Bureau's Third Research Institute.

• The total amount of ETH is not fixed, similar to the total amount of currency being not fixed, and its value comes from consumption demand. ETH and other public chain tokens all have actual usage demands.

Some say NFTs represent the latest trend in crypto art, while others claim NFTs are a dark horse asset with unlimited appreciation potential. So, do NFTs belong to art or assets? What are the important characteristics of NFTs? Moreover, how do these important characteristics realize value in the world of Web 3.0?

NFT: The data rights confirmation system of the digital society. Essentially, NFTs are digital assets formed based on cryptographic technology standards, literally meaning non-fungible tokens.

• In the Ethereum ecosystem, any digital asset generated based on the ERC-721 and ERC-1155 standards is called an NFT. Compared to fungible tokens (also known as FT), such as BTC or ETH, although they all belong to virtual assets, NFTs have a significant characteristic: each NFT is indivisible, so each NFT has uniqueness. Based on NFTs, we can mark various materials in the virtual world, including images, text, videos, animations, or even a piece of data, and establish a corresponding relationship with a specific account. Once the relationship is established, the owner of the account's private key can transfer and trade the NFTs belonging to that account, granting or denying access to the data, thus gaining control over that NFT.

• However, it is important to note that the virtual world does not have the concept of property rights, as property rights are a recognition from third-party institutions. In the virtual world, control rights equal property rights. Gaining control rights over an NFT essentially completes the confirmation of the commodity. Through various technical details, the owner of the NFT can obtain income generated from transfers and authorizations. This is precisely why NFTs have become the basic system for data rights confirmation in the digital society.

Based on low-cost and permanent property rights, NFTs serve as the foundational system for data rights confirmation. The primary characteristics of NFTs are low cost and permanent property rights. Where does the low cost manifest? First, it is reflected in the production cost. With a simple understanding, you can independently complete the production of NFT works. This process has a specific term in the crypto community called "Mint." The Mint operation is very simple; you just need to complete the image design, open a decentralized wallet, set up the Mint website, and upload the work to complete the NFT "Mint." The works can be a painting, an image, a video, or even a phrase.

Different registration processes can be followed, such as copyright, trademarks, etc. For NFT Minting, all you need to do is interact with the blockchain, and the types of works supported by NFTs are numerous; any work saved in electronic form can be made into an NFT.

In addition to the advantage of low cost, another characteristic of NFTs is permanent property rights. However, at this point, you may also realize that in the process of creating NFTs, the absence of any institution or individual participation is crucial because only property obtained in this way can be considered permanent property rights.

• For example, you may have played "Honor of Kings," where you spent a lot of time and money to obtain an "Honor Crystal" in the game. However, if you want to show this crystal to others, you must enter the game to achieve your "show-off" purpose. It's not just that you lack the ability to take this crystal out of the game to show others; rather, once you leave the game, this "crystal" may not exist at all. The fate of this "crystal" is akin to the fate of the entire Web 2.0 world, where all assets and creations need to rely on others' "stages" to be presented. If the "stage" of others ceases operations, no matter whose performance it is, regardless of how splendid it is, it will simply disappear!

If you want to protect the data you create from being used by others, that is absolutely impossible because the data is stored on the servers of internet companies. Even if you want to access the data you created, the process and cost are very high, and the access rights to the data can only be determined by the internet companies.

• However, in the context of Web 3.0, this fate has been broken. Just like NFTs, as long as not all nodes exit the network simultaneously, your NFT will exist; as long as you hold the private key of the controlling account, the NFT belongs to you. Whether you want to trade or give it away, you do not need any institution's help or permission. This is the permanent property rights of NFTs, and this is the new paradigm of Web 3.0!

Of course, selling high-priced artworks can indeed generate a lot of traffic, but if you think NFTs are a wealth-generating machine for creating high-priced artworks, you are mistaken. In the real world, traditional copyright protection systems and the art market can provide a nutrient-rich soil for "high-priced" artworks, while the value of NFTs lies in providing rights confirmation, circulation, and value discovery functions for more forms, more fragmented, and even cheaper digital creations.

For NFTs, such problems do not exist because the production and sales costs of NFTs are very low, and this tool is right at everyone's fingertips. We do not need any professional institutions' help; anything can become an NFT anytime, anywhere. Therefore, a large number of low-priced artworks will emerge in the market, allowing artworks to transform from "luxury goods" that are "high above" to "consumer goods" that enter ordinary households. Thus, compared to traditional copyright protection and art circulation mechanisms, NFTs represent a more powerful system that is cost-effective and adaptable to almost all forms of digital creation. This "challenger" has virtually no use in the physical world, but it exhibits significant advantages in the digital world.

• It can be said that the significance of NFTs lies not only in providing a low-cost and efficient rights confirmation function for digital creations but also in playing a fundamental and systematic role in cultural discovery in the digital world. Here, I want to emphasize once again the function of NFTs in cultural discovery. No matter how much emphasis is placed on it, it is not excessive. Just like the promotion of papermaking and printing played a positive role in the European Renaissance, a low-cost rights confirmation system has played an important role in allowing cultural expression rights to transition from the small circles of social elites to the "general public." Once the "general public" gains the market-backed rights to cultural expression, it means that the entire society will undergo comprehensive changes in terms of cultural dissemination channels, forms, content, and value propositions, and these changes will inevitably accelerate the dissemination of humanistic thoughts and the transformation of social levels.

For example, in medieval Europe, only "court painters" or painters serving the nobility could live enviable lives through their painting skills, so the creations of painters must revolve around the lives of royalty or nobility.

If simple creations can become popular due to gaining significant psychological recognition, then memes can also become popular commercial elements. If you're interested, you can learn about mfer and see how this little rascal in everyone's heart has become part of popular culture.

OK, after understanding the two characteristics of NFTs: low cost and permanent property rights, let's move on to one of their main applications, PFP, to understand what the most classic original business model of NFTs looks like so far.

In 2017, the two founders of Larval Lab generated 10,000 pixel-style images through algorithms. These images are the same size but differ in skin color, facial features, accessories, or actions. The reason for using pixel style is partly due to the creators' preference for this style, and partly because the composition of pixel style is relatively simple, supporting algorithmic generation. However, after generating the images, they did not sell them but allowed anyone to claim them for free through an Ethereum wallet. At that time, users willing to claim for free certainly did not predict that these avatars could sell for such a good price five years later; they participated purely out of curiosity for various crypto products. Therefore, today, holders of CryptoPunk are labeled as OGs (experienced veterans) in the crypto community.

Entering 2021, the crypto market entered another prosperous cycle. Although CryptoPunk cannot be traded on multiple platforms like BTC and ETH, the emergence of specialized NFT trading platforms like Opensea created a certain liquidity for it. With the boost of market sentiment, the transaction prices of CryptoPunk reached new heights. On May 22, 2022, Sotheby's successfully auctioned CryptoPunk #7523 for $11.75 million, pushing its transaction price to a new high.

• For any asset, rapid price increases against the backdrop of a booming market are its best advertisement. However, anyone with a bit of knowledge about capital markets knows that any asset's price will rise and fall. The narrative of CryptoPunk began as a tribute to the pioneers of the crypto community, but the price risks brought by speculative psychology have also become an undeniable label on it. We can hypothesize that in the future, no matter who spends $20 million to purchase a CryptoPunk avatar, we will not doubt their love and appreciation for pixel-style artworks, but we also won't doubt their strong desire to sell this avatar at a higher price. Perhaps the pursuit of adventure and wealth is an inherent trait of the crypto community, and this can also be considered part of NFT cultural discovery.

Moreover, NFTs not only reflect market attention through price performance but also express collectors' subjective mindsets. If you spend $12 million at an auction to acquire a CryptoPunk, you certainly gain ownership of that work, and you can naturally change it to your avatar. But does that mean others cannot use it as their avatar? If someone does so, does it constitute an infringement of your private property?

These facts illustrate that even if you spend $12 million, you only bought a link, which is packed in a certain block of Ethereum, indicating that you once spent a sum of money to pay for your favorite "avatar." If someone else uses this image as their avatar, it indicates that they also like this avatar, and it also shows that they are "showing off someone else's equipment." However, regardless of whether you spent $12 million or not, anyone using this image as their avatar is telling a story about their experiences and feelings. This is a form of "identity" expression. The longer people spend in virtual spaces, the higher the value of digital identity becomes, even surpassing the value of LV and Rolex in real life. Just as wearing a Rolex in real life may earn you trust from certain people, in the virtual world, using an avatar frequently exposed by various media can also provide certain conveniences. For example, someone who changes their Twitter avatar to CryptoPunk may receive hundreds of friend requests on the same day, which can also be seen as a proof of CryptoPunk's transition from mere personal self-expression to cultural discovery.

• It can be said that CryptoPunk pioneered the direction of PFP, and its price fully reflects the effect of head projects. However, the rapid price increase has also brought obvious side effects. High prices, in fact, also reject the expansion of the user base. Therefore, after CryptoPunk, a large number of PFP projects emerged, and from a thematic perspective, they became more diverse. For example, the Bored Ape Yacht Club (BAYC) themed around a group of super-wealthy individuals lounging in a country club; Cool Cats themed around cats; Pudgy Penguins themed around penguins; and World Of Women themed around women, etc.

• Mainly focusing on NFTs as the foundational system for data rights confirmation, four main characteristics have been summarized: low cost, permanent property rights, transparent expression, and programmability. Among these, the characteristics of low cost and permanent property rights enable NFTs to possess cultural discovery and value discovery functions that are completely different from existing copyright systems, and they may significantly impact popular culture and social psychology. However, you should also be aware that in the current market environment, PFPs generated based on these attributes face significant price risks, which you need to pay close attention to.

Next, we will continue to explore the other two characteristics of NFT data rights confirmation: "transparent expression" and "programmability." These two characteristics are completely absent in traditional property rights systems, and they share a commonality: they endow NFTs with richer commercial value. Next, I will specifically show you how they endow NFTs with commercial value.

Transparent Expression: The Commercial Value of NFTs in Digital Marketing. Since NFTs are generated based on decentralized networks, all account and data information is transparent and visible to the outside world. Therefore, NFTs can play an important role in digital marketing. We know that the essence of marketing is consumer demand management. Whether in the physical world or the virtual world, the first step in marketing is to find your target customers. Traditional methods generally involve high costs, such as survey research and channel research, and the accuracy of research results cannot be guaranteed. The high marketing costs ultimately need to be borne by users. However, if the basic characteristics of users can be expressed through the NFTs they hold, it becomes a very convenient channel for discovering user needs.

Moreover, you should also know that if users become tired of a certain NFT product, they will have long removed those labels from their accounts. Therefore, from this perspective, the accuracy of user data obtained through NFTs will significantly improve, which is undoubtedly very important for conducting personalized marketing based on user profiles. Additionally, the data displayed by NFTs is also multidimensional and three-dimensional. For example, an account can hold multiple NFTs, which actually reflects a comprehensive view of the account holder from multiple aspects and perspectives: for users, it is their self-expression; for manufacturers, it is the basic material for building customer profiles and can be used to explore deeper user needs.

• For instance, Li Ning, a professional sneaker manufacturer, may have a large database of shoe sizes for Chinese citizens and specific data on the wear of different parts of shoes for certain sports. However, they are likely to lack understanding of user characteristics in areas such as environmental protection, fitness, and whether they enjoy challenges, seek excitement, or are adventurous. These factors significantly influence the exploration of user needs, which is the advantage of NFTs in "transparent expression."

At that stage, once the characteristic data of a large number of users becomes transparent and visible, it means that the internet companies' ability to monopolize channels and data will become meaningless. On the contrary, the ability to analyze public data and shape brand connotations will become the core competitiveness! However, I guess when you see this, you may have some questions: If at that time, our personal information data is almost completely transparent, does that mean our privacy is completely unprotected? In fact, it does not. Because the subject of information expression based on NFTs is the account, not the real person. Moreover, from the current situation, the virtual account and the real person are "weakly bound," and on-chain accounts do not correspond one-to-one with individuals in the real world. In other words, individuals have complete control over what information they want others to know; if you choose to deny access, others cannot know any of your data.

From this perspective, the data expressed transparently through NFTs is essentially a form of active expression. It is information that users have a clear subjective desire to be searchable by the outside world. This actively expressed information is evidently more valuable for manufacturers. For example, you may also actively set your avatar on some social platforms or disclose your past activity experiences and work resumes in your profile. These are all our active choices. It can even be said that users subjectively hope to find "like-minded" friends or solutions that meet their needs through such behaviors.

• Therefore, analyzing these data is still of great value for our digital marketing efforts. It is precisely because of the commercial value of NFTs in digital marketing that major brands are now laying out NFTs. Some brands choose to create co-branded products with NFT projects, such as Adidas; some brands choose to acquire professional virtual goods manufacturers, such as Nike; and others choose to build their own metaverse and create NFTs, such as LV. However, more manufacturers choose to directly issue NFTs or digital collectibles. This way, they can achieve certain sales through the mutual exchange of virtual and physical products, while also gradually tagging their users and using similar methods to acquire new users. If you have some experience in data mining and analysis, you can try to create some tools in this field, or if you are interested in branding and marketing, you can try to design some activity plans through this method. In short, NFTs have become a compulsory course in digital marketing, and this is a brand new field. The earlier you take a step in this direction, the more significant advantages you will have over others for a considerable time in the future. So why not give it a try?

• Programmability: Endowing NFTs with Infinite Possibilities. As a foundational system for data rights confirmation, NFTs also possess programmability. If low cost and permanent property rights endow NFTs with cultural discovery functions, programmability reflects the enormous commercial value of NFTs.

The rights to copyright income, opportunities to participate in investment plans, and so on. It can be said that programmability creates infinite possibilities for the commercial value of NFTs. Let's look at a few simple examples. In the traditional copyright market, copyright income can only be realized through one-time transfers or authorizing others to use it. If the original author transfers the copyright to a professional publisher, regardless of how much profit the publisher earns from this work, the original author has no relationship with it. This is also a major reason why many authors of world-famous works remain impoverished throughout their lives despite creating great works.

So why can't the traditional copyright market establish a multi-level sharing mechanism for original authors? The reason is that the cost of supervision and implementation is too high, and there is no necessary technical support. However, with the emergence of NFTs, original authors no longer need to worry about this situation. Because the transaction records of NFTs are completely stored on the blockchain ledger, and various rules can be set through smart contracts. Of course, a mechanism can also be established to ensure that "no matter how many times the work is transferred, a certain percentage of royalties are paid to the original author." Moreover, this mechanism can be executed automatically. Once a transaction occurs, the original author and publisher will clearly know how much income they should receive, and it can automatically transfer to their accounts.

• For PFPs, the avatars have little independent value once they leave the account. However, for artworks, they are a complete cultural expression on a cultural level. For example, artworks need a name that reflects their cultural appeal, while avatars can simply use digital encoding. HashMask also recognized this point and creatively designed a process where collectors name the artwork. How do collectors name it? HashMask's approach is to launch a governance token, rewarding collectors for purchasing artworks from the primary market with governance tokens. Collectors earn a certain amount of tokens for each day they hold the artwork. However, to name or rename the artwork, collectors need to consume governance tokens, and each artwork has only two opportunities for renaming throughout its lifetime. Through this method, collectors can rename the artwork according to their understanding of it, thus participating in the artistic creation. NFTs find new ways to realize the value of digital artworks through this approach.

Moreover, NFTs can also combine with gaming, social networking, and finance to generate new business models. For example, NFTs allow gaming assets to exist independently of the game, potentially establishing a more open virtual ecosystem where land, resources, characters, and outputs can be confirmed, priced, and traded based on NFT technology.

The active community, celebrity effects, and directly monetizable commercial value have kept the secondary market trading of BAYC active, and the continuously rising secondary market prices have also transformed into a wealth effect for early holders. This has led BAYC to reach its peak market value of $4.23 billion on April 23, 2022, second only to CryptoPunk, ranking as the second-largest NFT market by market value.

Acquisition financing, issuing governance tokens, and selling metaverse land.

• Now, at this point, you might think that a story that started with a $40,000 investment and created a market value of $4 billion in a year could end perfectly. There are not many teams that can achieve such results, but BAYC has not stopped here; they have set a grand goal of becoming the "Disney of Web 3.0."

BAYC continues to adhere to its usual approach of continuously empowering community members. Although many teams recognize this model, it is evident that only BAYC executes it more thoroughly and goes further. In August 2021, BAYC distributed a bottle of "serum" to each community member. By mixing this "serum" with the "bored ape," each community member could obtain a "mutant ape" (MAYC) that they "created." MAYC is currently the sixth-ranked PFP project by market value. In December 2021, BAYC collaborated with Adidas to launch co-branded products, positioning itself as a guide for the global sports brand Adidas to enter the NFT world. Then, in the second half of 2021, while Yuga Labs continued to advance in community operations and expansion, its strategic thinking became increasingly clear. Entering 2022, Yuga Labs demonstrated to the world how it continuously moves towards the goal of building "Disney of Web 3.0" through a series of operations.

• On March 11, 2022, Yuga Labs acquired CryptoPunks and Meebits. With BAYC and MAYC, Yuga Labs has brought all the NFT projects ranked first, second, fifth, and sixth by market value under its umbrella. Then, on March 17, Yuga Labs issued ApeCoin and proposed in its planning that ApeCoin would serve as the governance token of ApeCoin DAO. This governance token will act as a medium of exchange to promote trading activities within its ecosystem and will serve as a participation certificate for accessing certain scarce resources or participating in community-exclusive activities. At the same time, this ApeCoin will also be a contribution certificate for third-party developers to create and develop within the APE ecosystem. In other words, ApeCoin will become the underlying support that connects all Yuga Labs projects, such as BAYC, MAYC, and other collaborative projects.

(An open public blockchain platform with smart contract functionality) and other projects. It can be seen that the participation of these institutions undoubtedly gathers a group of the most experienced, active, and exploratory partners for Yuga Labs. Recently, on April 30, Yuga Labs released a preview of the metaverse game Otherside and simultaneously launched land sales. Otherside is co-created by Yuga Labs and Animoca Brands, characterized by the ability to build a metaverse that gathers various NFT IPs while providing users with opportunities for UGC creation. The revenue from this land sale was approximately $320 million, and this operation also made Otherdeed the fourth-ranked project in the NFT market by market value.

Thus, you can see that from acquisitions to fundraising, from issuing governance tokens to selling metaverse land, in just two months, Yuga Labs seamlessly transformed every significant plan written by industry institutions into reality ahead of schedule. From the perspective of resource aggregation, Yuga Labs has achieved a dream start, but what lies ahead for Yuga Labs is still an uncharted wilderness. From a product perspective, successful fundraising does not necessarily mean product success, and Yuga Labs has achieved the integration of market resources solely by seizing market timing.

• The three "thresholds" for landing a business model. Of course, if they can realize the landing of the business model, it will be considered a true formation of a business closed loop. Currently, at least three major "thresholds" stand in front of Yuga Labs before the landing of the business model. First, Yuga Labs lacks experience in game operations. The success or failure of the Otherside project is crucially dependent on operations, and Otherside is actually key to Yuga Labs' goal of building the Web 3.0 version of Disney. Second, the user scale is insufficient. Although a series of IPs represented by BAYC have high market values and prominent brand advantages, the number of users holding various IP assets under Yuga Labs is only about 100,000+, which is still a significant gap compared to the user data of large games, making the goal of building a metaverse even more distant.

Moreover, the OtherDeed land auction also airdropped to early users, and this "the rich get richer" operation increasingly resembles the acquired CryptoPunk. Therefore, how to balance protecting the interests of early community members and expanding the community scale is another issue they need to face directly.

In summary, Yuga Labs cannot yet be considered a complete success story; it can only be regarded as a perfect start. However, just this start has opened up new ideas for the development of the industry, and we look forward to more exciting presentations from them in the future.

Axie Infinity: The Pioneer of Play to Earn! Axie Infinity is a turn-based strategy game that mainly offers two gameplay modes: battling and breeding. In terms of the battle mechanism, Axie has set up both PvE (player vs. environment) and PvP (player vs. player) modes, with winners in both types of battles receiving token rewards.

In terms of pet breeding, Axie allows for mutations of six body parts controlled by three genes. Players can not only profit by selling pets but also have a chance to generate extremely rare super pets, making this "lottery" mechanism design increase the game's playability and foster a group of loyal professional players.

Among them, AXS is a governance token, similar to a company's equity. The breeding process in the game requires consuming AXS, but players can earn AXS token rewards by ranking high in monthly player ranking matches. SLP is a utility token, similar to a ticket, which players can earn as a reward through PvP and PvE battles. However, players must first own three Axie pets to qualify for battles, and breeding pets requires consuming SLP. Each account has a limit on the amount of SLP it can earn daily, and newly acquired SLP has a 14-day lock-up period.

Additionally, Axie's "play-to-earn" model has given rise to a new business form known as gaming guilds. Gaming guilds differ from traditional gaming guilds primarily in that they provide leasing services based on in-game NFT assets (while traditional gaming guilds only focus on team formation and strategy sharing). For example, entering the Axie game requires owning three Axie pets, and gaming guilds can lend pets to players for gold farming and take a share of the profits. Thus, with gaming guilds, players can participate in the game at "zero cost," only needing to invest their time and effort to earn income.

STEPN: The Flash-in-the-Pan X to Earn. So, if playing games can earn money, can running do the same? STEPN's answer is, of course, it can. Launched in February 2022, STEPN is a game that focuses on "earning money by running." Although STEPN has moved the scene of users earning money to offline fitness, its economic model is very similar to Axie's: on one hand, users need to purchase "virtual running shoes" first, and after synchronizing running data through GPS and the "virtual running shoes," they can start "earning money by running." On the other hand, the main game mechanism of STEPN is also designed around the rewards and consumption of game tokens.

In terms of game token rewards, holding virtual running shoes is a prerequisite for earning token rewards, and the type and number of shoes directly affect the output of running shoes. Users holding one "shoe" can earn 2 energy points daily, and they can only run within those 2 energy points. Although these 2 energy points can only be used on the same day and expire if not used, there is no limit on the number of shoes a user can hold. Holding multiple shoes can even allow energy points to exceed 100.

In terms of game token consumption, STEPN divides all "virtual running shoes" into four major categories, each of which is further divided into 30 levels. Running consumes one energy point, but the output increases gradually from low to high according to the level. This creates a consumption scenario for game tokens in the process of earning tokens. Since everyone wants to earn a bit more, the basic logic is as follows.

In addition to upgrading running shoes, "Minting shoes" is also a consumption scenario for tokens. "Minting shoes" simply means "old shoes give birth to new shoes." Although this may sound a bit contrary to life experience, it actually meets the psychological needs of gamers, so users find it easy to accept this rule. Compared to Axie, STEPN's user base is actually broader, with a higher proportion of pure players. Many people initially came to earn money, but after running for a while, they gradually developed the habit of exercising daily and thus became long-term users of STEPN.

Therefore, in the first half of 2022, STEPN became a phenomenon-level product upon its launch, with daily active users peaking at over ten thousand. Unfortunately, during the period of increasing STEPN users, the virtual asset market experienced a significant downturn, with Bitcoin prices dropping by 60%. Many users who bought shoes at high prices found that the rewards tokens earned from running were worth very little, turning "earning money by running" into "paying to run." The game traffic saw a significant drop within less than half a year of its launch, and users became passive holders.

From the above two cases, it can be seen that whether it is card battles or running for fitness, there is a common thread running through the entire gameplay: players need to invest a portion of their capital first. So, from the perspective of capital flow, can players really earn money by playing games or running? If so, is this earning effect universal, or does it require certain conditions to be met?

Next, let's step out of the specific gameplay of the games and explore these issues from an economic perspective. Why can Play to Earn exist? Before analyzing the sources of income for Play to Earn, let's first review how traditional game manufacturers make money. Currently, paid games mainly fall into two categories: one is to pay upfront to buy the game, and the other is to play for free but pay for better experiences and more content, known as Free to Play. The "pay first, then experience" model has become history, while Free to Play is the universal model adopted by most games today. Game manufacturers generate income through various paid scenarios under the free game model, such as paying to unlock levels/maps, purchasing skins, etc., to enhance character abilities, reduce waiting times, or remove ads through payments.

Thus, we can see that in the income of these games, only advertising revenue comes from outside the game, while other revenues rely on converting new players or existing players into paying players. This means that manufacturers need to focus their efforts on attracting new players, improving player retention and activity, and enhancing payment conversion rates.

So, what impact does the emergence of the play-to-earn model have on the "free model" of games? Let's start exploring from the perspective of how NFTs empower game assets. First, NFTs can endow game assets with value through rights confirmation. Based on NFT confirmation, players can truly own these game assets. This "ownership" is reflected not only in control rights but also in creative rights. As a universal data rights confirmation system, players can showcase the time they spend and the skills they gain in the game through NFT assets, and for the first time, they gain "creative rights" over game assets, along with associated transfer and income rights. This is a key point we have been emphasizing in previous courses.

Thirdly, NFT assets have external value. This means that the NFT assets and game tokens obtained by players can circulate on-chain, rather than being limited to circulation only within the game, thus generating liquidity premiums and social value. Especially rare NFT assets represent a display of wealth, skills, and even social relationships. Additionally, the openness of on-chain data allows project parties to easily identify accounts holding rare attribute assets and conduct targeted marketing.

Therefore, it can be seen that the second and third attributes of NFT assets directly increase the attractiveness of game assets to players, while the first attribute fundamentally changes the structure of supply and demand for game assets. The transformation of the game business model occurs naturally. Based on these characteristics, the logic of "users invest time and data, so they should also receive returns" becomes the theoretical foundation for the establishment of P2E (Play To Earn).

• The Fate of Play to Earn: "Earning Effect" or "Death Spiral"? Now, from a profitability perspective, we can analyze the basic behavioral patterns of players in the P2E model, which