This article was originally written in Chinese and has been translated from: https://mp.weixin.qq.com/s/LRClErc9ojzNPGU7m3J7VQ

How can entrepreneurs identify opportunities and thrive in the rapidly changing blockchain industry and regulations? We asked the founder and CEO of LoMoStar in this interview. In his view, digital currency is just the tip of the iceberg of blockchain applications. The greatest value of blockchain lies in its application to all walks of life, and there are huge opportunities for investment and entrepreneurship in the future. The follow comes from his past five years of practical experience in this field, which is well worth reading.

Xiong Lijian | LoMoStar & XStar.io CEO. Entered the blockchain industry in 2013, is one of the most experienced entrepreneurs within this space, is an angel investor and also an highly pragmatic businessman

Progressive Decentralisation

Decentralisation is a progressive game of human nature. The development of blockchain is no longer decentralised within the framework of traditional understanding of the idea when it was first conceived. Instead, it reverts back to the centralization or becomes a distributed large centralized system, deviating from the original so-called “one -CPU-one-vote” vision where each participant has ​​bookkeeping rights. Why is this happening? According to the original theory of decentralisation, everyone should have the rights of bookkeeping and mining as long as they participate in the mining process. However, in reality, today when you mine, you merely connect yourself into a mining pool instead. According to the current statistics of mining pools distribution, Bitcoin is only a competition between a dozen mining pools. The largest few mining pools can account for over 80% of mining power. In another words, mining has turned into something reserved for the rich and powerful only. For example with Ethereum, currently over 50% of the asset is controlled by a certain organisation while the code-base and rights for updates are controlled by the Ethereum Foundation which leads to a highly centralised environment. On the other hand, the nodes of some public chains with dPOS consensus are all managed and under control by their respective foundation.

Taking a look at the various ICO token projects, whenever it is done on top of a public chain, over 90% of them are completely centralised. Any projects done outside of public chains are all centralised. In the view of a blockchain idealist, the utopian future of complete decentralisation does not currently exists within the blockchain world. Therefore, do not be completely dazzled and believe the grandiose claims of decentralisation. At the moment, it is only a vision and a goal. The progress of decentralisation should be a progressive process. That is to say, it should be promoted through a centralised management method, then gradually transition to a “distributed multi-centered” model and eventually move to a true form of decentralisation. In other words, first start centralized and then slowly transition to a democratic management model. Because at the beginning, the highest efficiency of commercial execution can be achieved in centralized operations. For example, Bitcoin caused debates among the various factions in the early stage because of various conflicts of interest. As a result, the block size debate lasted for more than three years, until it finally resulted in a fork.

Blockchain operates the same as in other areas of entrepreneurship. Nevertheless, the initial vision and the final state of representation are different. No one can completely think of the things that are going to come for the next five years and ten years at, let alone a longer roadmap of decades or a hundred years. For the blockchain entrepreneurial teams, it is necessary to make trade-offs in the fast-changing business environment. It is necessary to pursue the pursuit of efficiency, including the efficiency of system operations and the evolution of business models. Therefore, for the teams that actually want to develop real-world applications in the blockchain field, it is indeed necessary to have a relatively centralized mode of power in the initial stage of development, including an integration of resource scheduling, team building and an engineering research and development team. Incentives and a strong operating structure can advance the project this way and allow to realize new business models more quickly.

From the outset, the system and operating organization are in a more centralized state. Then, by distributing digital tokens and decentralizing coding power, a distributed and multi-centered state will gradually be formed. And after introducing more resources, it will evolve again. It therefore starts as centralized and gradually will evolve itself towards decentralization. I think that this is an inevitable trend and in the next one to two years there will be many blockchain projects that will operate in a similar mode. For example, the DPOS (Delegated Proof of Stake) model, which is now being sought after by the market, is very centralized. and EOS, ARK and others have adopted this consensus model. The Chinese name of DPOS is called the certificate of share authorization mechanism (also known as the trustee mechanism). Its principle is to let every person who holds tokens to vote, resulting in multiple representatives (such as the BTS bit stock is set to 101). EOS is designed in a way that it has 21 master nodes and 100 spare nodes. We can understand it as a number of super nodes or mine pools, and the powers of these super nodes are completely equal to each other. From a certain perspective, DPOS is somewhat like a parliamentary system or a congress. If delegates cannot perform their duties (when they are not able to generate blocks), they will be delisted and the network will elect new super nodes to replace them.

The EOS project raised funds in the name of Block.one, and then recruited more than 100 engineers to form a development team. After the software system development is completed and officially released, the community is then allowed to operate on the blockchain system. Because it is an open source software, of course, there may be numerous EOS chains overnight. In the end, you only need to vote on which one is the ‘real’ EOS main chain. In addition, how many NEO nodes are there and who are they? Nobody knows. Recently, some news was circulating in overseas communities. Some people said that NEO only has 7 nodes and a bug occurred a few weeks ago, causing the entire chain to crash once. However, I did not understand and study this in detail.

Blockchain investment strategy

The blockchain industry is currently developing rapidly. To make a value investment, it is necessary to have a long-term perspective and start from the macro-trend of how this industry is evolving. In the first half of 2018, blockchain is expected to experience a rapid period of development. After that, with the strengthening of supervision of various countries, the entire industry will usher in substantial fluctuations. The team that wants to enter the blockchain industry may therefore need to seize their time.Moreover, one of the new trends caused by large fluctuations is polarization. Some vaporware projects will soon be erased from history and some teams that are really doing things with technical capabilities and application scenarios will gradually emerge and enjoy the rapid development of this industry.

Based on the period of rapid development in the first half of the year, in terms of investment strategy, a project can be “fast in and fast out”. As long as this project is not too unrealistic and the team members appear rather capable of development these projects, they can achieve some short-term growth. These companies will mostly shout about their whitepapers a lot and talk about how they will change the world in the future while their technological developments are lacking in comparison to their marketing efforts. The above is a short-term investment strategy. If you consider the mid-to-long term, the polarization can result from regulation, making four directions possible for investment:

The first is to refer to the performance of Ethereum and other public chains in previous years and to lay out some public-chain projects that are held for a long period of time. The expected return is not too bad. However, in recent months, public-chain projects have appeared in large numbers and it is difficult to pick the right one. It is recommended that the strategy of diversifying investment, small positions and fixed investment. It is not recommended for one or two heavy positions because it is difficult to pick the needle in the haystack.

The second is the application class. In fact, this type of investment project is the most difficult to choose from and the dimensions considered can first jump out of the application market of the project itself. The blockchain projects initiated by existing internet companies may have a higher probability of success. The capabilities of these teams have already been proven in the internet market they operate in. So when they take the industrial resources, user base, blockchain technology concepts to design new business models and new business structures, the advantages are obvious.

The third type are trading platforms, decentralized exchanges, etc. It is expected that with the rapid growth of the industry, the profitability of such platforms has been verified or easily verified, as long as the team and products are not too bad, at least to ensure a certain capacity to sustain themselves. Regardless of whether or not there is a license, the number of exchanges in the world will increase, and more than a thousand will be normal. Because digital asset exchanges will be supplying the entire global capital market, there must be a sufficient number of platforms to carry such a huge market space. Of course, under the general trend, each country will have at least several and more than a dozen exchange platforms in the future and the competition will be fierce. The ecological system of traditional capital markets will basically enter the capital market system constructed by the blockchains. For example, the future exchange platform will fight for service experience and transaction experience when competing with one another Transaction costs will be greatly reduced and financial derivatives will be the main source of profitability on exchanges.

The fourth category are items that may change the structure of the internet. For example, (1) distributed network storage such as IPFS and SIA, (2) distributed file distribution systems and distributed mass computing systems implemented using the Token incentive mechanism, such as MGD, PlatoN. Moreover (3) ideas of which can truly solve the IoT mass terminal and massive data management and Trading blockchain systems, such as IOTA. Our LoMo team has also developed technology to upgrade itself towards this direction. These future projects that may transform the internet structure to create new internet value also have great investment potential.

It should be noted that first of all, whether it is the United States or China, Japan and South Korea, or Europe, there are fraudsters in wealthy places all over the world. Second, sometimes, in the market, it is difficult to distinguish between cheating projects and real entrepreneurial projects. It is best to find familiar friends in the blockchain industry or people worthy of advice to help, otherwise the risk is high and it is easy to be get caught out. Outside of this, the advice to investors is to strengthen learning, enhance the ability to think independently and maintain investment patience. If you identify the major trend of the blockchain and maintain patience, you will flourish. This has been proven many times in the last three years.

More than a giants only game

Internet giants have entered the blockchain industry, such as Alibaba, JD, Tencent, etc. However, the phenomenon of the monopoly industry of these traditional internet giants may not be repeated in the field of blockchain, as they become less powerful. The startup teams are also not afraid of the traditional internet giant. Why?

First, although some internet giants still use traditional methods to establish patent technology thresholds, blockchain technology is based on open source thinking to build communities, so in the future some excellent teams will have the opportunity to gather more developer resources and gradually grow. It can even be as good as these internet giants.

Second, there are clear boundaries between the traditional internet giants and the entrepreneurial team’s application projects, and there is no obvious competition for the time being. The traditional giants maintain their existing business barriers through blockchains, such as the projects currently being done by JD and Alibaba. They are mainly used in logistics traceability and supply chain finance. Therefore, in the short term, the blockchain is not only the game of the internet giant as new entrepreneurs will also have relatively equal opportunities here.

Among the influx of blockchain professionals, many come from backgrounds such as the IT industry, internet communities and gaming industry, professionals from these industries have tons of original technology and are accelerating their integration into the blockchain industry and will soon change the pace of industry development. In addition, the threshold of blockchain technology is significantly reduced, mainly due to the spirit of the open-source community. As far as a few years ago, as long as it does not involve the underlying architecture, new public and consortium chains, are mostly modified based on the open source architecture and code. They might as go as far as developing the smart contract functionality and that’s about it. Even projects that develop at the level of core architecture are becoming less and less common. This is mainly because there are already a plethora of open-source projects to be used as a foundation without trying to reinvent the wheel.

The lowering of technical threshold means that commercial barriers will be reflected in other aspects. The main threshold for future blockchain applications is how to popularize and promote your own applications and reducing the costs of company and market operations. So in terms of the current market, there have been already a lot of project applications appearing. On some fiery/hot tracks, at least three companies, and at the most more than 10 companies are in competition mode. If there are forecasts and bets on the market, there are now at least more than 10 companies competing with each other.

The final decision on which blockchain applications will be eliminated from the market, will mainly depend on the following aspects:

One is the maturity of the team, as well as the intensity of resources in the past such as: users, business model, accumulation of data and so on. Now, there are some teams that seize the time/opportunity to release early versions of apps. However, functions are handicapped, and the experience is also extremely poor. That is because the fundraising is too early, the digital asset prices in the hands of members rose too much. Their values and goals are being challenged, losing incentive, causing the team to lose its will to fight on.

Second, the project founder should have great spirit. For a public blockchain project, this team founder’s entrepreneurial motivation must not be just for the pursuit of wealth, but to also really create and innovate, to change the world’s aspirations/ambitions. Just like Satoshi Nakamoto and Ethereum creator Vitalik for instance. Truly successful public blockchain founders are just not the average person and we should need more than 10 years to test this claim.

For the team founder(s), other than resources, experience, execution force/powers, he also needs to possess entrepreneurial spirit. If the entrepreneur is only chasing/following a “trend” , the length of the blockchain “trend” will quickly pass. Short term will be about half a year or three months, while long term is about a year. Thereafter you have to choose between purely doing blockchain technology, or an exploration on the application side while being unprofitable in the early period, because widespread promotion of blockchain technology in all aspects of industries take time.

Therefore, only those who have true entrepreneurial spirit can lead their team to fight their way through intense competition. That is because what entrepreneurs look at is the vision of the next five or ten years.