Everything You Need to Know About China’s Web3 Development

A version of this article previously appeared on TechNode.

Tokenization, DeFi, DAOs, Smart Contracts, NFTs, GameFi — terms often used when discussing Web3, a catch-all term describing the vision of a new, better internet based on blockchain technology. Web3 supporters dream of a future internet led by users, organized in a decentralized network, and run on blockchain technology, in contrast to the current internet, which tech companies and other entities control.

Many have doubted China’s appetite for supporting Web3 due to the country’s preference for centralized systems and its tight regulations on cryptocurrencies. Yet while overseas venture funds are actively investing in Web3 ecosystems, the Chinese government and top Chinese tech companies have also devoted themselves to building consortium blockchains and have successfully launched blockchain projects in government affairs, commerce, and the broader society.

This article attempts to illustrate the development of the Chinese Web3 industry by assessing the technical characteristics of Chinese blockchain projects and identifying the unique value that differentiates China’s Web3 from other cryptocurrency-based financial markets.

Public Chain and Consortium Chain

Regarding the difference between Web3 in China and other countries, it is essential to distinguish between two blockchains: the public chain and the consortium chain.

The public chain is open to everyone and offers unrestricted access for all users, and data is transparent and cannot be tampered with. It is considered a truly decentralized blockchain. On the other hand, the consortium chain is jointly managed by multiple verified organizations. Each organization manages one or more nodes to uphold common goals and ensure accountability. Consortium chains tend to enjoy good privacy protection, low transaction costs, and fast transaction speeds.

The core difference between the two chains is that the public chain has a token incentive layer that the consortium chain does not have. Therefore, the former is also known as blockchain with cryptocurrencies, whereas the latter is blockchain without cryptocurrencies.

The differences between the two chains have also led to two directions of Web3 applications: the digital asset direction and the industrial blockchain direction. In many countries, the applicability of Web3 mainly revolves around the investment and transaction of cryptocurrencies. Cryptocurrency projects and crypto exchanges generated on various public chains have thrived, as have cryptocurrency wallets, decentralized autonomous organizations (DAOs), NFT trading platforms, and other related industries.

In China, however, token issuance and financing have long been banned, and the government has continued to crack down on crypto mining and virtual currency speculations. As a result, the attempt to adopt Web3 in China began in a more controlled environment.

Because many people regard digital assets as the core feature of Web3, they tend to conclude that the development of Web3 outside of China is further ahead, that there are no actual Web3 projects in the country, and that consortium chains can only be useful in fringe applications.

However, from a technical standpoint, the public and consortium chain can be applied in various scenarios based on different needs. The public chain does not have an absolute advantage over consortium chains.

In fact, absolute decentralization is a natural enemy of efficiency, as it requires confirmation by every network node, resulting in a lower transaction speed than the consortium chain. Moreover, cryptocurrency is only a basic application of blockchain technology. Each time the cryptocurrency market plunges, the so-called decentralized wealth creation system points to one scam after another.

China’s focus on the ‘chain’ rather than the ‘coin’ helps ensure that cryptocurrency hype does not affect the development and utilization of blockchain technology. In the early stages of blockchain development, China proposed focusing on technological breakthroughs and ecological improvement. In the later stages of blockchain development, China actively guided blockchain technology to support economic growth and improve people’s livelihoods in many aspects, including inclusive finance and digital transformation.

Currency-less Blockchains in China

Web3 also has to align with modern society’s laws, rules, and cultural customs; in a way, an authorized consortium chain with centralized characteristics fits better with Chinese conditions.

Luo Yihang, the founder of tech media outlet Pingwest, wrote in an opinion piece that he believes establishing a consortium blockchain network, where consensus is achieved through laws, regulations, and centralized governance, will lead to greater safety and transaction efficiency. He believes that, ultimately, this will create more practical value for the Chinese government, organizations, commercial institutions, and consumers.

In the service economy, China’s consortium chains are applied across industries, including food, copyright, law, health, insurance, credit reporting, taxation, carbon trading, supply chain finance, anti-counterfeiting traceability, logistics, transportation, and environmental protection. In addition, the government is also committed to providing the underlying infrastructure of blockchain tech and digital intellectual property rights.

Web3 is expected to transform the internet in three dimensions — technology, industry, and economics, according to the Web3 Prospective Research Report released by the China Academy of Information and Communication Technology, a state-backed scientific research institute, and blockchain company OKG.

At present, there are numerous examples of the consortium chain in use in China’s Guangdong-Hong Kong-Macau Greater Bay Area. The Greater Bay Area operates on “one country, two systems and three jurisdictions” and has accumulated unique advantages in blockchain development.

Tencent, Ping An, and other companies leading the development of the aforementioned consortium chains are headquartered in Shenzhen, a tech center in the Greater Bay Area. Many consortium chain projects have been launched in the area, greatly accelerating the development of the blockchain ecosystem in the region.

Hong Kong, Macau, and mainland Chinese cities in the Greater Bay Area have vastly different data transfer policies. Due to historical reasons, these regions operate in different jurisdictions, putting the area at risk of becoming ‘data silos.’

The Guangdong-Macau data verification platform developed by FISCO BCOS (a financial blockchain platform founded by Tencent’s WeBank) is an example of a system that promotes cross-border transfers of trusted data using blockchain technology. Taking advantage of blockchain tech’s transparent, traceable, and non-tamperable characteristics, professional service agencies can rely on hash value comparisons to verify the authenticity of the data source, thereby accessing credible data to complete requests made by data owners.

The platform mainly provides safe, credible, and efficient cross-border data verification for institutions and residents in Guangdong and Macau. In addition, it serves business scenarios such as cross-border asset certification, bank account opening, mortgage management, and wealth management. For instance, the platform has successfully shortened the process for Macau residents to apply for asset certification-related materials to just five minutes.

The Future of China’s Approach to Web3

The consortium chain controlled by state agencies or government organizations has helped various industries to work together better and opened up new possibilities. The benefits of China’s approach to Web3 primarily lie in its contributions to the real economy.

From a global perspective, the future of Web 3.0 is unclear, but in China, it has vast potential. According to an IDC report, China’s Blockchain as a Service (BaaS) business market reached 188 million USD in 2021, growing 92.6% from the previous year. Presently, Web3 in China still faces obstacles such as a weak technical foundation, financial risks of speculation and fraud, and uncertainty in regulatory policies.

Specifically, the construction of Web3 in China requires the government to actively introduce new applicable scenarios, drive innovation among enterprises, academia, and research institutions, and help create a user-led environment by opening and sharing the source code through secure and verified channels.

By placing heavy emphasis on developing the underlying infrastructure of the digital economy, such as blockchain technology and establishing new regulatory rules, China can build its Web3 ecosystem through practice and feedback.

Recently, the Chinese government has also been exploring the construction of NFT trading platforms and the digitization of assets to promote Web3 as a part of the digital economy development plan. In addition, with the popularization of the digital yuan, China is also expected to explore the application of digital assets in the future.

Such developments all indicate that China is relying more on industrial blockchain and government-led initiatives to prepare for the Web3 era.

This article was originally written in Chinese and translated by Maggie Chen

Cover image via Unsplash