The ETH HK event, jointly hosted by Scroll and Newman Group, took place on October 23 at Hong Kong Cyberport as scheduled. Attendees included investors, builders, and developers from the Ethereum community. The conference focused on Ethereum and its ever-evolving ecosystem, providing a unique platform for exchanging ideas, fostering innovation, and engaging in thought-provoking discussions.

MIIX Capital’s international investment analyst, Mark, actively participated throughout the event, diligently documenting the insights and discussions on the future development of the Ethereum ecosystem, the regulatory environment within the crypto industry, and key investment considerations in the Web3 industry. Here’s a summarized excerpt of the discussions:

Layer 2: Can a Real Rollup Please Stand Up

On October 23, a meeting hosted by Gokhan Er, a director at IOSG Ventures, featured discussions with key participants including Arjun Kalsy (Head of the Mantle ecosystem), Zhang Ye (Co-founder of Scroll), Marco Cora (Business Development Lead at ZKSync), Victor Ji (Co-founder of Manta Network), and Laura Shi (Director at ConsenSys). The importance of infrastructure and its functionalities, such as rollups and provers, as critical points in the system’s ecosystem, was emphasized.

Firstly, Layer 2 is an off-chain solution built on top of Layer 1 with the goal of reducing scalability and data bottlenecks. Transactions are executed off-chain and then data is posted to Layer 1 for consensus. This way, transaction data is stored in Layer 1 blocks, ensuring security through native ETH. Marco Cora of zkSync mentioned, “It’s best for us, as builders, to pay attention to decentralization (decentralized provers) as soon as possible to prevent attacks from being too intense to resist.

Additionally, participants discussed two different security models: Optimistic RollUp, which assumes transactions are valid by default and only calculates with fraud proofs when challenged, and Zero-Knowledge RollUp, which performs computations off-chain and submits validity proofs to verify the actual outcome of a batch of transactions against the network state. Victor Ji noted that the lower Gas Fees in Layer 2 could make online gaming feasible and drive broader adoption.

On-Chain vs Off-Chain Investments and Key Web3 Investment Thesis

In the recent period, the Web3 industry has experienced rapid development, and cities like London, Dubai, Hong Kong, and Singapore have been competing for capital inflow in Web3 projects, becoming major hubs for the crypto industry. During the meeting on Web3 investments, two key points were discussed, eliciting significant resonance among participants. These points are as follows:

Firstly, the definition of Web3.0 is not accurate, and the crypto industry is more financially oriented. For instance, Venture Smart is applying for a stablecoin license in Hong Kong and is working on a BTC spot ETF because they believe that the Web3 industry is more about finance than technology. While infrastructure is undoubtedly important as a tool, introducing more funds from institutions and retailers is the key to developing the crypto industry. That’s why when engaging with institutional clients, more people are talking about Finance 2.0 rather than Web3.0.

Secondly, investors in the Web3 industry primarily engage in on-chain investments, project investments, and liquidity fund investments, obtaining interests in payments, stablecoins, custody, staking, finance, and other aspects. Currently, there are many infrastructure projects already established or under development, including numerous “junk coins” that go unnoticed in ETH and Layer 2 projects. If ETH network developers do not prioritize quality and real use cases, the next bull market may only be associated with BTC projects. In the next cycle, investors will be more rational and focus on the actual use cases that users have in applications and products, their implementation.

These two points directly highlight the current problems and drawbacks in various projects, signaling the industry’s transition from disorder to order and from chaotic growth to civilized development. This is the necessary path for industry development and a sign that the Web3 industry is gradually maturing.

Regarding the topic of the regulatory environment in the crypto industry, participants engaged in in-depth discussions on the necessity of regulation during the meeting on October 24. By comparing the differences in policies among different countries, regions, and institutions, they recognized that regulation poses both challenges and opportunities for the crypto industry:

Security and AML Challenges in the Web3 Ecosystem

The Web3 industry is in a stage of rapid, unregulated growth, and the immature regulatory framework presents various risks due to the financial nature of the industry and projects. It faces significant challenges in terms of anti-money laundering (AML) and security.

Regarding AML, centralized projects inevitably face substantial challenges when implementing AML compliance, as it requires a significant cost and infrastructure requirements. On the other hand, decentralized projects may seem able to ignore the impact of regulations, but builders should also consider the regulatory policies in their region to avoid conflicts with regional policies.

In terms of security, decentralized projects face the primary risk of malicious code on websites (e.g., compromised Github) and the leakage of administrator permissions (private keys). Centralized projects face more direct network attacks, especially when they become well-known and attract attackers who actively seek vulnerabilities to exploit and disrupt the system.

In terms of personal assets, various risks are involved, including wallet theft, pyramid schemes, investment fraud, phishing attacks, and more.

All of these risks need to be managed, mitigated, and eradicated as the industry and regulatory framework mature. Therefore, builders and developers should proactively embrace regulation, engage with regional authorities, and incorporate regulatory requirements into their development roadmap.

Regulatory changes, a chance for crypto

From the collapse of the Terra Luna stablecoin in May 2022 to the bankruptcy of the world’s largest cryptocurrency exchange, FTX, in November 2022, despite the industry facing a “crypto winter,” Hong Kong continues to advance its ambition to become an international hub for virtual assets.

The fundamental reason behind the “crypto winter” is the lack of regulation. Therefore, the approach of the Hong Kong Securities and Futures Commission (SFC) is to “regulate to protect investors” rather than “enforce as a tool for promoting good behavior.”

Starting from June 1, 2023, retail investors can trade certain digital assets (non-securities tokens like BTC and ETH) on licensed cryptocurrency exchanges. Licenses must be obtained from the SFC. However, the SFC is currently developing the relevant regulations, which are expected to be implemented next year.

According to Sean Lee from the Crypto Innovation Committee, the Hong Kong dollar stablecoin would be a perfect combination of traditional finance and Web3 projects since the Hong Kong dollar is pegged to the US dollar. Stablecoins and the traditional industry will gradually connect with Web3. Therefore, from the perspective of large-scale transactions, projects focused on stablecoins have significant potential.

In Japan, the use of stablecoins is limited to traditional financial institutions, those subject to regulation and regular audits, which is very strict. Singapore, on the other hand, is very open and flexible. Hong Kong occupies a middle ground, making it unique. Hong Kong is not only a cryptocurrency hub but also a potential hub for national stablecoins and CBDCs.

Conclusion

The above is a summary of the discussions at the ETH HK event regarding the development of the Ethereum ecosystem, investment trends in the industry, and regulatory aspects. This event has provided us with a clearer understanding of the Ethereum ecosystem, industry investment trends, and regional policies in Hong Kong. We look forward to more diverse and enriching industry events in the future.

Note: The notes and summaries may contain errors. Please feel free to contact us for any corrections.