How the Web3 sector can combat the pertinent and costly issue of Maximal Extractable Value (MEV), with Da Hongfei, founder of Neo

[00:00:00] Hello everybody and welcome to the Crypto Hipster podcast. This is your host Jamil Hasan, the Crypto Hipster where I bring you founders, entrepreneurs, executives, artists, you name it, across all over the world of crypto and blockchain.

[00:00:15] And today I have an amazing guest from around the world for me. He is coming to us from Singapore. His name is Da Hongfei. He's the founder of NIO. Da, welcome.

[00:00:30] Hello Jamil. Finally, yeah, finally we made it.

[00:00:34] Finally made I'm happier here. Looking forward to this interview and yeah, I'm really excited. I woke up early this morning in my time to have this and it's great. So I'm looking forward to it.

[00:00:44] So let's kick it off.

[00:00:45] What's the time? Yeah, what's the time to are you? Which part are you? Are you in the US?

[00:00:50] I'm in the US New York time zone. So exactly 12 hours.

[00:00:55] Yeah, we are. We are actually on the like a different pole of the earth. The longest flight is from Singapore to New York, 17 and a half hours.

[00:01:10] Oh wow. Yeah. I once flew to Hanoi from the US. That took 20 hours but because we had a four hour stop.

[00:01:23] So yeah, I'm happy you're here. So let's kick things off and ask you the first question. What is your background and is it a logical background for what you're doing now?

[00:01:37] On the paper, I think it's not logical. I studied English and technology in my college, which is in Guangzhou in China.

[00:01:51] The university is called South China University of Science and Technology, but I was majoring in scientific English.

[00:02:02] So basically I'm not a same student. I'm more like a liberal arts student.

[00:02:12] So I got a Bachelor of Arts, not Bachelor of Engineering or Science.

[00:02:18] But during my college years, I was very interested in two things. The first one is computer science.

[00:02:30] I went to college in 1997. That's the year where internet became not popular, but become like let's say ordinary in colleges.

[00:02:49] But we still don't have internet access in our dormitory. We need to go to the so-called computer laboratory.

[00:02:57] It's like an internet cafe to use computer to use internet.

[00:03:02] So I immediately found for love with computer science. I spent a lot of time there studying it.

[00:03:11] I started C-language. I taught assembly language to myself and I started to write viruses in assembly language.

[00:03:26] And I was the moderator of the computer cybersecurity board of the BBS, the bulletin. That's an old thing from my university.

[00:03:40] So computer science is one of the two things. I spent a lot of time during my college.

[00:03:48] And the second thing is my hobby or my things I like is economics.

[00:03:58] I discovered a blog which is in Chinese and the title of the blog website is called New Institutional Economics.

[00:04:12] So I read a lot, not by textbooks but read a lot blogs articles in economics.

[00:04:21] So I gradually strongly influenced by the Austrian School of Economics, the New Institutional Economics.

[00:04:31] So that's the two aspects that I spent most of my time during my college years.

[00:04:39] And then after I graduated, I did not go to an internet company or tech company.

[00:04:50] I started to do educational consultancy by myself.

[00:04:56] I funded a small company. It's like a small business, only around 5 to 10 employees helping Chinese students.

[00:05:08] And until 2011, I came across a blog. Again, this blog is about Bitcoin.

[00:05:23] I remember I stayed very late that night, maybe 4 or 5 o'clock.

[00:05:32] I was just fascinated by the idea, by the technology, by the economic parts behind it.

[00:05:42] So then I spent a lot of time learning about it.

[00:05:47] Visiting the BitcoinTalk.org, BBS for our forums.

[00:05:54] So that's how I discovered Bitcoin.

[00:06:02] Wow. And you founded NEO.

[00:06:06] So what is NEO all about? How did that transition from Bitcoin to NEO start?

[00:06:15] How has NEO evolved over the years?

[00:06:21] In 2012, there was a post on the BitcoinTalk.org website, the forum.

[00:06:30] It was posted by a Chinese guy. His nickname is Brian Cat.

[00:06:38] He wrote that currently people are mining Bitcoin using CPU and some of them are using GPU, an FPGA.

[00:06:50] But those equipment are still slow.

[00:06:54] He is a doctor in a major Chinese university, a good university.

[00:07:02] And he asked for Bitcoin to crop something to build the first ASIC miner machine in the world.

[00:07:14] I did not remember how many Bitcoin he was funded.

[00:07:21] But I think it's equivalent to maybe one million US dollars something.

[00:07:29] At that time, that's a big sum of money.

[00:07:32] And finally he did it.

[00:07:34] And he also issued a so-called stock, a virtual stock of his company to the investors.

[00:07:43] So the funders not just get an ASIC miner,

[00:07:48] they also get the share of his company.

[00:07:53] And they made maybe 100 times in a couple of months.

[00:08:01] So I think it's an enlightening moment for me.

[00:08:09] So we decided, we thought it's a very interesting idea to do crop funding using cryptocurrency, using Bitcoin.

[00:08:18] But it's not easy because setting up a company and then issues virtual stocks

[00:08:27] and they issued it on a centralized website, not on the blockchain.

[00:08:32] So we decided maybe we can do something like a service.

[00:08:38] We can do a blockchain which is focused on crop funding for crypto projects.

[00:08:45] That's how NIO was born.

[00:08:49] That's crop funding for crypto.

[00:08:52] That sounds smart, good idea.

[00:08:53] So initially the tagline of NIO is Bitcoin plus Kickstarter plus Nasseq.

[00:09:14] I like it.

[00:09:17] That's 2014.

[00:09:19] We started maybe half a year after Ethereum.

[00:09:27] So that brings us to today.

[00:09:31] Over the years, your prices, I looked at your price on CoinGecko the other day.

[00:09:37] You're about $15. Your high was 600 something, right?

[00:09:41] But you're always low.

[00:09:43] You have made transformations and made changes over the years.

[00:09:46] One of the changes is NIOX.

[00:09:49] It's a side chain, right?

[00:09:52] What is it all about and how do you drive interoperability using it?

[00:09:58] Yeah, the current management of NIO is called NIO-N3.

[00:10:04] N3 is very independent from other blockchains like Ethereum or Solana.

[00:10:12] NIO has its own virtual machine called NIOVM.

[00:10:17] We wrote it for a scratch.

[00:10:20] NIO has its own smart contract system.

[00:10:23] We support Python, JavaScript, Go language and C-Shop.

[00:10:30] So we have a completely different smart contract system.

[00:10:36] It's a nice feature.

[00:10:38] It's a good try, a good exploration.

[00:10:42] But the problem is Ethereum has a huge ecosystem.

[00:10:48] And there are so many developers from the Ethereum,

[00:10:52] has an Ethereum solidity back.

[00:10:54] It's difficult for NIO to attract those developers

[00:11:00] and to let them know the nice, the good, the best features in NIO.

[00:11:04] So we decided to build an EVM-based, EVM-compatible side chain called NIOX.

[00:11:13] And we changed the consensus mechanism to NIO's consensus mechanism,

[00:11:21] which is called DBFT or delegated BFT.

[00:11:25] And then we also added a very interesting feature.

[00:11:31] We call it NTMEV to solve the toxic MEV problem within the Ethereum ecosystem.

[00:11:43] So NIOX is in a nutshell, NIOX is EVM compatible.

[00:11:50] It has the NTMEV feature and it has DBFT consensus.

[00:12:01] Very cool. Now you just said something interesting to me.

[00:12:04] You said you want to solve the toxic problem within the Ethereum ecosystem.

[00:12:09] What is that toxic problem?

[00:12:11] It's called MEV, minor extractable value.

[00:12:17] There are different definitions about MEV,

[00:12:20] but in simple words, it's the unfair advantage that the miners have.

[00:12:29] They can use it to steal or to...

[00:12:40] They can use the unfair advantage to make money,

[00:12:45] which comes from the ordinary novice users.

[00:12:51] And according to some statistics,

[00:12:58] I believe in 2020, if my memory serves me, in 2022,

[00:13:04] the total value of MEV is around 400 billion US dollars.

[00:13:10] That's for one year.

[00:13:12] So it is commonly believed that the accumulated MEV

[00:13:17] or historical MEV exists one billion US dollars.

[00:13:25] It's very much like front running in the traditional finance market.

[00:13:33] Yeah, it's very interesting because I've seen what I've seen recently

[00:13:41] in the market is the growth of Solana and growth of some other chains.

[00:13:48] One of the things that they said is that the Ethereum developers

[00:13:53] have grown complacent.

[00:13:55] I wanted to find out first, and I will follow up with the MEV,

[00:14:00] but how can blockchains like yours, like Neo,

[00:14:03] like others globally welcome new developers?

[00:14:06] And what's possible if you do attract those developers

[00:14:09] who don't have that unfair advantage, who can't front run,

[00:14:13] who can only work on development? What do you see?

[00:14:17] I think the reason, the rational behind our effort to eliminate MEV

[00:14:26] is not about attracting developers.

[00:14:29] It's more about to provide a level playground for ordinary users.

[00:14:35] Regarding developers, I think we need more applications to attract developers.

[00:14:45] Blockchain developers are still rare.

[00:14:50] I don't have exact number, but I believe maybe one in 1,000 developers

[00:14:57] or IT developers are blockchain crypto developers.

[00:15:01] We need more adoption. We need more application to attract those developers.

[00:15:07] One of the trends in US I saw recently is especially in Bay Area.

[00:15:13] As many developers, entrepreneurs are more interested in AI.

[00:15:18] They left the crypto sphere to do A and B.

[00:15:22] But with the price rising of Bitcoin in the past few months,

[00:15:30] I think maybe some of them will be back.

[00:15:36] I see that too, but I see developers going also to AI slash crypto projects.

[00:15:42] I see that too.

[00:15:44] I see developers going to AI and crypto projects.

[00:15:48] I see developers going to AI slash crypto projects.

[00:15:54] What are your thoughts on that?

[00:15:59] I think AI and crypto, there are definitely cross parts between AI and crypto.

[00:16:06] But I think to some extent I agree with Vitalik.

[00:16:13] I don't see that there is a necessity project to combine AI and crypto together.

[00:16:22] It's like crypto plus anything. It's not like that spatial.

[00:16:28] You need crypto to do AI or you need AI to do crypto.

[00:16:33] You definitely can combine those two great technologies together to do projects.

[00:16:37] But it's more like a narrative. It's more like a storytelling, marketing,

[00:16:44] fans, things like that in my opinion.

[00:16:49] There are some schools of thought that saying that the dangers of AI

[00:16:56] can only be managed or solved using crypto.

[00:17:03] The dangers of AI? Only one.

[00:17:05] The dangers of AI can only be solved by using crypto because it shows proof of

[00:17:14] effect where AI could be a narrative.

[00:17:20] I don't really understand the logic behind that statement.

[00:17:26] I think one of the most realistic cross-discipline between AI and crypto

[00:17:36] is that AI agents, they will not use credit card.

[00:17:41] They will not use your bank account or maybe your PayPal to pay for you.

[00:17:46] They definitely will use their digital currency to make the payment on the internet.

[00:17:51] And I believe that digital currency will be crypto.

[00:17:56] Got it.

[00:17:58] I want to go back to this idea of the persistent issues with the MEV.

[00:18:06] How do we solve them once and for all?

[00:18:10] Is Dan Coon going to help solve that or are there going to be novel approaches

[00:18:19] like Neo and others going to be able to be the one who makes the final solving

[00:18:23] of those persistent issues?

[00:18:26] The origin of MEV problem issue is coming from the privilege of miners.

[00:18:36] They don't have the power to change your transaction, but they have the power

[00:18:42] to reorder all the transactions in one block or even in the past few blocks.

[00:18:48] They can arbitrarily order in favor of their own interest.

[00:18:57] I think the spirit of blockchain is to eliminate unnecessary power or unnecessary privilege.

[00:19:08] Everyone is equal and even the miners, the bookkeeping power is decentralized between miners.

[00:19:18] So I think eventually we need a way to eliminate the power to order transactions in their own favor by miners.

[00:19:32] There are a few ways to do it.

[00:19:34] One way is to encrypt all the transactions until the order is set and will be written to a block.

[00:19:46] This is called encrypted mempool from the Ethereum community.

[00:19:55] With NeoX we use this method and we call it sealed transaction or envelope transaction.

[00:20:06] The transaction was put in an envelope.

[00:20:09] It's encrypted when it's passing in the peer-to-peer network.

[00:20:16] The consensus nodes need to agree to reach consensus in what order those transactions will be recorded on the next block.

[00:20:27] Only after that they have the ability to decrypt the transaction and then to write it in the next block.

[00:20:36] That's how we solve the MEV problem.

[00:20:41] The order is determined before knowing the actual content of the transaction.

[00:20:47] They have no way or no motivation to order transactions in different ways.

[00:20:56] I have an analogy of the envelope transaction technology.

[00:21:05] It's like from HTTP to HTTPS.

[00:21:09] In the HTTP days or the request, the website you visited are plaintext.

[00:21:16] You just send a request to a website that I want to visit the home page.

[00:21:23] Then everyone on the route can see your request.

[00:21:29] But in the HTTPS era, everything, all the communication between you and the server encrypted.

[00:21:38] Only you and the server knows what you are communicating about.

[00:21:43] So envelope transactions are somehow like that.

[00:21:47] Before it was written in a blockchain, it is encrypted.

[00:21:53] It is only decrypted after written into a blockchain.

[00:22:00] So you're encrypting and decrypting before it hits the blockchain.

[00:22:04] So when it hits the blockchain, it's probably encrypted and decrypted?

[00:22:07] Yes.

[00:22:09] That makes a lot of sense to me.

[00:22:11] There is a byproduct of this envelope transaction.

[00:22:18] It's not just bringing anti-MBV feature, it's also anti-sensory.

[00:22:25] Because the miners, the consensus nodes do not know what's the content of the transaction.

[00:22:31] They have to order it, put it into a proposed block first before knowing what the transaction is about.

[00:22:43] I like it from a security perspective.

[00:22:46] Yes.

[00:22:48] It first eliminates the privilege from the miner.

[00:22:53] Great.

[00:22:55] So I want to go back to something you said earlier on.

[00:22:58] You said you started in earnest in 1997.

[00:23:01] Right?

[00:23:03] That's when I was in grad school, when I got my master's degree in finance and traditional finance.

[00:23:10] Not the finance, right?

[00:23:13] When I look at traditional finance, one of the things that I think would help them is zero knowledge proofs.

[00:23:22] How do you think zero knowledge proofs can help revolutionize traditional finance?

[00:23:28] I think zero knowledge proof or zero knowledge can change the crypto industry a lot.

[00:23:42] But I don't know whether it will be that useful in traditional finance.

[00:23:47] Because traditional finance is more based on, it's not based on mathematical proof.

[00:23:54] It's based on trust.

[00:23:58] It's based on trust at third party.

[00:24:00] It's based on regulations oversight from government agencies, based on check and balance, based on the relationship between major institutions.

[00:24:16] So I think ZK will be much, much more useful in the trustless world.

[00:24:25] In the crypto world.

[00:24:29] I agree with you.

[00:24:31] One of the ways to eliminate MEV is if every transaction is a zero knowledge based transaction, it will also eliminate it.

[00:24:45] But that's not practical today.

[00:24:51] Maybe in two, four or five years, that will be possible.

[00:24:59] My background is AIG.

[00:25:02] My corporate background was AIG, right?

[00:25:05] And the world got into trouble with all these exotic derivatives according to default swaps and everything.

[00:25:10] I'm just trying to think on a traditional finance is based on trust, but you also have products that people can't understand.

[00:25:18] So how would they apply well to derivatives in the crypto sphere?

[00:25:25] How would they get more exotic?

[00:25:28] How can they be help?

[00:25:31] You mean zero knowledge and derivatives?

[00:25:34] How do they work together?

[00:25:36] Yeah, how could they?

[00:25:38] Let me think.

[00:25:42] I think the ZK knowledge actually can be adopted by almost every blockchip.

[00:25:50] Today, we are mostly using ZK or ZK proof to do layer two to breach the layer one and layer two.

[00:26:01] But if generating a ZK proof is cheap enough, we can have all the transactions to be in ZKP.

[00:26:16] So you don't need to really tell the blockchain what the transaction will be.

[00:26:24] You only tell them the state after the transaction and you include a proof to prove that the transaction is legit.

[00:26:35] So in that sense, not just derivatives, but every transactions like transfer or issue a token or buy an NFT, anything will be private.

[00:26:51] You don't know what they did.

[00:26:53] You only know the state after the states.

[00:26:59] Great.

[00:27:01] Thank you.

[00:27:03] I could go down this rabbit hole.

[00:27:05] I'm not going to go down the rabbit hole with you.

[00:27:07] I'm going to change the topic a little bit, make it a little bit easier for my to really do something and that is I want to talk about social.

[00:27:15] Right?

[00:27:17] We have seen an emergence of a few things.

[00:27:20] Social Fi and recently meme coins and other social platforms.

[00:27:26] Right?

[00:27:28] Why have we seen that emergence?

[00:27:31] I think it's all about incentive.

[00:27:34] A lot of people they play social fight, not just because it's a better social media platform.

[00:27:42] I think most of them because they are making money.

[00:27:46] They are speculating on this platforms.

[00:27:50] But speculating is not, I'm not using it as a negative sense.

[00:27:56] There is a huge speculation of the point in the world, even with ETF investors.

[00:28:03] It provides liquidity.

[00:28:06] It provides money for the developers, for the entrepreneurs like me like us.

[00:28:14] I think the first reason they emerge of social fight is that it's a good way to throw investors for speculators to play with.

[00:28:26] And then I think privacy is also a strong requirement for the future social platform and also anti censorship.

[00:28:36] I think it's because of that thought that people are using those social fight platforms.

[00:28:50] You said something else interesting right there.

[00:28:52] I hadn't thought about this because you said people are using ETFs to speculate.

[00:28:59] And when I think of ETFs, I think of conservatism.

[00:29:06] I think of a solid conservative.

[00:29:11] I don't think of speculation in the same sentence as ETF.

[00:29:14] But you just said, so why do you see it that way?

[00:29:17] Bitcoin is an asset of high velocity.

[00:29:27] I would say it's a risky or more risky asset compared to many of the traditional asset classes.

[00:29:40] So people who invest in Bitcoin, I think they are more risk taking.

[00:29:50] If they want stable return, they probably will invest in other things.

[00:29:56] So in that sense, the people investing in Bitcoin ETF are more speculative than people investing in other more regular asset classes.

[00:30:17] That makes sense to me.

[00:30:19] Something I just thought of is we don't think really in the US about the world.

[00:30:24] I agree. But comparing investors in the crypto world, they are definitely more conservative, more mainstream.

[00:30:35] That is true.

[00:30:37] One of the things that we don't really think about here, I don't because I'm speculating, I'm interested in investments that have a return.

[00:30:46] We don't really think of it as a risky investment is stable coins.

[00:30:53] The role of Tether is much more different in Singapore than it is in the US.

[00:30:59] What's the app for these stable coins like Tether and why is there a huge deal in Singapore?

[00:31:09] I think Tether and other stable coins like USDC has a different user demographic.

[00:31:21] Tether is more popular in Asia. Part of the reason is there are many countries in Asia that have foreign currency regulation.

[00:31:36] Their citizens cannot freely convert their own currency into US dollars or other foreign currencies.

[00:31:46] So Tether is the easiest way to make international payment.

[00:31:53] So not just the crypto users are using Tether.

[00:31:57] Many ordinary transactions are done by sending Tethers around.

[00:32:03] Some of them are not using Ethereum blockchain, they're using Tether because it's cheaper.

[00:32:11] The transaction fees are cheaper.

[00:32:14] I think USDC is more European focused. Tether is more Asia focused.

[00:32:25] I didn't think of the foreign currency risk. Yeah, that makes sense.

[00:32:27] Okay, so I have a couple more questions.

[00:32:35] First one, everything we said so far, what do you see as the future of NEO in the global merging landscape?

[00:32:44] NEO X will be the first attempt for NEO to do something to emerge with the bigger crypto ecosystem.

[00:32:58] We will have more efforts to develop new technologies from NEO X.

[00:33:06] NEO X will be the test field for new technologies for NEO.

[00:33:13] If the technology is proven, we will put it to NEO Manit the answering.

[00:33:21] We are gearing up to gear up our development.

[00:33:36] Sounds exciting.

[00:33:38] I want to thank you very much for your time today.

[00:33:43] I really enjoyed speaking with you and hopefully someday I can get back to Singapore as I was there in 2004.

[00:33:52] I have one last question, probably the easiest one I've asked you.

[00:33:57] How can people find out more information about you, about NEO, about NEO X?

[00:34:02] How can they become a developer?

[00:34:04] How can they do any of that?

[00:34:07] You can visit our website, neo.org.

[00:34:13] You will find all the contact information, the white paper, technology documents about NEO.

[00:34:21] You can find amazing projects built on top of NEO like Flamingo, Dex, DeFi and other projects.

[00:34:30] Just visit neo.org.

[00:34:34] Awesome. Thank you very much for your time today.

[00:34:39] Thank you very much. Thank you for having me.