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China’s Prosperous Role In DeFi

Although the Chinese DeFi market is still in its infancy, recent waves of adoption, DApps, and capital from the region are slowly capturing a significant market share of the DeFi ecosystem.

The DeFi ecosystem is making headlines across the globe. The explosive growth of the DeFi ecosystem is partly due to the popularity of the incentivized liquidity mining (yield farming) investment tactics that emerged in June, along with consistently high lending and low borrowing rates that caught the eyes of a new class of traders and investors. The total locked value of assets across all DeFi protocols increased from $950 million at the beginning of the year to over $1.7 billion in June and has now passed the $4.4 billion landmark as of August 6th according to DeFi Pulse data. Before the rapid acceleration of growth, protocols such as US-based MakerDAO mostly dominated the space having over 50% dominance of the market share at the beginning of the year. However, as new protocols and blockchains solidified their DeFi strategies, new developments and innovations from both sides of the globe helped diversify the ecosystem and reach untapped markets. According to the Q2 2020 DeFi Report from TokenInsight, the number of active DeFi users has more than doubled this year, in early 2020 it was reported that there were approximately 100,000 active DeFi users. Whereas last month it was found that the number of unique smart contracts interacting with DeFi applications had reached over 230,000. At Conflux Network, we have been closely following the growth of the DeFi space and see exciting opportunities for it around the world, especially in China.

Figure 1: DeFi users over time across all protocols based on unique address interaction — Source

China’s Blockchain Market

Since its initial ban on Initial Coin Offerings back in 2017, China has slowly begun to embrace blockchain technology, in a slightly different manner then how the West has. In March 2019 the Cyberspace Administration of China (CAC) released the first list of 197 registered blockchain companies which included Chinese tech-giants Alibaba, Baidu, and Tencent which have been developing products in the emerging sector. One thing that all of the near 200 registered blockchain related projects in the region had in common was that they were private or consortium style blockchain projects fit to serve enterprise or government needs. According to Xuemai Yu, chief executive officer of blockchain company DataQin — a company registered on the CAC list — told Forbes that the general consensus among regulators and the CAC was that the intention of promoting blockchain innovation was specifically for the private sector, and to avoid pursuing “the public blockchain, where anyone can access and write and read anything they’d like to”. Since the launch of this initial initiative, China now has more than 790 approved patents and over 29,000 registered companies working in blockchain technology with more than half focused on enterprise innovation to the banking and finance sector of the economy.

Figure 2: Breakdown of registered and operating blockchain companies across China — Source

With the excess amount of capital and nation-wide attention on private blockchain solutions in China, it was imagined that public chain projects would be phased out of China’s national blockchain strategy. That is no longer the case with Conflux Network, being the only state-endorsed public and permissionless blockchain out of China, we provide a unique regulatory position for DeFi applications to deploy compliant offerings; whether it being projects from the western market looking to enter the China market or vice-versa. This is especially important right now as DeFi has become the latest hot topic for development in China, with new Chinese-based projects and liquidity flowing into the ecosystem every day.

China’s DeFi Landscape

When DeFi began getting more attention last year, the majority of innovations and users were primarily located in the west. With nearly all DeFi DApps being created for English-speaking users and optimized to be interchangeable with the US Dollar and financial system, DeFi was considered a specialty market in the crypto ecosystem that was inaccessible to many Chinese investors and consumers. As the total locked value in DeFi steadily increased month-on-month, new projects that resembled established projects in the west began to pop up and garnish attention in the Chinese market such as dForce, MCDex, and DeBank.

Before the emergence of these new protocols, VCs were not paying much attention to DeFi projects in China. As from the 3.55 billion USD invested in blockchain technology by Chinese VCs in 2019, nearly 95% of fundraising went towards either out-of-state projects or industrial-focused private chain projects. “There was a turning point — around April 2019 when Uniswap announced receiving investment from Paradigm — that many Chinese crypto investors, media and thought leaders started to look seriously into DeFi,” said Tina Zhen from HoneyLemon.

Figure 3 represents the leading protocols based out of China across the different sectors of the DeFi ecosystem. Many projects have developed a large community and user base that has translated to adoption in the west such as Loopring and MCDex. Other formidable centralized projects in the region such as OKEX and KuCoin have seen the recent demand for decentralized DeFi products among consumers and have launched side-projects which offer decentralized exchanges and futures to their large user base. While the map is still somewhat scarce when compared to Western projects, it is important to note that many of these projects have been in operation for less than a year and have made significant progress compared to other regions, facilitating millions in volume.

Figure 3: Visual landscape of the leaders in the current DeFi ecosystem in China

DeFi’s Product-Market Fit in China

The sudden increase of adoption and injections of liquidity from Chinese users into the DeFi ecosystem should not come as a surprise. Traders across the country have been interested in trading and investing in cryptocurrencies even after the ban in 2017. Tether $USDT was especially popular in China, in August 2017 (before the ICO ban), USDT’s total market cap was around $300 million. Unwavered by these obstacles, the figure had soared to nearly $1.4 billion by the end of 2017. According to Chainalysis, most of the new USDT ($877 million from top 10 Asian OTC providers) minted after the 2017 restrictions went through Chinese exchanges. Since the restrictions, USDT has remained a favorite in the country, Chinese cryptocurrency exchanges facilitate 60% of all stablecoin tether (USDT) trading globally.

Figure 4: Analyzing the new Tether minted to different exchanges across the globe from 2017–2019 — Source

Trading and investing with Tether and other cryptocurrencies has always been a favorite for the Chinese market. When new decentralized crypto platforms focused on margin trading or lending and borrowing aggregators emerged with a Mandarin-friendly UI, they rightfully took off. Especially when considering that Chinese traders are one of the top nations for advanced trading. As reported by the China Securities Financial Corporation, leveraged trading in China has been steadily increasing over the past few years and now a 1.3 trillion yuan market (roughly $200 billion USD).

Public Permissionless Liquidity Trending In China

Beyond the attractiveness of DeFi to advanced traders in China, decentralized finance projects have found new opportunities for liquidity and users with the massively large market power of China. Hugo Xia, Chinese Market Development Specialist finds the recent growth in DeFi during 2020 is largely in part due to the new users emerging from the Chinese traders market saying:

Firstly, the purchasing power of the market, especially that of China, has increased tremendously under the COVID-19 pandemic. The second reason is that the concept of DeFi is finally being translated to DeFi products, many DeFi protocol’s underlying smart contracts are being utilized into making exciting products come to life, … this is huge progress compared to last year’s domination by centralized projects … .

Although the market is still in its infancy, the recent waves of adoption of new DeFi applications, blockchain projects, and capital flowing into the market from China will slowly add to the credibility and impact of DeFi on its path to being an alternative to the traditional financial systems.

In part two of this article we will look at the next steps for new projects looking to enter this prosperous market, potential barriers and challenges, and where Conflux Network is innovating in the exciting future for DeFi in China.

Written by Conflux Network’s DeFi Analyst, Sami Tannir

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Conflux Network

Conflux Network

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Conflux is a PoW + PoS hybrid first layer consensus blockchain for dApps that require speed at scale, without sacrificing decentralization.