DeFi Adoption in Asia
(originally posted Dec 22, 2021)
Table of Contents
Introduction
2021 DeFi Market Overview
DeFi Adoption in Asia 2021
- China
- India
- Southeast Asia (Vietnam, Thailand)
DeFi Startups in the Asia-Pacific Region
Investment Progress
Conclusion
Introduction
We have seen unprecedented rates of DeFi adoption in the west, with TVL rising to more than $250B on DeFi platforms. 2021 was the year of GameFi, with the P2E model in Axie introducing a new level of democracy to the large gaming industry worldwide. We believe that 2022 shall bring about rapid growth in the DeFi sector in Asia, allowing for a stronger and more interoperable bridge between the West and the East. Our 2021 DeFi report outlines the current state of DeFi in APAC countries and identifies potential opportunities that solidify our commitment to helping this sector grow in Asia.
2021 DeFi Market Overview
Decentralized Finance (DeFi) is seen as a revolutionary force for fintech innovation. Since December 2020, the amount of cryptocurrency held in DeFi has grown over 400%, reaching an all-time high of $94 billion Total Value Locked (TVL) in October 2021. The accelerated adoption of DeFi was a key driver of total market capitalization for the broader cryptocurrency markets. The total market cap of cryptocurrency on December 11, 2021 was $2.3 trillion, representing a 415% year-over-year increase.
NFTs (Non-fungible Tokens) have become some of the most promising applications in the DeFi sector. Within a year, the total market value for NFTs reached $46 billion, representing a nearly 100 times multiple from the $52,293,650 total market cap in December 2020. NFT sales in Q3 2021 were up eight-fold from the previous quarter across 34 million sales.
Ethereum remained the dominant ecosystem in DeFi in 2021, representing 66% of the total value locked when compared against the other smart contract blockchains. Other popular ecosystems that require lower gas fees for operation, such as Solana, Polkadot, and Celo, gained traction in Q3 2021 as well. The percentage of DeFi related deals launching on the Ethereum ecosystem fell from 83% and 92% in Q1 and Q2 , respectively, to 57% in Q3, implying a more fragmented competitive landscape for layer one ecosystem.
Given the fast evolution of Blockchain technology and the dynamic competitive landscape in DeFi, it is essential for investors to keep up with the latest developments in DeFi across the globe.
DeFi adoption has skyrocketed in the past twelve months — the average new Ethereum addresses have increased by 143,000 daily since December 2020. With over 300 million crypto users and over 18,000 businesses accepting cryptocurrency payments worldwide, DeFi adoption has become a global phenomenon.
Asia accounts for half of the 300 million crypto users. The high demand for cryptocurrency in Asia can be at least partially explained by the fragility of the local financial system. Historically, countries in this region have been vulnerable to the high volatility of inflation and local currency exchange rate, legacy banking systems, and regulatory uncertainty. Cryptocurrency delivers excellent value to residents of the region by providing an alternative store of value and means of exchange. Another reason for the wide adoption of crypto in Asia is due to ease of internet access — over 90% of consumers of the region can access the internet with a smartphone. In Chainanalysis’ 2021 ranking of the top 20 countries with the highest score for crypto adoption, eight of those are Asian countries, with Vietnam, India, and Pakistan ranking in the top 3.
On the other hand, the level of adoption of DeFi, was higher in the middle to high-income countries or countries with well-developed cryptocurrency markets, especially those with sophisticated professional and institutional markets. Standout countries that fit this category are the United States, China, Vietnam, United Kingdom, and several other Western European countries. Institutional investment activity surged in 2021 — transaction volume by institutional investors for both crypto and DeFi accounted for around 30% of total volume in Q3 2020, rising to 60–70% by Q2 2021. Data also suggests that large transactions make up a more significant share of DeFi activity. Transactions above $10 million account for over 60% of DeFi transactions in Q2 2021, compared to under 50% for crypto transactions. Therefore, we can make a preliminary conclusion that institutions drive the development of DeFi while smaller investors in emerging markets drive the adoption of cryptocurrencies.
DeFi Adoption in Asia 2021
China
2021 has been an extremely challenging year for cryptocurrency investors and operators in China as the Chinese government launched a series of regulation crackdowns against the industry. In May, China banned the crypto mining business as they view such activity jeopardizes the country’s pursuit of carbon neutrality by 2030. Before the crypto mining ban, China was the home to around 70% of global bitcoin mining power. Within two months after the ban, more than 54% of bitcoin’s hash rate, which is the collective computing power of miners worldwide, dropped off the network and the bitcoin code was re-calibrated to make it around 30% less difficult to mine.
In September, China doubled down on its mining ban by claiming all cryptocurrency-related business activities within the country were illegal and barred financial institutions from helping crypto investors deposit fiat currency on crypto exchanges. The move was seen by many to eliminate competition with Beijing’s new digital currency, the digital yuan, which is set to launch before the Beijing Winter Olympics in 2022. Shortly after the announcement, Huobi, Binance and OKEx, three of the world’s largest crypto exchanges founded in China, issued a public statement to close subsidiaries in China by the end of the year as there were no more hopes of expanding their businesses within the Chinese market.
China has repeatedly declared war on cryptocurrency over the years, but the rules eventually softened each time. Data from Qihoo 360, a local cybersecurity company, suggests that underground crypto mining appears to be alive in China. The November report shows an estimated 110,000 active crypto mining IP addresses in China on a daily basis. Because miners are uncertain of the seriousness of the Chinese regulators for the ban, many Chinese crypto utilize DeFi protocols, transferring their funds to on-chain wallets where transactions of individual accounts are more difficult to detect and track by the Chinese regulators.
Once accounting for over 90% of all crypto trading volume prior to the launch of regulatory restrictions in 2018, China will remain a major player in the cryptocurrency ecosystem despite the near-term hostile regulatory environment. The country is currently ranked at 13th for global crypto adoption and 4th for global DeFi adoption by Chainalysis, measured by both the value and volume of crypto transactions weighted by the population of internet users and purchasing power per capita.
India
2021 has also been a very volatile year for DeFi in India with uncertain new regulations around cryptocurrencies; however, theDeFi ecosystem in India has grown rapidly, with a plethora of new and influential projects that have launched this year. According to a report published by Chainalysis, in July 2020 and June 2021, the Central, Southern Asia and Oceania (CSAO) region accounted for almost 15% of overall cryptocurrency activities (settling over $550B in transactions). However, crypto regulation has been a very tricky topic in India in 2021, with the Indian Reserve Bank initially flaggingall DeFi applications being built in India and later implementing a complete banon cryptocurrencies. Despite these roadblocks from the government, innovation in DeFi continues to accelerate in India, with some of the world’s largest crypto projects stemming out of its rapidly growing DeFi ecosystem. One great example is Polygon, an Ethereum L2 scaling solution that now currently has a Market Cap of over $15B and over $8B TVL in its DeFi ecosystem.
On 18th December, the RBI proposed a complete ban on cryptocurrencies, citing serious concerns relating to macroeconomic and financial instability. From the central bank’s perspective, the main challenge lies in regulating intangible assets that originate overseas. The Indian government listed the “Cryptocurrency and Regulation of Official Digital Currency Bill, 2021” for introduction in its Parliament. This Bill seeks to initiate the framework in which the RBI could launch its own digital Rupee (INR), and aims to prohibit use of non-central cryptocurrencies in the nation.
The Indian Government’s hopes of creating a digital INR in 2022, centralized and regulated by the RBI, falls prey to the same regulatory problems as all other fiat currencies. The administrators would be able to freeze wallets, reverse transactions, and issue wallets — an indication of financial deplatforming at its worst. A network that cannot be shut down is something that India certainly needs as a hedge in times of conflict and uncertainty. More generally, Ethereum prevents social deplatforming, and DeFi built on the Ethereum network prevents the monopolization of state run borrowing and lending schemes that are subpar for Indian citizens and exacerbate the socioeconomic divide through predatory financial schemes. For example, private money lenders (‘loan sharks’) often create a debt-trap for poor rural farmers, with interest rates of up to 10% per day; the legal route is often no better, as state determined interest rates are simply too high. A solution to these issues could be through the creation of a digital rupee, pegged to (or backed by) a basket of digital crypto-assets.
In the Chainshot report, India ranked second in the world in the 2021 Global Crypto Adoption Index, sitting just under Vietnam at first place. According to some studies, up to 7.50% of the Indian population, or over 100M people, currently own cryptocurrencies. The main demographic of crypto users in India tends to be the middle class who have recognised this asset class to be a good investment. India’s largest crypto exchange, WazirX, saw a 17-fold increase in trading activity in 2021, with the largest trading pairs being BTC, USDT, Doge and Shib. This implies that a lot of Indian retail investors rushed to meme tokens to take advantage of regular volatility and exceptional returns, a trend which was seen all over the globe. Specifically, trading volumes reached all time highs in the lead-up to India’s largest festival, Diwali. As of 2021, it is estimated that 80% of crypto users in India are males aged 25–40; however, the amount of female users has increased by 300% in 2021. India is still currently in the adoption stage, with daily trading volumes being far lower than some of the developed countries. That being said, the daily average trading volumes have increased as much as 500% in 2021, including a 30% increase in the total volume of payments done in cryptocurrencies.
India’s DeFi ecosystem is young but growing rapidly, with some of the largest tier 1 VCs from Western countries betting big on the region. Over $500M has been invested in the Indian ecosystem by international funds. Antler, a Singapore-based VC, plans to deploy $150M in web3.0 and DeFi projects in the next three years. In December 2021, Sequoia Capital and its Indian subsidiary, Sequoia India, changed their Twitter account location to “the metaverse” and rebranded their entire social media presence to embrace their rapidly growing investment into the DeFi and web3.0 ecosystem. According to TechCrunch, Sequoia India may also be in talks to back Polygon via token purchases worth $50M to $150M.
Decentralized crowdfunding is perhaps one of the most efficient and lucrative ways for Indian startups to raise funding without access to American VCs.To date, EOS has raised over $4.1 billion and both Filecoin and Tezos have raised roughly a quarter of a billion dollars — entirely through financial decentralization.
Notably, several new DeFi projects in the space, such as MakerDao and Olympus Dao, have started to implement proof-of-reserve protocols that allow firms to automate their audits and check that they have the required cash on hand. This would prevent scandals like the infamous Vijay Mallya fiasco, which cost the Indian taxpayers billions of dollars from a scheme involving false evidence of reserves to gain access to loans. Systemic corruption and fraud would be reduced by using cryptographic proof of on-chain collateral required by SOTA DeFI protocolsRegulators would be incentivised to implement these changes since more foreign investment capital would be driven into the Indian ecosystem as investors could verify the destination for their funds. Once DeFi adoption is increased, Indian regulators will recognize Blockchain’s ability to prevent financial crime and increase trust in the system through cryptographic proofs of compliance — for the first time in history, full transparency of financial flows can be ensured.
Southeast Asia: Vietnam, Thailand
Vietnam
Vietnam led Chainalysis’ scoreboard of global crypto adoption and ranked second for international DeFi adoption in 2021. In a survey conducted by Finder of 42,000 people across 27 countries, 41% of Vietnamese respondents said they owned cryptocurrency. This ranks in the 1st place among surveyed countries.
A recent study by Kyros Venture unveiled that almost 40% of Vietnamese cryptocurrency consumers just entered the market this year who plan to invest at least two more times next year. Most Vietnamese investors hold an optimistic view of the market, with more than 60% of respondents believing Bitcoin will remain above $60,000 in 12 months and 24.3% respondents projecting it will break $100,000.
The high awareness and acceptance of cryptocurrency and DeFi in Vietnam can be explained by the following reasons:
- With the stock brokerage penetration rate of lower than 5%, Vietnamese citizens have limited access to traditional investment assets and therefore see crypto assets as an important investment vehicle.
- Nearly 70% of Vietnamese are unbanked and most people who live in rural areas do not have access to ATMs.
- There is a large remittance demand from Vietnamese to get money in-and-out of the country, with a large migrant worker community in the USA, Canada, Europe and elsewhere.
- Historically the local fiat currency faces cyclical devaluation challenges and the demand for inflation hedge vehicles is high.
- Vietnam leads the GameFi innovation and it is the hub for the popular NFT game Axie Infiniti. The play-to-earn model attracted many local game players and brought them into the crypto space.
The regulation in Vietnam towards DeFi and crypto is, like many countries, unclear in many ways. Although the government banned initial coin offerings (ICOs), prohibited the use of cryptocurrency for payments, and directed financial institutions to prevent cryptocurrency transactions, the door is still open for speculative trading and investment of tokens at the retail level.
Thailand
Thailand ranked 12th for Chainalysis’ global crypto adoption index and second for global DeFi adoption in 2021. The crypto ownership rate is estimated at 5.2% of Thailand’s total population, or 3.6 million people. The crypto awareness in Thailand is high — In a recent Ipsos survey conducted in February 2021, 88% of Thai respondents have heard of bitcoin and 44% plan to invest in it within a year. The crypto adoption accelerated in 2020. Bitkub, the dominant crypto exchange in Thailand, reported a 600% growth in transaction volume.
The Thai government has taken a more liberal and progressive stance towards cryptocurrencies, legalized the trading of seven approved digital currencies and continues to update the guidance on ICOs following the emergence of new digital assets. In July, the new Thailand law prohibits crypto exchanges from listing Meme tokens, Fan tokens, NFTs, and digital tokens.
DeFi Startups in the Asia-Pacific Region
DeFi startups in Singapore received the lion’s share of funding, totaling $77M out of $133.5M, with an average deal size of $4.9M. Singapore continues to lead the region with a thriving DeFi startup community that includes Acala Network, Impossible Finance, Tranchess Protocol, and InsureX, among others.
Spotlight: Acala Network
Acala Network is the DeFi hub on the Polkadot Network and has recently won the first parachain auction slot on Polkadot. Acala is an L1 smart contract platform that is scalable, Ethereum compatible, and has ready-made financial applications. With low transaction fees and direct access to the pre-existing DeFi applications built on top of Ethereum, Acala has quickly gathered traction from a large number of different groups. Investors include Polychain Capital, Pantera, Coinbase Ventures, and more. Projects building on the Acala ecosystem include Moonbeam, Phala, Ampleforth, Compound, and others, many of which have seen tremendous growth in 2021.
Investment Progress
Companies have had a record quarter for deal volume, but total funding dollars are slowing down. In Q3'21, DeFi startups raised $28.27 million across 15 transactions. Deal activity increased for the second consecutive quarter, with a 15% increase from Q2 to reach 15. On the flip side, financing volume fell to S28.27M in Q3 ‘21.
Both the average and median deal size for DeFi startups in the region increased in the fourth quarter, highlighting the sector’s growth. The average deal size increased by 71% from $3.14M in Q3 to $5.4M in Q4. In addition, the median deal size increased by 75% compared to the same quarter last year, reaching $3.2M.
Conclusion
In general, the expansion of DeFi in terms of innovation and growth strengthens our commitment to invest in APAC countries. While the regulatory environment has created numerous challenges for startups, many are well positioned to continue innovating and educating. Asia is well-suited for rapid growth in crypto adoption due to its rapidly growing and young population. Similar to the rapid growth rates seen in the GameFi sector, we believe Asia is poised for unprecedented growth in DeFi adoption and could potentially lead the world in innovation with the greatest consumer impact. With the right approach to education and investment, Asian innovation in DeFi will have a larger impact on its population and help bridge the gap between the West and the East. This bridge shall enable accessibility of capital to a very large, diverse, and talented group of individuals, and fuel rapid growth in the DeFi sector worldwide.
At OP, our mission is to invest in and support the best teams and projects that will bring blockchain adoption to the next hundreds of millions of people around the globe. We look forward to working with many more startups in APAC in the near future. If you are building one, let’s talk!
ABOUT OP CRYPTO
OP Crypto is a leading high conviction, early-stage venture capital firm in the crypto and blockchain industry, specializing in pre-seed and seed stage investments. The fund successfully raised $50M in September 2021 and has since invested in over 30 projects, including companies such as Scroll Tech, Snackclub, Merit Circle, Omni, and Fyde.
With the support of prominent investors like Bill Ackman and Alan Howard, as well as institutions like Galaxy Digital, Huobi, and DCG, OP Crypto has access to a global network of venture funds, scouts, and ecosystem partners to source the most competitive deals in the market.
With a core team based in the United States and strong ties to the APAC region, the fund serves as a bridge between East and West. Additionally, a dedicated portfolio team provides post-investment support to founders in areas such as marketing, tokenomics, and networking.
Learn more about OP Crypto at: Website
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