IOSG Ventures Newsletter #17: The Outlook of Chinese DeFi Ecosystem
The year of 2020, no matter what, was an extraordinary year for crypto market. We have witnessed an explosive growth of DeFi and the open financial ecosystem. Since its nativity, DeFi has been developing vigorously over the past two years and has quickly become the most attractive field in the entire blockchain industry. From July to August 2020, this DeFi market led by foreign communities and institutions quickly divided Chinese crypto community into two groups: the “classic” who persist in mainstream currencies such as BTC/ETH and the “trendy” who poke around other DeFi coins such as YFI, LINK, and SUSHI.
At the start of 2021, let’s take a look at how Chinese DeFi ecosystem has developed in the previous year, and then discuss its future direction and possibility.
Overview of Chinese DeFi Ecosystem:
The total market value of DeFi currently is estimated about $45 billion and occupies 4.7% of the total market value of cryptocurrency. In the summer, during the boom, the DeFi Dominance ratio peaked on Sep 1st (5.38%). After a few months of correction, it soared again.
According to Messari’s report, China dominates in terms of crypto whale activity and larger trades. East Asia (mostly China) is dominated by larger trades with 90% of all volumes above 510,000. East Asia focuses more on short-term trades over a wider variety of assets, while North America tends to be long-term holdings of Bitcoin. Over the 12 months to June 2020, Asia took up almost $300 billion in total transactions.
The participants of Chinese DeFi users are mainly located in the coastal cities, with 80% of them male, and the main age group is 20–40 years old. These people have well educated and wealthy. It is worth mentioning that Sichuan, as an inland Province, also has a lot of users participating in DeFi. Bestowed with rich hydropower resources in Southwest China, Sichuan is home to many crypto whales and miners. It seems like the liquidity mining concept of DeFi, similar to the POS(Proof of Stake) of Ethereum mining, would attract many old miners of Bitcoin & Ethereum.
Chinese projects in DeFi ecosystem
When it comes to the blockchain ecosystem, the most important ones are undoubtedly the DeFi projects. With Fair Launch discussed in our previous Newsletter, YFI led the wave of Fair Launch, and the Chinese project YFII, forked from YFI, also attracted attention and aroused widespread discussion.
YFII VS YFI
YFI is the governance token of the DeFi platform Yearn. Yearn is an aggregation platform that supports multiple DeFi protocols, which can automatically move capital between DeFi protocols to provide liquidity mining to help users get higher yield. Positioned as a “DeFi yield aggregator” and “DeFi Barometer”, Yearn.finance had a TVL of more than US$400 million. Just one month after its launch in mid-July, YFI’s price exceeded Bitcoin’s. As YFI possessed limited supply(30,000), some community members proposed additional issuance plans to change the total amount of 30,000 to 60,000, which was called Yearn Improvement Proposal #8.
Two weeks after YFI went alive, due to irreconcilable disagreements on Proposal 8, some community members of YFI (mainly Chinese communities) made the announcement of the fork, a.k.a. YFII. The main reason was that original miners were unwilling to dilute the currency and the new participants in the ecosystem wanted the opposite.
The fork of YFII can be attributed to different “expectations’’ within the community. Among holders of YFI tokens, few people were willing to watch their tokens get diluted. However, the new participants- especially DeFi platers in the Chinese community- viewed the game as an unfair one. Due to the duration of YFI Mining was only 10 days, this DeFi project had little place for Chinese players to make difference from the beginning, because of spatio-temporal limit. Therefore, Chinese big players flooded into YFII project, turning YFII into a giant with thousands of users within a week. The process of contract security audit was quick and the lock-up amount surpassed YFI accordingly. That’s the scenario of how China’s DeFi community has collectively established its own project YFII.
After YFII’s good try, YFII began to fork as well and its successors soon showed up in the market, such as YFIII, YFV… These YFX were actually dazzling but they didn’t manage to maintain a core community base. They were not as lucky as YFII. Only YFII is the chosen one on account of all good aces.
Although many forks of the popular DeFi projects originate from China, there are few of them who become DeFi Blue Chip or even survive due to lack of innovation.
However, launched in batches during the DeFi boom in August and September this year, some Chinese excellent DeFi projects, with user experience and usage scenarios, has their own uniqueness and innovations, such as IOSG’s Portfolios- DeBank& DODO.
DeBank
DeBank is a dashboard for tracking your DeFi portfolio, with data and analytics for decentralized lending protocols, stablecoins, margin trading platforms and DEXes.
The interface of DeBank is nice and user-friendly. By using DeBank’s one-stop DeFi wallet, users can save a lot of time and discover investment opportunities through detailed real-time data.
DODO
DODO is an on-chain decentralized exchange/liquidity provider for everyone, powered by the Proactive Market Making (PMM) algorithm, offering a dynamic pricing curve, being able to offer up to 10x more liquidity than Uniswap for the same amount of capital. Moreover, because providing liquidity to Uniswap requires exposure to both tokens in the pool, DODO allows LPs to have single token exposure. Last but not least, DODO will allow users to list new tokens according to a flexible bonding curve design, while Uniswap supports only a constant product curve as a pricing mechanism.
As we can be see from portfolios, Chinese market bears some characteristics where the projects’ operational capability and localization are generally preferred than their technological creation.
Chinese community in the DeFi ecosystem
At present, among the top ten DeFi protocols, there is no Chinese project(Currently DODO is NO.15).
There are several reasons for the phenomenon of China’s lag on the DeFi track as follows:
- The pacemaker DeFi protocols are mainly developed on Ethereum public chain, and most of the developers have worked on Ethereum for many years. Meanwhile, core community members of Ethereum are mainly Europeans and Americans, which brings cultural differences and leaves Chinese developers as outcasts. Nevertheless, as Chinese Polkadot community is getting much stronger, let’s see what will happen in the Polkadot ecosystem.
- Unlike overseas communities that can gather on Twitter、Discord or Telegram groups with more capacity in followers, Chinese projects and users rally in Wechat groups(the mostly used messaging and social media in China). With an upper limit of 500 people in wechat group, it’s hard to convey precise information in a uniformed way because the information tends to be fragmented and layered. It’s harsh to be widespread.
- Although they have seemingly prosperous development in homemade public chain, Chinese public chain projects(Conflux, NEO, Nervos, TRON) and three major exchanges(Binance’s BSC, Huobi’s Heco, OKEX’s OKChain) may have hardship forging ahead, because most of their job is copycatting. They want to attract Chinese developers to have their own ecosystem or to build a playground for their own instead of doing something new. It is difficult to collaborate with DeFi Lego on Ethereum to produce composability.
Future of Chinese DeFi ecosystem
As blockchain world is open, decentralized, and permissionless, it should be more smooth to communicate and collaborate between the Eastern and Western communities.
Dating back to history, the West, mainly Europe and the United States, has always been the front-runner since the Industrial Revolution in the 1860s. Eastern countries, by that I refer to China, didn’t participate in the world system until they entered the WTO in 2001. That’s to say, they were frameworked to a certain extent and had more difficulty innovating under the existing rules in academic research, modern finance, technology applications, etc. However, they do have a lot of siver linings behind the cloud. As for now, Chinese community is just warming up to DeFi. We can expect more resource to come to this field and then incubate more achievements just as some exemplary giants do (Alibaba, Wechat, Fintech, etc.)
“There are at least two kinds of games,” states James P. Carse as he begins this extraordinary book. “One could be called finite; the other infinite. A finite game is played for the purpose of winning, an infinite game for the purpose of continuing the play.”
🦄 About IOSG
Founded in 2017, IOSG Ventures is research and community-driven with offices across China, US and Singapore. We focus on Open Finance, Web3.0 and cross-chain ecosystems, investing in teams with top potential worldwide. Our portfolio covers more than 60 projects, including Layer-1 blockchains (Near, Polkadot, Cosmos), middleware (Celer, Raiden, Reach) and applications including DeFi (MakerDAO, Synthetix, UMA). We have been actively involved in various developer & DAO communities. We believe in long-term partnership and we work closely with our portfolios to advise and support them along their journey of entrepreneurship.
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