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Takeaways from Korea Blockchain Week (Aug 22)
Overview of the developments in the Korean Web3 market
Based on the insights and experiences obtained from KyberVentures team’s week-long visit to the Korea Blockchain Week in Seoul, the August monthly blog will focus on providing an overview of the developments in the Korean market.
Korea is a uniquely challenging market for leading tech giants such as Google, Twitter, and Whatsapp to expand into. Google, the world’s search engine behemoth (over 90% market share), famously wasn't able to win over Koreans. More than 70% of Koreans use Naver for online searches, writing blogs, doing online shopping, and making payments. The local tech market is still very much in the hands of local platforms such as the aforementioned Naver or the messaging super-app Kakaotalk. Even though the web2 tech market has settled differently than in the rest of the world, Korea is still considered a great test market for IT companies around the world to launch and pilot new ideas due to tight customer feedback loops and overall short tech replacement/innovation cycles. Koreans are tech-savvy and proud to be early adopters.
South Korea is the country with the highest internet and mobile banking service adoptions among Asian countries. (Source)
These tendencies are also found in the crypto industry. When the ICO boom occurred in 2017, the number of users and volume of the central exchange in Korea exploded. Interestingly, the Korean CEX only supported Korean native currency (the Won) trades instead of other crypto pairs like ETH or BTC from the start. Since the Won is a relatively stable currency and the adoption of stablecoins was still low, more than 95% of volumes were paired with the Won. When Binance and other global exchange users talked about their Altcoin trading price in ETH/BTC, Korean traders measured their portfolio performance in Won.
Considering Korean users' high level of online banking usage, the ease by which fiat and crypto transactions could be processed through simple deposits and withdrawals of the Won, lead to explosive growth in crypto trading volume. The Korea Exchange formed partnerships with leading Korean banks to easily move users’ savings to the exchange through on/offline banking deposits to buy and sell cryptocurrency. Trading fees were also low (around ~0.05% lower than that of global exchanges), Won transactions were updated within one minute, and withdrawal to the user’s bank account was processed at any time for a fee equivalent to $1. The superior user experience helped Korean CEXs generate a globally leading volume and a number of users.
As most of the transactions to/from the exchange are made against the Won, it has become very difficult for foreigners who do not have Korean bank accounts to trade on Korean CEXs. South Korea is considered among the strictest capital markets with highly enforced capital control laws preventing funds from leaving the country, and tax code and anti-money laundering (AML) regulations that make it difficult for foreigners to use Korean exchanges. These market conditions isolated capital injections (only Korean traders on Korean crypto exchanges), and the price of major crypto started depegging from the global market. There were huge arbitrage opportunities that market makers, funds, and retail traders to capitalize on, but it was almost impossible to withdraw any decent size of fiat currency out of Korea. This arbitrage opportunity was called the “Kimchi Premium” and went up as high as nearly +55% in Jan 2018.
In 2018, when the price of cryptocurrency collapsed and the kimchi premium bubble imploded, the Korean government began to introduce a more rigorous procedure for self-certification screening by Korean CEXs; banning ICOs of Korean companies, and investing in token projects to avoid irrational trading and secure investors.
Then how about the DeFi-adaptation in the Korean market in the subsequent DeFi summer?
If you look at the research paper released in 21 by Chainalysis, you can see that only 15% of crypto volumes in Korea were handled through decentralized offerings. Even in Japan, with a significantly lower trading volume, DeFi volumes were higher than in Korea. Korean users treat Crypto as a speculative investment asset. Therefore, Crypto projects and companies targeting Korean markets from 2017 to early 2021 often focused more on branding and trading volume through exchanges rather than securing DApp users through direct marketing.
This trend began to change in 2021 with the emergence of the L1 chain Terra and the popularity of the Anchor Protocol, which attracted the most attention and TVL. Thanks to the stablecoin's interest of 19% and the steady price increase on the Luna token, many Korean crypto traders had their first touchpoint with non-custodial wallets when using Terra Wallet. Users who never held crypto before began to use decentralized exchanges or landing platforms. Ultimately, and unfortunately, of course, this wide retail user adoption caused a great number of victims from the collapse of Terra and provided further justification for the Korean authorities to intervene and formulate new regulations on DeFi set to be implemented over the next couple of years.
Besides boasting top retail trading volumes, Korea has recently also developed to become a powerhouse for GameFi. The Korean game company WeMade is at the forefront of this trend. As of today, it launched over 19 decentralized games on the proprietary development platform WeMix and deployed them on the Klaytn chain. This pushes the industry a step closer to mainstream adoption of blockchain and cryptocurrency.
It feels natural for Korean web2 gaming companies with their valuable IPs, decades of game ecosystem, and game user management capabilities, to expand their business to the web3 game space as they can immediately launch high-quality games.
Korean web2 game companies such as; Come2us, Nexon, Neowiz, Netmable, and NCsoft, started to expand their businesses to web3. This will be an immense opportunity for the overall industry to become more mainstream. Web2 users will onboard more easily and learn the value of decentralization and asset ownership naturally. For companies, these can be channels for new user inflows, and generate revenue through token/NFT sales and DeFi operations. We believe this trend to be the start of a new significant wave of growth and investment opportunities.
Counting in overall market trends, a few L1 foundations started to see Korea as a strategic market and have been actively entering Korea since 2022. The representative L1 is the Polygon foundation, which has formed various partnerships with Korean companies and explained, "We have selected Korea as a strategic point to growing the Web3 ecosystem”, adding: "We plan to provide comprehensive support to domestic developers." Aptos, Sui, and Starknet foundations are also actively announcing their plans to hire Korean employees and are paying attention to securing shares in the Korean market.
Besides L1 foundations, Korean conglomerates are also showing an increased interest in web3. At the Adoption Conference panel session hosted by CrossAngle, Korean conglomerates that started their web3 journey shared their views on the future of the industry. It was interesting that most of them shared similar reasons for entering web3; namely sustainable business operation through community formation and overall market demand. Conversely, all the panel members also emphasized overcoming the same barriers.
The biggest problem mentioned is the low scalability of current networks. Existing L1 networks can’t handle the onboarding of large-sized web2 games or social platforms with hundreds of millions of users with the current TPS limitations. No matter how sleek the UI or user onboarding process is, if the network cannot be safely expanded, companies won’t be able to provide the same level of UX or speed to users.
The second concern is regulations and restrictions by Korean authorities. After the Terra incident, the Korean government has continued to discuss introducing stricter rules on handling virtual currency. Much remains uncertain and not yet confirmed, which makes it difficult for companies and projects to establish long-term plans. Due to the virtual asset issuance (ICO) ban in 2017, domestic companies can’t issue coins, so most issuers have to establish corporations overseas or are operating in the form of a DAO.
However, if reasonable regulations are introduced over time and an environment of planning certainty is created, the inflow of investment funds from institutions will accelerate. In addition, it is expected that companies that are currently reluctant to enter digital asset-related businesses due to regulatory uncertainties will enter the web3 space with more confidence.
KyberVentures will closely follow the Korean market's growth, with a special focus on the Metaverse, NFT, and GameFi sectors.