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When Nervos co-founder Guoning Lü saw some China-based decentralized finance (DeFi) projects raise millions of dollars in hours, he knew that the DeFi craze had officially reached the East.
One project saw its total frozen value (TVL) climb from $ 2.9 million to $ 14.4 million within two weeks of launch in August, then triple three days later. The project called DODO, a liquidity provider founded by a Chinese development team, now has a Total Locked Value (TVL) – the total amount of assets staked in the protocol – of over $ 100 million, ranking 16th in DeFi Pulse at press time.
DeFi is one of the hottest trends in the cryptocurrency world. So it’s no surprise that the DeFi craze can find its way into China, which has an active cryptocurrency community despite government restrictions on token trading and sales.
Chinese startups are playing a crucial role in the DeFi boom with highly localized and agile adaptations of Western projects and a laser-centric marketing apparatus on China’s crypto communities, industry observers say.
From July to mid-October, the number of DeFi searches skyrocketed on the Chinese social media platform WeChat. It nearly doubled during this time period, according to WeChat Index, a data analysis tool that includes keyword searches, articles, and forwards in WeChat moments.
Major Defi projects, such as NEST, DForce and YFII, all with a huge Chinese following, have raised millions of dollars within a few weeks and topped the TVL rankings on DeFi Pulse.
Not just imitators
China often has a reputation for adapting Western products to local markets or, in some cases, for imitating them. Compound allegedly China-based DForce “stole” its code and Chinese liquidity-mining site YFII cloned another overseas-based project, Yearn.Finance (YFI).
“Of course, many Chinese projects copy the code of DeFi’s western pioneers like liquidity leader Yearn.Finance and decentralized exchange UniSwap,” Lü said of Nervos. “However, Chinese companies are innovating in localizing original products and this is what makes DeFi products more popular in the country.”
DeFi-compatible crypto wallets, centralized exchange financing schemes for retail investors, and targeted marketing strategies are among the localized products and services that Chinese startups have created to pave the way for DeFi within the country.
DeFi’s Chinese startups reach many crypto investors through portfolios.
“Not many people know how to use DeFi applications directly, given its complex technical features and financial schemes,” Lü said. “However, many Chinese crypto wallets simplify and streamline the processes for user participation in DeFi projects.”
Hangzhou-based ImToken, for example, is one of the most popular mobile wallets in China. It has a built-in decentralized exchange (DEX), Tokenlon, which allows its users to trade tokens from different dapps on Ethereum, EOS and TRON within the wallet.
While the wallet is natively integrated with the Kyber blockchain protocol, the in-wallet DEX is built on top of the code of another DeFi 0x project. Founded in 2016, imToken secured $ 10 million through a Series A round led by IDG Capital two years ago.
While some U.S. counterparts may also provide similar services, such portfolios have emerged as one of the main channels for Chinese investors to participate in DeFi, Lü said.
Trading costs are another barrier for retail investors to participate in DeFi. Since most DeFi dapps run on Ethereum, transaction fees on the blockchain have become prohibitive for smaller investors.
Centralized exchanges, which are the major players behind China’s DeFi scene, have a solution for this, said Jason Wu, CEO of decentralized crypto lending startup DeFiner.
“Centralized exchanges are raising money from retail inventors to invest in DeFi so that millions of small Chinese investors can afford the high gas commissions in projects,” Wu said. In turn, these centralized exchanges increase trading volume and earn more commissions by listing and trading the native governance tokens of such DeFi projects on their platform.
Spread the word
Community building and marketing strategies are critical to the success of a DeFi project. In China, major opinion leaders (KOLs), in-person meetups, and Ask Me Anything (AMA) meetings online are all key parts of the crypto marketing apparatus, Jason Wu said.
“The crypto space, including DeFi, is very much KOL driven,” said Sharlyn Wu, chief investment officer at Huobi DeFi Labs. “For a new project coming to market, a number of KOLs are needed to support it and the KOL will influence a wider audience to get into the projects.”
According to Jason Wu, many of the KOLs in China understand English and translate and process the content of Western thought leaders to inform the Chinese crypto community.
There are three levels of KOL, says Sharlyn Wu. “Level 1 KOLs dig into white papers, the code and formula of business models, and Level 2 KOLs basically translate into the Chinese community. Level 3 KOLs are the ones that move things into the border retail market. ”
These Chinese influencers tend to be researchers, venture capitalists, and crypto journalists, Sharlyn Wu said.
Now, in-person meetings and conferences are returning as China appears to have contained the spread of the coronavirus. DeFi-themed meetings have increased recently in China, Jason Wu said.
“Last week, I attended three conferences in three Chinese cities. Some of the conferences held more than 1,000 attendees, “said Jason Wu, who recently launched his DeFi project.” There are retail investors, but most of the people are centralized exchange business development managers, DeFi startups and members of cryptographic media “.
Wu said Chinese KOLs tend not to use Weibo, the Chinese version of Twitter, as their main social platform. He noted that there are many limitations on the topics you can post on, such as direct trading between fiat and cryptocurrencies.
WeChat is also where most of the online dating in the crypto community takes place. Through Ask Me Anythings (AMAs), cryptocurrency investors ask Chinese KOLs about new DeFi products and the latest industry trends.
According to Jason Wu, Chinese crypto media also play an important role in informing people about new DeFi projects, as well as organizing conferences. They tend to focus on the technical side of the cryptocurrency business as China’s central bank restricts the promotion of cryptocurrency trading.
Deep pockets
“Cryptocurrency capital is always looking for returns and DeFi has offered a great opportunity.” Lü said. “When cash extraction took off earlier this year, capital not only started flowing but concentrated in the DeFi space.”
The capital behind China’s DeFi projects may not come from new capital but from two existing forces that have existed for a long time in the Chinese cryptocurrency industry, he said.
On the one hand, there are industrialists who have invested in infrastructure and ecosystems, who share dividends as the whole space grows, he says. On the other hand, there are institutional investors who tend to be more speculative and prioritize short-term gains.
China’s deep pockets in cryptocurrencies can be traced to its cryptocurrency mining industry with mining giants like Bitmain and MicroBT.
Centralized exchanges originating from China such as Huobi, KuCoin and Binance have also been a driving force behind many cryptocurrencies in China.
However, helping DEX newcomers could become a problem for China-originated centralized exchanges like Binance. In a recent interview with CoinDesk, Binance CEO Changpeng Zhao said centralized exchanges may need to share the crypto trading market with DEXs.
Binance, Huobi, and Kucoin, three exchange giants born in China, have made efforts to enter the DeFi space. Binance recently launched its patented blockchain, where developers can build DeFi applications on the platform, while Huobi launched DeFi Labs to bolster DeFi’s hopes. All three exchanges have listed DeFi assets as the governance tokens for trading.
The first wave to hit the DeFi scene in China is casino-style gambling, Sharlyn Wu said, noting that there has been too much speculation in the market. But that could change. And China may not always be in a position to follow the West.
“Even though Asia was initially lagging behind in the first wave of DeFi from the US, I think developers in China will lead DeFi the way they led CeFi,” Sharlyn Wu said.
