Author: IGNAS

Compiled by: Shenchao TechFlow

In South Korea, almost everyone knows about Bitcoin.

In 2017, this country with a population of over 50 million accounted for 20% of all Bitcoin transactions and became the largest market for Ethereum.

South Korean students check Bitcoin prices during breaks, office workers trade while waiting in line for coffee, and elderly people participate in market trading from home.

The frenzy peaked when local Bitcoin prices were 40% higher than those on U.S. exchanges. Coinmarketcap even removed South Korean prices from cryptocurrency listings. This phenomenon is known as the "Kimchi Premium."

In 2018, when the government cracked down on speculation, this Kimchi Premium disappeared. First, the government mandated the use of real-name bank accounts for cryptocurrency trading, and then banned ICOs altogether that same year. The Kimchi Premium may have long vanished, but the frenzy continues.

By 2022, South Korea ranked third in Bitcoin trading volume, accounting for 8.7% of the market. The United States led with a 69.8% share, followed by Japan with 11.3%.

One explanation for this frenzy is South Korea's rapid adoption of new technologies, but there are more factors at play: culture and narrative.

Understanding South Korean Culture: The Miracle on the Han River

The Korean War from 1950 to 1953 left South Korea as one of the poorest countries in the world. By 2023, it had become one of the wealthiest.

The rapid economic growth is attributed to family-owned conglomerates (known as chaebols), a focus on exports, hard-working labor, and the mindset of South Koreans. This mindset emphasizes swift action and efficient task completion.

The "빨리 빨리" (hurry hurry) mentality permeates South Korean life. Every second counts. Food must be delivered quickly, trains must arrive on time, and buildings are constructed within weeks. Whatever you do, do it quickly and efficiently. Getting rich quickly is no exception.

However, becoming wealthier has become more challenging. Since 2012, economic growth has slowed from double-digit growth in the 2000s to about 3%. Therefore, ways to get rich include investing in stocks or real estate, but the market is not suitable for everyone.

With high-risk investments lacking, the appeal of real estate and domestic stocks has diminished as property prices soar and interest rates rise. Derivatives trading has strict certification requirements, and the overall tech stock index KOSDAQ has seen little growth since 2011.

For a long time, the alternative has been gambling.

The way to get rich quickly------gambling.

The problem is that gambling is even illegal in South Korea.

Games, including lotteries, horse racing, boat racing, and bicycle racing, as well as casino gambling, are illegal------even for South Koreans traveling abroad.

According to data from the Korea Center on Gambling Problems, established by the South Korean government in 2012, the prevalence of gambling addiction in South Korea is two to three times higher than in other major countries. While it is unclear how these statistics are compiled, the widespread social theory that South Koreans are particularly susceptible to gambling addiction has influenced related legislation.

With other investment options limited, cryptocurrency is seen as a way to get rich quickly.

South Koreans view cryptocurrency exchanges as a form of gambling, trying to make large sums of money in a short time.

In the West, narratives about "not being limited to banks" in cryptocurrency or Bitcoin as digital gold dominate. However, in South Korea, there is a high level of trust in finance and banking, making these narratives less impactful.

Ultimately, the story of Bitcoin as digital gold is not compelling enough because gold cannot spike 100% in price in a day.

But altcoins can.

To keep traders engaged and provide an adrenaline rush, some local exchanges have become experts at meeting this demand.

For example, being listed on a major exchange always attracts retail investors' attention, but only in South Korea does delisting present an opportunity as well.

The delisting window requires deposits to stop, so as the inflow of new tokens is restricted, speculators drive up prices to gain last-minute profits before trading is halted. Naturally, delisting notices generate as much or even more attention among speculators than listings do.

An even more thrilling feast is the maintenance of exchanges. When deposits and withdrawals are closed but trading is not banned, this situation is referred to as "가두리" (a closed net used to hold live fish). Similar to fish trapped in an inescapable net, a closed market does not rely on external prices and cannot be arbitraged, making trading in such an environment a true feast for gamblers.

Fairly speaking, this type of internal market trading is also popular in South Korean stock trading, and cryptocurrency provides a new opportunity to use this tactic.

Some exchanges even start without opening deposits and withdrawals for cryptocurrencies, focusing on internal market trading.

But cryptocurrency regulation has followed…

Since 2021, exchanges must register with financial regulatory authorities.

All exchanges must have an ISMS security license and real-name bank accounts (only five exchanges have both). Failure to register can lead to up to five years in prison or fines of up to 50 million won for cryptocurrency exchange operators.

Cryptocurrency regulation has imposed restrictions on trading, requiring each investor to use a real-name bank account. This means South Koreans must open a real-name account at a bank supported by the exchange.

South Koreans even need to report deposits/withdrawals to their wallets or other centralized exchanges by registering withdrawal addresses with local CEXs.

The ultimate result of this regulation has been the closure of hundreds of cryptocurrency exchanges.

Currently, only five exchanges have real-name bank accounts. One of these exchanges, Gopax, was supposed to be acquired by Binance, but a report in a South Korean daily stated that the Financial Services Commission (FSC) is reviewing Binance's acquisition due to a recent lawsuit filed against Binance by the U.S. Securities and Exchange Commission (SEC).

Why DeFi is not popular in South Korea

Given all these changes and the ongoing cryptocurrency bear market, the narrative of cryptocurrency as a gambling alternative should prompt South Koreans to turn to DeFi.

However, DeFi is not as popular in South Korea as it is in the West, despite efforts from major blockchain companies in South Korea.

For example, Klaytn is the largest Layer 1 blockchain in South Korea, with its own DeFi, NFT, and GameFi ecosystems. Klaytn is supported by Kakao, a South Korean company similar to Facebook, with 53 million active users. There is even a Klaytn wallet within the Kakao Messaging App.

As of the time of writing, there are 34 DeFi applications on Klaytn (according to DefiLlama data), with a total locked value (TVL) of $123 million. This figure is decent, but in reality, the adoption rate of DeFi in South Korea is low.

Based on my personal conversations with South Koreans involved in cryptocurrency investment, I noticed that only a few showed interest in DeFi. Even my colleagues working at a cryptocurrency exchange do not have much fondness for DeFi, with only a few familiar with setting up a Metamask wallet.

Their motivations for avoiding DeFi vary, but I now believe the main reasons are as follows:

• In a society with higher trust in the financial system, the benefits of self-custody are not compelling enough, and major centralized exchanges like Upbit and Bithumb already provide sufficient trust.

• DeFi is more complicated to use compared to centralized exchanges: wallets, private keys, deposits, and withdrawals are all "annoying," and the user interface and experience of DeFi applications themselves have not been adapted for the South Korean market.

• In pursuit of quick wealth (gambling), centralized exchanges provide enough entertainment without the need to gamble on decentralized exchanges.

• Lack of Korean content. DeFi terminology is complex and aimed at English speakers.

• Single or even double-digit annualized returns are not attractive to speculators who prefer leveraged trading on exchanges (derivatives trading is banned in South Korea).

Since I am not Korean myself, I consulted my friends Doo and Garlam. Doo is the COO of StableLab and a growth AVC member of MakerDAO; Garlam is an executive partner at Momentum 6.

Question 1: Why do you think that despite the popularity of cryptocurrency in South Korea, DeFi is not as popular?

Doo:

While South Korean users show interest in aspects like lending and yield in DeFi, the use of self-custody options like Ledger and MetaMask is not widespread.

Moreover, most DeFi applications and websites are written in English, which poses a significant barrier for South Korean users.

Recent cases of Haru Invest and Delio closing withdrawals illustrate this, prompting many users to opt for Korea-friendly centralized finance (CeFi) platforms to experience "DeFi-like" lending and yield.

Garlam:

I believe there are three key factors:

Structure: The traditional banking system has a rigid structure and clear guidelines, making the evolving DeFi difficult for some to adopt. For example, due to certain anti-hacking, key tracking, and authentication software only being supported on Internet Explorer, some people still find it difficult to use Google Chrome for banking. This rigid structure drives many towards familiar platforms like centralized exchanges.

Busy: South Koreans' busy work and social schedules limit their ability to keep up with the rapid developments in DeFi. Many are either too busy or too complacent to invest time in understanding this constantly evolving field, especially if the information is provided in a foreign language and only remains relevant for a short time.

Timing: Participation in DeFi often starts with high-risk, high-reward projects before shifting to safer blue-chip DeFi. Due to the time zone difference between South Korea and the U.S., where most projects are released and updated, many South Koreans frequently miss opportunities. This, combined with the need to constantly monitor English news (which is not commonly used in South Korea), leads to poor initial experiences in DeFi and hinders their ability to keep pace with developments.

Question 2: What changes need to be made for DeFi to gain adoption in South Korea?

Doo:

There are two main pathways (though not mutually exclusive) to achieve this. One is to be more "Korea-friendly" by providing Korean-language materials and websites.

The other is to collaborate with popular centralized entities. For example, Coinone is one of the few major South Korean exchanges that has integrated DeFi yield positions, allowing its users to benefit from these DeFi yields.

This is a step towards gradually guiding users to use DeFi directly in a non-custodial manner.

Garlam:

Very simply. South Koreans need to make money from DeFi. Once they taste the sweetness, the frenzy will begin.

Question 3: What do DeFi protocols and communities need to do to attract South Korean users to participate in DeFi?

Doo:

Attracting South Korean users varies by DeFi protocol. For some protocols, attracting South Korean users may be more challenging than for others.

The complexity of the project's product often determines the difficulty of attracting users.

For example, options and insurance are complex products that most South Korean users find hard to understand. Therefore, such protocols may be more successful in attracting South Korean users to trade their tokens rather than use their products.

For simpler DeFi products, marketing and, most importantly, acquisition channels need to be considered. Marketing can be done both passively and actively.

Passive methods include translating websites into Korean and providing Korean guides so users can easily find and use them. Active methods may include participating in interviews and speaking at events in South Korea.

Maintaining a Korean Telegram or Kakaotalk group may also be beneficial. In terms of acquisition channels, protocols need to collaborate with Korean centralized finance platforms or Korea-friendly crypto mobile wallet companies that can provide DeFi products.

Compared to other regions, mobile wallets are the preferred method for South Koreans to access cryptocurrency.

Garlam:

Localization------South Korea is a culturally homogeneous market. Without a genuine Korean team operating within South Korea, it is challenging for teams to enter the South Korean market.

KOLs and media------they are the preferred medium for people to exchange information. Identifying good and bad participants in Telegram and Kakao groups and educating the administrators of these groups (even providing them with promotional budgets) could yield the highest return on investment for expansion.

First-mover advantage------As mentioned earlier, during uncertain times, people often revert to their default modes. Tokens traded on South Korean exchanges allow them to become familiar with their names and historical prices. Once people can derive some benefit from a token, they are more likely to engage with the entire ecosystem.