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Why are Koreans so passionate about cryptocurrency trading but not enthusiastic about DeFi?

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Korean students check Bitcoin prices during breaks, office workers trade while queuing for coffee, and elderly people participate in market transactions at home.

Original Title: "Korean Cryptocurrency Culture: Why Koreans Like Cryptocurrencies but Not DeFi?"

Original Author: IGNAS

Original Source: TechFlow

In Korea, almost everyone knows about Bitcoin.

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

Korean students check the price of Bitcoin during their break time, office workers trade while waiting in line to buy coffee, and elderly people participate in market transactions at home.

When the local Bitcoin price is 40% higher than that of US exchanges, the frenzy reaches its peak. Coinmarketcap even removed the Korean price from the cryptocurrency market. This phenomenon is called "Kimchi premium".

In 2018, when the government cracked down on speculative activities, the premium of kimchi disappeared. Firstly, the government enforced the use of real-name bank accounts for cryptocurrency transactions, and then banned ICOs comprehensively in the same year. The premium of kimchi may have disappeared long ago, but the craze continues.

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

The explanation for this trend is not only the rapid adoption of new technologies in South Korea, but also cultural and narrative factors.

Understanding Korean Culture: The Miracle of Han River

The Korean War from 1950 to 1953 made South Korea one of the poorest countries in the world. By 2023, it became one of the wealthiest countries.

Rapid economic growth is attributed to family business groups (known as chaebols), emphasis on exports, hard work of labor force, and the mindset of Koreans. This mindset is characterized by quick action and efficient completion of tasks.

(Fast) mentality has permeated into the lifestyle of South Korea. Every second is important. Food must be delivered quickly, trains arrive on time, and buildings are constructed within a few weeks. Whatever you do, do it quickly and efficiently. Getting rich quickly is no exception.

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

Due to a lack of high-risk investments, the appeal of real estate and domestic stocks decreases when real estate prices are expensive and interest rates rise. Derivative trading has strict certification requirements, and the overall technology stock index KOSDAQ has hardly grown since 2011.

For a long time, substitutes have always been a gamble.

Quick way to get rich - gambling

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

Games including lotteries, horse racing, boat racing, and cycling, as well as gambling in casinos, are all illegal - even for South Koreans traveling abroad.

According to data from the South Korean Gambling Problem Center established by the South Korean government in 2012, the addiction rate to gambling in South Korea is two to three times higher than in other major countries. Although it is currently unclear how these statistics are calculated, the theory that South Koreans are particularly susceptible to gambling addiction is a widely circulated social theory, which also affects the formulation of relevant laws.

Due to restrictions on other investments, cryptocurrencies are seen as a fast way to get rich.

Koreans view cryptocurrency exchanges as gambling, attempting to earn large amounts of money in a short period of time.

In the West, the dominant narrative surrounding cryptocurrency is about "going beyond banks" or Bitcoin as digital gold. However, in Korea, there is a high level of trust in the financial and banking industry, resulting in less influence from these stories.

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

However, counterfeit currency can.

In order to maintain the participation of traders and bring about an adrenaline rush, some local exchanges have become experts in meeting demand.

For example, being listed on a major exchange always attracts the attention of retail investors, but delisting from the exchange is also an opportunity, only in Korea.

The delisting window requires a halt to deposits, so with the inflow of new tokens restricted, speculators will drive up prices to gain the final profits before trading is no longer possible. Naturally, the delisting notice has attracted the same or even more attention among speculators as the listing notice.

The more exciting feast is maintained by the exchange. When deposits and withdrawals are closed, but trading is not disabled, this situation is called "closed net" (a closed net used to load live fish). Similar to fish that cannot escape the net, the closed market does not rely on external prices and cannot be arbitrated, making trading in this environment a true feast for gamblers.

To be fair, this type of internal market trading is also popular in stock trading in Korea, and cryptocurrency provides a new opportunity to use this method.

Some exchanges even do not offer cryptocurrency deposits and withdrawals from the beginning, focusing on internal market trading.

However, cryptocurrency regulation follows...

Since 2021, exchanges must register with financial regulatory agencies.

All exchanges must have an ISMS security license and a real-name bank account (only 5 exchanges have both). The person in charge of an unregistered cryptocurrency exchange may face up to five years in prison or a fine of up to 50 million Korean won.

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

Koreans even need to register withdrawal addresses at local CEX and report deposits/withdrawals to their own wallets or other centralized exchanges.

The final result of the regulation was the closure of hundreds of cryptocurrency exchanges.

Currently, only 5 exchanges have real-name bank accounts. One of these exchanges, Gopax, was supposed to be acquired by Binance, but a Korean newspaper reported that the Financial Services Commission (FSC) is reviewing Binance's acquisition due to a recent lawsuit filed by the US Securities and Exchange Commission (SEC) against Binance.

Why DeFi is not popular in South Korea

Considering all these changes and the ongoing bear market of cryptocurrencies, the narrative of cryptocurrencies as a substitute for gambling is likely to drive Koreans towards DeFi.

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

For example, Klaytn is the largest first-layer blockchain in South Korea, with its own DeFi, NFT, and GameFi ecosystem. Klaytn is supported by Kakao, a social media platform similar to Facebook in South Korea, with 53 million active users. There is even a Klaytn wallet in 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 US dollars. This number is not bad, but in reality, the adoption rate of DeFi in Korea is relatively low.

According to my personal conversations with Koreans involved in cryptocurrency investment, I noticed that only a few people showed interest in DeFi. Even my colleagues at a cryptocurrency exchange where I work do not have much love for DeFi, and only a few are familiar with setting up a Metamask wallet.

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

1. In a society with higher trust in the financial system, the benefits of self-custody are not enough to attract people, and major centralized exchanges like Upbit and Bithumb have already provided sufficient trust.

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

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

4. Lack of Korean content. DeFi terminology is complex and targeted towards English speakers.

5. Annualized returns of even single or double digits are not attractive to speculators who prefer leveraged trading on exchanges (derivatives trading is prohibited in South Korea).

Due to the fact that I am not Korean myself, I consulted my friends Doo and Garlam. Doo is the Chief Operating Officer of StableLab and a Growth AVC member of MakerDAO; Garlam is the Managing Partner of Momentum 6.

Doo:

Although Korean users have shown interest in DeFi loans and returns, the use of self-custody options such as Ledger and MetaMask is not widespread.

Additionally, most DeFi applications and websites are written in English, which is a significant barrier for Korean users.

Recently, the situation where Haru Invest and Delio have suspended withdrawals has proven this point. This has prompted many users to choose to use Korean-friendly centralized financial (CeFi) platforms to experience "DeFi-like" loans and returns.

Garlam:

I believe there are three key factors:

Structure: Traditional banking systems have strict structures and clear guidelines, which makes it difficult for some people to adopt the constantly evolving DeFi. For example, due to certain anti-hacking, key tracking, and authentication software only being supported on Internet Explorer, some people still have difficulty conducting banking transactions on Google Chrome. This rigid structure has led many people to turn to familiar platforms such as centralized exchanges.

Busy: The busy work and social schedules of Koreans limit their ability to keep up with the rapid development of 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 period of time.

Timing: Participation in DeFi often starts with high-risk, high-return projects and then moves towards safer blue-chip DeFi. Due to the time zone difference between Korea and the US where most project releases and updates occur, many Koreans often miss out on opportunities. This, combined with the need to constantly monitor English news (which is not commonly used in Korea), has led to a poor initial experience in DeFi and hindered their ability to keep up with the pace of development.

Question 2: What changes are needed for DeFi to be adopted in South Korea?

Doo:

There are two main approaches (although not mutually exclusive) to achieve this goal. One is to provide Korean materials and websites to be more "Korean-friendly".

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

This is a step-by-step guide for users to directly use DeFi in a non-custodial manner.

Garlam:

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

Doo:

The methods to attract Korean users vary depending on the DeFi protocol. For some protocols, attracting Korean users may be more challenging than other protocols.

The complexity of project products often determines the difficulty of attracting users.

For example, options and insurance are complex products that most Korean users find difficult to understand. Therefore, such agreements may be more successful in attracting Korean users to trade their token rather than using their product.

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

Passive methods include translating the website into Korean and providing Korean guides so that users can easily find and use them. Active methods may include participating in interviews and giving speeches at events in Korea.

Maintaining a Telegram or Kakaotalk group in Korea can also bring benefits. In terms of access, protocols need to collaborate with Korean centralized financial platforms that can provide DeFi products or Korean-friendly cryptocurrency mobile wallet companies.

Compared to other regions, mobile wallets are the preferred method for accessing cryptocurrency in South Korea.

Garlam:

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

KOL and media - they are the preferred medium for people to exchange information. Identify excellent and poor participants in Telegram and Kakao groups, and educate the administrators of these groups (even provide them with promotion budgets). This may bring the highest return on investment for expansion.

First impressions are important - as mentioned earlier, when uncertain, people tend to revert to their default mode. Trading tokens on Korean exchanges allows them to become familiar with their names and historical prices. Once people are able to derive some benefit from the tokens, they are more likely to participate in the entire ecosystem.