Enter the Dragon: China Will Unlock Value in the DeFi Space

By Chyna Qu, Co-Founder and COO of

China casts a long shadow in global business economics. Known as much for its rapid industrialization as its population of over 1.4 billion, the country has arguably been the primary source of growth in the world since the financial crisis, propping up established industries while supercharging emerging ones. This is true too in the crypto world, where China is becoming a considerable power in Decentralized Finance (DeFi). 

Blockchain in China is seen mostly as a source of innovation in the private sector, and so the functionality and use cases of DeFi are proving more popular than speculative trading in cryptocurrency. Because the sector was initially found mostly in clusters in English-speaking countries, China was somewhat late to get involved, but has already established itself as a center of excellence in the sector that can move markets and drive innovation. 

China’s embrace of DeFi

China has had mixed feelings about cryptocurrency, with a 2017 ban on trading still in place, despite accounting for about 65% of the world’s hash power according to some research. 

Despite some concerns, the Chinese government saw the enormous potential of the technology, as they decided that China should play a leading role in helping to create the technology that has the potential to upend global finance. Since China began publicly talking about approving licenses for blockchain companies two years ago, their activity in the space has accelerated. In the first month of 2020 over 33,000 blockchain companies registered in the country. 

This acceleration took place over the summer as the DeFi boom took hold. Searches for DeFi on WeChat, China’s “app for everything”, almost doubled between July and October according to the WeChat Index. Entrepreneurs and startups were swept along in this explosion of interest. This year’s global pandemic caused a lot of economic activity to grind to a halt and led to extreme volatility in financial markets. This in turn drove interest in alternative investments such as DeFi, and Chinese interest in DeFi coincided with this boom.  

As a result, Chinese regulators have moved from being bearish on crypto to showing signs of embracing it and favoring progressive regulation. In September, Conflux Networks created a new research institute to experiment with building a regulatory compliance platform that can bridge global DeFi applications and government regulations. Conflux has previously been backed by the state, showing the government wants to become a leader in the space. 

A Chinese liquidity project called DODO saw its total valued locked rise from $2.9 million to $14.4 million within two weeks after launching in August, before tripling three days later. This rose to over $100 million before crashing in mid-August and settling at $26 million. Chinese DeFi suffers from the same volatility and lack of liquidity that plagues more established work in the industry. But the market also holds the key to addressing these issues.

At first there was a high barrier to entry for DeFi in China and around the world, as early adopters needed to be knowledgeable in convoluted financial products, smart contracts, and fluent in English. This led to a tendency for geographical clustering that still hampers the industry to some extent. To overcome this, the Chinese DeFi community relies heavily on community building and marketing done by key opinion leaders, in-person meetings and online Ask Me Anything sessions. Entrepreneurs in China proved to be quick learners, and the country’s unique culture of collaboration allowed them to share knowledge and close the gap quickly on the Western markets where DeFi technology first originated. 

China’s potential to unlock value

Anyone paying attention to world economics and politics can tell that when China gets involved in an industry, the country creates a great deal of value. The government’s “Made in China 2025” push towards advanced manufacturing in areas such as biotechnology, AI and chip manufacturing will further the depth of technical talent in the country and provide the conditions for DeFi entrepreneurship to flourish. China’s ruling party certainly understands finance, and their actions indicate they want the country to be involved in creating the functionality and accessing the new markets that DeFi unlocks. 

Use cases from DeFi include smart contracts and greater control over interest rates in lending; these use cases alone threaten the world’s established legal and financial systems. Both of these industries have been largely consolidated in Western hubs such as London and New York, granting economic power and associated soft power to the nations that house them. China will see a move into DeFi as being an opportunity to innovate and create value, as well as a chance to continue their rebalancing of global power away from the Anglosphere and towards Asia. 

Having fewer established incumbents in the space may even prove an advantage as they can build their system from first principles without having to worry about protecting the incumbent companies and existing jobs that have already grown dependent on an outdated system. Look no further than mobile technology and payments: Here China became a world leader in adoption because of their lack of existing infrastructure, not despite it. Applying the same logic to DeFi puts China in place to be a major player. 

One reason the community as a whole welcomes further Chinese involvement is the need to solve liquidity. While interest in the sector has exploded, the industry is still run by whales and DeFi may be heading in the same direction. Not enough people see the potential of DeFi, which in turn leads to a lack of liquidity that prevents the use cases and functionality from being realized. China has the potential to bring a massive audience on board, and to serve as a gateway to other parts of Asia that are currently unreachable. Bringing this liquidity into the market would be a huge step towards bringing DeFi out of the crypto ecosystem and into the mainstream. 

Entrepreneurs should welcome the entry of China into the DeFi market. As well as providing much-needed liquidity and innovation, it grows the market substantially and gives entrepreneurs in the space access to new customers at scale. Those who are not familiar with the country should start brushing up. 

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.