On January 16, Klaytn Foundation and Finschia Foundation proposed to merge our technology, user bases, and resources to build the largest blockchain in Asia. This post is part of a series of communications to help both our communities understand our strategy and intent behind the merge proposal, in order to facilitate informed discussions that we will be actively listening to leading up to the governance vote.
This post is divided into two main sections:
- The growing institutional demand for crypto highlights key facts and figures that indicate rapidly increasing interest in cryotp from financial institutions; and
- Meeting institutional investor requirements through our combined strengths details how the unification of Klaytn and Finschia’s strengths will make Project Dragon attractive to institutional investors.
Through this post, we will explain how the merged chain will respond to the growing institutional demand for cryptocurrencies. Please note that the contents of this post are based on current data and insights, and may be subject to change based on the evolving industry landscape.
The growing institutional demand for crypto
The recent approval of the Bitcoin Spot ETF, a hot topic in the industry, was a long-awaited event for crypto as a whole, as many products have previously been denied approval due to legal risks and possible market corrections. This is a strong indication that the way the institutional market views crypto is changing.In response, the industry is moving quickly, with institutions such as Blackrock having already filed for a spot Ethereum ETF filing.
Beyond these ETF products, institutional investors are increasingly interested in cryptocurrencies as a whole. According to Coinbase’s latest survey (November 2023), 45% of institutional investors believe they will increase their allocation to cryptocurrencies in the next three years, and 57% believe the price of cryptocurrencies will increase in the next 12 months – a stark contrast to the signals from the 2022 survey, when only 8% of institutional investors were positive about cryptocurrencies. Beyond cryptocurrencies as an investment, respondents are generally also optimistic about blockchain’s ability to disrupt traditional payments and trade payments markets.
This demand is expected to continue to grow as the crypto market and blockchain industry approach more traditional institutions. However, responding to this institutional demand is not just about listing on exchanges, but also about the performance of the project itself, as well as the chain’s sense of scale, brand, infrastructure, and internal systems.
In the next section, we will highlight what institutional investors are looking for, what Project Dragon is prepared for, and what strengths we will have once merged that will help Project Dragon respond to this institutional demand.
Meeting institutional investor requirements through our combined strengths
Traditional institutional investors have different investment strategies and risk sensitivities, depending on their nature and mode of operation (active or passive), but for simplicity’s sake, let’s look at the commonalities.
The project’s fundamentals, prospects, and brand
Institutional investors focus on whether the projects they invest in will perform well in the long run, so the fundamentals and prospects of the project itself are among the most important aspects.
As we explained in the proposal, in order to strengthen the fundamentals of these projects, Project Dragon will launch the Defi TF to strengthen the large-scale DeFi infrastructure and build an ecosystem linked to RWA (Real World Assets) that is familiar to existing institutional investors.
On this front we are already one step ahead, having partnered with Tokeny, an RWA tokenization platform, joined the ERC3643 RWA Token Association, launched a gold-pegged token, developed ship tokenization products, tokenized real estate with Elysia, and made crypto-to-fiat payments with LINE Pay. In addition, we plan to pursue roadmaps that will strengthen the fundamentals and prospects of the project itself, such as discovering AI DApp categories, onboarding Asian SSS game companies, and large-scale on-chainization of Web2 assets.
In terms of strengthening these fundamentals, we are already in active discussions with several stablecoin issuers to onboard their native stablecoins onto Project Dragon. These native stablecoins typically have higher liquidity and market capitalization thresholds which the merged chain will be able to fulfil.
From a branding perspective, Project Dragon’s unique strength of being integrated with Kakaotalk and LINE messenger, two of Asia’s most popular messaging apps, gives us an immediate advantage in attracting the attention of traditional institutional investors who may value our close business relationships with Kakao and LINE. Additionally, Klaytn and Finschia have years of experience operating chains and have built brands and recognition centered on South Korea, Southeast Asia, and Japan, respectively.
Transparency and decentralization
As the rejection of the original Bitcoin Spot ETF illustrates, institutional investors and regulators are highly sensitive to the possibility of market manipulation in the assets they invest in, or rapid price movements driven by previously undisclosed information.
To mitigate these concerns, we will apply a much more rigorous and transparent disclosure regime, especially relating to the distribution of tokens, and new ecosystem and infrastructure funds will either follow predetermined governance or have robust internal control and disclosure systems in place. For example, any grant programs will be operated transparently from application to post-evaluation to ensure that the grant funds are being utilized responsibly..
In addition to transparency, decentralization is also an important factor, especially since traditional U.S. institutional investors currently do not invest in cryptocurrencies if they have security characteristics. Therefore, decentralization is not only necessary for the continued development and security of the protocol itself, but also an essential milestone for Project Dragon in its institutionalization process.
With the chain merge, Project Dragon will gain increased governance decentralization by virtue of a larger governance body and decentralization of voting rights, as well as increased technical decentralization from having a larger number of conensus nodes and endpoints.
In addition to this, Project Dragon will continue to pursue the direction of becoming permissionless and politically decentralized. By allowing anyone to participate as a consensus node with a minimum stake, the number of validator nodes will sharply increase. Additionally, anyone will also be able to freely delegate their tokens to validators to participate in governance.
Large market capitalization, liquidity, and global exchange listings
Institutions typically run large funds, which means that their investments need to be above a certain minimum market capitalization and liquidity threshold, and, of course, they need to be listed on global exchanges and included in a number of indices, which can have stringent requirements. As an example, to get into the S&P Cryptocurrency LargeCap Index, a digital asset needs to meet the following criteria:
- Market capitalization: A digital asset must have a market capitalization of at least US$1 billion. “Market capitalization” is defined as the “effective coin supply” multiplied by the coin price.
- Liquidity: Must have a three-month MDVT (median daily trading value) of at least US$1 million. At the discretion of the Index Committee, shorter periods of MDVT may be allowed.
There are several other criteria required by other indexes such as the Bloomberg Galaxy Crypto Index, but the most important ones are as follows
- Be in the top 25 overall by market capitalization.
- The asset’s market capitalization (relative to the combined market capitalization of the top 25 assets) must be at least 1%.
Based on these criteria, 12 cryptocurrencies are currently included, ranging from Bitcoin to XLM (Stellar, $3.2 Billion). Several other indexes exist, including the Nasdaq Crypto Index and the MarketVector Digital Assets Index, with the commonality that they are composed primarily of the highest market capitalization crypto assets. With a market capitalization of around $900M at the time of integration and the combined liquidity of both chains, Project Dragon will be able to meet these criteria faster than before.
In addition, the trading prices and liquidity of these indices are mostly provided by data providers that they trust, and in the case of data providers, a few global exchanges are the standard for pricing and liquidity. For example, the S&P uses data from Lukka Inc. which includes exchanges such as Binance, Coinbase Pro, Crypto.com, Gemini, Huobi, Kraken, and OKX. For Project Dragon, we plan to collaborate and list on fiat on- and off-ramp exchanges that are accessible to institutional investors, including those already listed, which is expected to be easier than doing so individually as two separate chains.
Investment and information infrastructure, including Custody
As you can see from the figures above, the infrastructure required by institutional investors is not just limited to crypto exchanges. Since it is very difficult for institutional investors to store and manage cryptocurrencies themselves, they primarily use custodians to store their cryptocurrencies. In fact, since the approval of the ETF, we have seen new custodians obtain various security and audit licenses (ISO, SOC, etc.) in order to meet the demands and high standards of institutional investors. Therefore, being on the list of custodians is very important to attract institutional investments.
They also need a brokerage that can do this for them, as they often buy and sell in large quantities, and many of their trades are done through intermediaries. Finally, there will need to be steps taken to allow cryptocurrencies to be purchased within the existing financial infrastructure, such as via the Bitcoin ETFs that we see today.
Project Dragon intends to start with custody and brokerage, and gradually build out the related infrastructure. For custodians, in addition to the S&P Cryptocurrency Index mentioned above, it’s important to have an integrated chain of trusted global custodians, such as Bitwise and BlackRock, among many others. We will be working with integrated trusted custodians and brokerages, prioritizing regions where there is demand first.
In addition, we have a research infrastructure that will give us valuable insights on key players in the industry, a data analytics platform that provides us with direct access to important data, and this year we will be working with a number of different research firms that institutions can access, such as Messari, as well as a service that allows us to share chain information on the Bloomberg Terminal, which is used by many institutions.
For obvious reasonsthese infrastructures, including Custody, often prioritize the integration of assets with high name recognition and market capitalization. Therefore, the larger and more recognizable the project, the more favorable it is to negotiate and integrate, and in this respect, naturally, Project Dragon will be in a much stronger position.
As big players in the market, institutional investors are only interested in the key players of the industry. As Asia’s largest blockchain ecosystem, Project Dragon will have an overwhelming advantage in terms of growth, branding, decentralization, infrastructure support, and integration, giving us the capability to capture the coming wave of institutional investor participation.