'Na-Ka-Li-Co-Be-Dang-To,' a term coined to list Korean unicorn startups, is highly coveted in Korea for offering competitive salaries comparable to those of conglomerates like Samsung and fostering a horizontal corporate culture.
The first two companies in this sequence, Naver and Kakao, have spearheaded the growth of Korea's Web 2.0. They have continually expanded their business reach, leveraging their substantial capital and network.
Instead of aiming for global expansion, they focused on the Korean market, either acquiring or outcompeting their rivals. They appeared to assist local businesses through their platform's influence, but when the opportunity arose, they increased their fees and strengthened their dominance.
Witnessing the steep rise in crypto's price, both Naver and Kakao launched their Layer 1 platforms, Finschia and Klaytn, respectively. However, the outcomes were disappointingly outperforming./s
I'll cover how these two companies operated, briefly outline their current L1 ecosystems, share public reactions to the possibility of their merger, and provide my own thoughts on the matter.
In South Korea, when one speaks of monopolies, the term “chaebol” often comes to mind. Since the era of economic development in the 1960s, chaebols have received significant support from both the government and public during their corporate growth. This led to issues such as octopus-like expansion, unfair support to subsidiaries, and reckless investments. After the 1997 Asian financial crisis, government-led corporate restructuring somewhat resolved these issues. However, illegal inheritance and gifting, funneling business to certain parties, and infringement of the rights of small businesses emerged as new concerns. These problems have been partially addressed through legal amendments, regulation by the Fair Trade Commission, and public criticism. The chaebols have faced substantial checks and balances from the government, political circles, and civic groups, proportionate to the immense wealth they have accumulated in our society.
Recently, the word “monopoly” reminds everyone of Kakao and Naver before the chaebols. Over time, Naver and Kakao have been seen as heroes protecting the domestic market from foreign companies like Google and have brought about many positive changes to the lives of Koreans by providing a plethora of online services. However, as platform companies like Naver and Kakao began to dominate the market, concerns about monopolization and unfair competition have grown. They have been at the forefront of new technologies and innovations, but unlike the chaebols, they have faced little to none ramifications to their business practices.
As of December 4, 2023, according to the Fair Trade Act, Kakao Corporation has 144 domestic companies under its umbrella. Publicly listed companies include Kakao, Kakao Games, Kakao Pay, KakaoBank, and Neptune. The combined market capitalization of these companies is on par with the top 5 chaebols in the country.
Kakao, with over 200 domestic and international subsidiaries, broadly categorizes its business into two main sectors: “Platform” and “Content”.
The Platform sector primarily includes businesses like advertising utilizing KakaoTalk and the Daum portal, shopping (distribution), and connecting service providers and users, such as with their taxi service. The Content sector involves businesses where users spend their time. This includes Games (mobile, PC, others), Music (Melon, digital music distribution, record distribution, music production), Media (video production, management), and “Story” (entertainment, Piccoma).
Kakao's business diversification, based on its platforms with strong network effects, inevitably led to controversies regarding the infringement on local markets in Korea. Kim Beom-su, then-chairman of Kakao, was summoned to the was summoned to a hearing three times to address these octopus-like expansions. To generate revenue, platform companies inevitably end up infringing on the profits of local markets and SMBs. Kakao, in particular, faced backlash for exorbitant fees, charging up to 10~30% on services like KakaoMakers and KakaoTalk Gift, stirring up controversy last year. This overlaps with Naver's public apology in 2013 for infringing on local markets and subsequent withdrawal from numerous businesses. Following this, Lee Hae-jin, then-chairman of Naver's board, stepped down from all positions to lead the company's global market expansion as the Global Investment Officer (GIO).
Now, these two incarnations of monopoly are contemplating joining forces in the blockchain business.
*Fun Fact : As seen in the stock swap with CJ Logistics and Shinsegae, Naver generally adopts a “partnership” strategy with existing industry leaders to indirectly enter new businesses. On the other hand, Kakao opted for a strategy of acquiring existing businesses and directly jumping into the fray. Unlike investment through stock holdings, this model of acquiring and runninxg the business directly necessitates a greater focus on profitability. Unlike Naver, it's not as easy for Kakao to withdraw or reduce its domestic businesses due to the direct nature of its investment
Too Much Love Will Kill You: Klaytn, introduced in 2019 by Kakao's blockchain R&D subsidiary, GroundX, positioned itself as an “Enterprise Public Blockchain.” It's a more centralized but swifter fork of Ethereum. During the ICO boom,, Klaytn emerged, vocally opposing the prevalent scams and rug pulls. It indeed provided a favorable environment for developers, equipped with well-structured documentation. There was a saying that a $22.4M personal investment from Chairman Kim Beom-su and the distribution of Klaytn tokens through the Klaytn Governance Council, a form of DAO, onboarded a plethora of projects. However, the moral hazard associated with starting a business with “free” money, aka Grants, led to typical crypto-project calamities, ultimately impacting the users who trusted and invested in these tokens.
On January 3rd, 2024, a dramatic event unfolded as the Orbit Bridge, developed and operated by Korea's blockchain pioneer Ozys was hacked. The hack resulted in a theft of $81.5 million. Orbit Bridge, mainly used for transfers between Ethereum and Klaytn mainnets, saw its vaults plundered, raising fears of a bank run and significantly tarnishing Klaytn's reputation. This was particularly impactful because Ozys had been intricately involved with Klaytn from its early days, even announcing a partnership agreement in September 2023.
Less is More? : Fincshia is the rebranded iteration of Link Chain, launched by LINE's blockchain subsidiary LVC in 2018 (which, notably, underwent two rebrandings: Link Chain → LINE Blockchain → Finschia). Similar to Klaytn, it devised a strategy to distribute LN tokens as rewards to ecosystem participants instead of conducting an ICO. LINE even established its own exchange for the distribution of LN. However, its insular policy, designed to lock users within the LINE ecosystem, failed to shine. While Kakao's Klaytn garnered attention with the announcement of partnerships with major corporations at its inception, LINE Blockchain received comparatively less attention. Regulatory hurdles eventually forced the shuttering of its own exchange business, leading to six years of merely rumors and no substantial growth.
Yet, a significant positive development has recently enlivened the Finschia ecosystem. LINE NEXT Corporation, its developer, announced receiving an investment of $140 million from Cresendo Equity Partners and its consortium. Notably, at that time, Finshia's market cap was $200 million. This investment marked the largest in the Asian blockchain and Web3 sector for 2023.
On January 13th, the Korean blockchain industry was shaken by an announcement: the integration of Klaytn and Finschia. Here's a summary of the announcement by Finschia:
Summary of the Original Text
The integration with Klaytn is a strategy and proposal aimed at creating a larger Finschia ecosystem and accelerating its growth.
It's merely a proposal at this stage and will be decided through community feedback and voting.
Finschia will consider the community's opinions to come up with the best plan that takes into account rationality and potential for growth.
There will be a town hall for Q&A, and the community's proposals will continue to be developed thereafter.
Token Exchange Ratio
After the integration of Finschia and Klaytn, the new PDT coin will be issued and exchanged on a 1:1 basis with Klaytn. On the other hand, 1 FNSA is deemed equivalent to the price of 148 KLAY, hence 1 FNSA will be swapped for 148 PDT.
The announcement essentially states “the decision will be determined by the governance results.” There are suspicions that decisions are pre-made and voting is just a formality. However, I believe this integration proposal between Klaytn and Finschia genuinely seeks the community's opinion, as it was not widely known among most members beforehand.
*Fun Fact DeFi Kingdom and SwapScanner were heavily criticized for what appeared to be pre-arranged votes to pass Klaytn’s governance proposals. However, these votes were ultimately rejected, indicating a genuine democratic process within the community governance system.
1. Negative Reaction
"Murphy who retired in his 30s and later reversed his decision”(I know its long but indeed his nickname)now has about 6,000 subscribers, publicly criticized the recent development in a strong tone.
My Perspective on the Klaytn x Finshia Merger
(Please note, Your Honor, this is purely a personal opinion.)
Klaytn: Screwed due to the Orbit hack
Orbit was a service that facilitated asset transfers between Klaytn and other mainnets. Honestly, it's baffling why it was created in the first place. It's been practically ruined following a recent hacking incident.The company that created Orbit, Ozys, seems doomed, so there's a high chance that Orbit Bridge will soon vanish. Most DeFis operating on Klaytn relied on Orbit Bridge, so essentially, the entire ecosystem has been blown up. (For details, check out DeFi Llama.)
Finschia: Just retarded
A big corporation (LINE) created it, and it's been doing nothing significant for years. Of course, they might have done something, but people tend to say they've been idling if there are no visible results. I'm open to objections from true Finshia holders. As a result, it barely managed to list on Bithumb, but they definitely wanted to be on Upbit or Binance.
Benefits of the Merger
Klaytn side - Can just say "Who cares about the Orbit Bridge?" and run away without taking care of this hack. The victims are Orbit's, not Klaytn's to worry about. With the damage amounting to over a hundred billion won, it's more economically reasonable for Klaytn to just shut down Ozys and move on.
Finschia side - Free listing on Binance, lol. Plus, if projects that were leeching off Klaytn come back to work for Finschia, it's like killing two birds with one stone since it will have the same effect as them working on top of Finshia.
It's just the kind of ridiculous, creative idiocy that seems characteristically "Kimchi," and I believe crypto enthusiasts in the US and Europe would shake their heads in dismay over this situation.
It's hard not to say that these "Kimchi idiots" are really going above and beyond.
2. Moderate Position
On Telegram, with around 7,300 subscribers, the operator of 'Gangseong Coin,' known for proficient investing, has shared their opinion, focusing on the price rather than the fundamentals, recognizing the value of the topic's buzz :
1. It's fundamentally a meaningless stunt, but price is bound to rise.
2. No matter how good the news, if the headline is dumb, price won't rise. But this one just makes you drool at first glance; it's deliciously enticing.
3. Look at what happened to the token price when MC recently rebranded to Beam.
4. Plus, Bithumb is likely to support the token swap for the new token released by Klaytn and Finshia without question. There's no need even to consider whether Lee Seok-woo, the representative of Upbit, will support the token swap.
3. Positive Position
An encouraging opinion shared on Twitter by the OverDare BD Lead, a Create-to-Earn mobile based metaverse game project jointly developed by Krafton(PUBG) and another subsidiary of Naver, Zepeto.
I personally think that the merger between Finschia and Klaytn is a great business decision. Both chains have been operational for a long time and were losing some momentum, which is vital in the blockchain business. This apparent loss of momentum made people less interested… leading to a decrease in TVL and token prices, and even fewer people became interested... It was a death spiral. Finschia was achieving significant results as an urban platform, and Klaytn had its moment as a promising “Ethereum killer”, with many DeFi projects turning to it. Of course, merging is easier said than done, and it must have been incredibly difficult. The decision-makers from both companies who made this happen deserve respect. Given the regulatory ambiguity so far, as chains backed by large corporations, there must have been many things they wanted to do but were too scared to. This is precisely the difference between startups and large corporations. Startups can just go for it because the CEO takes responsibility, but in large corporations, the CEO can't take full responsibility, so they are more cautious. Regulations are still unclear, but the fog is slowly lifting, so I hope to see bolder moves in the future.
The following comment was added to the post:
Personally, it seems like Kakao is selling Klaytn to LINE... Time will tell.
Interestingly, there's another group feeling the pressure from this merger: $WEMIX holders. WEMIX is a blockchain L1 developed by Wemade tree, a subsidiary of another Korean game company, Wemade. To give a bit more context about Wemade, it's a company with substantial presence, known for creating the game “Mir”, which was once the top national game in China. (Later, Wemix launched Mir as a P2E version that is called MIR4 and made a great success.) Although Wemade it doesn't rank among the “Big 3” gaming companies in Korea (Nexon, NC Soft, Netmarble), it's an okay game company.
Wemade once faced issues such as opaque use of funds by the foundation, token circulation issues, and conflicts with Upbit, the leading entity of DAXA, the new "malpractice organization" in Korea. At one point, it even had its token delisted from Upbit. At that time, delisting $WEMIX, which was the second-highest in trading volume on Upbit, seemed counterintuitive to Upbit's financial interests. Many were shocked when the delisting actually happened.
What's interesting about Wemade is that it's a gaming company that's better known for its lucrative investments than for making games. In fact, it was one of Kakao's early investors. Putting that aside, WEMIX, which started as a side chain of Klaytn, began as a specialized blockchain layer for games, onboarding various games and allowing the exchange of game currencies with WEMIX, which could then be used in other games. However, it launched its own mainnet called WEMIX3.0 in 2022 and underwent migration. In 2023, when Klaytn and Finschia were underperforming, WEMIX raised its profile in Korea, both for good and bad reasons, and sought to solidify its position as Korea's leading blockchain. But now, with the news of Klaytn (backed by Kakao) and Finschia (backed by Naver) merging, there's understandably some tension. So, from WEMIX and its holders' perspective, while they may feel like they're being unnecessarily provoked, some people believe that WEMIX's position in the Korean blockchain space will become more precarious if this merger truly takes place.
Although it hasn't gained much attention yet, the following is a prophetic post about the sale of Klaytn, written by a user in July last year on DCinside, a Korean forum akin to Reddit. The post discusses how Klaytn's initial coin offering (ICO) to early investors and its subsequent business operations have led to ongoing debates about its securities nature. The post suggests that one solution to resolve these issues could be to sell Klaytn to a third party.
" As previously mentioned by influencers and internal employee posts on Team Blind, Klaytn's operational methods are known to closely mirror the insider relationships between Kakao and its subsidiaries. A recurring theme in interviews with Kakao's chairman, Kim Beom-su, is his ambition for the company to become a breeding ground for CEOs. This has led to setting up his own relatives to run subsidiaries and scaling them up for an exit. Klaytn, too, has seen DeFi-focused investments made through Klay, and it's been revealed that many of these projects originated from Klaytn's management team. The majority of these ended up being sold off in exchanges. Like most DPoS (Delegated Proof of Stake) blockchain projects, a significant portion of the reserve is allocated to the core entity, and it's designed to ensure that the network stakes bring the most block rewards to themselves. As a result, inflating the reserve through block rewards, including those accumulated in their nodes, has been used as a means to continually generate investment funds and as an exit strategy. The tokenomics are very disadvantageous towards investors and unsuitable for long-term investment.
The recent summary judgment in the SEC vs. Ripple case in the New York district court, as anticipated by many experts, revealed that the law strictly scrutinizes securities nature through the Howey Test. An investment contract is recognized as a security if it includes all four of the following criteria: 1) an investment of money, 2) in a common enterprise, 3) with the expectation of profit, 4) to be derived from the efforts of others. However, the key point is that the asset used in the investment contract itself is not considered a security.
Klaytn, through its early private ICO, met criteria 1), and GroundX used the funds for necessary business expenses, satisfying criteria 2). Private ICO participants expected profits and sold their coins on exchanges like Coinone when the price rose, meeting criteria 3). GroundX, by criteria 3), conducted various partnership services, events, and listings for liquidity using Klaytn. Considering the summary judgment against Ripple, which recognized sales to institutional investors as securities, selling to a specific group and conducting business with those funds virtually guarantees price appreciation and profit generation. Therefore, if Klaytn cannot disprove the non-fulfillment of criteria 3) and 4), it's likely that it will become impossible to list on major exchanges.
This situation is not unique to Klaytn. Many projects, especially those predating the SEC lawsuits, that ICO'd to specific identifiable investors are particularly vulnerable. The recent trend involves conducting IFOs, where they encourage a lot of trades on their chains, charge high fees, and then give their coins in proportion to the fees paid while benefiting from increased trading volume.
In conclusion, Klaytn faces a bleak future due to its 1) operational methods, 2) tokenomics, and 3) securities issues. However, there is a good solution that encompasses all three issues.
It involves selling the current Klaytn to an entity entirely unrelated to Kakao. This entity would create a new blockchain and swap the existing Klay for the new chain's coin. Since Klaytn's block generation is centralized to a few entities, after moving to the new chain, they would cease the operation of Klaytn, dispose of the blockchain data, erase past records, and, with new operators for the new chain, change the 1) operational methods. By designing the new chain differently, adjusting the total and per-block issuance, the 2) tokenomics will be revamped. Since the ICO transaction records from the Klaytn chain era will be completely erased and relations severed, it will also be free from 3) securities issues. Moreover, existing holders will not suffer asset loss as they will receive the swapped new coins. "
At this point, it's worth mentioning the ambitious announcement of Klaytn, overseen by the former chairman of Kakao, who has been maintaining a strategic distance. The news article accompanying photo cover his fervent dedication to blockchain technology.
The former chairman, Kim Beom-su, is leading the charge in blockchain, staking everything on it. He mentions Ethereum, EOS, Steemit, and Telegram, stating that if Kakao connects its services with blockchain technology, it could create much better services.
Major platforms, Naver and Kakao, are fundamentally transforming the organizational structure and operational principles of capitalist enterprises. These platforms, through so-called “supply-side economies of scale”, have secured market dominance in a monopolistic form, generating revenue across various businesses.
Once they dominate the market, these platform companies inflate their size by gradually increasing fees through their powerful supplier and consumer networks. Moreover, indiscriminate market entries using their platforms can destroy the industrial ecosystem.
For instance, Kakao Mobility, a taxi platform company, raised prices by changing its fee structure or launching high-priced services. Naver's resale platform “KREAM” implemented a 1% fee policy for buyers in April and then raised the fee to 2% in June. Ultimately, it announced three fee hikes in five months, increasing profitability.
The two famous monopolistic companies, widely used as the national messenger and search portal, holding the daily lives of Koreans who spend most of their time on smartphones hostage, are embarking on blockchain ventures, advocating “decentralization and data sovereignty”.
Anyway, let's sum up two different L1's mother company and focus on their blockchain companies. It's hard to know what type of internal discussions went through but regardless of how well or poorly the blockchain business was operated, experience gained through trial and error suggests that Klaytn might excel compared to Finschia. In every aspect, including onchain TVL, active wallets, and transaction volume, Klaytn is overwhelmingly dominant. Although the price is currently $0.22, it once reached $3.6, and Klaytn officials must have made a lot of money. With such a long operation, there is no incentive to work harder. So, they probably want to stop and would be grateful if someone else took over.
Finschia hasn't done anything for a long time, and many people are likely tired, but expectations are also high. (As mentioned earlier, it secured an investment of $135M in December 2023.) It recently launched an NFT marketplace called DOSI, but it's seen more as Naver's flagship Finschia dApp rather than an independent team building on a public blockchain.
So, the merger of these two can potentially overcome each other's shortcomings and evolve into a super power.
If you thought so, okay... but it will take me some time to become friends with you. This approach might have worked if Kakao and Naver had done it, but this is a joint venture between Klaytn and Finschia, and 99% of Koreans, i.e., people influenced by Kakao and Naver, have no interest in $Klay or $FNSA.
Both companies focus domestically in terms of platform and technology, and it's hard to say they are competitive on a global standard. Blockchains should compete on the global stage, not as a domestic business. Targeting Korean users mainly will eventually lead Koreans to switch to services offering more attractive airdrops, unless its integration is so smooth that users won’t notice. In short, users will leave with no hesitation after draining the marketing budget in search of ROI.
Whether it's Finschia, Klaytn, or Ethereum, the barriers users feel are the same. Non-custodial wallet creation, key management, token bridging, and swapping - all of this is just too unfamiliar. If new developments like Account Abstraction (AA) could eliminate all these steps, then it's likely that services could operate just as fine as Web2 services. So, the the only advantage that the joint venture of Finschia and Klaytn, aspiring to become Asia's No.1 chain, has over the Korean market is the lack of a language barrier, but that's something they already had separately, so merging won't make it any better. The power granted by their parent companies, Kakao and Naver, has significantly diminished in terms of trust in Korea due to their business operations over the past few years. Users don't expect decentralization from a chain created by Kakao and Naver, but these companies have consistently claimed decentralization whenever they needed to take responsibility.
From a dApp builder's perspective, when defining what a promising chain is, it's a chain with many users onboarded, native token holders sufficient to cover gas fees for transactions within the dApp, or like Arbitrum, as in continually making new technical attempts (e.g., Stylus) or technological attempts to increase interaction with other ecosystems (even if they make L3 using Orbit, if it's L2 that receives security from Ethereum, it can offer a program that can settle anywhere). However, builders focused on obtaining grants might be interested in the joint chain created by Klaytn and Finschia. But such builders, focused on grants and not users and the market, are unlikely to create good services.
Last but not least, in this fiercely competitive DYOR (Do Your Own Research) space, wise users and builders seek the team's authenticity. Once trust is broken, it's not easily mended.
I sincerely hope that whether these two companies merge or stay separate, they do well. I often say that Korean builders are highly underrated. Korea is unique in that, more than any other country, people working in crypto have a high level of education, are passionate about understanding and studying technology, and are building with a strong philosophical motivation to find answers in an unestablished market. But it's disheartening to see the lackluster image of these two companies, which are heavily PR'd as representative projects. The biggest issue they need to overcome is to fire the malignant stockpiles occupying positions out of moral hazard, reduce the size of the organization to make it more flexible, and send developers to various international conferences to increase interaction with other genuinely technical developers.
This is purely my personal opinion, but I believe it would greatly help ecosystem building if as many team members as possible created Twitter accounts to follow the discussions and read at least one article a day by good researchers in Korea. From my experience working in large companies, I've noticed that many people, although not well-versed in crypto, are experts in other fields. Onboarding these people takes a long time, and if they don't make an effort initially, everything seems unfamiliar and they drift further away. So, it might be useful to allocate time for something like a snack time during office hours, where everyone reads and discuss together as a team. I think such small changes in soft power can be the spark for significant improvements.
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