Project Dragon Overview

Project Dragon, the birth of an Asian mega-blockchain

On January 16, 2024, Klaytn and Finshcia, two of Asia’s leading blockchains, announced plans to launch a unified mainnet. By combining their respective ecosystems and assets, they aim to build an Asian mega-blockchain and lead the global Web3 market.

The combination of two mainnets is unprecedented in the Web3 market, especially since they are derived from two of the leading big tech companies in Korea and Japan, Kakao and LINE, respectively. Furthermore, they are both relatively mature projects with over five years of experience, with different cultures, visions, and underlying technologies that make up the respective ecosystems. In this report, we’ll analyze the highlights of the merger between Klaytn and Finschia, and the strengths and potential of combining the two mainnets.

Klaytn, Finschia merger highlights

Three major changes are expected in the integration of Klaytn and Finschia. These are 1) the issuance of a new unified token, 2) the creation of an integrated network spanning Ethereum and Cosmos, and 3) the creation of Asia’s largest Web3 governance, including Kakao and Line affiliates.

The first is the issuance of a new token that will integrate the Klaytn and Finschia ecosystems. Each holder of KLAY and FNSA tokens will be entitled to claim the new integrated token based on a calculated ratio. The ratio was determined based on the average exchange rate of the tokens over the last two weeks. New tokenomics will also be implemented around the token.

The second is the creation of a unified network that encompasses both Ethereum and Cosmos. Klaytn and Finschia have announced plans to build a new, compatible network based on their respective mainnet technologies and assets. However, due to limited time and resources, the first integrated network will be built by issuing upgraded tokens based on KLAY in the Ethereum ecosystem, which has 1) a low price entry barrier and 2) is listed on relatively more exchanges. Later, Cosmos-based technologies and assets will be integrated to create a fully compatible network.

Finally, decentralization will be further enhanced by building Asia’s largest Web3 governance. Under unified governance, user and community delegation will be enhanced. The respective governance councils will be merged and expanded to include up to 100 participants, including affiliates of Kakao and Line.

In addition, the team has announced its ambition to combine the technologies and assets of each mainnet to create even more synergies. These include building infrastructure for institutional demand, strengthening large-scale De-Fi infrastructure, and large-scale upload of Web2 assets on-chain. In particular, the plan to build infrastructure for institutional demand is highly anticipated, as the launch of traditional financial products utilizing crypto has been garnering a lot of attention since the approval of the Bitcoin ETF. The creation of a larger, more decentralized project is likely to attract the attention of major institutional investors, making it an attractive option for those looking to invest in Asia-based cryptocurrencies. In addition, the issuance of “native stablecoins,” a new business initiative for integrated mainnets and tokens, is gaining traction.

The strengths and potential of Project Dragon

① Securing a global competitive advantage

Source: Project Dragon, Klaytn&Finschia

The launch of Klaytn and Finschia integrated mainnet is expected to create a strong competitive advantage in the global Web3 market with the combination of their financial and technical resources. In particular, one of the main advantages of the merger is the ability to effectively utilize the resources of early developers Kakao and Line. These two companies have approximately 250 million users on their messenger services, and their rich user pools will play a key role in acquiring potential Web3 users.

In addition, they are expected to gain a competitive advantage by fully utilizing their messenger-based infrastructure. Kakao’s and Line’s messengers are super apps covering finance, shopping, entertainment, and more, and have the potential to create explosive synergies by combining them with Web3 technologies. Messenger-based FT/NFT transfers and payments, and NFT utilization profile functions are a few examples. Therefore, the integration of the two mainnets is expected to play an important role in increasing the acceptance and awareness of new technologies based on their rich user pool and familiar services.

② Stronger decentralization

The integration of Klaytn and Finschia could be an important strategy for further decentralization. In particular, it is expected to reduce the direct ties to early developers, Kakao and Line.

Currently, Kakao affiliates hold more than 50% of the voting power in Klaytn’s governance council, and Line affiliates hold more than 30% in Finschia. The launch of a unified foundation is expected to significantly reduce the token stake of companies and naturally ease regulatory burdens such as securities. Furthermore, the weakening of the two companies’ voting power may lead to the strengthening of decentralization, which may be an important factor in increasing the possibility of listing on additional cryptocurrency exchanges.

In Korea, “Act on Reporting and Using Specified Financial Transaction Information” prohibits crypto exchanges from trading crypto assets issued by related parties. In the past, it was difficult for Klaytn to be listed on Upbit due to Kakao’s stake in Dunamu. This is similar to the case where Com2Us holds a stake in Coinone, making it difficult to list on that exchange. With this integration, there is cautious speculation on the possibility of the new integrated token being listed on Upbit.

③ Scaling global coverage

The integration of Klaytn and Finschia is likely to significantly improve global coverage. Kakao already has a strong presence in South Korea and Vietnam, and Line has a strong presence in Japan, Thailand, and Indonesia. Klaytn and Finschia are also competitive in their different regions. An analysis of country-specific traffic on Klaytn and Finschia official websites for the last three months shows that they are dominant in different markets. Their integration is expected to be a project that encompasses the Asian ecosystem and will quickly expand its influence in the global market.

Source: Tiger Research

Their integration is important not only for global coverage but also for their home markets of Korea and Japan. Currently, Korea and Japan are global Web3 hotspots, with projects such as Avalanche and Solana aggressively entering the market. In this context, the launch of Klaytn and Finschia combined foundation is a strategic decision. It is expected that their competitive advantages will not cancel one another in the same market, but will be unified and synergized to gain an edge over other projects.

④ Synergistic relationship and development

Both Klaytn and Finschia have unique strengths in their respective fields, and their relationship is often viewed as complementary to each other’s weaknesses. Klaytn has strengths in developing infrastructure. According to their technology development roadmaps, Klaytn quickly opened up endpoints by launching KAS (Klaytn API Service) in 2020, while Finschia did so three years later in December 2023. Also, there is a significant difference in the number of Github repositories on each mainnet: 702 for Klaytn and 16 for Finschia. Of course, this does not prove the degree of technological advancement for each mainnet, but they do show that Klaytn has a relative advantage in terms of infrastructure technology due to its long history of experimentation and development.

Source: Brown&Friends, Netflix

Finschia stands out from Klaytn in terms of products. It is a project with the largest Web3 product assets in Asia, including NFT profiles using Line Messenger, stamp-based NFTs, and an NFT marketplace. In addition, it has plans to launch a social app utilizing AI technology and a new Web3 game using Brown & Friends characters.

The two projects have clear areas where they excel and areas where they fall short. By combining the mainnets, it is expected that the teams will be able to create positive synergies by leveraging each other’s strengths in areas where they are relatively inexperienced. This will enhance their business operations, enabling them to explore diverse approaches to developing their business models.

Potential risks

The risks of mainnet integration cannot be ignored. As with any merger between Web2 companies, integration takes time and effort. In particular, the integration of two foundations with different cultures, visions, and technical infrastructures, is expected to be a very complex process to undertake in a short period of time.

In addition, the dApp services in these ecosystems are expected to face major challenges. With limited time and resources, large-scale efforts such as infrastructure transformation will be a huge burden. This could lead to a loss of trust in the ecosystem and a possible exodus of some projects.

The Web3 ecosystem is made up of a wide variety of participants, and the combination of various stakeholders is more akin to an integration of countries than a corporate merger. Therefore, it is unclear whether a unified foundation can be launched in a short period of time. It is also possible that the teams may miss the crucial timing of mass adoption due to mainnet integration.

Another concern is delisting issues on global crypto exchanges such as Binance. Klaytn and Finschia expect delisting issues to be minimal, as they are technically compatible and will focus on EVMs that are listed on many exchanges. However, some argue that there is a high likelihood of a new listing review process as the integration is not just a change in the underlying network, but introduces a new governance and ecosystem.

While there have been instances where transactions have been maintained during WeMix’s move from Klaytn to its own Ethereum-based mainnet, the integration of Klaytn and Finschia is a much more complex matter. As such, the potential risk of delisting cannot be ignored.

Since liquidity supply is the most important factor in Web3, delisting issues are likely to have a negative impact on the ecosystem. Risk management by preventing delisting from cryptocurrency exchanges is important.

Conclusion

The merger of projects as large as Klaytn and Finshcia is a highly unusual and significant announcement for the Web3 ecosystem. The integration of the two projects raises a lot of expectations and concerns. However, in terms of market expansion and technological advancement, the outlook is generally positive. This is because the creation of a mega blockchain representing Asia is expected to be highly competitive from a global perspective. Also, institutional investor interest is expected to increase based on enhanced decentralization, such as reducing the direct connection to the initial developer.

However, ideals and reality are different. Business and technology are not the only factors that make up the Web3 ecosystem. The Web3 ecosystem is a complex and dynamic marketplace comprised of many different players, including end users, investors, and builders. While it is impossible to satisfy all of them, it is essential to set reasonable standards that take into account their respective interests.

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