Table of Contents
1. Introduction
2. Price Trends of FNSA and KLAY
3. Merger Timeline and Community Responses Throughout
4. The Finschia-Klaytn Union, Project Dragon
5. What’s Next?
6. Final Thoughts
1. Introduction
On January 16 , a proposal for the merger between Finschia and Klaytn (tentatively named Project Dragon) was announced. Despite initial strong opposition from Finschia investors during the governance voting phase, the merger of the two chains was eventually approved on February 15. The merger is scheduled to progress sequentially with activities such as issuing new tokens and establishing integrated governance. So let’s delve into the process leading to the merger confirmation, community responses, merger roadmaps, and the outlook for Project Dragon.
2. Price Trends of FNSA and KLAY
After experiencing a price decline in Q3 2023, FNSA and KLAY recovered in Q4. Then immediately after the news of the merger was announced, including the posting of the merger proposal on January 16 and the passing of the vote on February 15, the price increased in volatility, rising and falling sharply, likely due to investors selling off a large amount of volume as they believed there was no more ingredient for the upside. However, after the merger was confirmed, both coins stabilized, with KLAY's price breaking through 400 KRW after falling to 250 KRW during the voting period.
3. Merger Timeline and Community Responses Throughout
The road was in no way smooth until the governance vote confirmed the merger. The voting was initially scheduled to take place between January 26 and February 2 in the governance community of each chain, and it looked like the merger was close when Finschia’s validator GoodGang Labs voted in favor, but A41 and BUGHOLE, which have a lot of governance power, expressed a ‘No with Veto’ vote, bringing the no vote to 35%. Their negative reaction was based on 1) the lack of advance notice of the merger proposal, resulting in lack of evaluation of the technical feasibility of the merger, 2) the insufficient merger roadmap, and 3) the unclear basis of the exchange rate calculation between FNSA and the new token (tentatively named PDT). Moreover, there were concerns that the barrier to entry for Finschia investors into governance would increase from the merger with Klaytn because while general investors are allowed to participate in governance through asset deposits for Finschia, Klaytn operates a governance council (GC) centered on institutions. Thus, unlike Klaytn, which had a nearly 100% approval rate, Finschia investors expressed strong opposition.
On the Cosmos network, where Finschia operates, a vote of 33.3% or more is enough to defeat the proposal, effectively killing the merger. On January 31, the two foundations suspended the vote and announced to hold a re-vote on February 8. In a further explanation of the merger released on February 6, they explained the exchange ratio and governance as follows:
- The exchange ratio for FNSA and PDT (148:1) is based on market price. This is recognized under the South Korean as an indicator that reflects the past, present and future value of an asset. Therefore, setting the exchange ratio differently from the market price can result in a skewed benefit to one shareholder.
- For Finschia investors, the plan is to prioritize governance investment delegation and allocate a separate budget to activate Finschia-related services, ensuring that investors do not incur losses.
Finschia’s investors eventually swayed in favor with persuasion, and the governance vote, which concluded on February 15, successfully confirmed the merger with 95% of the vote in favor from Finschia and 90% from Klaytn.
4. The Finschia-Klaytn Union, Project Dragon
4-1. Their histories
Finschia and Klaytn are layer 1 chains and smart contract platforms for building mainstream blockchain services and have steadily been growing with various services and partners since their launch. Finschia was launched in September 2018 by LINE Tech Plus, LINE's blockchain subsidiary, and initially operated as a private blockchain. In 2023, it transitioned to a public blockchain and was operated by the Abu Dhabi-based Finschia Foundation. It established PoS governance with 15 companies, including SoftBank and LINE, and has recently reorganized its policies for transparent tokenomics, including abolishing the zero reserve policy and the maximum issuance of 1 billion tokens. Klaytn, on the other hand, launched as a public blockchain in June 2019, and was initially operated by Kakao's blockchain subsidiary, Ground X. In 2021, it became operated by Ground X's parent company and Kakao's Web3 investment and incubation company, Krust Universe. In 2023, the company established the Klaytn Foundation in Singapore, and is moving toward sustainable tokenomics by burning over 5 billion existing tokens and establishing a transparent operating system based on governance approval.
4-2. Project Dragon
Source: Klaytn, Finschia
Project Dragon, the lovechild of Finschia and Klaytn, aims to build an ecosystem that connects Web3 assets and integrates Asian layer 1 markets, leveraging the 250 million users of LINE and Kakao messengers. With their combined assets, the integrated chain will have a market capitalization of $1.4T, over 420 dApps, and over 45 governance partners.
DOSI of LINE Next expanded its business and secured many partners by on-chainizing Web2 game items Source: LINE
While both chains have a common goal of becoming the leading Layer 1 in Asia and mainstreaming blockchain, they have been going about it differently—Finschia focusing on attracting users and services on Web2 and Klayton focusing on achieving high on-chain metrics on Web3. Finschia and Klaytn, which are respectively ranked at the top of Asia in Web2 and Web3, will be able to grow complementarily by utilizing their respective assets, and are expected to become a Layer 1 with powerful strength in both Web2 and Web3.
Suggestion: LINE Next's DOSI initiative, which involves tokenizing Web2 game items to expand its business and secure a multitude of partners.
4-3. Roadmap
Source: Finschia, Klaytn
Klaytn and Finschia announced a roadmap to complete the merger in both technology and ecosystem by 2024. In terms of blockchain integration, they will first unify the communities and migrate the ecosystem's infrastructure, dApps, and services to form a new ecosystem. They also aim to issue a unified token and launch new governance within Q2. To strengthen tokenomics, 24% of the existing supply will be burned and the outstanding supply will be permanently removed, after which a new burn model will be introduced. The integrated network will be developed initially with EVM for initial liquidity and capital inflows, followed by a second integrated network based on EVM+CosmWasm in Q4. Governance will be a joint proposal, with an integration task force and an integration foundation to be established in Abu Dhabi.
Source: Finschia, Klaytn
They also plan to build a new brand and narrative, list on major CEX/DEX, and expand liquidity to revitalize the ecosystem of the integrated chain. Moreover, they will secure the market position of the integrated token by cooperating with custody/wallet/analytics companies.
Investment and information infrastructure of the integrated chain including custody Source: Klaytn
They will also provide SDKs and APIs for enterprises for Web3’s mass adoption and collaborate with global IP projects in Q3 and Q4 to support LINE NEXT's new social and content apps. As for the Web3 on-chain strategy, an infrastructure for native stablecoins will be released and Dragon DeFi Initiative (D2I) will be operated as an incentive program that will create a robust DeFi ecosystem.
Stable DeFi model where DEX, lending, and staking can synergize with each other Source: Klaytn
To focus on the Asian market in particular, the integrated chain plans to build a business development system by country and conduct Asian community boost-up programs in South Korea, Japan, Vietnam, Thailand, Taiwan, etc. to activate communities and DAOs. In addition, they will establish unified governance by the end of Q2 to respond to decentralization requirements and strengthen node user and community delegation functions.
5. What’s Next?
Finschia and Klaytn have been operating with different technology bases, directions, and community environments, so initial challenges are expected. Therefore, in the early stages of integration, it is expected that the two chains will establish a foundation with a tight strategic plan for technical and ecological merger, and then focus on their common goal of mass adoption of Web3 and further target the Asian market.
In the process of technical integration between Finschia and Klaytn, the network will initially be developed on Klaytn's EVM for liquidity and capital, but will eventually move toward EVM-CosmWasm. However, there has never been a case of two chains operating on such different technology bases coming together, which calls for phased materialization strategy to integrate the two chains with differentiated technology and reduce trial and error.
Not only that, meeting the community needs of the two separate chains will also be a challenge. Klaytn and Finschia, which have been implemented by two large South Korean platforms, have been getting great attention in the market and have developed in their separate ways. As such, each community will have different expectations of the chains and different perspectives on the integration. In fact, some communities on Finschia voted against the integration during the voting process. Thus, both chains will need to engage in close communication with their communities to align on the direction of the integration.
In terms of governance, both chains are expected to be more decentralized than before. Previously, validators on the Klaytn network were limited to a select few companies that were approved by the foundation. In effect, Klaytn was a semi-centralized network, and it has since announced an open transition to allow anyone to join as a validator. LINE, the predecessor to Finschia, also operated LINE Link in a centralized manner on a private mainnet before establishing a foundation in Abu Dhabi and rebranding as Finschia to transition to a public blockchain. With the merger of the two chains, the companies said they will enhance user and community delegation and maximize decentralization by expanding the number of governance participants to up to 100, which can make it more neutral from a governance council perspective. However, in order for this to work smoothly, the unified foundation will need to transparently disclose its ecosystem building and fund usage, and actively engage with new communities to build trust.
Most importantly, integrated chains are expected to have a stronger presence in Asia. Klaytn, which has its foundation based in Singapore, has always been heavily dependent on the South Korean market, but Klaytn-based DeFi and NFT services have also gained traction with meaningful real-world transactions. Finschia, however, has experience operating NFT services primarily in the Japanese market, rather than the Korean market. Therefore, it is expected to maintain chain activation through a smooth migration in the early stages of integration, and then strengthen its influence in Asia by focusing on strategic areas.
6. Final Thoughts
The merger between Finschia and Klaytn has been a bumpy ride, with a lot of backlash from the governance vote stage, but now that the merger has been confirmed and investors have been convinced, anticipation is high that the creation of Asia's No. 1 chain is just around the corner. While Finschia and Klaytn have many differences in governance, underlying technology, direction, and growth strategy, which will all be significant challenges for the merger, they have grown with the same goal of becoming a significant player in the Asian L1 market. We can’t wait to see how each chain will bring its experience and know-how to their union.