The number and amount of encrypted financing in this quarter have reached a new low since 2021, but industry hotspots continue to emerge.
Original author: Gu Yu & Biscuit
The second quarter of 2023 has just passed, and the encrypted field may have entered the depths of a bear market. Since the collapse of Terra and FTX in 2022, as well as multiple crypto-friendly banks experiencing a run on their reserves, the liquidity of cryptocurrencies has plummeted. In addition, regulatory agencies continue to suppress centralized exchanges, impacting market confidence. The struggle between centralized crypto giants like Binance and Coinbase and the US SEC continues. One of the few pieces of good news is that several asset management giants, such as BlackRock, have once again applied for a spot Bitcoin ETF.
So, how did the encrypted investment and financing market perform in the second quarter of 2023? What are the current hottest trends in the market? Rootdata has conducted a comprehensive analysis based on platform statistics. This report consists of two parts: an overview of the encrypted investment and financing market in 2023Q2, and an analysis of market trends in investment and financing.
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1. Overview of the 2023Q2 encrypted market investment and financing
RootData data shows that in April-June 2023, the crypto industry disclosed a total of 301 project financing events, with a total financing amount of US$2.177 billion, far lower than the US$7.802 billion in April-June 2022, a year-on-year decrease of about 72.1%. Compared with the previous quarter’s US$2.47 billion, there was a slight decline, a decrease of about 11.8% compared to the previous quarter. In summary, both the number and amount of financing in this quarter hit a new low since 2021.
Looking at the distribution of financing in various tracks, the following figure shows the number and amount of financing in each sector from April to June 2023 (unit: hundred million US dollars):
Among them, the infrastructure track has the highest number and amount of financing among the nine tracks, with an average financing amount of over 10 million US dollars per project. Popular financing projects in this track include modular blockchain, zk concepts, etc.;
The DeFi track ranks second in terms of the number of financing projects and fourth in terms of financing amount. Popular sub-segments in this track include DEX, derivatives, etc.;
The gaming and social entertainment tracks rank third and fourth in terms of the number of financing projects, respectively. Sub-directions such as gaming platforms and creator economy were highly favored by capital in the second quarter of 2023.
In terms of investor activity, RootData recorded that 16 investors participated in more than 8 investment rounds, with institutions such as NGC Ventures, HashKey Capital, DWF Labs, Binance Labs, Polygon Ventures, Coinbase Ventures, Alchemy Ventures, OKX Ventures, and GSR participating in over 10 rounds.
II. Analysis of Cryptocurrency Investment Trends in Q1 2023
1) Layer1
In the second quarter of 2023, a total of 17 Layer1 projects raised a total of $236 million in funding, an increase of 91.4% compared to the first quarter of 2023. The funded Layer1 projects can be roughly divided into two categories:
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Cosmos-based projects: Nibiru, Syntropy, Sei Network, Berachain…
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Established public chains: EOS, TomoChain, Conflux, IOST, Ton…
In terms of trends, as Ethereum, Bitcoin, and other networks shift more attention to layer 2 scaling, the Layer1 space is primarily driven by the Cosmos ecosystem, with the concept of modular public chains gaining traction. In the second quarter, Layer1 projects still achieved impressive valuations: Sei Network ($800 million), Nibiru ($100 million), Berachain ($420 million).
However, the funding of established public chains seems to be more influenced by price speculation. For example, Conflux raised $10 million from DWF Labs in the first quarter and received an additional $18 million in the second quarter from DWF Labs.
In this quarter, two highly anticipated Layer1 projects launched their mainnets but their performance has been disappointing. On April 20, the privacy-focused public chain Iron Fish launched its mainnet (raised $33 million, valued at $190 million), and on May 3, the Move-based public chain Sui launched its mainnet (raised $336 million, valued at $2 billion). Iron Fish received little attention after the airdrop frenzy, and Sui has been caught in the debate over its status as a consortium chain.
Nevertheless, the Layer1 space, with its immense potential and narrative power, will remain the most attractive sector for investors in the long run.
2) CEX
Since the collapse of FTX in the fourth quarter of 2022, various forces have been trying to fill the void left behind, and more funding events have been disclosed in this quarter. In the second quarter of 2023, a total of 12 CEX projects raised a total of $152.25 million in funding, an increase of 851.5% compared to the previous quarter.
Among them, EDX Markets, a non-custodial exchange supported by Wall Street, completed a new round of funding and officially launched its trading services. The exchange operates in a non-custodial model, meaning it does not hold customers’ digital assets during trades, thereby reducing custody risks. It functions similar to traditional exchanges like Nasdaq or the New York Stock Exchange. EDX Markets offers trading for BTC, ETH, LTC, and BCH, and plans to launch EDX Clearing later this year to settle trades matched on the EDX Markets platform.
According to RootData statistics, EDX Markets has received favor from a series of top investment institutions, including LianGuairadigm, Sequoia Capital, Virtu Financial, Fidelity Digital Assets, Citadel Securities, Jiaxin Wealth Management, Miami International Holdings, and more.
In addition, ABCDE Capital has invested in the cryptocurrency derivatives trading platform CoinCatch, which focuses on social trading for KOLs and allows KOLs to share their trading strategies with their followers. Other projects in the CEX sector that have received financing include Bitcoin financial services provider River Financial, institutional-grade digital asset exchange One Trading, and cryptocurrency exchange Bitget.
3) DeFi Derivatives
With the increasing maturity of DeFi basic products and Ethereum staking, DeFi derivatives protocols have become one of the few innovation hubs in the cryptocurrency field. According to RootData statistics, in the second quarter of 2023, a total of 14 DeFi derivatives raised $39.45 million in financing, an increase of 194.4% compared to the previous quarter.
Most of the funded derivatives protocols involve functionalities such as options, perpetual contracts, and spread trading, or amplify trading positions through lending or margin usage with the goal of improving capital efficiency. For example, the multi-chain structured product protocol Thetanuts Finance provides automated options strategies, and the decentralized volatility product Smilee supports users in shorting LP tokens to mitigate impermanent loss risks.
In addition, some derivatives protocols also have varying degrees of innovation. The yield trading protocol Pendle Finance allows users to tokenize and trade future yields by leveraging top yield generating protocols like Aave and Compound, and then divides the yield assets into tokenized ownership (zero-coupon bonds) and yield components (coupons), thus providing innovative yield trading opportunities. The time-bound token trading market Hourglass tokenizes users’ staked assets in DeFi protocols.
4) Artificial Intelligence
With the AI sector ignited by ChatGPT, there has been a lot of attention and practice on how Web3 and cryptocurrencies can be combined with AI. In the second quarter, AI concepts in the crypto projects like Gensyn, WorldCoin, and Kaito have all received financing.
Specifically, Web3 projects with AI concepts can be divided into two categories: infrastructure-oriented projects that optimize the operational logic of the AI ecosystem, and application-oriented projects that leverage AI technology to optimize work in the Web3 field.
In the infrastructure-oriented category, typical projects are Gensyn and WorldCoin. Gensyn is a distributed computing network for training AI models that uses blockchain to verify the correct execution of deep learning tasks and trigger payments through commands. While WorldCoin is not directly related to AI technically, as a project founded by the creator of ChatGPT, it aims to become a digital identity system for the AI era, reducing or even avoiding the impact of AI on user economic rights and social rights.
In terms of application direction, typical projects include Kaito, NFPrompt, Mazzuma, etc. Among them, Kaito mainly optimizes the research process of encrypted users’ digital assets through AI. NFPrompt helps artists generate NFT artworks through AI, and Mazzuma helps developers generate smart contract code through AI. These scenarios can effectively improve the work efficiency of target users.
In the AI era, the combination of Web3 and encryption technology will become increasingly close. The number of AI concept projects recently included by RootData has also increased significantly, and more related projects with innovative scenarios may appear in the future.
5) Wallet
As one of the main entrances in the encryption field, the competition of encrypted wallets involves user experience, security, multi-chain support, additional functions, community and support, business models, etc. With the rise of account abstraction concept, in the second quarter of 2023, projects such as Safeheron, Fedi, Openfort, etc. have all received financing.
Specifically, the financed projects mainly focus on wallet infrastructure platforms. Safeheron, a digital asset self-custody platform, provides institutional-level wallet solutions for small and medium-sized enterprises based on independently developed MPC and TEE technologies. Account abstraction wallet Openfort allows users to register using various popular authentication methods (such as Google, Gmail, and Twitter). Wallet-as-a-service platform Universal Ledger provides APIs and event-driven architecture for developers and engineers, while maintaining global compliance standards similar to FATF 40 and regulatory requirements of local jurisdictions.
In addition, the financed projects also include Bitcoin ecological wallet Fedi, privacy protection wallet Leo Wallet in the Aleo ecosystem, hardware wallet Tangem, smart wallet Giddy, and so on.
Account abstraction enables wallets to better handle and manage users’ account information, and provides more convenient, secure, and privacy-protected digital asset management functions. In the future, the threshold for using wallets may be greatly reduced, and they may even become the default configuration for users.
6) Decentralized Social
Decentralized social aims to help users better manage their social relationships and content, and achieve monetization. Some projects also try to connect different applications and users to achieve collaborative games and co-governance. Well-known encryption projects such as Lens Protocol, CyberConnect, Story Protocol, etc. received financing in the second quarter.
Overall, the decentralized social track can be divided into three main directions: social graph, social metaverse, and social media platforms. Social graph records users’ social relationships and interaction data on the blockchain, enabling users to control and own their social data. Social metaverse is a digitally immersive social space based on virtual reality or augmented reality technology, where users can create their own digital identities and interact with other users. Decentralized social media platforms allow users to create, share, and communicate content without being controlled by centralized institutions.
In the social graph direction, both Lens Protocol and CyberConnect provide decentralized identity verification solutions, protecting users’ personal information and interaction data through blockchain technology, allowing users to communicate, share content, and build social relationships with other users. The difference is that CyberConnect focuses on simplifying the user interface and operational processes. Its functions such as social relationship management, encrypted chat, and distributed storage aim to facilitate secure and private social interaction. Lens, on the other hand, focuses on content presentation and creator experience, aiming to enable creators to directly derive value from their content.
In the direction of social metaverse, Orbofi, PoPP, AnotherBall, and May.Social all allow users to create and manage their own digital identities, and showcase personalized characters, appearances, and assets in the virtual world. Through internal economic models and incentive mechanisms, they encourage user participation and contribution to the social metaverse ecosystem. Users can earn economic rewards through content creation and asset trading.
In addition, Story Protocol, led by a16z Crypto, is a platform that focuses on decentralized content creation, social interaction, and creator incentives. It provides a transparent and immutable way to publish and share content, and promotes user participation and economic rewards for creators through incentive mechanisms and community governance. At the same time, the platform emphasizes user control over their own data and privacy protection, enabling users to participate in content creation and social interaction in a safer and more autonomous way.
7) NFT Market
In the NFT market track, OpenSea remains the undisputed leader, so more projects are turning their attention to niche areas, allowing digital art, music, games, and other virtual items to become valuable assets. These vertical NFT markets also received funding in the second quarter.
Specifically, the funded projects in this track can be divided into comprehensive NFT markets, music NFT markets, and social NFT markets.
In the direction of comprehensive NFT markets, Tegro, Collectibles, Treasureland Market, and others support the display and trading of various types of NFTs, with slight differences in filtering functions, transaction processes, and supported blockchain networks.
In the direction of music NFT markets, platforms such as Spinamp, MetaZ, and AlienSwap focus on NFTs in the music and entertainment field, including music works, virtual concert tickets, etc., with differences in music partners and artist communities. In addition, special services are also one of the factors that attract users. For example, Dew Drops provides selected digital collectibles to collectors via SMS, Meta[Z] offers NFT issuance services for sneakers, and AlienSwap returns all income to the community.
In the direction of social NFT markets, platforms like Oxalus, Colecti, and The Hug focus on NFTs in the social and creative fields, such as social greeting cards, virtual gifts, creative artworks, etc.
Overall, these NFT markets have made some differentiated innovations in positioning, focus on functionality, user interface, and community. Users can choose the market that suits their needs and interests to obtain a better NFT purchasing, showcasing, and interactive experience.
8) Developer Platforms
In the second quarter of 2023, Web3 developer platforms raised approximately $89 million in funding. These 16 platforms can be divided into 4 categories based on their positioning, focus on functionality, tools, and services provided.
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Identity verification and wallet service platform: Magic and Ramper focus on providing identity verification and wallet services, aiming to improve the user experience of Web3. In terms of approach, Magic supports login through email or social accounts, while Ramper utilizes its self-developed key management architecture called Recoverable Pluralistic Encryption System (RPMS).
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Blockchain development tools and service platforms: Platforms such as Tableland, Mirror World, Ironforge, and Sort all provide developer-friendly interfaces, documentation, and tools to simplify the blockchain development process. The difference lies in their focus areas – Tableland focuses on structuring relational data, Ironforge aims to enhance the development experience on Solana and simplify integration with existing systems. Sort allows developers to create rich applications using Ethereum data.
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NFT development and API platforms: Platforms such as Mazzuma, BlockSLianGuain, and SPYCE5 specialize in NFT development and APIs, offering tools and services to simplify the development and integration of NFT applications. They provide real-time data and metadata retrieval, NFT price querying, ownership verification, and other functionalities.
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Others: Airstack and Cookbook provide developers with tools and services to quickly and easily access on-chain data across projects and blockchains.
The importance of developer platforms for a blockchain network lies in providing infrastructure, tools, resources, and support to facilitate ecosystem development and application development. With the emergence of more and more applications and developers with clear business models, developer platforms are also gaining attention from capital providers.
Summary
Overall, due to difficulties in raising funds for crypto funds, lack of market confidence, and limited exit channels, crypto investment institutions have slowed down their investment frequency and are waiting for clearer signals in the market before adjusting their investment strategies.
In this situation, the majority of crypto companies need to reassess their revenue, expenses, and cash flow and prepare strategies for the worst-case scenario. Many projects that lack cash flow and viable use cases are likely to be eliminated from the market during this bear market. New market trends will also give rise to a new wave of projects competing in the game created by venture capital institutions.
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