The number and value of crypto funding in the first quarter were at a record low since 2021, but industry hotspots continue to emerge.
As the first quarter of 2023 just passed, most crypto practitioners have mixed feelings. On one hand, market confidence has been shaken by several US bank runs and the continued crackdown on centralized exchanges by regulators; on the other hand, crypto assets represented by BTC and ETH have performed quite well in the secondary market. In addition to price signals, we believe other multiple signals within the crypto space are showing signs of strong recovery and growth.
So, how did the crypto investment market perform in Q1 2023? What are the hottest trends in the market today? How often and how did investment institutions invest? And what were the preferences?
To answer these questions, RootData provides a comprehensive analysis based on platform statistics. This report contains three sections: Q1 2023 crypto investment and funding market overview, investment and funding market trend analysis, and investment institution performance.
I. Q1 2023 Crypto Market Investment and Funding Overview
RootData shows that in January to March 2023, the crypto industry disclosed 309 project funding, with a total funding amount of $2.317 billion, much lower than the $12.48 billion raised in January to March 2022, down about 81% year on year, and also lower than the $3.463 billion raised in October to December 2022, down 33% quarter on quarter. In conclusion, the number of rounds and the amount raised in Q1 were both at a record low since 2021.
This shows that the crypto industry has entered a bear market cycle, the pace of funding in the primary market has fallen off a cliff, and investment institutions are relatively cautious and have not made many investments. On the other hand, many projects have seen lower valuations after entering the secondary markets, and thus the secondary market is more favored by investors than the primary market.
Looking at the distribution of funding by segment, the following chart shows the number of funding rounds and amounts (in USD billion) for each segment from January to March in Q1 2023:
Among them, the infrastructure segment has the highest number and amount of funding among the nine segments, with an average single funding amount of over $10 million. Popular projects in this segment include modular blockchain and zk concept-related project.
The DeFi segment ranks second in terms of the number of funding rounds and fourth in terms of funding amount, and the popular segments in this segment include DEX and derivatives.
Game and social entertainment segments are in third and fourth place in terms of the number of funding, where game platforms, creator’s economy, and other sub-divisions were favored by capital in the first quarter of 2023.
II. Q1 2023 Crypto Investment and Funding Market Trend Analysis
1) Ethereum Staking Protocol and Services
Ethereum liquidity stake allows users to lock up ETH in the blockchain network to receive rewards while providing liquidity to the locked-up funds. According to DefiLlama, the total value of crypto assets deposited in liquidity stake protocols is close to $15 billion as of the end of March 2023. The upcoming Ethereum Shanghai upgrade to open stake unlocking is expected to bring higher stake participation and will make competition among liquidity stake protocols even more intense.
For users, liquidity stakes are attractive in several ways: first, they are user-friendly, as they do not require 32 ETH to participate in network validation, which is a relatively stable and safe type of fixed-income product; second, staked tokens can be withdrawn at any time without a threshold; third, staking can release liquidity, thus improving the efficiency of using funds; fourth, users can not only receive validation proceeds but also participate in revenue governance.
In addition, liquidity stakes are expected to grow further, as ETH stake ratios are significantly lower than other L1 tokens. Currently, only 14% of ETH is staked, while on average 58% of tokens is staked in L1. The current market consensus is that more funds will flow into stake protocols once the Shanghai upgrade is successful, eliminating the liquidity risk and lock-up period uncertainty.
The current market for liquidity stake protocols is facing fierce competition, and the newly born products of the same kind are mainly working in three directions: one is to cooperate with other Dapps to provide more application scenarios for derivative tokens; the other is to strive for deployment on more L1 chains to maximize the TVL; and the third is focusing on improving the security level of the protocol.
During Q1 2023, staking protocols and services including Unamano, Rocket Pool, Obol Network, Diva, and Ether Fi have received funding. There are also institutional cryptocurrency custody and staking solutions Finoa and MoodMiner, which supports the staking of more than 100 digital assets with an asset threshold as low as €1. And MoodMiner, which supports over 100 digital assets with a low asset threshold of 1 euro.
The future of the liquidity staking protocol depends on the overall long-term development of the public chain, and its security will be a top priority. In addition, factors such as value capture capability and on-chain DeFi ecological construction will also have a notable impact on the protocol.
2) AI
Over the past decade, AI has steadily entered the business world and been improving the user experience of Internet products, which however has not attracted much interest from crypto outsiders.. But ChatGPT is a watershed, since which everyone starts to talk about how AI is disrupting their work, study and life.
How artificial intelligence will transform the crypto space has become one of the most popular discussions this year. Many believe that the maturity of AI concepts will bring great gains to the Web3 world. The typical use cases include DeFi, GameFi, NFT, DAO, and smart contracts.
During Q1 2023, blockchain platforms based on artificial intelligence and machine learning have received large amounts of funding, such as Fetch.ai , decentralized collaboration platform FedML, identity-focusing Aspecta, social media focusing PLAI Labs, digital asset research platform Kaito and AI creation platform Botto. We expect to see further integration of AI and blockchain, leading to a more secure, transparent and efficient system.
3) DeFi derivatives
Just as the traditional financial derivatives market is supported by the hedging needs of the real sector, DeFi derivatives are evolving from a single trading need to more diversified areas such as risk hedging.
On the other hand, while CEX leads in derivatives trading volume, decentralized derivatives protocols like GMX and Gains Network are also growing at a significant rate in a bear market in 2022, thanks to their greater transparency and innovative system design.
Currently, a succession of emerging decentralized derivatives protocols are emerging with traders, liquidity providers and token holders at their core. Fundamentally, they aim to solve the following problems: first, attracting liquidity and improving asset utilization; second, building composability and cross-margin, such as using multiple forms of crypto collateral to collateralize leveraged positions; third, providing a user-friendly experience for traders and liquidity providers.
According to Rootdata, DeFi’s derivatives-focused projects that received funding in the most recent quarter include Narwhal Finance, a perpetual contracts trading platform that leverages all asset classes through synthetic assets, Vest Exchange, a decentralized perpetual contracts exchange under the Arbitrum ecosystem, Optix Protocol, an options trading platform supporting 10x leverage, Cega, an alternative derivatives protocol building exotic option structured products for retail investors, Blueberry Protocol, a strategy aggregation protocol that aggregates various leveraged strategies into a single account.
4) NFTFi
The NFT segment is undergoing significant change. This emerging asset class promises to an exclusive set of financial ecosystems.
With the widespread adoption of NFT, various DeFi protocols and technologies are expected to be applied to NFT, leading to so-called NFTFi to improve capital efficiency.
DeFi platforms such as Aave and Compound have been around for several years, and now similar products in the NFTFi space such as BendDAO, ParaSpace, JPEG’d, and NFTfi have emerged. The market is steadily expanding as evidenced by user data and transaction volume data from platforms such as Bend, NFTfi, Pine, Arcade, JPEG’d, Drops, and x2y2.
(Data of transaction size for NFT lending platforms)
Similar to the Summer of DeFi in 2020, the Summer of NFTFi will occur at some point. This may attract DeFi players. Even if they are not interested in NFT, they may be attracted by potential rewards.
NFT has gone through a turbulent cycle of unleveraged trading over the past two years, and with the introduction of NFT derivatives, more people will be able to participate in larger-scale trading. The emergence of NFTFi is expected to bring greater liquidity and market efficiency to the entire ecosystem.
During Q1 2023, Midaswap, liquidity book-based NFT automated market maker protocol, insrt finance, NFT revenue generation protocol, paprMEME, NFT lending protocol powered by Uniswap V3, NFEX, NFT derivatives exchange offering leveraged trading, and EZswap, community-focused NFT exchanges have received funding.
5) Data analysis products
Most companies in Web3 are making efforts to make data-driven decisions to pursue growth. The crypto space needs more data analytics products to provide users with more comprehensive, diverse, and in-depth insights. On the other hand, groundbreaking crypto data tools will also effectively enhance the science of investor decision-making while making the flow of data in the crypto industry more transparent.
At present, how to integrate off-chain, on-chain, and social media data, how to use data to drive, attract and retain new users, and how to analyze user behavior through data to guide business are already important issues that many game companies, NFT companies and even capital management platforms are focusing on.
Such products receiving funding during Q1 2023 include Helika, a data analytics platform for game studios and NFTs, bitsCrunch, a multi-chain insights platform focused on NFTs and digital assets, EdgeIn, data intelligence platform focused on Web3, and Trusta Labs, Web3 Security Infrastructure, providing witch attack prevention analytics
6) Creator economy
Although the Web3 industry is still in its infancy, with a small audience and a lack of content production, there are several strong competitors, showing us a blue ocean with great potential.
The token incentive is an important innovative tool for the creator economy, allowing creators to use new monetization and value capture mechanisms to attract fans and co-create new content. Its larger-scale adoption may enable the creator ecosystem to grow stronger and more dynamically.
During Q1, projects in many segments in the creator sector were financed. In terms of music, Web3 interactive music platform Muverse and music collectibles platform VAULT were funded. In terms of content, the Web3 content creation platform RepubliK and the novel reading platform Read2N were funded. In terms of brands, fashion, and artists, the cultural brand ManesLAB, the artist platform Wild and the Web3 fashion platform Syky were funded. The platform for YouTube creators and fans to build a better mutual benefit mechanism GigaStar has also been funded.
7) Modular Blockchain
A modular blockchain is a blockchain that completely outsources at least one of the four components — execution layer, settlement layer, consensus layer, and data availability layer — to an external chain. Due to the complexity and limited solution capability of serving millions of users and more on one chain, sharding and Layer2 solutions were proposed, which gradually evolved into modular blockchains. The initial solution for modular implementations was rollups, a concept that was then further expanded into the modular blockchain.
The main advantages of the current modular blockchain lie in its sovereignty and scalability. A new modular blockchain can be as sovereign as L1, despite the use of other layers. This allows the blockchain to respond to hacks and push upgrades without any underlying permission. Secondly, it effectively improves scalability, i.e., modularity allows for scaling without sacrificing security or decentralization.
Caldera, focusing on building a high-performance, customizable layer 2, modular settlement layer dYmension, and an ecosystem of interoperable and scalable rollups Sovereign have all raised large amounts of funding.
8) zk rollups
The Zk ecosystem is thriving. Zk-Rollup uses proof of validity to validate and package all transactions off-chain, and the validated transactions are submitted to the main chain with a zero-knowledge certificate to prove the validity of the transaction. In the words of Uri, CEO of StarkWare, ” Integrity is doing the right thing, even when no one is watching. “ This idea echoes that of the early stage of Bitcoin development.
Optimistic Rollups are compatible with EVM and have a mature and early technology solution, with lower migration costs for developers. The typical projects include Arbitrum and Optimism, which garbs most of the share of the rollup market. The zk-Rollups, on the other hand, are not as widely used as the OP-based rollups for smart contracts because they are not EVM-compatible and are more technically difficult, resulting in a slow development.
However, zk-Rollup has many advantages over Optimistic Rollup. The first is its scalability. The data required by zk-rollup to upload to the main net is lower than that of Optimistic rollup. In practical application, zk-Rollup’s ability to improve performance is about ten times that of Optimistic Rollup. The second is the short time it takes to finalize a deal. The third is higher security.
Vitalik said in 2021 that in the short term, Optimistic rollups will win because of their EVM compatibility. But in the medium to long term, as zk-SNARK technology improves, zk-rollups will win for all use cases.”
The zk concept projects receiving funding during Q1 2023 include zero-knowledge proof-based trust layer Proven, Ethereum-native zkEVM Layer 2 solution Scroll, zk-rollup protocol Polybase, Web3 interoperability infrastructure PolyHedra, zk dark pool protocol Renegade, ZK hardware acceleration project Cysic, interoperable and scalable rollups ecosystem Sovereign, ultimate ZKP-based Web3 middleware Hyper Oracle and zero-knowledge proof marketplace =nil.
9) Security Solutions
Web3 security technology is evolving rapidly, but the code transparency and openness of the blockchain continue to lead to frequent hacks. So far in 2021, Web3 has lost more than $10 billion due to security issues. Therefore, how to provide asset protection-related products for enterprises, infrastructure providers, and general users to avoid losses from hackers or human errors is always an important topic for the crypto industry.
How to analyze smart contracts to prevent vulnerabilities? How to monitor on-chain transactions for malicious activity? How to build a better and more mature digital asset ecosystem? The above questions are also what the security company is trying to solve.
During Q1, projects can be divided into two categories according to the type of customers served: one is to business customers, such as Ironblocks, the crypto security service provider that automates threat detection and helps teams take preventive measures, Hypernative , crypto security company that uses proprietary machine learning models to monitor both on-chain and off-chain data sources, MetaTrust, which automates the generation of security scanning solutions with its security scanning engine; one is to consumers, such as Staging Labs, crypto-security company that actively scans transactions 24/7 and transfers risky assets in time and Coincover, crypto security solution that identifies unauthorized access to suspicious transactions.
III. Crypto Investment Institution Performance
After a series of turmoil such as the FTX fallout, the crypto investment institution market is undergoing a reshuffle, with many venture capital institutions keeping silent, while others are still accelerating their investment frequency.
To ensure the data is more representative, (data in Q1 is insufficient), Rootdata counted the number of crypto investments in the last 6 months (October 2022-March 2023) and compared it with the previous 6 months (April-September 2022), and selected the 10 crypto VCs with the highest growth rate and the highest decrease rate in the number of investments based on a minimum investment requirement of 8 times.
In the fastest growing Investors, DWF Labs is known as a dark horse in the industry, with at least 21 public investments in the last six months, while it has no previous record of making a bid. In addition, ABCDE Capital, Blockchange Ventures, Chapter One, Foresight Ventures, Cogitent Ventures and Placeholder see the number of investments double.
In Investors with the largest drop, the Mechanism Capital, Folius Ventures, Zee Prime Capital, Polygon Labs, Dapper Labs, Tiger Global, Republic Capital, and other well-known institutions are down more than 85%, with the number of publicly disclosed investments less than 2 times.
In addition, the top 10 investors in the last 6 months in terms of the overall number of investments are Coinbase Ventures, Shima Capital, Big Brain Holdings, Polygon Ventures, Polychain, Circle Ventures, HashKey Capital, Solana Ventures and a16z.
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