The number and value of crypto financing in the quarter were at a 2021 low, but the industry has embraced many hot spots.
As the crypto world entered a bear market, the second quarter of 2023 has just passed. At the same time, the cryptocurrency liquidity has nosedived since the run on Terra, FTX, and others in 2022 and on several other crypto-friendly banks. Additionally, the ongoing regulatory crackdown on centralized exchanges has hit market confidence, with centralized crypto giants such as Binance and Coinbase struggling to battle with the SEC. But there is a silver lining: several management giants, including BlackRock, are again filing spot bitcoin ETFs.
So, how did the crypto investment and financing market perform in the second quarter of 2023? What are the hottest trends in the market today?
Rootdata analyzes this comprehensively with the platform’s statistics. This report contains two parts: 2023 Q2 crypto investment and financing market overview, and investment and financing market trend analysis.
I.2023 Q2 Investment and Financing Overview in the crypto market
RootData data shows that from April to June 2023, the crypto industry disclosed a total of 301 project funding events with a total funding amount of $2.177 billion, much lower than the $7.802 billion raised in April-June 2022, a year-over-year decline of about 72. 1%. It was also down slightly from the previous quarter’s $2.47 billion, 11.8% down from last quarter. All in all, both the number of financing and the amount of funds raised in the quarter reached record lows since 2021.
In terms of the distribution of financing by segment, the following chart shows the number of financing and the amount of financing (in 100 million USD) in each segment in Q2 2023 from April to June:
Among them, the Infrastructure segment has the highest number and amount of financing among the nine segments, with an average single financing amount of more than $10 million. Popular financing projects in this segment include modular blockchain and zk concepts.
The DeFi segment is ranked second in terms of the number of funding rounds and fourth in terms of funding amount, with popular segments in this segment being DEX, derivatives, and more;
The game and social entertainment segments were in third and fourth places in terms of the number of funding rounds, with game platforms, creator economy, and other segments highly favored by capital in Q2 in 2023.
In terms of investor frequency, RootsData recorded 16 investors with more than 8 investment rounds, among which NGC Ventures, HashKey Capital, DWF, Binance Labs Polygon Ventures, Coinbase Ventures, Alchemy Ventures OKX Ventures, and GSR have invested more than 10 times.
II.2023 Q2 Crypto Investment and Financing Market Trend Analysis
1)Layer1
In Q2 2023, a total of 17 Layer1 projects closed $236 million in financing, representing a 91.4% increase compared to Q1 in 2023. The Layer1 projects that received funding can be broadly categorized into 2 directions:
Cosmos technology-based: Nibiru, Syntropy, Sei Network, Berachain…
Traditional public chains: EOS, TomoChain, Conflux, IOST, Ton…
Trend-wise, the Layer1 segment innovation is mainly driven by the Cosmos series of products, and the modular public chain concept is implemented as networks such as Ethereum and Bitcoin shift more attention to Layer 2 scaling. In Q2, Layer1 still achieved impressive valuations: Sei Network ($800 million), Nibiru ($100 million), and Berachain ($420 million).
However, funding received by traditional public chains was mostly driven by coin speculation, with Conflux having received $10 million in funding from DWF Labs in the first quarter, and DWF Labs chasing a further $18 million in the second quarter.
Two high-profile Layer1 projects went live on the mainnet this quarter, but their performance was not stellar: Iron Fish, a privacy public chain, went live on the mainnet on April 20 (with $33 million in funding and a valuation of $190 million), and Sui, a Move-based public chain, went live on the mainnet on May 3 (with $336 million in funding and a valuation of $2 billion).
Iron Fish was left unattended after the departure of the venture capital hunter, and Sui was even caught up in the alliance chain debate.
Nonetheless, the Layer 1 segment will remain the most attractive to investors for a longer time due to its huge imaginary space and power narrative.
2) CEX
Since the collapse of FTX in the fourth quarter of 2022, the vacuum left by it has been sought after by other projects. And more and more funding rounds were disclosed during this quarter. A total of 12 CEX projects closed $152.25 million in funding in the second
a quarter of 2023, 851.5% up from the last quarter.
Among them, EDX Markets, a non-custodial exchange backed by Wall Street companies, has completed a new round of funding and officially launched its trading services. The exchange adopts a non-custodial model, which mitigates custodial risk by not holding clients’ digital assets during trading, playing a role similar to traditional exchanges such as the Nasdaq or the New York Stock Exchange. Products available for trading on EDX Markets include BTC, ETH, LTC, and BCH, and the exchange plans to launch EDX Clearing later this year to settle trades matched on EDX Markets.
According to RootData, EDX Markets is favored by a range of top-tier investors, including Paradigm, Sequoia Capital, Virtu Financial, Fidelity Digital Assets, Citadel Securities, Charles Schwab, and Miami International Holdings.
Additionally, ABCDE Capital invested in CoinCatch, a crypto derivatives trading platform that focuses on social trading for KOLs and allows KOLs to share trading strategies with their followers. Other projects that received funding in the CEX segment include River Financial, a Bitcoin financial services provider, One Trading, an institutional-level digital asset exchange, and Bitget, a crypto exchange.
3) DeFi Derivatives
With the growing maturity of the DeFi basic product and Ethereum Pledging segment, DeFi Derivatives protocols have contributed most of the innovation to the crypto space. According to RootData, a total of 14 DeFi derivatives closed $39.45 million in funding in Q2 2023, an increase of 194.4% quarter to quarter.
Most of the derivatives protocols that have received financing involve features such as options, perpetual contracts, and spread trading, or the amplification of trading positions through borrowing or margin, to increase capital efficiency. For example, Thetanuts Finance, a multi-chain structured product protocol, offers automated options strategies, and Smilee, a decentralized volatility product, supports users in shorting LP tokens to mitigate their risk of impermanent loss.
In addition, several derivatives protocols made innovations to varying degrees. Earnings trading protocol Pendle Finance allows users to tokenize and trade future earnings by leveraging top-tier earnings generation protocols such as Aave and Compound and then dividing the earning asset into a tokenized ownership (zero-coupon bonds) and an earnings component (coupons), thus providing innovative earnings trading opportunities. Time-bound token exchange marketplace Hourglass locks in a period to tokenize users’ pledged assets in a DeFi agreement.
4) Artificial Intelligence
With the AI segment being triggered by ChatGPT, how Web3 and cryptocurrencies can be combined with AI has also sparked a lot of interest and practice. In Q2, crypto projects combined with AI concepts such as Gensyn, WorldCoin, and Kaito all received funding.
Specifically, the AI concept of Web3 projects can be divided into two categories, one is the infrastructure direction, optimizing the logic of AI ecological operation, and the other is the application direction, using AI technology to optimize the work in the web3 domain.
In the infrastructure sector, typical projects are Gensyn and WorldCoin. Gensyn is a distributed computing network for training AI models, which uses blockchain to verify whether deep learning tasks have been executed correctly and triggers payments through commands. WorldCoin although not technically and directly related to AI, as a project founded by the founder of ChatGPT, aims to become a digital identity system in the era of AI to reduce or even avoid the impact of AI on users’ economic rights and social rights.
In the application sector, typical projects include Kaito, NFPrompt, and Mazzuma. Among them, Kaito mainly optimizes the digital asset research process of crypto users through AI, NFPrompt helps artists generate NFT artworks through AI, and Mazzuma helps developers generate smart contract code through AI, and all these scenarios can effectively improve the work efficiency of target users.
In the AI era, Web3 and cryptography will be combined more and more inextricably and RootsData’s recent inclusion of AI concepts has increased dramatically, and more innovative scenarios of related projects may emerge in the future.
5) Wallet
As one of the main entrances to the crypto space, crypto wallets are competing on user experience, security, multi-chain support, extras, community and support, and business models. With the rise of the account abstraction concept, projects such as Safeheron, Fedi, and Openfort were funded in Q2 2023.
Specifically, the projects that received financing are mainly focused on wallet infrastructure platforms. Safeheron, a digital asset self-custodial platform, is based on self-developed MPC and TEE technologies and can provide institutional-level wallet solutions for SMEs. Account abstraction wallet Openfort allows users to register using a variety of popular authentication methods (e.g. Google, Gmail, and Twitter). Wallet-as-a-Service platform Universal Ledger provides developers and engineers with APIs and an event-driven architecture while maintaining global compliance standards similar to FATF 40 and regulatory requirements in local jurisdictions.
Also funded were Fedi, a Bitcoin eco-wallet; Leo Wallet, a privacy-protected wallet from the Aleo eco-wallet; Tangem, a hardware wallet; and Giddy, a smart wallet, among others.
Account abstraction enables wallets to better handle and manage users’ account information and provide more convenient, secure, and privacy-protected digital asset management features. In the future, the threshold for wallet use may be significantly lowered or even set by default for users.
6) Decentralized Social
The decentralized social sector aims to allow users to better manage and monetize their social relationships and content. Some of these projects also try to connect different apps and users for collaborative play and governance. Well-known crypto projects such as Lens Protocol, CyberConnect, and Story Protocol received funding in the second quarter.
Overall, the decentralized social segment can be divided into 3 main directions: social graph, social meta-universe, and social media platform.
Social graph realizes users’ control and ownership of their social data by recording their social relationships and interaction data on the blockchain. A social metaverse is a digital 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 exchange content without being controlled by a centralized institution.
In the direction of social graphs, the Lens Protocol and CyberConnect both provide decentralized authentication solutions that protect users’ personal information and interaction data through blockchain technology, allowing users to communicate, share content, and build social relationships with other users. CyberConnect focuses on simplifying the user interface and operational processes with features such as social relationship management, encrypted chat, and distributed storage to facilitate secure and private social interactions. The Lens focuses on content presentation and the creator experience, to enable creators to derive value directly from their content.
In the direction of social meta-universe, Orbofi, PoPP, AnotherBall, and May.Social allow users to create and manage their own digital identities and display personalized roles, appearances, and assets in virtual worlds, and encourage users to participate and contribute to the social meta-universe ecosystem through internal economic models and incentives. Users can be financially rewarded for creating content, trading assets, and more.
Additionally, Story Protocol, with investment led by a16z Crypto, is a platform that focuses on
decentralized content creation, social interaction, and creator incentives. It provides a transparent, tamper-proof way to publish and share content, and promotes user engagement and financial rewards for creators through incentives and community governance. At the same time, the platform focuses on users’ control over their data and the protection of their privacy, enabling them to engage in content creation and social interaction more securely and autonomously.
7) NFT Market
OpenSea is still the dominant player in the NFT marketplace circuit, so more programmers are turning their attention to niche segments that enable virtual goods such as digital art, music, and games to become valuable assets as well. These vertical NFT marketplaces also received funding in the second quarter.
Specifically, projects funded in this segment can be categorized into the comprehensive NFT market, music NFT market, and social NFT market.
In the direction of the integrated NFT market, Tegro, Collectibles, Treasureland Market, and others all support multiple types of NFT display and trading, with minor differences in filtering functionality, trading processes, and supported blockchain networks.
For the music NFT market, Spinamp, MetaZ, AlienSwap, and other platforms focus on NFT in the field of music and entertainment, including music works, and virtual concert tickets.
The difference lies in groups of music partners and artists. In addition, special services are also a factor in attracting users. For example, Dew Drops offers selected digital collectibles to collectors via SMS, Meta[Z] offers a service to distribute NFTs for sneakers, and AlienSwap returns all its revenue to the community.
For the social NFT marketplace, platforms such as Oxalus, Colecti, and The Hug are focusing on NFT in social and creative areas such as social greeting cards, virtual gifts, and creative artwork.
Overall, these NFT Marketplaces have made some differentiating innovations in terms of positioning, functional focus, user interface, and community. Users can choose the right marketplace based on their needs and interests for a better NFT purchasing, presentation, and interaction experience.
8) Developer Platform
In the second quarter of 2023, Web3 Developer Platforms received approximately $89 million in funding. 16 of these platforms can be categorized into 4 areas according to their positioning, functional focus, and tools and services offered:
Platforms for authentication and wallet services: Magic, Ramper specializes in providing authentication and wallet services designed to lower the entry barrier for users. In terms of approach, Magic supports login via email or social, while Ramper does so through a key management architecture it developed itself, called Recoverable Multiple Cryptography System (RPMS).
Blockchain development tools and services platforms: Tableland, Mirror World, Ironforge, and Sort, provide developer-friendly interfaces, documentation, and tools to streamline the blockchain development process. Unlike Tableland, which focuses on structuring relational data, Ironforge focuses on improving the Solana developer experience and simplifying integration with existing systems, and Sort allows developers to create rich applications using Ethereum data.
NFT Development and API Platforms: Platforms such as Mazzuma, BlockSpan, and SPYCE5 focus on NFT development and APIs, providing tools and services to simplify the development and integration of NFT applications. They provide real-time data and metadata retrieval, NFT price query, ownership verification, and more.
Others: Airstack, Cookbook Tools, and services for developers 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 building and application development. As more and more applications and developers emerge with clear business models, developer platforms are gaining more and more attention from capital.
Summary
Overall, due to crypto fundraising difficulties, lack of market confidence, and poor exit channels, crypto investment institutions have slowed down their investment frequency, waiting for clearer market signals before adjusting their investment strategies.
In this situation, the majority of crypto companies need to reassess their income and expenditure, and cash flow situation and make strategies for the worst-case scenario. Many projects that lack cash flow and application scenarios will inevitably be eliminated from the market in this bear market, and new market hotspots will give rise to a new wave of projects competing in the new round of infinite games created by venture capitalists.
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