Over the past few quarters, the Web3 investment market has been experiencing a challenging bearish trend. Only those businesses with sustainable and legitimate models are thriving and surviving in this market. As the market conditions remain unpredictable, investors are more inclined towards investing in products that are resilient and continue to innovate.
To gain insight into the current investment climate, we analyzed the Venture Capital (VC) fund investment and deal activity in the previous quarters. Our analysis indicates that the crypto VC deal activity has seen a sharp decline of -47.9% in the fourth quarter of 2022, as compared to x% in the Q1, Q2, and Q3. This trend marks the vertical’s third consecutive QoQ decline, with only $2.5 billion invested, which is the lowest amount of capital invested since Q4 2020. Moreover, the deal count also witnessed its lowest level since Q4 2020, with only 345 deals, representing a QoQ decline of -39.6%.
Despite this overall decline, we observed that blockchain platforms, including Layer-1 and Layer-2 networks, continue to attract investors. Celestia, a modular L1 platform, raised $52.3 million in a Series B funding round, while Matter Labs, a developer of L2 protocol zkSync, raised $200.0 million in a Series C round. Blockchain games also received significant investments, including early-stage rounds from Fenix Games ($150.0 million), Future Star ($140.0 million), and M.a.n.c ($50.0 million).
In conclusion, while the investment market is experiencing a bearish trend, investors are still seeking opportunities in businesses with resilient and innovative models. The blockchain industry is still attracting investors, particularly in platforms and games, indicating a potential for growth in the coming quarters.
In Q1 2023, the highest amount of venture capital was raised by startups operating in the Trading, Exchange, Investing, and Lending sector, amounting to $538m, which represented 22% of all the money raised. The Wallet segment followed closely behind, with $519m raised, making up 21% of the total capital raised. The leading company in the Wallet segment was Ledger, a manufacturer of hardware wallets, which raised a $108m extension in March 2023 to its 2021 Series C funding round of $386m.
In terms of deal count, the Web3, NFT, DAO, Metaverse, and Gaming subsectors took the top spot, followed by companies in the Trading, Exchange, Investing, and Lending sector. The Wallet and Enterprise Blockchain categories attracted larger amounts of capital invested in later-stage companies, whereas the Infrastructure category had the most pre-seed investment. As expected, the Trading/Exchange/Investing/Lending companies received a considerable share of capital invested in later stage companies, while the Web3/NFT/DAO/Metaverse/Gaming sector received very little investment in companies at the latest stages.
Notable seed-stage VC deals in the crypto space as of Q4 2022 were invested in Fordefi, an infrastructure and developer tools company funded by Lightspeed Ventures and Ping, which pertains to the Crypto Corporate Management and Finance space.
According to Bitwise Investments, DeFi assets soared in Q1 2023, driven by favorable crypto market trends. DeFi staking services, such as LDO, benefited from regulatory crackdowns on centralized counterparts.
The cryptocurrency industry has been through some challenging times in the past year, but the DeFi protocols proved to be resilient and well-positioned for growth in 2023. According to recent reports, Uniswap, one of the leading DeFi protocols, gained significant market share against traditional competitors like Coinbase. During the 2022 “stress test,” Uniswap’s strength was evident as investors turned to the platform during difficult times.
In recent months, several banks have experienced financial challenges due to the fast-paced increase in borrowing costs. Silvergate Bank, a primary bank for the crypto industry, was one such bank that faced insolvency and was liquidated in March 2023. Despite this setback, the crypto industry is mature enough to continue without Silvergate, although many companies are now in search of new banking relationships.
Stablecoins, a vital component of the DeFi ecosystem, offer a less volatile alternative to other cryptocurrencies. Despite a temporary loss of peg to the US dollar, USDC remains the go-to USD-backed stablecoin, and stablecoin payments and transfers are rapidly increasing in popularity. In Q1 2023 alone, over $2 trillion worth of stablecoin transactions were processed, serving as a financial lifeline for citizens in countries experiencing banknote shortages and elevated inflation.
Despite the challenges and pressures faced by the cryptocurrency industry, it is experiencing renewed growth in fundraising, with DeFi emerging as the most sustainable business model with efficacious and useful use cases for the industry.