2023 Q1 Encryption Investment and Financing Report: Market Overview, Popular Trends and Performance of Investment Institutions

Original author: Xijiaxiang, Gu Yu, RootData

The first quarter of 2023 has just passed, and most of the encryption practitioners in it are mixed. On the one hand, several banks in the United States have suffered a run crisis, and regulators have continued to suppress centralized exchanges, which has impacted market confidence; but on the other hand, encrypted assets represented by BTC and ETH have performed quite well in the secondary market. In addition to price factors, we also believe that multiple signals within the crypto space are showing signs of strong recovery and growth.

So, how will the encryption investment and financing market perform in the first quarter of 2023? What are the hottest trends in the market right now? What are the frequency and preferences of investment institutions?Rootdatafirst level title

1. 2023 Q1 Encryption Market Investment and Financing Overview

RootData data shows that from January to March 2023, the encryption industry disclosed a total of 309 project financing events, with a total financing amount of US$2.317 billion, far lower than the US$12.48 billion in January-March 2022, a year-on-year decrease of about 81%. Compared with the US$3.463 billion in October-December 2022, there is also a significant decline, a 33% month-on-month decrease. All in all, both the number of financings and the amount of financing in this quarter hit a new low since 2021.

It can be seen that after the encryption industry entered the bear market cycle, the financing rhythm of the primary market has fallen off a cliff, and investment institutions are relatively cautious and have not actively taken action. On the other hand, the valuations of the primary and secondary markets of many projects are inverted, so the secondary market is more popular with investors than the primary market.

From the perspective of the financing distribution of each track, the following figure shows the number of financing transactions and the financing amount (unit: US$100 million) of each sector in the first quarter of 2023 from January to March:

Among them, the number and amount of financing in the infrastructure track are the highest among the nine tracks, with an average single financing amount exceeding US$10 million. Popular financing projects on this track include modular blockchain, zk concept, etc.;

The number of financings on the DeFi track ranks second, and the amount of financing ranks fourth. The popular subdivisions of this track are DEX, derivatives, etc.;

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2. 2023 Q1 Encrypted Investment and Financing Market Trend Analysis

1) Ethereum pledge agreement and service

Liquidity staking protocols in the current market are facing fierce competition, and new products of the same kind are mainly working in three directions: one is to cooperate with other Dapps to provide more application scenarios for the generated derivative tokens; the other is to Strive to deploy on more L1 chains to maximize TVL; the third is to focus on improving the security level of the protocol.

For users, liquidity staking is attractive in the following aspects: first, it is user-friendly, and it does not require 32 ETH to participate in network verification and benefit from it, which is a relatively stable and safe fixed-income product; the second is Pledged tokens can be withdrawn at any time without threshold; the third is to release liquidity, thereby improving the efficiency of capital use; the fourth is that users can not only receive verification benefits, but also participate in revenue governance.

Additionally, liquidity staking is expected to grow further, as the ETH staking ratio is significantly lower than other L1 tokens. Only 14% of ETH is currently staked, while 58% is the average for L1 staked. The current market consensus is that once the Shanghai upgrade is successful and the liquidity risk and uncertainty of the lock-up period disappear, more funds will flow into the pledge agreement.

Liquidity staking protocols in the current market are facing fierce competition, and new products of the same kind are mainly working in three directions: one is to cooperate with other Dapps to provide more application scenarios for the generated derivative tokens; the other is to Strive to deploy on more L1 chains to maximize TVL; the third is to focus on improving the security level of the protocol.

During 2023 Q1,Unamano、Rocket Pool、Obol Network、Diva, Ether.Fi and other pledge agreements and services have successively obtained financing. Plus institutional cryptocurrency custody and staking solutionsFinoa, the asset threshold is as low as 1 euro and supports more than 100 digital asset pledgesMoodMiner。

It can be said that the future of the liquidity staking protocol depends on the overall long-term development of the public chain, and its security will be the top priority. In addition, factors such as value capture capabilities and on-chain DeFi ecological construction also have a considerable impact on the protocol.

2 ）AI

Over the past decade, artificial intelligence has steadily entered the business world and gradually improved the user experience of Internet products, but this has not attracted much interest from outsiders. ChatGPT changes that. Suddenly, everyone is talking about how artificial intelligence will disrupt their work, study and life.

How artificial intelligence will transform the encryption field has become one of the most concerned topics in the encryption industry this year. Many people believe that the maturity of the AI ​​concept will bring great benefits to the Web3 world, and its typical use cases include DeFi, GameFi, NFT, DAO, smart contracts, etc.

During the Q1 period of 2023, blockchain platforms based on artificial intelligence and machine learning have successively received large amounts of financing, such asFetch.ai, decentralized collaboration platformFedML, focusing on the identity systemAspecta, focus on social directionPLAI Labs, digital asset research platformKaitoand AI creation platformBotto. We can expect to see further integration of artificial intelligence and blockchain, leading to more secure, transparent and efficient systems.

3) DeFi derivatives

Just like the traditional financial derivatives market is supported by the hedging needs of the real industry, DeFi derivatives are also evolving from a single transaction demand to more diversified risk hedging and other fields.

On the other hand, although CEX is far ahead in terms of derivatives trading volume, due to higher transparency and innovative system design, decentralized derivatives agreements such as GMX and Gains Network will also grow significantly in the bear market in 2022.

Currently, emerging decentralized derivatives protocols centered on traders, liquidity providers and token holders are emerging one after another. Fundamentally, they focus on solving the following problems: first, to attract liquidity and improve asset utilization; second, to build composability and cross-margin, such as using multiple forms of encrypted collateral to collateralize leveraged positions; third, , providing a friendly user experience for traders and liquidity providers.

According to Rootdata statistics, in the most recent quarter, projects that received financing in the direction of DeFi derivatives include a perpetual contract trading platform that realizes leveraged transactions of all asset classes through synthetic assetsNarwhal Finance, Arbitrum ecological decentralized perpetual contract exchangeVest Exchange, an option trading platform that supports 10 times leverageOptix Protocol, and an alternative derivatives protocol for building exotic option structured products for retail investorsCega, a strategy aggregation protocol that aggregates various leverage strategies into one accountBlueberry Protocolwait.

4 ）NFTFi

The NFT track is undergoing major changes. This emerging asset class is expected to establish an exclusive financial ecosystem.

With the widespread adoption of NFT, various DeFi protocols and technologies are expected to be applied to NFT. This is NFTFi, which is like "Lego building blocks" that can improve capital efficiency by plugging in different protocols.

DeFi platforms such as Aave and Compound have been born for several years, and now, similar products in the NFTFi field, BendDAO, ParaSpace, JPEG'd, NFTfi, etc. have also appeared. As can be seen from the user data and transaction volume data of platforms such as Bend, NFTfi, Pine, Arcade, JPEG'd, Drops, and x2y2, this market is steadily expanding.

(Transaction scale data of NFT lending platform)

Similar to the Summer of DeFi in 2020, the Summer of NFTFi will appear at some point. This may appeal to DeFi players, even if they have no direct interest in NFTs, but are expected to be attracted by the potential rewards.

In the past two years, NFT has experienced a turbulent cycle in the case of unlevered participation in transactions, and with the launch of NFT derivatives, more people will participate in larger transactions. The emergence of NFTFi is expected to bring greater liquidity and higher market efficiency to the entire ecosystem.

During 2023 Q1, NFT automatic market maker agreement based on Liquidity BookMidaswap, NFT revenue generation protocolinsrt finance, an NFT lending protocol powered by Uniswap V3paprMEME, an NFT derivatives exchange that provides leveraged tradingNFEX, a community-centric NFT exchangeEZswapAnd so on to obtain financing.

5) Data analysis products

Most companies in Web3 are struggling to make data-driven decisions to drive growth. The encryption field needs more data analysis products to provide users with more comprehensive, diverse and in-depth insights. On the other hand, pioneering encrypted data tools will also effectively improve the scientific nature of investor decision-making, and at the same time make the data flow in the encryption industry more transparent.

At present, how to integrate off-chain, on-chain and social media data, how to use data to promote new users, active users, and retention, and how to guide business through data analysis of user behavior, has become the focus of many game companies, NFT companies and even asset management companies. Important issues that platforms are paying attention to.

During 2023 Q1, such products that announce financing news include data analysis platforms for game studios and NFT servicesHelika, Multi-chain insights focusing on NFT and digital assetsbitsCrunch, a data intelligence platform focusing on Web3EdgeInand Web3 security infrastructure that provides Sybil attack prevention analyticsTrusta Labs。

6) Creator Economy

Although the creator economy in the Web3 industry is still in its infancy, with a small audience and lack of content production, on the other hand, there are not many strong competitors in the industry, which is very blue ocean and has great potential.

As an important innovation tool in the creator economy, token incentives allow creators to use new monetization and value capture mechanisms to attract fans and co-create new content with them. Its larger-scale application is expected to help the creator ecosystem become stronger and more dynamic.

During the 2023 Q1 period, projects in many subdivisions of the Creator Track have obtained financing. Music, Web3 interactive music platformMuverse, music collection platformVAULT; Content, Web3 content creation platformRepubliK, novel reading platformRead 2 N; Branding, Fashion and Artists, Cultural BrandingManesLAB, artist platformWild, Web3 fashion platformSyky; in addition to building a better mutual benefit mechanism platform for YouTube creators and fansGigaStaretc. to obtain financing.

7) Modular blockchain

A modular blockchain refers to a blockchain that completely outsources at least one of the four components of "execution layer, settlement layer, consensus layer, and data availability layer" to an external chain. Since serving millions and more users on a single-chip chain is too complex and has limited resolution capabilities, people proposed sharding and Layer 2 solutions, which gradually evolved into modular blockchains. The initial solution for modularization was rollups, and this concept was further expanded into a modular blockchain.

The main advantage of the current modular blockchain is twofold, one is sovereign, although other layers are used, the new modular blockchain can be sovereign like L1. This allows the blockchain to respond to hacking attacks and push upgrades without any underlying permission; the second is to effectively improve scalability, that is, modularization can be achieved without sacrificing security or decentralization expand.

During 2023 Q1, focus on building a high-performance, customizable second-layer blockchainCaldera, Modular Settlement LayerdYmensionand an ecosystem of interoperable and scalable rollupsSovereignBoth have received large-scale new rounds of financing.

8) zk concept

The Zk ecosystem is becoming more and more prosperous. Zk-Rollup adopts validity proof to verify and package all transactions under the chain. When the verified transaction is submitted to the main chain, a zero-knowledge proof is attached to prove the validity of the transaction. In the words of StarkWare CEO Uri: "It provides computational integrity without trust. Even if no one supervises, you can be sure that the calculation is performed correctly." It sounds very similar to the idea of ​​​​early Bitcoin.

In contrast, Optimistic Rollup is compatible with EVM, the technical solution is mature and implemented early, and the migration cost is relatively low for developers. This means that the projects Arbitrum and Optimism currently have the highest market share among rollups. Because zk-Rollups are not compatible with EVM, the technical difficulty is relatively high, and the development progress is slow. At present, the application is not as extensive as the rollup of the OP system that can be oriented to smart contracts.

However, zk-Rollup still has many advantages compared with Optimistic Rollup. One is better scalability, and zk-Rollups need to upload less data to the main network than Optimistic Rollups. In practical applications, zk-Rollup's ability to improve performance is about ten times that of Optimistic Rollup; the second is that the transaction finalization time is short. The third is higher security.

Vitalik once said in 2021: "In the short term, Optimistic rollup will win because of its EVM compatibility. But in the medium and long term, with the improvement of zk-SNARK technology, zk-rollups will win all use cases."

During 2023 Q1, the zk concept projects that announced the completion of financing include: a trust layer based on zero-knowledge proofProven, Ethereum's native zkEVM layer 2 solutionScroll, zk-rollup protocolPolybase, Web3 Interoperability InfrastructurePolyHedra, zk dark pool protocolRenegade, ZK hardware acceleration projectCysic, an ecosystem of interoperable and scalable rollupsSovereign, ZKP-based ultimate Web3 middlewareHyper Oracle, zero-knowledge proof market=nil; 。

9) Security solutions

Web3 security technology is developing rapidly, but the code transparency and openness of the blockchain still lead to frequent hacking incidents. Since 2021, Web3 has lost more than $10 billion due to security issues. Therefore, how to provide assets protection-related products for enterprises, infrastructure providers, and ordinary users to avoid losses caused by hackers or human errors has always been an important topic in the encryption industry.

How to analyze smart contracts to prevent vulnerabilities? How to monitor malicious activity of on-chain transactions? How to build a better and more mature digital asset ecosystem? The above problems are also what the track company is trying to solve.

During the 2023 Q1 period, related projects can be divided into two categories according to different types of service customers: one is for B-end customers, such as encrypted security service providers that automatically detect threats and help teams quickly take preventive measuresIronblocks, a crypto security firm that monitors on-chain and off-chain data sources using proprietary machine learning modelsHypernative, Automatically generate security scanning solutions with the help of security scanning enginesMetaTrustThe second is for C-end users, such as encryption security companies that actively scan transactions around the clock and transfer risky assets in a timely mannerStaging Labsfirst level titleCoincover。

3. Performance of encrypted investment institutions

After a series of turmoil such as the FTX incident, the crypto investment institutional market is also undergoing a reshuffle. Many venture capital institutions have fallen silent, and many institutions are still accelerating their investment frequency.

Considering the representativeness of the data interval (the amount of data in the first quarter is insufficient), Rootdata has counted the number of crypto investment institutional sales in the past 6 months (October 2022-March 2023), and compared with the previous 6 months (2022 April-September) data, and based on the minimum investment of 8 times, 10 crypto venture capital institutions with the highest growth rate and the largest decrease in the number of investments were selected.

In the fastest growing dimension,DWF LabsIt is a well-known dark horse in the industry. It has made at least 21 public investments in the past six months, and the agency has no record of making a deal before. also,ABCDE Capital、Blockchange Ventures、Chapter One、Foresight Ventures、Cogitent Ventures、PlaceholderThe number of public shots has more than doubled.

In the dimension with the greatest decrease,Mechanism Capital、Folius Ventures、Zee Prime Capital、Polygon Labs、Dapper Labs、Tiger Global、Republic Capital and other well-known institutions have fallen by more than 85%, and the number of publicly disclosed investments is not more than 2 times.

In addition, from the perspective of the overall number of investments, the top ten investors in the past 6 months areCoinbase Ventures、Shima Capital、Big Brain Holdings、Polygon Ventures、DWF Labs、Polychain、Circle Ventures、HashKey Capital、Solana Ventures、a16z。