Original author: Chase Devens

Original compilation: Deep Chao TechFlow

Crypto’s performance in the ongoing bear market is perhaps best exemplified by funding data in the space. Q3 2023 did not break away from the sequential quarterly downward trend we have seen since early 2022 - Q3 hit new lows in both total funding and deal count since Q4 2020. The quarterly total was slightly lower with 297 transactions totaling $2.1 billion, down 36% from the previous quarter.

Financing in stages

From the transaction stage analysis of the third quarter, we can see that most of the transactions are concentrated in the early rounds. Seed funds accounted for the largest total funding raised, with $488 million raised across 98 rounds. Trends in the number of deals show a clear shift from later-stage projects to earlier-stage projects compared to three years ago.

Early-stage deals (consisting of Pre-Seed, Seed and Series A rounds) increased from 37% of deal share in Q4 2020 to 48% in Q3 2023. Meanwhile, late-stage deals (made up of Series B or later rounds) decreased from 8% of deal share in Q4 2020 to 1.4% in Q3 2023. This suggests that investors trying to fund projects with significant upside potential can achieve higher return multiples when market sentiment eventually shifts in a positive direction.

The third quarter also saw a large amount of capital coming in in the form of strategic investments, such as companies investing $200 million in Islamic coins and private equity transactions. Strategic financing deals have been steadily increasing during the bear market. At the bull market highs in Q4 2021, strategic rounds accounted for only 0.2% of total funding. This share rose to 22% by the third quarter of 2023, indicating that tough market conditions are forcing projects to seek short-term bridge financing or ultimately be acquired by larger projects.

Fundraising situation by sector

Sector Trend

The distribution of sector funding in Q3 is similar to the pattern weve seen over the past 12 months. The chain infrastructure, DeFi and gaming sectors have been the most well-funded sectors during this period. The services segment, defined by complementary business functions such as marketing, incubators, security and legal services, was the only segment to raise an average of more than $100 million in the past 12 months. While other sectors are important to the development of the overall crypto sector, these four sectors continue to attract the majority of investor attention.

Another notable trend last year was the increased amount of funding for infrastructure-based projects compared to user-facing applications. This is best demonstrated by grouping the consumer, DeFi, and gaming sectors into the “Applications” category, and the application infrastructure, chain infrastructure, custody, and DePIN sectors into the “Infrastructure” category.

When we look at the proportion of funds raised between these buckets, we see a subtle shift from user-facing applications to infrastructure projects. This relationship is supported by stable funding for infrastructure projects compared with higher variability applications. However, this trend may not last long, as more investors are beginning to realize that without successful user-facing crypto applications, infrastructure investments are unlikely to generate the returns they expect.

Leading sector

Fundraising in the third quarter was relatively evenly distributed across sectors. Chain infrastructure accounts for the largest share of funding at 18%, while DeFi leads in the number of transactions funded at 67. Finally, gaming had another strong showing during the quarter, with nearly $250 million invested.

chain infrastructure

Despite only 21 deals, the chain infrastructure segment still accounted for the largest share of funding raised in the third quarter. One-third of these transactions occurred in the smart contract platform subcategory, with Fhenix raising $7 million to build fully encrypted smart contracts.

Scaling solutions accounted for 43% of funding raised in this segment. This represents an ongoing shift from smart contract platforms to scaling solutions. The first quarter of 2022 was the first time funding for scaling solutions exceeded funding for smart contract platforms, when Polygon raised $450 million for its scaling solutions. In three of the past four quarters, the investment ratio has exceeded the all-time high in the first quarter of 2022. The ratio peaked at 7x in Q4 2022, primarily due to lower investment activity in the smart contract platform category during the quarter.

More than 40% of chain infrastructures funding in Q3 2023 came from the Optimism Foundations sale of approximately 116 million OP tokens at the end of September to further advance. Other notable deals include Flashbots’ $60 million Series B round to continue development of SUAVE, and Bitmain’s $54 million strategic investment in Core Scientific, a leading Bitcoin mining company.

DeFi

DeFi was the sector with the most fundraising projects in the third quarter, with a total of 68 transactions. Investment in this sector is highly concentrated, with the transaction category accounting for 38% of all investment capital and a total of 33 transactions. Overall, DeFi projects raised a total of $210 million, with an average transaction size of $3 million.

Binance Labs was an active investor in the DeFi sector in the third quarter, with a total of 7 transactions, including 10 million on Helio Protocol (a liquidity staking platform based on the BNB chain) and Radiant Capital (a money market based on LayerZero) US dollar strategic investment. The largest DeFi deal of the quarter was a $16.5 million Series A for Brine, a Starkware-based order book DEX.

Three of the top four DeFi investors in Q3 are ecosystem entities. Binance Labs, Base Ecosystem Fund, and Polygon were responsible for a total of 16 transactions.

game

The gaming sector clustered a number of early-stage deals, making it the third-highest-funded sector in the third quarter, raising a total of $249 million across 33 deals. Compared with other user-facing applications in the consumer space, gaming accounted for 67% of capital investment in the third quarter.

The vast majority of transactions in the gaming sector come from the long tail of investors. Only seven entities have deals with two or more projects, while 104 investors have invested in single projects in the sector.

The biggest deal in the gaming sector is Futureverse’s $54 million Series A round, a platform that combines AI with the world of the Metaverse. Other metaverse-based game projects, such as Mocaverse and Mahjong Meta, also received funding during the quarter. Finally, Proof of Play raised $33 million in seed funding from lead investors a16z and Greenoaks. The chain-based game studio was founded by Amitt Mahajan, the original co-creator of the Zynga game Farmville, who hopes that blockchain-based games can have a similar growth trajectory as early free mobile games.

investor

In the third quarter, crypto’s most active investors made 144 investments. Despite this, this group only accounts for 7% of all investor transactions, indicating that cryptocurrency financing is still dominated by long-tail investors.

Outlier Ventures and Binance Labs are by far the most active investors - they made 23 and 22 deals respectively in the third quarter, which is more than double the next closest investor, Robot Ventures. Outlier Ventures mainly focuses on payments (six transactions) and DeFi (five transactions).

As we highlighted in August, Binance Labs has been actively investing in 2023, focusing on the DeFi and gaming sectors. In addition, projects developing zero-knowledge and privacy technologies are also investment targets of Binance Labs. Notably, 12 of Binance Labs’ 22 transactions were projects participating in its accelerator program. However, even if these are excluded, Binance Labs’ other 11 investments still tie it with Robot Ventures for Q3 deal activity.

Finally, 54% of active investors in the third quarter were from the United States. This figure is consistent with the quarterly average over the past four years (55%). Even as project founders slowly leave the U.S. for more regulatory-friendly jurisdictions, the U.S. remains home to the majority of cryptocurrency accredited investors.