Macro-level overview
2023-03-01 10:15:53 UTC
The digital asset sector has seen 6,380 deals since 2017, as of this writing. The NFTs/Gaming category raised the highest number of deals. The deal count for Data/Analytics/Information (DAI) was the lowest, 261. Although some firms appear as data analytics companies, their value proposition emphasizes more on infrastructure development, developer tooling, etc. We classify such companies under the Infrastructure category; hence this could be another reason for the DAI deal count being low.
DAI firms like Chainalysis, Nansen AI, Glassnode, etc., cater to most of the industry's current data analytics and compliance needs as they have matured significantly over the years. Although their dominance could have increased the barrier to entry for new companies, we believe there will be a higher influx of new companies and investments for this category in the near future.
The 2017 bull run brought unprecedented genuine interest from people, causing a sharp uptick in users. This sudden interest meant developing and scaling the industry’s infrastructure to complement the increasing user adoption was a priority. The dire necessity led to significant growth in Fundamental Categories - CFS, Infrastructure, and Trading/Brokerage in 2018.
Web3 has been another exciting area of development to inspect. During the ICO boom of 2018, every so-called blockchain entity wanted to introduce utility tokens that allow token holders to perform a specific function on the blockchain network. However, after the markets relinquished the ‘Up Only’ narrative, the craze for utility tokens dwindled. Web3 dropped about 41% in terms of the number of deals, making it the highest YoY (Year over Year) fall in any category ever since 2017.
However, the number of deals for Web3 has steadily risen in the last three years. Development of alternate Layer 1s and their low transaction fees improved asset interoperability, and better infrastructure in contrast to 2017-2018 could be a few factors that have attracted investors to Web3.
DeFi dominated the space for four quarters concerning deal counts starting Q3 2020. Compound's liquidity mining program of COMP tokens in May 2020 rewarded users with various incentives for lending and borrowing on Compound. This incentive program, along with the fair launch narrative of Yearn Finance, kicked off the DeFi Summer. Lending protocols, decentralized exchanges, and derivative products launched in numbers as DeFi applications gained traction in the hype of DeFi Summer.
Uniswap’s monthly volume went from $169M in April 2020 to over $15B in September 2020. The total value locked in DeFi increased by over 10x.The amount of Bitcoin moved to Ethereum went from 20,000 in April to almost 60,000 in September. 22% of the total capital injection in the DeFi category transpired during Q3 2020 and Q2 2021. These numbers demonstrated proof of DeFi’s aggrandizing strides in Crypto.
‘NFT’ in recent years became a buzzword in Crypto. NFTs/Gaming corresponds to the highest number of deals because of the growing interest in blockchain gaming, metaverse, and creator economy. NFTs materialized into a cult as they percolated into the broader culture and made digital asset ownership a more widely-known concept. 87% of the total deals raised under the NFTs/Gaming category were made from 2021 and onwards. Since Q2 2021, NFTs/Gaming has outperformed other categories every quarter in deal counts.
Until the recent rise of other layer 1s, the crypto market cap was heavily correlated with bitcoin’s price movements. Bitcoin's contribution to the crypto market cap was 95% until March 2017 and has oscillated between 35% and 72% since then. In January 2017, bitcoin finally broke $1,000 after years of price fluctuations ranging between $100 and $900.This rise kicked off a euphoric bull run. Prices doubled to $2,000 in mid-May and skyrocketed to over $19,000 by December. Over the following 18 months, bitcoin’s price plummeted below $4,000. However, the first-of-its-kind bull run helped attract some attention from venture capitalists. Crypto investments increased from $1.5 billion in 2017 to $8.4 billion in 2018.
Even though the price of bitcoin and crypto market cap plummeted from 2017 to 2018, we observed investors' growing interest in the sector. A similar trend can be noticed in the aftermath of the 2020 bull run. The total crypto market cap has fallen sharply from $3 trillion to $1 trillion, but money infused in the industry has barely decreased YoY. From the repetition of such events, we can infer, henceforth, that private funding is typically a lagging indicator of the sector’s health and interest. Investment trends exhibit a delayed response to the overall macroeconomic volatility and crypto-specific events. On top of that, many deals are finalized earlier than when they are announced and made public.
From 2018 to 2019, Amount raised decreased by 57%, which most likely was a response to a prolonged bear market. From 2020 to 2021, as the total number of deals increased more than 2x, the amount infused in the sector increased by 808%. Projects under CFS, Infrastructure, NFTs/Gaming, and Trading/Brokerage saw a big jump in terms of amounts raised.
Overall, the Infrastructure and CFS category projects attracted the most investments, closely followed by NFTs/Gaming. DAI projects remain the least popular category for investments. Currently, venture capitalists prefer developing existing DAI platforms with room for growth instead of experimenting with newer projects. Companies like Chainalysis, Nansen, and Dune analytics dominate the DAI category investments. 34% of the total investments in the DAI category correspond to the three companies mentioned above.