Cryptocurrency Q1 Review and Market Outlook

Quick Facts:

• Despite the market downturn, crypto investing remained very active in the first quarter.

• On the infrastructure side, we see a lot of movement in cross-chain solutions and DAO tools. New layer-1s are still incubating.

• DeFi primitives developed on Ethereum are being extended to newer L1s, while Polkadot is accelerating development.

• NFT projects are focused on bringing more utility to the space, with Yuga Labs making huge waves this quarter.

• The rise of Axie Infinity has attracted many successful traditional game developers to develop games on Web3, and Southeast Asia has become the main force in the game.

After reaching a peak in November 2021, the inherently liquid cryptocurrency market entered the new year and more or less stagnated in the first quarter. However, the private placement market has maintained the hot momentum of last year.

According to The Block, venture capital investment hit a record $12.5 billion in the first quarter of 2022, a figure that has grown for seven consecutive quarters. But we are noticing signs of a slowdown, especially in late-stage investments, which may be seen in our second quarter activity.

The volume reflects the constant emergence of new companies and projects in the space. This is due to the low startup costs for crypto and Web3 companies, as well as the open source code and the ability to bootstrap or self-fund through the issuance of tokens.

Our investments fall into six categories. Within these six categories, here is how we performed in the first quarter of 2022.

Given that we invest in early-stage projects, this gives us a glimpse into what the industry will be like in the near future. Next, let’s dive deeper into some of the trends and themes we identified during the first quarter.

Cross-chain and Web3 infrastructure are booming

In the early days of cryptocurrency, Bitcoin and Ethereum dominated. With the launch of new layer 1s in recent years, the ecosystem beyond BTC/ETH has exploded, with more than 10 chains now hosting over $1 billion in value.

The value that is moving across multiple networks is growing, creating a greater need for value on one chain to flow to another. As a result, we will continue to see the construction of cross-chain infrastructure to facilitate activity between blockchains.

Even with a multi-chain future secured, we are still developing new L1s. Our investments in Aptos (a general purpose L1 from former Diem employees), Celestia (a modular blockchain), and Subspace show that the industry is not innovating at the grassroots level. This also begs the question - will today's dominant L1 be replaced one day?

There are also a plethora of tools out there to help DAOs and Web3 communities thrive. Solutions for payroll (Diagonal, Zebec), social engagement and networking (Taki, Backdrop, Bonfire), and commerce (Rain) all point to a future where online communities can coordinate more seamlessly.

DeFi’s multi-chain proliferation

Speaking of the multi-chain world, we see a lot of familiar patterns in these rapidly evolving L1 networks. Basically, Ethereum set the tone for the ecosystem to flourish: AMMs (Uniswap), money markets (Compound/Aave), oracles (Chainlink), and yield aggregators (Yearn.Finance), etc.

For the emerging L1 competition, teams understand that they will need those same fundamental primitives. Therefore, it is not surprising to see Ethereum’s DeFi building blocks manifest in projects such as Solana, Avalanche, NEAR, Polkadot, etc.

For example, from our first quarter investments, Aurigami on NEAR and Solend on Solana are similar to Compound. Katana and Francium on Solana are similar to Yearn.finance. Redstone is similar to Chainlink, leveraging Arweave for cheaper storage and providing oracle services for longer tail tokens and NFT data feeds. While these projects are similar to applications originally created on Ethereum, they have all innovated.

Polkadot

Particularly active in Q1 was the Polkadot ecosystem. With the long-awaited launch of the Polkadot parachain set for late 2021, we saw momentum around DOT.

We can launch a network of L1s on Polkadot. These L1s are called parachains and are all able to interoperate with each other. With the parachains online, Polkadot is now able to host user applications.

NFT Expansion Pack

After a breakout summer, NFT sales have retreated from earlier highs. Yet beneath the surface, innovation is more vibrant than ever.

While NFT activity in 2021 has been centered around simple buying and selling (aka flipping jpegs), the next wave of projects are building utility around NFTs. For example, NiftyApes and PawnFi are working to bring liquidity to NFT holders, allowing them to obtain loans backed by NFTs. Platforms like Cymbal aim to bring more community and social features around NFT ownership.

Yuga Labs, the studio behind Bored Ape Yacht Club, received a $4 billion valuation this quarter, building a BAYC-branded metaverse. Next, they acquired the IP rights to the NFT collections cryptopunk and Meebits. They announced the start of a trilogy of films, where BAYC NFT holders can submit their NFTs to be cast in the films and receive licensing fees - an interesting new experiment in on-chain licensing.

GameFi 2.0

Blockchain-based gaming has been popular in 2021 thanks to the rise of Axie Infinity, which saw sales of NFTs reach a staggering $848 million in August before falling off a cliff. (It’s worth noting that despite the apparent reversal of trend and a serious hack, Axie still managed to generate $30 million in NFT sales in March.)

Axie’s multi-billion dollar earnings were enough to catch the attention of the gaming world, and since then, the next wave of blockchain-based games has quietly emerged. Notably, many of the teams have created highly successful mobile, web, and AAA games (such as Clockwork Labs, Block Tackle, Summoners Arena, Third Time, Avalon).

Future blockchain-based games will inject crypto NFTs into more familiar Web2 game formats — MMORPG, FPS, MOBA, etc. Other CBV portfolio companies, such as Joyride, will make it easier for game developers to integrate crypto/NFTs into existing games.

Currently, Southeast Asia is transforming itself into the epicenter of the crypto gaming world, led by countries like the Philippines and Vietnam. We are particularly excited about the developments in the region and the Vietnam Gaming Association and CBV portfolio company Ancient8.

Outlook

Many crypto investors are feeling uneasy amidst the volatile macro landscape. More often than not, we are asked how a market downturn will impact CB Ventures’ activity. To date, there has been no shortage of high-quality entrepreneurs in the crypto and Web3 space. However, if prices continue to fall, as observed in the broader venture capital space (down 19% quarter-over-quarter), it would not be unreasonable to expect a slowdown. Regardless, our strategy would not change much.

It’s worth reminding that some of the most successful projects today were funded during the 2018/19 bear market. To put this in perspective, our early investments include Compound, OpenSea, Polygon, Arweave, Starkware, Blockfi, NEAR, and Messari, among others. As such, we will continue to invest in high-quality founders and projects that advance the industry, regardless of broader market conditions.

It’s worth repeating that the investable space in Web3 has expanded a lot: DeFi, NFTs, DAOs, the metaverse, and games are all developing in L1. Then there’s the cross-chain infrastructure to stitch everything together, and L2 solutions to help everything scale. Not to mention a thousand other ideas that haven’t come out yet.

Source: https://medium.com/the-coinbase-blog/coinbase-ventures-q1-recap-and-market-outlook-f84488b25ae9