Coinbase Ventures Q1 recap and market outlook

Around the Block from Coinbase Ventures sheds gentle on key developments in crypto. Written by Connor Dempsey

TLDR:

• Regardless of the market downturn, Q1 was one other extremely lively quarter for crypto enterprise funding.
• On the infrastructure aspect, we’re seeing a ton of exercise inside cross-chain options and DAO tooling. New layer-1s are nonetheless being incubated.
• Acquainted DeFi primitives developed on Ethereum are increasing into newer layer 1s, and Polkadot is selecting up steam.
• NFT initiatives are centered on bringing extra utility to the area, with Yuga Labs making critical waves over the quarter.
• The rise of Axie Infinity has attracted profitable conventional gaming devs to construct in Web3, with South East Asia rising as a hotbed of exercise.

After peaking in November 2021, liquid crypto markets fell into the brand new 12 months and kind of treaded water in Q1. The non-public markets, nonetheless, stored up the torrid tempo set final 12 months.

Based on data from The Block, Q1 2022 noticed a file of $12.5 billion in enterprise funding — a determine that has elevated for seven consecutive quarters. Coinbase Ventures was busy as nicely, closing 71 new offers in Q1, typically focusing on early stage investments. We are going to observe that we’re beginning to see indicators of a decelerate, notably with later stage investments, that may possible be seen in our Q2 exercise.

Deal quantity is a mirrored image of the continued inflow of latest firms and initiatives being fashioned within the area. That is aided by the low startup prices that crypto & Web3 firms get pleasure from because of open-source code and the power to bootstrap or self-fund by way of token issuance.

CBV overview

As a refresh:

• Coinbase Ventures advances crypto & Web3 by partnering with distinctive founders who share Coinbase’s mission of making extra financial freedom for the world.
• We’ve been acknowledged as probably the most lively company VCs on this planet by deal count.
• Ventures companions with founding groups on the earliest levels and all through their journey. We make investments throughout all classes throughout the cryptoeconomy, in search of to align ourselves with the perfect and brightest minds within the area.
• Up to now, we’ve invested in 300+ groups building everything from layer 1 protocols, Web3 infrastructure, centralized on-ramps, decentralized finance, NFTs, metaverse applied sciences, developer tooling, and extra.

We typically break down our investments throughout six classes. Inside these six classes, right here’s how our exercise shook out in Q1 ‘22.

On condition that we put money into initiatives of their infancy, our exercise can provide a lens into what the business has in retailer within the close to future. With that, let’s dive into among the developments and themes that we recognized in Q1.

Cross-chain & Web3 infrastructure bloom

Within the early days of crypto, Bitcoin and Ethereum dominated. With new layer 1s coming on-line in recent times, ecosystems outdoors of BTC/ETH have exploded, and there are actually greater than 10 chains internet hosting over $1B in value.

The rising worth throughout a number of networks has introduced an growing want for worth on one chain to stream to a different. As such, we’re persevering with to see cross-chain infrastructure being constructed out to facilitate exercise between blockchains (CBV Q1 investments: LayerZero, ZK Hyperlink, LiFi, Foxchain, Socket, Composable Finance).

Even with the multi-chain future assured, we’re nonetheless seeing new experimental layer 1s in growth. Our investments in Aptos (common function L1 from former Diem workers), Celestia (modular blockchains), and Subspace (Proof-of-Archival consensus) recommend that the business is just not executed innovating on the base layer. It additionally begs the query — will the dominant layer 1s of immediately sometime be usurped? Time will inform.

Additional up the stack, there’s extra tooling on the best way to assist DAOs and Web3 communities flourish. Options for payroll (Diagonal, Zebec), social engagement & networking (Taki, Backdrop, Bonfire), and commerce (Rain) all level to a future the place these on-line communities can coordinate extra seamlessly.

DeFi’s multi-chain proliferation

Talking of the multi-chain world, we’re seeing acquainted patterns emerge throughout these burgeoning layer 1 networks. Principally, Ethereum set the tone for the foundational apps and protocols wanted for an ecosystem to thrive: an AMM (Uniswap), cash markets (Compound/Aave), an oracle (Chainlink), and yield aggregators (Yearn.Finance) to call a couple of.

For an rising layer 1 to compete, groups perceive they’ll want those self same foundational primitives. As such, it’s changing into widespread to see Ethereum’s DeFi constructing blocks replicated throughout layer 1s like Solana, Avalanche, NEAR, Polkadot, and so forth. Betting on these foundational protocols is an effective solution to acquire publicity to a broader ecosystem: a playbook we adopted in Q1.

For instance, from our Q1 investments, Aurigami on NEAR and Solend on Solana resemble Compound. Katana and Francium on Solana resemble Yearn.finance. Redstone resembles Chainlink, leveraging Arweave for cheaper storage to supply oracle providers to longer tail tokens and NFT knowledge feeds. And whereas these initiatives resemble apps first created on Ethereum, they’re every innovating in distinctive and differentiated methods.

Polkadot Cometh

Elsewhere in DeFiland, we have been notably lively within the Polkadot ecosystem in Q1. With the long-awaited launch of Polkadot parachains arriving on the finish of 2021, we’re seeing momentum round DOT pickup steam.

You possibly can consider Polkadot as a community that you may launch layer 1s on prime of. Every of those layer 1s, known as parachains, are able to interoperating with each other. With parachains dwell, Polkadot is now able to internet hosting consumer functions.

We’ve now invested in four of the 5 dwell parachains (Acala, Moonbeam, Parallel Finance, and Astar) and waded deeper into the DOT waters in Q1 with investments in Composable Finance, Satori, and Coinbase alum Luke Youngblood’s new undertaking: Moonwell.

NFT growth pack

After a breakout summer season, NFT gross sales have come again right down to earth a bit from their earlier highs. Under the floor, nonetheless, innovation is extra vibrant than ever.

The place NFT exercise in 2021 centered round easy shopping for and promoting (aka flippin’ JPEGs), the subsequent wave of initiatives are constructing utility round NFTs. NiftyApes and PawnFi, for instance, are working to deliver liquidity to NFT holders by letting them take out loans collateralized by their NFTs. Platforms like Cymbal purpose to deliver extra neighborhood and social options round NFT possession.

Yuga Labs, the studio behind Bored Ape Yacht Membership, made waves this quarter by elevating at a $4B valuation to construct a BAYC branded metaverse. Subsequent, they acquired the IP rights to NFT collections CryptoPunks and Meebits. They capped it off by saying a movie trilogy (produced by Coinbase) the place BAYC NFT holders can submit their NFTs to be forged within the movies and receives a commission a licensing payment — an fascinating new experiment with on-chain licensing.

GameFi 2.0

Blockchain based mostly gaming had its popping out occasion in 2021 centered across the rise of Axie Infinity. Gross sales of Axie Infinity NFTs peaked at a staggering $848M in August earlier than falling precipitously. (Observe that regardless of the apparent pattern reversal and a major hack, Axie nonetheless posted a good $30M in March NFT gross sales).

Axie’s multi-billion greenback run was sufficient to place all the gaming world on discover and the subsequent wave of blockchain based mostly video games have been quietly elevating ever since. Notably, lots of the groups elevating have monitor data constructing extremely profitable cellular, internet, and AAA video games (Clockwork Labs, Block Sort out, Summoners Area, Third Time, Avalon).

The blockchain based mostly video games of the long run will infuse crypto NFTs into extra acquainted Web2 gaming codecs — MMORPGs, FPS, MOBA and so forth. Different CBV portfolio firms like Joyride will make it simpler for sport devs to combine crypto/NFTs into current titles.

At current, South East Asia is establishing itself as the middle of the crypto-gaming world, led by the Philippines and Vietnam, amongst others. We’re notably excited by developments on this area and the progress of Vietnamese based mostly gaming guild and CBV portfolio firm Ancient8.

Ventures outlook

Amidst a shaky macro image, many crypto traders are on edge. Extra ceaselessly, we’re getting requested how the market downturn will have an effect on CB Ventures’ exercise. Up to now, there’s no scarcity of top of the range entrepreneurs constructing in crypto and Web3. It isn’t nonetheless unreasonable to count on a slowdown ought to costs proceed to sag, much like what’s been noticed in broader enterprise funding (down 19% QoQ). Regardless, our technique gained’t change a lot.

It bears reminding that among the most profitable initiatives of immediately have been funded through the bear market of 2018/19. In that gentle, our early investments in initiatives like Compound, OpenSea, Polygon, Arweave, Starkware, Blockfi, NEAR, and Messari amongst others come to thoughts. As such, we’ll proceed to put money into high quality founders and initiatives shifting the business ahead no matter broader market circumstances.

It additionally bears repeating simply how a lot the investible Web3 panorama has broadened: DeFi, NFTs, DAOs, metaverses, and gaming are all evolving throughout a wealthy array of layer 1s. Then there’s cross-chain infrastructure to sew all collectively as nicely layer-2 options to assist all of it scale. To not point out a thousand different concepts not but dreamed up. In different phrases, there’s greater than sufficient innovation happening to maintain the CB Ventures’ staff busy indefinitely.