Published on Apr 12, 2023

Navigating the State of Web3: A Comprehensive Quarterly Report

Author: Rubin
#Insights
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Navigating the State of Web3: A Comprehensive Quarterly Report


Web3, the next frontier for innovation and investment, is taking the world by storm. At its core, Web3 is built on blockchain technology, offering secure and transparent transactions without the need for intermediaries. This revolution is empowering individuals to take control of their digital assets and data in a way that was never before possible.

In our report, we highlight the most significant events and developments in the Web3 space over the past quarter. We cover major fundraises, mergers and acquisitions, as well as tracking the latest advancements in Web3 gaming, decentralized finance, and non-fungible tokens.

Whether you're a seasoned Web3 expert or just getting started, our report is an essential resource for anyone looking to stay informed and up-to-date on the latest trends and innovations in the Web3 ecosystem. With our help, you'll be able to navigate the complex and rapidly-evolving world of Web3 with confidence and clarity.

Key Takeaways

  1. The total funding value for web3 applications in Q1 2023 was over $17 billion, representing a significant increase from the previous year.
  2. NFTs have become a significant part of the Web3 market, with the total sales volume of NFTs reaching over $5 billion in Q1 2023, according to data from NonFungible.com
  3. The market for DeFi platforms has also grown significantly, with the total value locked in DeFi protocols reaching over $50 billion by the end of March 2023, according to Defillama.
  4. The adoption of blockchain technology by traditional financial institutions has continued to accelerate in Q1 2023, with major banks and investment firms announcing new initiatives and partnerships with blockchain companies.
  5. In 2022, online fraud caused US citizens a loss of over $10 billion, out of which crypto investment scams accounted for $2.57 billion

Market Overview

The following section talks about the overall market performance of the crypto market in terms of market capitalization, dominance and fluctuations.

Market Performance

The cryptocurrency industry has experienced fluctuations in market trends throughout the previous year. The total crypto market capitalization in 2022 reached $829 Billion after falling from a record breaking $3 Trillion in 2021. Now the market has set its pace to recovery with the total market cap of $1.1 Trillion as on March, 2023

Meanwhile, the market cap for stablecoins, according to Coingecko is at $134 Billion and has a 11.16% share of the total crypto market cap.

Source: CoinGecko

The State of Web3 Ecosystem

In this section we will talk about the recent happenings and key takeaways from DeFi, NFT and Gaming space.

DeFi

Recent developments in the cryptocurrency space indicate that even decentralized finance (DeFi) is not immune to bear markets. The total value locked in DeFi has decreased to around $50 billion, which is only about a third of its previous high in May 2022. Despite this, DeFi has made some notable progress in becoming a disintermediated and immutable financial system.

  • DeFi's smart contracts with embedded settlement instructions and over-collateralized lending standards recovered $400 million from a financially compromised borrower, Celsius Network.
  • MakerDAO, another DeFi giant, voted to increase its DAI savings rate tenfold to 1% to remain competitive.
  • On-chain project Ondo Finance, which focuses on tokenizing US Treasuries and corporate bonds, launched with the intention to offer "share class" tokens usable on other DeFi platforms as on-chain collateral.
  • After the FTX exchange's collapse, the permissionless spot and swap exchange GMX saw its protocol revenue more than double to $16.7 million in November.
  • Lido, an Ethereum-based staking platform, has seen a significant increase in the price of its utility token since the beginning of the year, and assets worth over $9.4 billion are currently staked on its platform.
Source: Dune Analytics

Recent events in the past month have proven that stablecoins can not be so stable. With a comparatively stable market capitalization of $134 Billion, the events of the last few days left industry participants closely following the stablecoin markets in the wake of these new banking tremors.

USDC saw a sudden fall to ¢88 amid Silicon Valley bank fallout. Circle, the parent company of USDC, the cryptocurrency exchange, was holding approximately $3.3 billion in SIVB, accounting for 8.25% of USDC's $40 billion market cap.

It was observed that DAI's price movement was following that of USDC, which is likely due to DAI's collateral pool containing around 42% USDC. On the other hand, two other stablecoins, Tether (USDT) and BUSD, appreciated in price above their par value as traders moved their funds into stablecoins perceived as safer due to no existing relationship with SIVB.

Additionally, a significant amount of stablecoin trading volume occurred on decentralized exchanges (DEXs), where USDC was trading at a discount of up to 14 cents against USDT on Uniswap v3.

Source: CoinMetrics

NFT

As the world of Non-Fungible Tokens continues to grow,we can anticipate some exciting developments in 2023. NFTs have already garnered attention for their potential to revolutionize digital ownership and generate fresh revenue streams for artists and creators. As the market and technology continue to develop, NFTs will undoubtedly be used in even more imaginative and creative ways.

  • In the NFT space, Bitcoin Ordinals have been gaining significant traction, with a total of 594,050 inscriptions as of March 26, 2023..
  • According to a recent report by Galaxy research, the Bitcoin NFT ecosystem is projected to grow to $4.5 Billion in 2025.
  • Since February 2, 2023, BLUR's daily trading volume has been consistently increasing compared to other tokens. OpenSea continues to be the largest marketplace in terms of daily traders.
  • At the time of writing, Blur's volume is $48.1 million, while OpenSeavolume is $9.3 million.
Source: Dune Analytics

Gaming

In January 2023, the Web3 gaming industry had a promising start, raising $156 million across ten investments. Experts predict that the industry will experience exponential growth in the coming years, adding the first 10 to 100 million gamers to Web3 within the next year or two. Robbie Ferguson, co-founder and president of Immutable, a Web3 gaming company, and Ryan Wyatt, president of Polygon Labs, a layer-2 chain, both shared this sentiment.

  • Several notable developments took place, including the emergence of TreasureDAO, a platform for creating metaverse projects, Square Enix's launch of its first NFT game, and Courtside Ventures' $100 million investment in its third venture capital fund focused on sports, collectibles, wellness, and gaming. The total investment value in Web3 games and metaverse projects amounted to $156 million.
  • Trading volume for experiential metaverse or virtual worlds showed significant growth in January 2023, with a 114% increase from December 2022, reaching $44.5 million.
  • Immutable and Polygon Labs partnered to expand the gaming ecosystem, with Immutable utilizing Polygon's zero-knowledge technology to simplify onboarding game studios and developers in Web3.
Source: Dune Analytics

Investment Landscape: Investor Sentiment and Outlook

PitchBook's Q4 2022 Crypto Report, indicates that venture capital (VC) activity in crypto has decreased to $2.5 billion, which is the lowest amount invested since Q4 2020. Despite these challenges, crypto enthusiasts, founders, and investors remain resilient and are willing to play the long game for their beloved ideologies and technologies.

According to Crunchbase data as of March 8, 2023, only $96.3 billion has been invested in VC-backed Web3 startups in 233 deals so far this year. It is expected that the final numbers for the quarter will be even lower than Q4 of the previous year when Web3 funding dropped to $2.7 billion in 373 deals.

Source: mpost.io

During the first quarter of 2023, 95 startup companies in the web3 industry were able to raise a total of $727,287,823.95. Among the leading industries in Q1 2023 were gaming and the environment.

Source: Defillama (for data)

It can be observed that the seed rounds and Series A rounds were the most significant contributors to the capital inflows, accounting for $639.7 million and $413 million respectively. It should be noted that there were several deals classified as "unknown" which could include other business operations like debt financing that may not be a cause for negative speculation in the current market situation.

Though the amount of capital deployed varied across the first quarter, the previous quarter, and the year-ago quarter, the average deal size remained steady with an average of $3.4 million in Q1 2023 compared to $3.78 million in Q1 2022 and $3.1 million in Q4 2022, according to early PitchBook data.

Investors are valuing pre-seed rounds at an average of $5 million to $25 million, while seed rounds are being valued between $10 million and $30 million. Additionally, there has been an increase in the number of deals in the Consumer Infrastructure sector.

Riding the Wave of Web3 Investment: Notable Fundraises in Consumer Infrastructure

1. Mar. 20, 2023 – Illumix Raises $18M

HQ: San Francisco, US

Founder: Kirin Sinha

Round: Series A

Investment Partners: LightShed Ventures, Henry Kravis (co-founder of KKR & Co), Matthew Ball, Mark Cuban, Sony Innovation Fund, RW3 Ventures, OV, Visible Ventures, and Xavier Niel

About: The company provides low-code augmented reality (AR) software that allows marketing leaders and creative executives to create immersive AR experiences without requiring technical expertise. Illumix previously raised $8.6 million in a seed round in 2018.

2. Mar. 14, 2023 – DressX Raises $15M

HQ:  Los Angeles, US

Founder: Daria Shapovalova

Round: Series A

Investment Partners: Greenfield, Slow Ventures, Warner Music, The Artemis Fund, and Red Dao and others

About: DressX is a multi-brand retailer of digital fashion clothing.

3. Mar. 1, 2023 – Hexa Raises $20.5 Million

HQ: Tel-Aviv, Israel

Founder: Yehiel Atias, Jonathan Clark, Ran Buchnik

Round: Series A

Investment Partners: Point 72 Ventures and others

About: A 3D asset visualization and management platform that uses existing 2D images and AI to create 3D digital twins of products, including apparel, that can be displayed on websites, social media, and in AR applications.

4. Feb. 28, 2023 – Avalon Raises $13M

HQ: Florida, US

Founder: Sean Pinnock

Round: Seed

Investment Partners: Bitkraft Ventures, with participation from Hashed, Delphi Digital, Mechanism Capital, Coinbase Ventures, and angel investors, including former Microsoft exec Charlie Songhurst and Twitch co-founder Kevin Lin

About: Avalon is an Orlando, Florida-based platform to create games and virtual experiences.

5. Feb. 27, 2023 – Guhada Raises $6.1M

HQ: Seoul, South Korea

Founder: Scott Jaeseob Yoon

Round: Series B

Investment partners: Korea Investment Partners, Woori Bank, DTNI Investment, and BM Ventures

About: A blockchain based luxury online commerce platform that enables customers to purchase luxury goods from Europe at reasonable prices and have them delivered to their doorstep.

6. Feb. 23, 2023 – OWND Raises $750K

HQ: Copenhagen, Denmark

Founder: Mads Lunau Liechti and Anker Bach Ryhl

Round: Pre-seed

Investment Partners: Nordic VCs and Skyfall Ventures

About: OWND is a curated platform only for fashion NFTs which is expected to launch in April.

7. Feb. 21, 2023 – Unikbase Raises €2M

HQ: Paris, France

Founder: Etienne Hermite

Round: Seed

Investment partners: Weber Investissements and others

About: Unikbase's digital twin technology enables the identification, authentication, and ownership of valuable objects, using web3 and track and trace technologies.

8. Feb. 15, 2023 – Superplastic Raises $20M

HQ: Vermont, US

Founder: Paul Budnitz

Round: Series A4

Investment Partners: Amazon's venture capital arm, with participation from Kering, Craft Ventures, Google Ventures, Galaxy Digital, Sony Japan, Scribble Ventures, Kakao, Animoca Brands, Day One Ventures, and Betaworks.

About: Superplastic is a virtual entertainment firm that collaborates with brands, such as Gucci, Fortnite, Mercedes-Benz, Tommy Hilfiger, and celebrities like Paris Hilton, Post Malone, and The Weeknd to sell toys, apparel, and NFTs.

9. Jan. 26, 2023 – Spatial Labs Raises $10M

HQ: Los Angeles, US

Founder: Iddris Sandu

Round: Seed

Investment Partners: Blockchain Capital and Macy ventures

About: The web3 infrastructure and hardware company uses its LNQ One Chip to offer blockchain-based digital twins that track physical items’ authenticity, origin, ownership history, and real-time value.

10. Jan. 25, 2023 – Emperia Raises $10M

HQ: London, UK

Founder: Olga Dogadkina and Simonas Holcmann

Round: Series A

Investment Partners: Base10 Partners and joined by investors including Daphni (via its retail fund Dastore), Sony Innovation Fund, Background Capital, Stanford Capital Partners and Concept Ventures, as well as angel Jay Radia.

About: Emperia, a London, UK- and New York-based immersive virtual retail provider which has already collaborated with brands such as Dior, Ralph Lauren, and Lacoste to develop virtual stores, and now aims to accelerate the adoption of "metaverse e-commerce" and support brands in strengthening their omni-channel retail strategies.

11. Jan. 17, 2023 – SYKY Raises $9.5M in Series A

HQ: New York, US

Founder: Alice Delahunt

Round: Series A

Investment Partners: Seven Seven Six and joined by Brevan Howard Digital, Leadout Capital, First Light Capital Group, and Polygon Ventures

About: A blockchain-powered luxury platform functions as an incubator, marketplace, and social community for the digital-first generation of designers and consumers to create, curate, share, and trade fashion collections

Notable Venture Capitalists

In Q1 2023, notable investors in the cryptocurrency and blockchain space included Andreessen Horowitz, Bitget, and nine institutional banks. Environmental startup Carbonplace secured $45 million in funding from BBVA, BNP Paribas, Standard Chartered, CIBC, Itaú Unibanco, NatWest, National Australia Bank, SMBC, and UBS. Among these banks, only three had previously invested in crypto companies.

Source: mpost.io

BNP Paribas participated in the Series B round of financial technology innovation firm HQLAᵡ, while Standard Chartered Bank had blockchain-powered startups Metaco and Ripple in its portfolio. SMBC Nikko Securities had previously invested in the Series D of Kyash, a provider of mobile-first banking services from Japan.

In addition, Andreessen Horowitz, a prominent venture capital firm based in Silicon Valley, invested $40 million in the seed round of CCP Games, a developer of massively multiplayer role-playing games, including the popular sci-fi-styled game Eve Online. Over the past three months, Andreessen Horowitz also led the Series A rounds of group chat protocol Towns and Createra.


Macro Perspectives: Community Sentiment and Outlook

The use of cryptocurrencies for purchasing goods and services has experienced a sudden surge, driven by both consumer demand and merchant adoption. However, the sustainability of this trend is dependent on the ability of the cryptocurrency industry to establish a more comprehensive and reliable foundation of trust across all demographics, with a particular emphasis on reaching female consumers.

Despite the growing interest in decentralized systems, centralized brands continue to hold sway over consumers' trust and confidence in 2023. As such, it seems unlikely that a full-scale revolution towards Web3 will occur anytime soon. Instead, the real benefits of blockchain technology will likely be realized by those who can effectively merge the best of Web2 and Web3, providing consumers with a seamless and intuitive experience that combines the advantages of both systems.

The emergence of the internet and digital technologies have opened up new possibilities for individuals to make a living through their online activities, such as content creation, gaming, and gig work. As these online communities continue to grow, many early adopters have turned to cryptocurrencies and Web3 technologies as a way to reap financial benefits.

Tokens and NFTs are being used to gate content, build community loyalty, and offer exclusive access to live events, shaping the future landscape of mainstream use cases. However, widespread adoption of cryptocurrencies and Web3 technologies is still not widespread. Nonetheless, the innovative use of tokens and NFTs in digital cultures and subcultures is providing valuable insights into the potential applications of these technologies in the future. Overall, community sentiments in 2023 towards cryptocurrencies and Web3 technologies are positive, but there is a need for further trust-building efforts and integration with existing systems to achieve widespread adoption.

Conclusion

As we move further into the future, the cryptocurrency market continues to evolve and adapt to changing trends. While the overall market performance has experienced fluctuations, with the total market cap reaching a record-breaking $3 trillion in 2021 and then falling to $829 billion in 2022, it has now set its pace to recovery with a total market cap of $1.1 trillion as of March 2023. Stablecoins, which once were perceived as stable, have faced challenges with recent events causing fluctuations in their prices, highlighting the need for industry participants to closely follow the stablecoin markets.

In the world of DeFi, despite some setbacks, there have been notable advancements in becoming a disintermediated and immutable financial system. Smart contracts with embedded settlement instructions and over-collateralized lending standards have shown their effectiveness in recovering funds from compromised borrowers, and projects like Ondo Finance have launched with innovative offerings for on-chain collateral. The NFT market has also gained significant traction, with Bitcoin Ordinals and BLUR tokens showing promising growth, and the gaming industry in the Web3 ecosystem has started strong with notable investments and partnerships.

However, venture capital activity in the crypto space has decreased to the lowest amount invested since Q4 2020, indicating some challenges in the investment landscape. Nevertheless, crypto enthusiasts, founders, and investors remain optimistic about the future outlook of the market, as the industry continues to mature, innovate, and adapt to changing dynamics. As we move further into the future, we can expect to see even more exciting developments and trends shaping the cryptocurrency market, with potential for further growth and evolution in the ever-evolving landscape of digital finance.

References

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