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Compile/Nick
The current bear market situation is best reflected in the crypto industry’s financing data. The third quarter of 2023 is no exception, continuing the downward trend in multiple quarters since the beginning of 2022. Both the overall financing amount and the number of transactions in the third quarter hit new lows since the fourth quarter of 2020. There were 297 financings in Q3, totaling less than $2.1 billion, a 36% decrease from the previous quarter.
Investment and Financing Rounds
Breaking down Q3’s deals by funding round, we can see that the majority of deals are concentrated in the early stages. Seed round financing accounted for the largest proportion, with a total of 98 rounds and US$488 million raised. Trends in deal counts indicate a clear shift from late-stage to early-stage projects over the past three years.
The share of early-stage deals (pre-Seed, Seed, and Series A) increased from 37% in Q4 2020 to 48% in Q3 2023. Meanwhile, late-stage rounds (Series B or higher) fell from 8% in Q4 2020 to 1.4% in Q3 2023. This suggests that investors are strategically adjusting their bear market positioning in an attempt to fund projects that will provide larger multiples of returns in the next bull market.
There was also a large number of strategic investments in the third quarter, among which corporate and private equity transactions were more eye-catching, such as the US$200 million investment in Islamic Coin. Strategic financing deals have been steadily increasing throughout the bear market. At the peak of the Q4 bull market in 2021, strategic round financing accounted for only 0.2% of total financing. In the third quarter of 2023, this share increased to 22%, indicating that severe market conditions are forcing projects to raise short-term bridge funds or eventually be acquired by larger projects.
Investment and Financing Track
track trends
The allocation of crypto industry financing in the third quarter of 2023 followed a similar pattern to the past 12 months. Public chain infrastructure, DeFi and gaming areas have been the most funded areas during this period. The services segment, which includes business functions such as marketing, incubators, security and legal services, was the only area to raise an average of more than $100 million in the past 12 months. While other areas are also important to the growth of the overall crypto industry, these four areas continue to attract the attention of most investors.
Another notable trend last year was that infrastructure projects received more funding than user-facing applications. This is best demonstrated by categorizing the consumer, DeFi and gaming sectors into the “Applications” category, and the application infrastructure, public chain infrastructure, custody and DePIN sectors into “Infrastructure”.
When looking at the share of funding in each category, we see a subtle shift away from user-facing applications and towards infrastructure projects. In contrast to the application class, this relationship benefits from ongoing funding for infrastructure projects. However, this trend may not last long, as more and more investors are beginning to realize that without successful user-facing crypto applications, infrastructure investments are unlikely to achieve the returns they expect.
Mainstream track
Financing in the third quarter was relatively scattered across various tracks. Public chain infrastructure accounted for the largest share, reaching 18%, DeFi led in the number of transactions with 67, and chain games attracted nearly US$250 million in investment in the quarter.
Public chain infrastructure
Despite only 21 transactions, the public chain infrastructure track accounted for the largest share of funds in the third quarter, with one-third of the transactions occurring in the smart contract platform subcategory.
Scaling solutions accounted for 43% of the funds raised in this track. This represents a continued shift in funding from smart contract platforms to scaling solutions. In the first quarter of 2022, Polygon raised $450 million for its scaling solution, marking the first time that funding for scaling solutions exceeded funding for smart contract platforms. In three of the past four quarters, the ratio of capital investment in scaling solutions to capital investment in smart contract platforms has exceeded the highest ratio in the first quarter of 2022. This ratio reached 7 times in the fourth quarter of 2022, mainly due to relatively low investment activity in the smart contract platform category during that quarter.
In the third quarter of 2023, more than 40% of the US$387 million in financing for public chain infrastructure came from the approximately 116 million OP tokens sold by the Optimism Foundation in late September. Other notable deals in this track include Flashbots’ $60 million Series B funding round, and Bitmain’s $54 million strategic investment in Core Scientific.
DeFi
DeFi was the area with the most financing projects in the third quarter, with a total of 68 transactions. Investment in this space is highly concentrated, with the exchange category accounting for 38% of all invested capital, with a total of 33 transactions. DeFi projects have raised a total of $210 million, with an average transaction size of $3 million.
Binance Labs is an active investor in the DeFi space, completing seven transactions this quarter, including a $10 million strategic investment in Helio Protocol (a liquidity staking platform on the BNB chain) and Radiant Capital (a money market on LayerZero). Additionally, the largest DeFi deal of the quarter came from a $16.5 million Series A round from Brine, an order book DEX built on Starkware.
Judging from the number of transactions in the third quarter, three of the top four DeFi investors are ecosystem entities. Binance Labs, Base Ecosystem Fund and Polygon completed a total of 16 transactions.
Chain games
The gaming space accumulated a number of early-round deals, helping it become the third-highest funding area in the third quarter, with 33 deals raising $249 million. Compared with other user-oriented consumer areas, gaming accounted for 67% of financing in the third quarter.
Most deals in gaming come from long-tail investors. Only seven entities have deals with two or more projects, while 104 investors have invested in single projects within the sector.
The biggest deal in gaming is a $54 million Series A financing deal for Futureverse, a platform that combines artificial intelligence with the world of the Metaverse. Other Metaverse gaming projects in the space, such as Mocaverse and Mahjong Meta, also received funding during the quarter. Proof of Play has raised $33 million in seed funding from lead investors a16z and Greenoaks.
crypto industry investors
The 10 most active investors in the crypto industry made 98 investments in the third quarter. Despite this, they accounted for only 7% of all investor trades, indicating that crypto investing is still dominated by more tail investors.
Binance Labs is by far the most active investor. In the third quarter, its involvement in 23 deals was more than double that of second-place investor Robot Ventures. Binance Labs has been actively investing in 2023, focusing on the DeFi and gaming sectors. In addition, zero-knowledge and privacy technology projects are also investment targets of Binance Labs. Notably, 12 of Binance Labs’ 23 transactions were projects participating in its accelerator program. But even if these projects are excluded, Binance Labs’ 11 other investments still put it tied with Robot Ventures for third-quarter deal activity.
Finally, 54% of active investors in Q3 2023 were from the United States. This figure is consistent with the quarterly average over the past four years (55%). Although project founders are gradually leaving the United States for more regulatory-friendly jurisdictions, the United States is still home to the majority of professional crypto investors.
Gyro Finance contact information
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Xiao Huang (WeChat ID 18925291949)
Ning (WeChat ID 13631579042)
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