State of Blockchain Venture 2023

On Monday, Pantera published The Year Ahead, a letter detailing the 2022 year-in-review and our 2023 market outlooks (full piece here). I discussed the state of blockchain venture during the past year in terms of funding & deals, developer activity, and trade volume. Read on below:?

STATE OF BLOCKCHAIN VENTURE :: BY PAUL VERADITTAKIT, GENERAL PARTNER

Key Metrics

While crypto prices began declining in January of last year, private market deal activity continued, at least in the first half of 2022.

??Private market valuations tend to lag behind public market pricing.? Compared to the previous bear markets, this last bull market saw the rise of consumer crypto and other sectors such as DAOs (decentralized autonomous organizations), crypto gaming (play-to-earn model), NFTs (non-fungible tokens), and the Web3 creator economy.

From the pie chart above, on the sector breakdown for Pantera’s 2022 deals, DeFi took pole position, with the gaming/consumer sectors hot in second place.? DeFi investment was focused around the following areas:

• Infrastructure (Braavos, Waterfall)
• Derivatives (Maverick, Cega)
• The start of institutional DeFi with structured products (Ondo, Rift)

On the gaming side, we focused on experienced teams (Metatheory, Revolving Games) building fun, engaging games with crypto economics. Consumer DeFi companies focused on areas like identity (Unstoppable Domains) and the fashion metaverse (Spacerunners).? During the bull market and up through Q2 of 2022, Pantera invested with a barbell strategy in terms of capital deployment, mostly into the seed rounds of startups.

During the latter half of 2022, we have been waiting for private market valuations to reset.? While the absolute numbers of startups fundraising during that time decreased a bit, we are seeing a higher percentage of startups coming to market with strong teams — entrepreneurs coming out of established crypto startups like Coinbase, larger tech companies like Facebook, Uber, and Square, and legacy financial institutions like J.P. Morgan and Goldman Sachs.?

What matters most to VCs is the quality and amount of talent entering the ecosystem.? From Alchemy’s data, the number of developers building on their leading platform has tripled during this bear market:

As I mentioned in my recent blog post on 2023 predictions, there has been a consolidation of the spaces that entrepreneurs are focused on, which usually happens in every bear market.? I see a shift into infrastructure and areas like decentralized finance, tokenization of world assets onto the blockchain, developer tooling, and data infrastructure

Post-FTX, volume has shifted to highly regulated exchanges like Coinbase and Bitstamp, as well as DeFi-based decentralized exchanges.? Below is decentralized exchange volume within the last 12 months, with November (the month of FTX’s collapse) having a remarkable uptick in volume.?

With more scrutiny around trust and security, we believe there are opportunities for startups in areas like self-custody, security, insurance, and identity.? Another trend that is similar to past bear markets is that we expect a higher percentage of deals to be started by domestic founders versus international founders, because of the focus on infrastructure versus applications.? As we start to escape the bear market, we expect to see Asia emerging with a larger share of NFTs, gaming, and decentralized social applications.? Asia is in a better position on the application layer due to cost of labor, vibrant influencers and brands, and strong social mobile penetration.??

The Time Is Now

We believe this is a tremendous time to start a company in the blockchain space. On average, talent is more educated and passionate about the industry than in previous cycles. A plethora of capital? has been raised ($121B raised from the entire VC industry in H1 2022[4]) and is awaiting deployment. Many new crypto VCs have emerged.? In our experience, bear markets typically represent a time where there is less noise and distraction from building.? In addition, we’ve observed that institutions and enterprises are more open than ever before to working with blockchain companies to enhance their businesses.

Valuations for private deals in the second half of 2022 have dropped quite a bit, with growth-stage valuations dropping more dramatically than those of early-stage deals. The majority of the deals that we are seeing involve both equity and tokens in the same round.? We believe entrepreneurs should prioritize making sure they have enough runway and buffer to last through the bear market and into the next bull market, optimizing for the right investment partners and not valuation.? More mature companies are expected to be pushing towards profitability.? Secondary transactions and acquisitions are likely to be more common during this time, providing liquidity for both employees and investors.?

We believe Pantera is open for business, and actively looking for compelling seed and Series A opportunities.? We want to partner early with entrepreneurs we believe can accelerate development of the new economic layer of the internet.

Paul Veradittakit

DISCLAIMER

Pantera Capital Puerto Rico Management, LP and its affiliates (“Pantera”) makes investments in crypto assets and in blockchain-related companies.?Pantera and/or its affiliates or personnel may be an investor in, or have relationships or other business arrangements related to, certain instruments, companies and/or projects discussed herein.?This document does not contain any advertisement for Pantera’s investment advisory services, or any other services or products, whether provided by Pantera or otherwise.?The information and opinions presented in this document are solely those of Paul Veradittakit; they do not represent, and should not be interpreted as representative of, the views of Pantera or any other individual working for Pantera, and do not represent investment, legal, tax, financial, or any other form of, advice or recommendations.?Neither Pantera nor Mr. Veradittakit is acting, or purports to act, as an investment adviser or in a fiduciary capacity with respect to any recipient of this paper.?Information contained in?this document?is believed to be reliable, but no representation is made regarding such information’s fairness, correctness, accuracy, reasonableness or completeness.?There is no obligation to update this document or to otherwise notify a reader if any matter stated statement or information contained here changes or subsequently is shown to be inaccurate.?Nothing contained herein constitutes any representation or warranty as to future performance of any financial instrument or company.?Forward-looking statements should not be relied upon, and performance or outcomes may differ materially from what is contemplated herein.?Opinions included here incorporate subjective judgments or may be based on incomplete information.?This document does not constitute or contain an offer to sell or a solicitation to buy any securities or a recommendation to enter into any transaction, and no reliance should be placed on this document in making investment decisions.?