Feb 2023#MarketResearch

Crypto VC funding is back at the 2021 low but DeFi and infrastructure have a big investment potential

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Valeriya Novikova

Senior Manager, Strategy&Marketing

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In spite of the continuing bear market, venture funds continue investing in crypto projects, but their attention has rotated to solutions in DeFi and infrastructure, plus a few experimental niches like soulbound tokens. BDC Consulting analysts have synthesized fundraising statistics, adoption data, and the latest forecasts to identify the best crypto investment opportunities for 2023.

Market-wide funding is down, but the average check for DeFi and infrastructure is up

Project funding may be a better indicator of the state of the market than volatile crypto prices. In order to find out whether the blockchain industry is really on the verge of breaking out of the bear phase, the experts at BDC Consulting have analyzed the latest VC funding stats published by Messari and other sources. 

Overall, VC funding in most of the blockchain market is back at the 2021 lows. In particular, investments in GameFi are down 7 times from the March 2022 peak, while DeFi funding has halved in the past few months alone.

However, there are niches that have done comparatively well in 2022 in terms of the average amount invested per round and the share in the total amount raised across the market. In other words, the total number of successful rounds and the total amount of investment is down, but every project that does manage to attract funding gets more money.

We are talking about blockchain infrastructure and DeFi. The leading niche is tooling (dev tools, bridges, etc.), with 108 closed investment rounds and over $1.7 billion raised. It is followed by DeFi liquidity and custody solutions, yield farming, and staking. 

NFT projects also made it on the list – however, VCs seem to be interested in startups with an infrastructural twist rather than simple collections or NFT games. Examples include MynaSwap, an NFT DEX that allows users to turn physical collectibles into digital goods; and Recur, a low-code solution for building customizable NFT experiences. 

Crypto geography: Asia sees the highest VC funding growth rate and adoption

In terms of the geographical distribution of VC funding, North America still leads by the number of newly created projects that raised money in 2022: 31, which is 15% more than in 2021. However, the rate of increase is the highest in Asia, where 25 new startups raised funds, or 24% more than the year before. 

Asia also leads in terms of crypto adoption. Among the top 7 countries by the level of adoption, 5 are in Asia: Thailand (44%), Turkey (40%), United Arab Emirates (34%), Philippines (29%), and Vietnam (27%). All of them, however, lag behind Nigeria with 45%.

Nigeria and other African countries also supply the majority of user traffic to crypto projects’ websites: 47%. North America supplies 26% of the traffic, followed by Asia with 15%. It is interesting to note that a high level of adoption doesn’t directly translate into a number of visits to crypto websites. 

Meanwhile, the biggest increase in the number of crypto users in 2022 was registered in the MENA region (Middle East & North Africa, +48%), followed by Europe (+40%). 

VCs name DeFi and infrastructure as the biggest opportunities in crypto for 2023

The team of BDC Consulting also spoke to representatives of several leading VCs about their preferred investment sectors for 2023 – and compared the results to the niches named in the latest Messari CryptoTheses report and to Vitalik Buterin’s picks. 

Venture funds generally agree that decentralized finance and blockchain infrastructure are the most promising segments, though it’s also worth experimenting with brand-new niches like soulbound tokens and DAOs. Among their picks:

  • Yield & staking
  • Liquidity
  • Lending
  • Privacy 
  • Storage
  • Taxation & KYC
  • Consumer dApps
  • Sustainable GameFi, etc.

It’s interesting to compare this list with the investment picks mentioned in the latest reports by Messari, a16z, Alliance, and Vitalik Buterin himself. They also mention staking, yield, privacy and storage, KYC, and dev tooling.

In conclusion

Venture funds still see a big potential in the blockchain industry, even if the media sometimes make it look like crypto is dying. However, there is a rotation of investor interest towards DeFi and infrastructural solutions that have a clear practical value and solve real problems in the space, such as decentralized storage and Web3 identity management – rather than GameFi or regular DEXes, for example. 

According to the analysts at BDC Consulting (the leading blockchain consulting firms in Europe and the CIS), regular investors should pay attention to these segments and adjust their strategy accordingly in preparation for the next market cycle.

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