Market Update: Q1 2022
(originally posted 17 Apr, 2022)
With the accelerated mainstream adoption of cryptocurrencies, the crypto market has been increasingly tracking the stock market lately. Bitcoin’s price has seen a 40% drop in Q1 since its all-time high above $68,000 on Nov.10, 2021, following the pessimistic market sentiment that was set back by surging inflation, lagging recovery in the job market, the rapid developing military conflict in Eastern Europe, and the Fed’s ongoing hawkish statement on rate hiking.
Topics
In this report, we are going to provide high-level quarterly updates on each topic below:
Infrastructure
Metaverse
GameFi
DeFi
Infrastructure
Despite the ups and downs of the general crypto market in Q1, the development of the blockchain ecosystem has remained robust. The Total Locked Value (TVL) of all blockchains has seen a substantial recovery recently from the January low of $185 billion to $215 billion by the end of March, only 6.2% below the all-time high of $256 billion in November 2021.
One of the biggest developing trends in 2021 is the change in the competitive landscape of Layer-1 platforms with the rise of nascent ecosystems such as Fantom ($FTM), Solana($SOL), and Terra($LUNA). This development has continued in Q1 2022, with Ethereum’s market share retreating from 62.31% to 56.18%.
Terra is one of the biggest winners of this quarter, with its market share growing from 7.57% to 12.24%. The sharp increase in users and activities in Terra was partly due to the formation of Luna Foundation Guard, now holding a $1.1 billion bitcoin reserve, to ensure UST’s sustainability. Other factors include the partnership with Near and Aurora to boost DeFi growth, along with the launch of RoboHero, a metaverse game for smartphones based on the LUNA token.
As Layer-2 scaling solutions remain the hottest topic in the crypto space, Layer-2 protocols defied the market trend with an increase of TVL of 17% in Q1. Arbitrum is the dominating solution, with more than 53% market share in the Layer-2 ecosystem.
Here are a few highlights of fundraising activities on the blockchain ecosystems in Q1:
- Near Foundation Raises $150 Million to Bolster Web3 Adoption
- Immutable Raises $200 Million to Bring NFTs to Layer 2 Ethereum
- Avalanche Multiverse: Offers Up To $290 Million In Incentives
For those who are interested to learn more about Layer-1 ecosystems, we recommend a report published by The Block that proposed a valuable framework to evaluate and compare different blockchain solutions:
- Layer-1 Platforms: A Framework for Comparison by The Block
Metaverse
Two months after Microsoft’s announcement that Teams will embrace the metaverse with 3D avatars and virtual meeting environments, the tech giant pushed its betting on a metaverse future further with a $75 billion acquisition of Activision Blizzard, doubling the deal size of the company’s biggest acquisition to date, LinkedIn.
In Q1, leading companies of traditional industries also accelerated their initiatives to march into the metaverse space, experimenting with new ways to develop and engage with their customer base. In February, JP Morgan announced plans to open a lounge in Decentraland, becoming the first major bank in the metaverse. The company claims to play a significant role in the metaverse and believes the virtual business approach will help tackle real-life issues such as validating accounts and fraud prevention. A recent report published by the company titled “Opportunities in the metaverse” stated JP Morgan’s view that “the metaverse will likely infiltrate every sector in some way in the coming years, with the market opportunity estimated at over $1 trillion in yearly revenues.”
After JP Morgan’s announcement, another major global bank HSBC became the first bank to enter The Sandbox metaverse. The bank plans to buy a plot of the virtual land and develop it to engage with sports, esports, and gaming fans. The CMO at HSBC Asia-Pacific, Suresh Balaji, said in a statement that the partnership with The Sandbox will enable the bank to “create innovative brand experiences for new and existing customers.” Gucci, Warner Music Group, The Walking Dead, Snoop Dogg, and Adidas are among the global brands working with The Sandbox.
The recent development in the metaverse space is not limited to financial institutions. In February, global fast-food giant McDonald’s filed ten trademark applications to the US Patent and Trademark Office for a virtual restaurant to deliver food in the metaverse and in real life as the company tries to join the virtual reality frenzy.
Q1 highlight in the development of the metaverse: Yuga Labs, the creator of Bored Ape Yacht Club, revealed its metaverse project called Otherside after announcing a $450 million raise to build a media empire around NFTs.
In March, Yuga Labs made a major move to consolidate the NFT market, acquiring CryptoPunks and Meebits from Larva Labs. The firm is now in control of three of the most influential names in the crypto world and holds 43% of the NFT floor market cap for the top 100 Ethereum collections. The floor price of Meebits and CryptoPunks rose after the announcement, and trade volume for both collections spiked 1,000% the day after. Yuga Labs also launched its native token, ApeCoin, to empower an interoperable decentralized metaverse ecosystem. The trailer of Otherside, released on March 19, showcased the animated image of BAYC and other projects like Cool Cats, WoW and CrypToadz, revealing its ambition to expand the company portfolio in the future. Yuga Labs is also in the process of integration with other game studios to enable its metaverse vision. The $450 million round brought strong partnerships to the ecosystem, with top-tier venture capitals such as Andreessen Horowitz, Animoca Brands, The Sandbox, FTX, etc participating in the fundraising.
The metaverse explosion has defied a broader crypto market drawback. In Q1, NFTs generated $12 billion in trades while the sales volume and number of unique traders are on the rise. This has solidified our fund’s focus on investing in the best people and most innovative projects in the space. We are currently invested in reNFT, a protocol layer that enables peer-to-peer renting of NFTs and generating interest yield. reNFT enables NFT asset holders to put them to work by renting out gaming assets to use in blockchain gaming experiences, digital art, or any other NFT assets.
Curated Readings on Metaverse:
- The Metaverse Could be Tech’s Next Trillion-Dollar Opportunity: These are the Companies Making it a Reality by CB Insights
- The Metaverse Will Radically Change Content Creation Forever by Falon Fatemi
- How the Game Industry Is Charging Into the Metaverse by Ian Sherr
- Why the Metaverse Will Change the Way You Work by Sarah E. Needleman and Kathryn Dill
GameFi
Despite the euphoric sentiment experienced after Meta’s rebranding back in November was replaced by fear following the market turbulence for GameFi protocols in Q1, investments keep pouring into the sector, an indication that the space is still following a positive overall trend. Blockchain-related gaming projects raised $1 billion and $722.5 million in January and February. If the investments keep coming at this rate, the $4 billion investment accumulated in 2021 will be surpassed by Q2.
Splinterlands, Alien Worlds, and Crazy Defense Heroes are the most popular blockchain games by the number of unique wallet addresses (UWA) interacting with dapp’s smart contracts. Axie Infinity has lost some ground in its blockchain activity due to the negative impact on the price of AXS and SLP and changes to the earning model.
Some of the development in the space that worth following are:
- Splinterlands closed two critical partnerships in Q1 — an NFT collaboration with rapper Waka Flocka Flame and cooperation with Warner Music Group to unlock new revenue streams for musicians and artists with the intersection between music and blockchain games.
- Axie is preparing important changes to its ecosystem including the Origin season’s expected release, bringing a more dynamic play mode.
We are investing in multiple gaming guild projects that bring more players to the blockchain gaming space. One of the investments, Snack Club, lowers the entry barriers for average gamers in Latin America by lending out GameFi assets and helps build the Metaverse by investing in the up-and-coming GameFi projects themselves.
An interesting reading piece on gaming guilds:
- Play-to-Earn Guilds: A Breakdown by Impossible Finance by Impossible Research
DeFi
The total DeFi users in Q1 has seen a rise of 8.9%, reaching over 4.5 million users in March 2022, despite the unfavorable market conditions. Two main forces are likely to drive the long-term growth of DeFi — the convergence of DeFi with games and the accelerated DeFi adoption for institutions. Permissioned DeFi, a form of DeFi that combines the decentralization benefits of DeFi with a centralized control mechanism that meets institution users’ Anti-Money Laundering and Know Your Customer requirement, may ease the security concerns from institutions and give a push for DeFi adoption. In January, Aave launched its permissioned liquidity pool, Aave Arc, to help institution users to have regulatory compliance in DeFi. Thirty licensed financial institutions performed AML/KYC requirements and onboarded the platform as suppliers, borrowers, and liquidators.
Security issues remain one of the biggest challenges in DeFi space. As the competitive landscape shifted drastically in 2021 from a monopolistic market that was dominated by Ethereum to a multi-chain reality, we’ve witnessed a surge in cross-chain activities. Bridges that allow crypto users to move digital assets from one blockchain to another become a crucial piece of the cryptocurrency ecosystem. Ethereum bridges doubled TVL since last summer and exceeded $20 billion in Q1. Bridges need to store a reserve of cryptocurrencies to underwrite the “wrapped” coins, tokens that are pegged to one type of cryptocurrency but can operate on another blockchain network, and that treasure-house has become a significant target for hackers.
A total of $1.2 billion was stolen in security breaches in Q1 — a jaw-dropping figure that shocked investors as the total DeFi hacks only cost market participants $154 million at the same time last year. The hack on Ronin bridge that occurred on March 29 alone resulted in a loss of $625.5 million, responsible for nearly half of the total security losses in Q1. In February, hackers launched an attack on Solana Wormhole and induced a loss of $326 million. We believe the security issue for cross-chain bridges will become an essential topic in the industry throughout 2022 and will continue to monitor the development of regulations in reaction to the problem and search for the best projects that enhance the security of the DeFi ecosystems.
Relating article to read:
Summary
In addition to our aforementioned research, the reports listed below are worth noting as we further explore the space:
- What’s Next for NFT Infrastructure? by Amandayoung.eth
- 15 Ways the World is being Transformed By DAO by Aragon
- DeFi 2.0 — Real World Assets by Wheatstones
In conclusion, we strongly believe that blockchain is a technological solution to numerous social issues. As continuous growth in blockchain infrastructure, the Metaverse, GameFi, and DeFi continues to reach new heights, we are all the more encouraged to continue supporting innovators, leaders, and visionaries in elevating blockchain technology to the next level of adoption, functionality, and positive impact. As always, we look forward to working with you to drive the next frontier of crypto innovation together.
ABOUT OP CRYPTO
OP Crypto is a leading high conviction, early-stage venture capital firm in the crypto and blockchain industry, specializing in pre-seed and seed stage investments. The fund successfully raised $50M in September 2021 and has since invested in over 30 projects, including companies such as Scroll Tech, Snackclub, Merit Circle, Omni, and Fyde.
With the support of prominent investors like Bill Ackman and Alan Howard, as well as institutions like Galaxy Digital, Huobi, and DCG, OP Crypto has access to a global network of venture funds, scouts, and ecosystem partners to source the most competitive deals in the market.
With a core team based in the United States and strong ties to the APAC region, the fund serves as a bridge between East and West. Additionally, a dedicated portfolio team provides post-investment support to founders in areas such as marketing, tokenomics, and networking.
Learn more about OP Crypto at: Website
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