Market Update: Q2 2022
(originally posted 5 Jul, 2022)
The collapse of the Terra Luna ecosystem, the Celsius drama, and news of the 3AC meltdown have characterized the crypto market turmoil that we have witnessed this quarter. Despite the global economic downturn, there is still growth and activity in the Web3 space and especially in the Metaverse/NFT and GameFi verticals, which we strongly invest and believe in. Protocols and platforms continue developing and enhancing their ecosystems for the long term, while new projects also emerge amidst the bear market trend.
Topics
In this report, we are going to provide high-level quarterly updates on each topic below:
Infrastructure
DeFi
Metaverse
NFTs
GameFi
Infrastructure
The Terra ecosystem debacle and the crash of the associated LUNA token and UST stablecoin have exacerbated the crypto bear market and reshaped the competitive landscape for the blockchain ecosystem. Terra, ranked only behind Ethereum as the second-largest blockchain ecosystem by market share in Q1 2022, was almost wiped out in May. The TVL of the ecosystem remains only $39 million at the time of this report, a fraction of its April high of $30 billion.
The Terra ecosystem was established with a dual cryptocurrency circulation mechanism. The native token, LUNA, is issued by Terra to support the ecosystem’s long-term growth. UST is the stablecoin that is created when LUNA is burnt by its holders. To retain the UST peg to the dollar, 1 UST could always be exchanged for $1 worth of LUNA. Arbitrage opportunity emerges if the UST drops its value below 1 dollar — traders could buy UST and exchange it for LUNA to profit from the transaction. Such action will drive up the UST price and bring it back to 1 dollar.
This design worked well in the past, even during volatile market conditions. However, on May 7, over $2 billion worth of UST was taken out of the Anchor Protocol, the most prominent lending and borrowing protocol in the Terra ecosystem that provides investors lucrative interest rates. Hundreds of millions of which were immediately sold. The huge sell pressure pushed the UST price down to 91 cents. Subsequently, a panic sentiment reinforced by an already bearish market drove users to rush to pull out their funds from Anchor and swap out of UST. The situation evolved into a “death spiral” as arbitrageurs redeemed UST for LUNA at $1 and sold it immediately, leading to a significant decrease in its price. More LUNA was minted for each UST burned, creating an over-supply of the token. The Luna Foundation Guard tried to protect the peg by deploying $1.5 billion BTC from its reserve but failed in its efforts. What’s more, the deployment of BTC caused further sell-pressure in the broader crypto market in sync with UST. The price of UST reached a low of less than $0.20 within a week, and more than $30 billion was evaporated from the ecosystem.
The collapse of Terra brought opportunities to other L1 ecosystems to fill the vacuum left by UST’s downfall. Tron is currently leading the stablecoin race and became the most robust ecosystem after the Terra debacle. Since its launch of USDD in May, TVL of the ecosystem only went down 5%, compared to an average loss of over 50% for other blockchain ecosystems such as Ethereum, BSC, Avalanche, and Solana. In the hope of preventing a catastrophic meltdown like what happened to Terra, Tron has taken a phased approach for USDD rollout. Currently, only a group of whitelisted institutions, such as Alameda Research, Amber Group, and Multichain, can mint the stablecoin and impact the supply of the tokens in the event of a depegging. On June 5, Tron announced the plan to increase the reserve amount for the USDD stablecoin and set a minimum collateral ratio of 130%. Currently, USDD supply in the market stands at around $700 million while it has more than $1.4 billion in assets backing the stablecoin.
On May 13, treasury secretary Janet Yellen said the Terra meltdown emphasized the risks of stablecoins pegged to the US dollar and called for additional federal regulations to prevent future threats. Remaining a critical part of the blockchain ecosystem, stablecoins will undoubtedly encounter more tests with the advancement of Web3. We will closely monitor developments in the space and continue to put our stake in the ecosystems that we believe will stay intact and overcome the market downturn. A reading on Terra for those interested:
Here are the highlights of other ecosystem developments in Q2:
- Crypto Lending Platforms Under Immense Stress as Court Orders 3AC Liquidation by Bitcoinist
- Celsius Halts Withdrawals, CEL Token Collapses by U.Today
- FTX Nears Deal to Buy Lender BlockFi in Likely Fire Sale by Bloomberg
DeFi
DeFi is the blockchain vertical that felt most of the struggles of the crypto winter. Year-to-date performance for DeFi underperformed the industry and broader crypto market. The TVL of DeFi protocols decreased by over 60% in the first six months during turmoil market conditions, while ETH and BTC performed better at around 45% and 33%. The decline in TVL is caused by the strong correlation of the protocol’s native token to the broader crypto market and investors switching positions to stablecoins or fiat to protect their wealth during the downtrend.
Due to the lower transaction activities, monthly revenue from the top 10 DeFi protocols has been following a downtrend since last November’s peak of the bull market cycle. Uniswap was least impacted by the worsened market condition and managed to maintain its ability to generate profit. The protocol recently acquired Genie, the first NFT marketplace aggregator, to expand the products to include ERC-20 tokens and NFTs. In May 2021, Uniswap announced that liquidity pool positions would become NFTs on Uniswap V3, appearing as unique on-chain-generated art based on the position’s individual properties. The introduction of NFTs to Uniswap3 is a massive boost in capital efficiency and user experience. It allows supporting functions with multiple fee tiers and concentrated liquidity ranges instead of choosing an equal value of tokens.
Metaverse
Corporate and public interest in the metaverse has remained stable, despite the recent turmoil in the crypto market. Companies continue to recognize the value of expanding into the metaverse, which provides the potential for unique consumer experiences and community engagement.
This quarter witnessed major companies — such as Samsung and Epic Games — initiate efforts to enter and participate in the space, while established NFT/metaverse projects continue to find success by expanding their virtual worlds.
Following Samsung’s launch of their virtual store — Samsung 837X — on the Ethereum-powered Decentraland in January, the company has now reaffirmed their intentions to dive further into the Metaverse. Vice Chairman Han Jong-hee has reportedly discussed the creation of “Samsung’s version of the metaverse” with numerous employees, after naming the metaverse as one of their primary new-growth areas during their annual shareholders’ meeting in March.
Game-dev giant, Epic Games, has also made significant moves within the space this quarter. In April 2022, the company’s valuation increased to $31.5 billion after raising $2 billion in funding from both Sony and KIRKBI (parent company of The Lego Group) in order to build an Epic Games metaverse. Sony will have limited creative involvement in its development, however, their expertise in VR products, extensive library of games and film, as well as their significant user-base of console gamers should be highly beneficial to the project.
Moving on to more familiar projects, Yuga Labs’ followed through on their promise to launch the Otherside metaverse by the end of April. This comes after they dominated headlines in March, when news broke out that Yuga Labs had closed on a $450 million funding round to build its flagship metaverse project. On April 30, the highly anticipated Web3 project launched an initial mint of 55,000 “Otherdeeds” (tokenized land deeds that entitle holders to space in the Otherside metaverse), raking in over $300 million from this event.
The project has found success on secondary markets too. At the time of writing, the ‘Otherdeed for Otherside’ collection has an all-time trading volume of 310.2K ETH on Opensea — already ranking 4th in terms of all-time total trading volume on the platform.
Other NFT/metaverse projects have accelerated their growth initiatives this quarter and have seemingly defied the bear market sentiment through successful digital land sales too. The Sandbox recently launched virtual LAND sales for the latest expansion of the map — Mega City 2 — on April 28, marking the second phase of Hong Kong’s decentralized cultural hub in the metaverse. In addition, the firm announced in mid-April that it was seeking to raise $400 million in funding from new and existing investors, which would increase its valuation to over $4 billion, in order to expand its workforce and pursue acquisitions.
NFTs
2021 was certainly considered to be the Year of NFTs: the most successful projects (BAYC, CryptoPunks, Azuki, etc.) managed to break into mainstream media and garnered worldwide attention, resulting in the NFT boom of Q4 2021. However, the NFT industry in 2022 has scaled to even greater proportions as more top-tier brands are entering the space to release their own digital products, either through launching their own projects, or by collaborating with established NFT collections.
Late April saw Nike and RTFKT (the virtual fashion start-up acquired by Nike in December) reveal the Nike Cryptokicks — virtual sneakers that will be customizable with eight RTFKT-made skins. The release is widely regarded as the first of many projects that will be released by Nike x RTFKT in the near future.
Virtual fashion and digital wearables appear to be a significant NFT/metaverse trend to take notice of in 2022, with Gucci, Prada, Givenchy and other renowned luxury brands also looking to design their own NFT collections and give consumers access to high-end virtual fashion products.
Corporate interest in NFTs has also been robust in Q2 2022. Global investment bank, Goldman Sachs, announced that they have been “exploring NFTs in the context of financial instruments,” and specifically “the tokenization of real assets,” said Mathew McDermott (global head of digital assets for Goldman Sachs) at the Financial Times Crypto and Digital Assets Summit on April 27.
Hyped and emerging NFT collections grabbed all the attention in Q1 2022, but the latest, most important developments in the space seem to revolve all around NFT Marketplaces this quarter. Capitalizing on the continued growth of the industry, NFT marketplaces have significantly ramped up their efforts to improve the user experience (UX), interoperability, scalability and security of their platforms. Meanwhile, popular exchanges, blockchain protocols and traditional companies all look to develop or acquire their own NFT marketplaces.
Some interesting developments regarding NFTs and marketplaces this quarter include:
- Popular exchanges, Kraken and Coinbase, launch their respective NFT marketplaces
- Nifty Gateway (the online digital art auction platform owned by Gemini) collaborates with Samsung to develop the first-ever NFT platform for Smart TVs
- Ebay acquires the renowned NFT marketplace, KnownOrigin, as confirmed via press release on June 21. The marketplace currently sits 12th place on all-time trading volume for Ethereum NFTs, at $7.8 million, as reported by DappRadar
- Crypto hardware and security company, Ledger, recently announced that they will be launching an NFT marketplace (Ledger Market) and Web3 scaling service (Ledger Enterprise Create) at the Ledger Op3n Conference during NFT.NYC 2022
- Mastercard announces that they are working with Immutable X, The Sandbox, Nifty Gateway, MoonPay and others to enable NFT e-commerce. This will allow users to purchase non-fungibles from leading marketplaces without the need to buy cryptocurrency first
- Fractal, the upcoming marketplace for gaming NFTs, reported on April 1 that they had closed a Seed financing round valued at $35M, led by Paradigm and Multicoin Capital. [Animoca Brands also participated]
- In May, Flow (the Layer-1 blockchain behind NBA Top Shot and NFL All Day) announced their $725 million fund that will be used to scale the Flow ecosystem
However, it is the secondary NFT marketplace, Opensea, that continues to dominate the space in Q2. The platform is still on top of the rankings of all-time total volume traded for Ethereum NFTs, according to DappRadar, with an all-time trading value of over $30 billion. The pessimistic market speculation that ‘NFTs are dead’ has been far from accurate, though it cannot be denied that the space has taken a hit this quarter.
Still, Opensea ended the month of April with just under $3.5 billion in volume, which is a 40% gain from March. On May 1 alone, they recorded $476 million in volume, starting off very strong this quarter. Despite the recent recession, Opensea has also continued to pursue large-scale recruitment. This is in direct contrast to the massive layoff spree reported by other crypto-related companies this quarter, such as Crypto.com (260 layoffs), BlockFi (850 layoffs), and Coinbase (1,100 layoffs)
Opensea has also implemented significant platform updates this quarter, which is a positive sign of the continued effort to advance all facets of the NFT space.
In early April, Opensea integrated credit card payments that allows buyers to purchase NFTs without a crypto wallet. Via their MoonPay platform, they now accept payments from Visa, Mastercard and American Express, as well as digital wallet payments from both Apple and Google Pay.
Later that month, the company announced their acquisition of leading NFT aggregator, Gem, whose product allows users to purchase NFTs across multiple marketplaces in a single transaction. Despite the acquisition, Opensea has stated that Gem will continue to operate independently as a standalone brand, though the platform will try to integrate some of Gem’s features.
In May and June, Opensea made major strides in improving the safety and efficiency of the platform. Most notably, the platform is migrating to the Seaport protocol which will provide users with more advanced capabilities and greater transaction efficiency. The company has claimed that users will spend 35% less in gas fees following the migration. Overall savings for next year are projected to be roughly $460M, based on 2021 data. This migration, in tandem with their integration of Gem’s features, is a positive indicator that leading NFT-based companies are exploring ways in which to reduce the costly nature of trading non-fungibles through blockchain technology.
The big NFT highlight of Q2 2022, though, must be: Opensea’s integration of Solana NFTs
Opensea has now enabled the listing and purchasing of Solana NFTs on the platform, which should bring in an influx of new buyers to the platform. This is proof that Solana NFTs have exploded in popularity this quarter and will likely continue to challenge Ethereum-based NFTs in the future. Behind Ethereum and the Ronin Network, Solana is the third most dominant blockchain protocol for NFT activity (with a total trading volume of around $2.35 billion as of June 5).
Despite the integration of Solana NFTs on the Opensea platform, Magic Eden remains as the top-choice of marketplace for Solana NFT buyers. The coming months will determine whether Opensea will be able to contest for the spot.
As we continue to observe the NFT/metaverse verticals perform strongly and develop, we stay committed to our thesis of supporting the most innovative projects in the space. This quarter we made investments in Everyrealm, a metaverse aggregator that invests in, develops and manages digital real estate assets and metaverse platforms. They have also built a full-stack NFT and metaverse gaming development studio.
Curated Metaverse/NFT readings:
- 5 Technologies That Will Shape the Metaverse’s Future by Entrepreneur
- The Metaverse, Digital Dressing Rooms and the Future of Fashion Retail by Forbes
- 3D NFTs are the Next Step in the Evolution of Non-Fungible-Tokens by Analytics Insight
- How to Change the ‘NFTs Are Bad’ Narrative: UnicornDAO Co-Founder by Decrypt
GameFi
Blockchain games have seemingly gone against the Crypto Winter this quarter, with reports of healthy ecosystems and new investments pouring into the GameFi sector. This is comforting news to any who feared that the turbulence and uncertainty in the broader markets would disturb the forward momentum of the blockchain gaming industry.
In mid-June, DappRadar collaborated with BGA Games to produce an interesting report on how blockchain gaming has seemingly resisted the bear market trend. According to the report, an average of 1.15 million unique active wallets (UAW) interacted with blockchain games daily in the month of May.
Other news highlights from the past few months also demonstrate healthy status of the Web3 gaming industry:
Illuvium, the “open-world exploration, NFT collector and autobattler game built on the Ethereum blockchain”, has also made waves in Q2. The P2E game concluded a digital land auction that ran from June 2 till June 4, which distributed 19,969 virtual land plots to be bought with ETH or sILV2 (the reward generated through staking the Illuvium governance token: ILV). The sale ultimately accrued 4,018 ETH and 239,388 sILV2, combining for a total value of over $72 million at the time. In contrast to the notorious gas war that plagued the Otherdeed for Otherside sale, Illuvium’s Dutch Auction managed to mitigate gas fees (maintaining an average fee of around $20 per land sale) since it runs on the Immutable-X (IMX) network. This is a testament to the benefits of layer-2 scaling solutions like Immutable-X, that ensures transaction efficiency while granting the advantages of the Ethereum infrastructure.
The Gala Games ecosystem is seeing steady growth on their mission to become a Web3 gaming empire. The company recently hosted the Galaverse conference from June 6 till June 8, in which they unveiled an exciting new partnership with Epic Games. They further revealed that their blockchain shooter game, ‘GRIT,’ will also be featured on the Epic Games Store (which boasts over 30 million active users).
There is a healthy amount of capital still flowing into the GameFi/metaverse industry in Q2. A16Z rolled out $600 million in order to create Games Fund One, which intends to bolster game studios and infrastructure development.
Immutable also launched their inaugural developer and venture investment fund of $500 million in mid-June. The capital will support Web3 game developers and NFT-based companies that build on their layer-2 Ethereum platform, Immutable X.
We at OP Crypto believe in the long term growth and development of blockchain gaming and the broader GameFi market. Along with our recent investments in Everyrealm, we also added Tavern DAO to our portfolio. Their DAO aims to be at the intersection of gaming guilds and game developers by empowering scholars and gamers with the tools to navigate the P2E ecosystem.
Conclusion
It has been a difficult quarter for crypto, but builders and investors (us included) still remain adamant in the mission to increase the adoption of blockchain technology by focusing on long term growth and development. We at OP Crypto are convinced that our continuous support of the most visionary people and best, skilled communities across all verticals will bring about the next level of blockchain innovation. We will continue to invest in and support the people and projects that have the expertise, commitment and vision to survive severe downtrends such as these. As always, we look forward to working with you as we march into the next half of 2022.
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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