State of Blockchains Q3
We started the year anticipating a winter in the ecosystem. Q3’s venture funding points to the fact that a freeze in capital liquidity is indeed here. Blockchain startups no longer see token sales as a mechanism for fund-raising. Instead, they have moved towards raising venture financing from venture capitals.
Here’s the three key take-aways we sourced from the report.
1. The empire strikes back: VC investments in the space at all time high as professionalisation of the industry continues
The drastic reduction in the frequency and size of token sales have created a gap that is now being filled by venture capital. VC financing is moving earlier in the funding cycle at Seed or Series A instead of the later stage, pre-ICO rounds we witnessed in Q2. Legal expenses, marketing costs and community building efforts are part of the reason why startups that don’t necessarily require a network or token have been avoiding token generation events completely. Until we see a recovery in Bitcoin’s price, it is likely that the model of token generation events that took center stage in 2017 would never return.
- VC investments have surged from a total of $900 million in 2017 to $2.85 billion so far this year, a 316% increase
- VCs are active across all funding stages with 119 deals disclosed this quarter the most ever as quality projects with developed products continue to receive financing.
- The US is still the dominant source of VC investments in the crypto space
Aron Van Ammers, Founding Partner of Outlier Ventures commented:
“As we see the focus of early stage investment into tokens shift away from tech-savvy retail investors toward VCs, hedge funds and ultimately larger institutional investors, we’re seeing a large growth in new businesses and services enabling the larger institutional investors to enter the space. Self-sovereignty means self-responsibility, and when your private keys are lost or stolen there is no broker to call. Institutional investors have a need to reduce that technical complexity and risk. New players solve that problem; from institutional-grade custody providers, to trading platforms offered by the financial incumbents.”
2. Crypto Winter bites with total ICO raised in the quarter down nearly 74% as speculators flee
Although number and size of public token fundraises has reduced, startups, corporates and regulators continue to believe that tokens are foundational to Web 3.0 infrastructure and represent the opportunity for new business models. This quarter has witnessed a considerable improvement in both the amount of traction and complexity of token design by startups before they approach private capital or public capital markets. There is a shift in thinking in the industry in the role of tokens not just as fundraising mechanism but also as a business model innovation. Large, venture funded businesses will begin using tokens as a way to engage, retain and attract users.
- Q3 ICO raises were $1 billion down from $3.8 billion in Q1, a decline of close to 74%
- September ICO raises in total was just $150 million
- The industry is maturing as token projects raise more money privately and plan for public sales when the network is more developed
Eden Dhaliwal, Partner and Head of Crypto-economics at OV said:
“This quarter saw significant negative sentiment around utility tokens from an investment standpoint. Many investors have grown frustrated over regulation and exasperated over valuations of tokenized networks. This represents a new cycle back towards equity based blockchain investments until the crypto community makes advances in validating tokens as a new asset class with viable business models. That said, projects with well designed token economies are still finding support from the community and increasingly from VCs.”
3. Regulators catching FOMO: Governments around the world look to create friendly environment for blockchain startups
There is a key difference between the bear markets of 2014 and 2018. The former witnessed governments around the world rushing to issue bans on tokens. The latter has regulators around the world pushing their jurisdictions to explore blockchains as a means to maintain their edge as innovation and commercial hubs. France, Thailand, Singapore, Switzerland and Thailand have pushed for the creation of ecosystems that enable token issuance this past quarter. Japan’s Financial Services Agency has enabled self-regulation by the token ecosystem in the region through the setting up of a ‘Virtual Currency Exchange Association” consisting of industry leaders in the region.
- The UK and the crypto-asset taskforce suggested the UK had the opportunity to become a global centre for blockchain-related innovation
- In France, a bill exploring the possibility of providing a legal framework for the sale of tokens is in active discussion
- In Switzerland, a new working group by key financial policy including FINMA to explore if a sandbox or sandboxes could solve regulatory hurdles for the token economy.
The blockchain ecosystem has evolved from struggling to find banking partners to governments becoming increasingly sensitive of the possibility of startups moving abroad in search of more friendly startup and funding environments. Forward-looking countries have begun engaging with regional banking entities to foster a regulatory environment to capture the vast economic gains