December 2021 – The year of the Bull

First of all, we would like to wish all our readers a very warm and prosperous New Year. 2021 has been a historic year for the blockchain and a great year for us at Mapleblock as well. In this month’s coverage we will go over some of the key market trends of the past year.

More capital invested than ever

The year 2021, saw the biggest allocations by Venture capital firms into the crypto space. More than $33 bn was invested in over 2,018 deals. This was a watershed moment for the industry and the trickle down effects of this capital should be seen in the following years with more aggressive user acquisition and key talent rotation from traditional tech spaces. The year also saw a record demand from capital allocators to blockchain/digital assets with over 49 new funds raised at an average of ~$300 mn.

  • The opportunities and market for digital assets is expanding, 2021 also saw some of the highest demand from retail investors to allocate capital to crypto currencies with exchanges seeing record user growth
  • Over 43 of the raises had valuations over $1 bn (unicorn) many of these were founded during the last bear market, showing signs of maturity in the space.
  • Crypto based companies are valued significantly higher than the broader VC market with median pre-money valuation 141% over the median across all other sectors. This could be in part due to the relatively less number of opportunities compared to the demand for capital allocation to the space

Source: Galaxy Digital research 

A favorable macro landscape

The sustained bull cycle of late 2020 exploded as we entered 2021, there were a number of macro catalysts that we believe led to this meteoric rise in digital asset prices as well as mainstream coverage. The pandemic caused inflation was one of the start off points as it led to massive money printing in several big economies. Anticipating high inflation, a lot of capital moved into both equity, crypto and other asset markets leading to all-time-highs in many asset classes. This capital move bolstered by signs of institutional adoption furthered the growth of the blockchain sector.

Further, El Salvador announced that it will recognise bitcoin as legal tender, with many other developing economies warming up to the idea of cryptos. Ukraine legalized cryptocurrencies in September of 2021 and countries like India contemplated experimenting with CBDCs and regulating the asset class. The European Union also launched the digital Euro project, which could likely result in the Euro becoming a CBDC operated between the EU nations. 

Large institutional players in traditional finance also seemed to take keen interest in the space with several banks announcing plans to develop crypto custody capabilities, setting up trading desks and offering exposure to their clients via structured products like ETFs.

Major financial hubs made the play to become a crypto hub, attracting talent, companies & capital by offering favorable regulatory environments. Dubai, Singapore and Miami led the charge by publicly announcing plans to develop a crypto hub.

The L1 wars, and a multichain future

In the August of 2021, we saw a massive capital rotation into the alt-L1 chains against a relatively stagnated Ethereum price. Ecosystem incentives and launch of hundreds of new projects with lower barriers to access and the low gas fee became a catalyst for user activity aside from price action alone. TVL for non-ethereum blockchain grew from almost zero to over $100 bn in 2021, with the Solana, Terra and Avalanche ecosystems leading the charge. Ethereum’s share of DeFi went from nearly 100% to about 63%. The key reasons for these trends:

  • With the launch of several quality projects on chains like Solana, Fantom and Terra, the alt-L1 users experienced DeFi without the excessive gas fees. We also saw a significant shift in developer activity and rate of smart contracts deployed on-chain to grow past Ethereums on some L1s
  • Ecosystem incentive programs played a large part in incentivising these developments with over 8 incentives programs of over $100 mn each were announced including the Solana foundation, Fantom foundation, Avalanche Rush and Terraform Labs programs
  • The year also saw Venture Capital rotating into other L1 ecosystems to capture the market of proven models that worked on Ethereum as well as backing new use cases that were not feasible on Ethereum

With the immense growth of alt-L1s and slowing down incentives in the Ethereum ecosystem it also resulted in a lot of liquidity moving towards newer L1 chains in search of new alpha. This trend of capital rotation was somewhat limited by the infrastructure and has created  demand for cross-chain bridges and multichain dApps. At Mapleblock we see this demand to grow for reasons beyond the incentives and an opportunity to allocate capital. 

Some key winning trends that we foresee are:

  1. Cross-chain bridges: These are a key infrastructure layer that supports cross-chain liquidity exchange whether its in form of swaps or wrapping native tokens to newer ecosystems
  2. Cross-chain dApps: As opportunities for better yields arise and liquidity is fragmented across newer DEXEs on different chains, multi-chain dApps like Sushi, Curve and AAVE will become the norm and introduce cross-chain txns to offer best swaps and user experience going forward
  3. Polkadot: The ecosystem made significant strides towards the end of 2021 with the launch of its first ever parachains. This will be a cornerstone ecosystem in a multi-chain future that is focused on easy flow of assets across chains

Enter the Metaverse

Another key breakout trend of 2021 was the promise of the Metaverse. Blockchains ability to prove digital ownership is the first time ever where we could truly own our digital identity and avatars. With Facebook rebranding to Meta we saw a surging interest in this sector with top virtual world projects, Decentraland and Sandbox growing as much as 3-4X. 

  • A metaverse is a virtual place of interconnected worlds where users can interact with each other and build an economy. NFTs are the base technology that can enable such an experience
  • Metaverse has natural synergy with online gaming which many are already immersed into, asset ownership adds an additional layer of real world economics that come at play, making gaming more social and immersive. We are already seeing this trend build out as players of Axie Infinity have found substitute for their real world income by just playing the game
  • Play-2-Earn is also going to become an important aspect of metaverses and blockchain gaming, however designing virtual economies can be as tricky as managing a real world economy and will be a challenging battle. Axie infinity is currently struggling with a massive inflation problem inherent to its token design.

Key trends to look for:

  1. As the metaverse trend heats up we will see significant investments in AR/VR and 3D game building technologies to power up better and more immersive gaming experiences
  2. Big budget AAA gaming studios will likely see a shift in their business models and attempt to build their own metaverses. Ubisoft was one of the first large game publishers to offer NFTs for its Tom Clancy’s Ghost Recon game
  3. Early P2E and metaverse projects will heavily rely on the community to ensure any longevity. Incentives, art and mechanics will lag until there is more maturity in the space.

Rise of new DeFi primitives

Throughout the 2020 and 2021 DeFi wave, lending and AMMs have been the two mainstays of the DeFi ecosystem. However in 2021 we saw new narratives and more sophisticated DeFi primitives emerge with some carving their own niche

Algorithmic stable coins: as crypto grows larger, decentralized stablecoins become more relevant as the industry decouples from the reliance on centralized parties to enable store of value and denomination currencies. The FUD with tether and the success of UST has opened the door wide open for more experimentation on stable coins

Derivatives trading: The success of DyDx and Perp protocol are another signal of maturing trading activity on-chain. Just like centralized exchanges the volume for perps will likely overshadow the volume of spot trading on decentralized exchanges. This trend was accelerated by a number of infrastructural upgrades allowing for scalability in txn volumes and lower fees. We also foresee growth in DeFi margin trading protocols and options trading protocols much like their centralized counter parts

DeFi aggregators and on-ramps: Despite DeFi’s massive growth only a handful of crypto users have ever interacted with a DeFi protocol. This is largely due to a cumbersome UX, however the interest in crypto markets and DeFi will allow DeFi aggregators that keep an eye for the best opportunities and solve for easier onramp to become big winners of 2022 and beyond. Access to DeFi markets is also tempting due to the generally better rate of returns offered compared to CeFi

Last year at Mapleblock 

We spent the past year at Mapleblock with an incredible pace working alongside our amazing portfolio to build some of the best projects in the web3 space. We increased our team size and our muscles to support our portfolio across many strategic areas.

We invested in over 15+ projects across various themes of the year, backing teams with proven track records and an ability to execute. Following the theme of this newsletter we will disclose some of these and how they fit within the themes of 2021 and our outlook for 2022 & beyond

First, based on our cross-chain and multi-chain thesis we backed Router protocol and Safle wallet. As the demand for cross-chain technologies grows, Router aims to build a universal cross-chain communication and asset transfer protocol that solves the problem of liquidity fragmentation across all L1s and L2s. The Safle team on the other hand is heads down building a wallet solution for the multi-chain world. They aim to create a one-stop wallet that functions across all L1s and L2s while offering better UX and private key management

Following the themes of gamefi and metaverse we backed Nitro League, Cryptia and Kawaii Islands. The teams behind these projects bring deep experience from traditional gaming and have a deep understanding of crypto tokenomics and community building. We also invested in Good Games Guild who aim to build one of the largest gaming guilds in southeast asia, and maximize P2E opportunities in the metaverse

From our DeFi theme, we invested in Primex, an on-chain margin trading protocol. Margin trading is a new DeFi primitive that we believe will be one of the mainstays in the space as more trading activity moves on-chain. We also invested in DeFi Land which is a defi asset management platform built under a layer of a P2E farming game

Finally, we also invested in NewOrder DAO. DAOs were one of the biggest narratives of 2021. NewOrder is a venture DAO that incubates & accelerates DeFi projects. We have our eyes on DAOs as an emergent trend of this year. DAOs are one of the most promising experiment to build collaboration between strangers on the internet  

We also partnered with several other projects, which will be announced in 2022. We will also be sharing deeper level insights on the progress and our investment thesis for our portfolio companies as we look towards partnering with more promising teams in the space and develop our thesis of the space. We are excited about the future of the industry and what the new year might bring. In our next newsletter we will be sharing some key trends to look forward to in the year 2022

Disclaimer: This article is a summary of the writers opinions and research. Digital assets are a volatile asset class and readers should be aware of the potential risks of investing in blockchain projects. This is not investment advice & we will not accept liability for any loss or damage that may arise directly or indirectly from any such investments.