Bitcoin’s 20% growth in 2023 has attracted cautious optimism from investors as investment in crypto projects is gaining momentum.
The year 2023 has started positively for crypto projects as bitcoin breached the $20,000 mark and declining inflation set the stage for a comeback from 2022 implications.
Investor Confidence in Crypto Boosted by Ethereum Upgrade
Investor confidence seems to be waning after 2022 shattered confidence in the crypto industry following the collapse of several major centralized entities.
The implosion of FTX, Celsius, and Three Arrows Capital soured investor confidence and increased regulatory scrutiny on investor due diligence. Additionally, several firms such as Tiger Global and Sequoia have had to write down investments in centralized entities such as FTX.
However, many smaller VC firms see a future in Ethereum once developers convert the blockchain’s proof-of-work consensus mechanism to proof-of-stake.
Ethereum developers changed the network’s consensus mechanism from proof-of-work to proof-of-stake in last year’s merge upgrade. This change shifted Ethereum from miners to validators. Validators send 32 ETH to a staking contract on the Ethereum network for a chance to secure the network. Those who cannot stake 32 ETH can contribute less ETH to institutional or decentralized staking pools. Ethereum stakers are incentivized to hold their tokens on the network to earn annual returns.
The upcoming Shanghai upgrade that enables the withdrawal of staked ETH from the network’s beacon chain may also encourage further investment, while some projects are looking to improve the user experience for crypto market participants.
Big Money Going to Ethereum Infrastructure Providers
Ethereum block proponent Flashbots, which provides software to help Ethereum validators maximize returns, has invited an investment of $30-$50 million in two tranches. One percent of each tranche will go towards the “ecosystem allocation”. According to The Block, crypto-focused venture capital firm Paradigm is leading the funding round.
Ssv.network, which provides validator infrastructure for Ethereum 2.0, intends to raise $50 million through an ecosystem fund. The organization helps secure Ethereum through greater decentralization. Money from the fund will go towards projects to decentralize Ethereum’s proof-of-stake network. Ssv.network has already earmarked $3 million for developer funding.
Proof of Market protocol developer The Nil Foundation today closed a $22 million funding round led by Olaf Carlsson-V’s Polychain Capital. Nil develops technology to help layer two blockchains create so-called zero-knowledge (ZK) proofs of validity to verify the accuracy of their transactions in their layer one base chain. Rollup minimizes transaction fees by executing transactions from the base chain and then posting them to layer one.
ZK layer two or rollups are complex to build and sometimes require sophisticated hardware. Rollup hardware company Altvena recently raised $15 million from Paradigm and Bain Capital Ventures, The Block reports.
In contrast, optimistic rollups post transaction data to layer one, hoping that the data is true, hence the name. Unlike ZK-rollups, optimistic rollups use so-called fraud proofs to accurately post transaction data to a single layer. Bad actors are discouraged from creating bad transactions or submitting false fraudulent evidence.
Startup investor leads seed round for New Wallet
Apart from infrastructure development, investors are also focusing on mass adoption of Web 3 technologies.
While many investors have been denied access to funds secured in private wallets of bankrupt exchanges, there is growing demand for crypto market participants to have their crypto in custody. Without technical expertise, however, most self-custodial wallets present a challenging learning curve.
Cypher, a new multichain Web3 wallet focusing on seamless user experience, recently secured a $4.3 million seed round led by startup investor Y Combinator. In addition to UX improvements, Cypher allows users to bridge crypto between EVMs and the Cosmos network. The team behind Cypher will reportedly use the funds for research and development and to pursue banking partnerships.
Another crypto investor Reciprocal Ventures led a $4.2 million funding round for Web3 Credential Protocol Gateway. The gateway stores information that proves a person has certain accolades or attributes on the decentralized storage platform Arweave.
While very little has been invested in centralized companies, some investors are targeting centralized blockchain applications for mass adoption.
Whereas the Venom Foundation, a more centralized, layer one blockchain solution, recently co-launched a $1 billion fund to encourage the development of payments, remittances and central bank digital currency systems on its blockchain.
Asset manager HashKey Capital recently closed a funding round for its Fintech Investment Fund III, whose investment thesis aims to drive mass crypto adoption in emerging markets. The investment firm has previously invested in layer two crypto protocols Polygon and Animoca Brands.
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