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DeFi market set to reach $1 trillion: Crypto VC Investors remain bullish despite market downturns

Web3 Wednesday (#3)

Dear readers,

Needless to say, the crypto world has undergone some major changes in the past year (remember Terra/LUNA and FTX 👀?). However, despite these challenges, there is a glimmer of hope on the horizon. Crypto VC investors are still betting on the future of the industry and are actively seeking ways to support and grow projects in this market.

In 2022, the focus for crypto VC was on navigating high-profile collapses and ensuring that founders had sufficient resources to weather the bear market. But for 2023, the focus is shifting to finding innovative ways for founders to grow their projects, sourcing investments at favorable valuations, and incubating more projects in-house.

Are YOU still bullish on the future of crypto? 🤔

🍿 Quick Snack

  • 💪 Despite the negative sentiment surrounding crypto today, investors still believe activity will eventually return to normal. Also, permissioned DeFi is expected to gain traction among institutions, creating a market opportunity worth more than $1 trillion.

  • 💃 Web3 could help the fashion industry become more sustainable by providing transparency and traceability across the supply chain.

  • 💰 HashKey Capital has raised $500 million for Fund III and aims to deploy this capital accross crypto, DeFi, and NFTs with a focus on opportunities in emerging markets.

🍔 The Full Meal

Crypto VC Investors remain bullish on DeFi despite market downturns, scandals and disruptions

Last week, 6 investors sat down with Jacquelyn Melinek @ TechCrunch to chat about the future of crypto and DeFi for 2023. Here’s what they said:

  • Despite the general market downturn and wavering trust caused by a slew of scandals and market disruptions, investors at major firms are still writing checks in the decentralized finance (DeFi) space.

  • DeFi projects continue to be in focus in the crypto VC world, with anywhere from 20% to 50% of crypto-related pitches today being DeFi-focused.

  • Investors are revamping their investing strategies for the future, while others are holding to their current plans, with perhaps a small tweak or two. The current strategy for investing in DeFi protocols and projects has shifted to an increased focus on valuation and exploring projects that are working on permissioned DeFi and token-curated registries.

  • The DeFi market is currently around $50 billion in TVL (total value locked) and is expected to bifurcate into two categories: permissioned and permissionless.

Permissioned Defi refers to decentralized finance platforms that are restricted to certain participants or require authorization from a central authority to access and use their services.(e.g. R3 Corda, Symbiont)

Permissionless Defi refers to decentralized finance protocols that are open to anyone and do not require any kind of prior approval or authorization to participate in their networks or use their services.(e.g. Uniswap, Aave, Compound, Sushiswap)

  • The combined market for permissioned and permissionless DeFi has the potential to become worth anywhere from $500 billion to $2 trillion by 2028.

  • Permissioned DeFi is expected to gain more traction among institutions, creating a market opportunity worth more than $1 trillion if just a small percentage of traditional finance activity moves on-chain.

  • Other DeFi use cases that are expected to gain mainstream adoption include real-world assets (e.g. precious metals, real estate, corporate debt) and derivatives, with solutions tailored towards long-tail assets (low volume / hard-to-find) and emerging markets.

⚡️ For founders, what does this mean?

  • If you’re looking to raise capital, focus on highlighting (1) unique technology, (2) a clear advantage for a specific use case, and (3) a defensible moat.

  • If you’re looking to build a new venture or pivot your existing one, think about the use cases and pain points for non-crypto/non-technical users, and then build solutions (or user experiences) for them.

  • Fashion is one of the most polluting sectors in the world, being responsible for up to 10% of the world’s carbon dioxide output. This is more than the international flights and maritime shipping industries combined.

  • Blockchain could help fix this by allowing for more transparency and increased awareness of what happens to a product after one discards it or produces it.

  • For example, a new marketplace using decentralized technology called SPIN allows consumers to rent, buy and sell clothing using VR and AR technologies, enter digital versions of stores, chat with avatars and buy physical items.

“No more questions about whether an item is real or fake, or how it’s actually made; it’s complete transparency from production to delivery to secondhand sale”

- Hugo Renaudin, founder and CEO of P00LS
  • Crypto-focused asset manager HashKey Capital has raised $500 million for investments in the Web3 ecosystem via FinTech Investment Fund III.

  • The raised capital will be deployed towards blockchain infrastructure, applications, and tools that have the potential for mass adoption, with a focus on opportunities in emerging markets.

  • Since its inception in 2018, HashKey Capital has managed over US$1 billion in client assets with a proven track record of investing across all stages of blockchain and crypto companies. To date, the firm has contributed to various popular projects including Cosmos, Coinlist, dYdX, Animoca Brands, Polkadot, and others.

⚡️ Fun fact:

  • As one of the earliest institutional investors in Ethereum, HashKey Group was the inspiration behind the upcoming “Shanghai upgrade” which is scheduled to enable Ethereum stakers to withdraw their assets from the network’s staking contract by March.

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