Hikes Are Hurting
Last year saw the Federal Reserve (Fed) approve its first rate hike in more than three years, and an aggressive path of rate hikes has ensued to try and tame rampant inflation. Crypto prices plummeted throughout 2022 in response to the high inflation and rising interest rate environment.
But how did this environment affect the amount of capital being raised in the crypto space? And what is the trend in funding for different sectors of the crypto space?
The Current State of Funding in Crypto
Not only do high interest rates pressure crypto prices, they also pose a significant challenge to crypto fundraising efforts. With traditional investment opportunities looking more attractive, competition for capital is fierce, making it harder for crypto projects to attract capital and liquidity.
Data from DeFi Llama shows that a total of $36bn was raised in 2021 compared to $22bn in 2022 (Chart 1). And year to date, around $1bn has been raised so far. The total amount raised peaked at the end of 2021 and has been falling ever since (Chart 2).
Funding Plummets for Centralised Projects
While the total amount raised by crypto projects may have taken a hit, the industry is still raking in significant amounts of cash. So, where is the money going? Which sectors are getting the lion’s share of funding, and how has this trend shifted in recent years?
- In 2020 centralised cryptocurrency platforms dominated the scene, with CeFi projects and centralised exchanges taking the top 2 spots in terms of total amount raised (Chart 3). Together, they claimed over 45% of the total amount raised by the top 7 categories that year.
- In 2022 DeFi took the lead, followed by infrastructure (Chart 4).
- Year to date, infrastructure has eclipsed other categories in terms of total amount raised (Chart 5). It claims over 77% of the total amount raised by the top 7 categories this year.
A common theme over the past three years has been infrastructure consistently ranking among the top 3 categories that have attracted capital, and its share has been increasing year on year (21% in 2021, 27% in 2022, and 60% YTD, Charts 3 to 5).
Infrastructure is a broad term, encompassing everything from Web3 infrastructure, shared compute, oracles, internet of things (IOT), and other tools. Many investors believe in the long-term potential of blockchain technology and see these infrastructure projects as a way to invest in the future of technology, finance, and the global economy.
In conclusion, while the total amount of funding for crypto projects may be lower compared to recent times, the trends are pointing towards a significant shift in the types of projects that are receiving the most investment. The focus is now on fundamental blockchain infrastructure.