Web3 primary market review and track analysis in the third quarter of 2023: the bull market is gradual, how to lay it out?

The activity of the supply and demand sides of the primary market has declined for three consecutive quarters

In Q3 2023, the total financing amount of the market was 1.694 billion US dollars, and there were 170 financing events, and the average financing size increased slightly (Ramp and BitGo, two fund infrastructures for traditional institutions, completed 400 million financing). In October 2023, the amount raised was $426 million, which is the lowest amount raised in nearly four years. The amount of financing and financing events continued to decline, the overall trading in the market was not active, and institutions still dominated the conservative strategy, and the main funds were invested in infrastructure and strong fundamental projects, such as Flashbot.

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Data source: RootData

Market sentiment is dull and is expected to pick up in the next two quarters

In the process of continuous decline in investment and financing funds, the decline is gradually narrowing, and the original main tracks such as DeFi, GameFi, and games have fallen to the freezing point, and RWA and BTC projects have not brought continuous activity in the altcoin market.

We believe that the current state of the primary market has been similar to the emotional blunt in Q4 2019, institutions only invest in projects with strong fundamentals, and the optimization projects of the conventional track have completed the layout of the basic framework in the past year and a half, and they are relatively conservative for emotional or small innovation projects, and it is difficult for the market to break the emotional freezing point with a new narrative in a short period of time. The current state of the market needs to re-energize confidence after a qualitative change in fundamental growth.

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CHART SOURCE: ROOTDATA 2023.09.28

Considering the current volume of on-chain funds, the number of wallets and the fundamentals of infrastructure continue to grow, we believe that the primary market is experiencing a bottom and is expected to bottom out in the next two quarters:

1. Zksync, Starknet, Celestia, Layerzero, Eigenlayer, Scroll and other projects will have major fundamental updates and testnet iterations in the next two quarters, or the mainnet will be launched, which can drive potential on-chain behavior activity and opportunities for further ecological layout.

2. After the upgrade of Ethereum Cancun, the L2 ecosystem will bring further prosperity, the TVL of the L2 ecosystem in Q3 will stabilize at 10 billion US dollars, and the asset volume and trading volume will enter a bottleneck period of growth.

3. The game track will usher in a large-scale launch, which has a high probability of driving the market; In the second half of 2021, the game financing volume exceeded 5 billion US dollars, and after more than a year and a half of preparation, the new generation of chain games has been greatly improved in terms of production quality, operational maturity, playability, and experience optimization, and will be launched in the next three quarters.

Industry track analysis

Overall, this bear market cycle has lasted for more than 6 quarters, during which almost all the old narratives have evolved and developed to varying degrees, some of which have been fully falsified by the market, and new narratives have also appeared one by one to test the waters, generating effective market feedback. In the 6 quarters of observational research, we believe that the market has generated sufficient inductive and deductive materials, which can lead to more reliable research ideas and perspectives.

ETH will have a Cancun upgrade in the next six months, and BTC will have its next halving in 7 months; We believe that as of Q3 2023, the potential core tracks in the next bull market cycle have basically emerged in the market

Based on past market experience and inductive summary, we divide the existing main tracks into four categories according to the priority order of occurrence, the reasons for the growth explosion, the scale of the overall supply and other factors:

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Ethereum Legitimacy Driven (Important)

Ethereum legitimacy mainly describes the core technology path of the current development of the blockchain, and this category has raised more than 10 billion US dollars in the 6-quarter bear market, basically accounting for about 40% of the entire market fundraising scale.

As the airdrop of large-scale projects has become one of the few effective asset issuance paths and market hotspots in the bear market, such projects have continued to accumulate high user data and ecological resources. At the same time, the important core competency of projects in the "Ethereum legitimacy" category in the early stage is ecological BD, which enhances brand voice and ecological attention through cooperative news, narrative nesting, airdrop expectations, strong capital endorsement and other methods of head projects; The fundamental development of such projects is mainly based on the construction of technical ecology and narrative, which is not greatly affected by market sentiment and the price of Bitcoin, and with better financial strength and airdrop effect, we believe that it is easier to become the main leading track of the market in the early stage of the bull market. **

| | | | | --- | --- | --- | | Subdivision track | Description | Opportunity & Characteristic Analysis | | Ethereum Layer 2 and other Layer 1 | Ethereum layer 2 network as a scaling solution; Public chains that optimize throughput, speed, and settlement time; or technology infrastructure for or enhancement of specific use cases Such as Arbitrum, Zksync, Manta, Sei, etc The market consensus is high, and the track development has strong certainty The bear market is stable, and it is easy to accumulate considerable media and product user data The scale of financing is much higher than that of application type products, and the funds are abundant The main audience of the bear market is mainly studios with on-chain airdrops The development of the project is extremely dependent on the BD resources of the inner circle, and in the early stage, it will enhance the market voice and build an ecosystem through project cooperation news, narrative nesting, financing, airdrop expectations, etc The development of the project is less dependent on market sentiment and the price of Bitcoin More likely to lead the market in the early stages of a bull market | cross-chain and interoperability; Modularity & Data Availability | Enhance the ability to transfer assets, liquidity, messages, and data between blockchains; Provide new data availability infrastructure, modular consensus layer, and reduce blockchain deployment costs Such as Layerzero, Orbiter, Celestia, Eigenlayer, etc | L3/Rollup as a Service/Appchain | Further expanding the performance of the public chain, the head application can capture more value and network management expenses Such as Altlayer, Caldera, Dydx, etc | AA Wallet | With Account Abstract Wallet, that is, each wallet account is a smart contract, which unifies the two account types that are prevalent in the market: contract account (CA) and externally owned account (EOA), so that the account itself is "programmable", ensuring that assets are only held by smart contracts, and has strong functionality that can be traded in batches, high availability such as payment of gas and key recovery, and scalability of "plug-ins" with low trust costs, etc., so AA Wallets are also seen as a new paradigm in the wallet space For example, OKX Web3 Wallet, Argent | With stronger functionality and scalability, it can realize complex logical contracts and authority delegation with one click, so as to pay gas fees on behalf of others, batch transactions and other functions It is more in line with the habits of Web2 users, and it can realize account login and retrieval through social media, and the simple one-click transaction makes the user's crypto wallet use threshold very low AA wallet products like OKX Web3 Wallet have the opportunity to become the underlying infrastructure for the next large-scale Web3 application

Turning Point in Objective Trend or Creating a New Asset Class (Significant)

The rapid growth of the primary market track and leading the market usually requires one of the following criteria:

• The original track or technical environment has developed steadily, and new narrative ideas or operational strategies have been generated, such as GameFi and DeFi;
• Objective trends and steady growth in the volume of users or assets, reaching qualitative changes that lead to new product categories, such as derivatives trading;
• New narratives, generating new asset classes, with unlimited distribution channels for a large number of new assets, such as NFTs;

Therefore, we have sorted out which categories of tracks in the current market meet one of the above criteria, and believe that some segments of the market have begun to gradually approach the inflection point, and it is more likely to become the engine of the next round of bull market.

| | | | | --- | --- | --- | | Subdivision track | Description | Opportunity & Characteristic Analysis | | RWA and RWAFi | The application scenarios of Real World Assets (RWA) in the blockchain, represented by U.S. bonds, include asset custody, liquidity mortgage, etc Such as Maker DAO, FRAX | Due to the rise in U.S. Treasury yields, it is extremely attractive to funds denominated in the U.S. dollar standard on the chain The total TVL of on-chain RWA products, represented by Maker, increased from $1 billion in February this year to $6 billion in July, making it the fastest-growing asset category in the DeFi space this year On top of the 5% yield on U.S. bonds, there are also scenarios such as TradeFi or leveraged trading to further amplify the returns It is expected that after the market assets reach 10 billion US dollars, more scenarios such as RWAFi and other liquid products will be expanded | New Stablecoin | PayPal will issue PYUSD in the United States; The opportunity in the primary market lies in decentralized reserve stablecoins For example, Maker DAI | The impact of the bank crash on Circle at the beginning of the year reduced the market's confidence in centralized stablecoins, and the size of USDC shrank by nearly 60% in half a year The market is more aware that Circle and Tether do not share the yield of the underlying collateral like the holders, but continue to recognize the interest or note yield as income, and the risk of a thunderstorm is shared by the market RWA and Ethereum staking continue to grow, and the DeFi ecosystem has formed a stable 4-5% annualized interest-bearing asset The steady growth of collateral quality and volume paves the way for the growth of CDP-type decentralized stablecoins | LSD vs. LSDFi | Liquid Staking Derivatives, users can stake ETH through POS in exchange for certificates, hold LSD to enjoy staking rewards, and at the same time can release the liquidity of staked ETH. For example, Lido, Eigenlayer, Pendle, etc At present, the staking amount of LSD ETH has accounted for 22.6% of the total amount, and it is expected that it will continue to grow to more than 30% in 2023, greatly improving the asset scale and capital utilization rate on the chain It is expected to release hundreds of billions of dollars of on-chain asset liquidity in the future Ethereum staking yield can be considered as a crypto-native risk-free rate, replacing stablecoin liquidity yield as the niche standard for the entire DeFi and generating new inter-protocol yield nesting and liquidity opportunities at scale It can be used as an underlying asset in the field of reserve stablecoins or industry fixed income | BTC Ecology/BRC20 | BTC Ecosystem Package Ordinals NFT project, BRC-20 project and other standards, L2 and sidechain projects, DeFi projects, etc For example, Unisat | Bitcoin inscriptions and NFT marketplaces have created a new asset class for the industry; And let the smallest unit of bitcoin, sats, be transformed from a concept to a practical unit Bitcoin is still the largest consensus in the market, and a new ecological narrative needs to be explored to support the bottom of the value as the halving effect becomes weaker and weaker Although the asset base and market consensus are extremely high, the advancement of the technology stack of the Bitcoin ecosystem is still the biggest disagreement, and there will be a long-term debate between practical scenarios and the reliability of decentralized technology

Scale Expansion of Mature Tracks

| | | | | --- | --- | --- | | Subdivision track | Description | Opportunity & Characteristic Analysis | | Web2.5 Games | Including Hyper Casual light games, MMO, SLG and other triple-A heavy games; The game state is synchronized off-chain, and NFT, DID, tokens and other factors are introduced to make the on-chain economic system The supply of game track projects is very strong, with the overall financing scale in 2021 and 2022 ranging from $6 billion to $8 billion, second only to the infrastructure track At present, the main project background in the market is Web2 Internet, and after two years of bear market, the polishing of product quality has been significantly stronger than in 2021 However, the gaming track has not found a new way to expand users in the bear market: there is no new regional growth point except for the Southeast Asian market; Large-scale Web2 teams have entered, and there is no industrial solution in terms of traffic acquisition methods; Affected by the high proportion of the hair studio, the new token attempt did not work well The overall cold NFT market has further limited the past traffic acquisition and product distribution methods, resulting in difficulties in obtaining distribution channels for triple-A game products, further suppressing the recovery of the game track | During the DeFi 1.0 period, products expanded, and DeFi derivatives were the mainstay The DeFi derivatives trading market is dominated by futures perpetual contracts, as well as options, synthetic assets, etc For example, DyDx, GMX, etc. | At present, more than 97% of derivatives trading volume is executed on CEXs, while derivatives DEXs only account for 2.72% of the total trading volume, while spot DEXs account for nearly 10% of the total spot trading volume, so there is huge room for growth in derivatives DEXs After the upgrade in Cancun, with the improvement of infrastructure such as DA layer, RaaS, and application chain, it brings a new valuation and narrative perspective to derivatives trading Compared with other product categories in the DeFi 1.0 era, including lending, spot DEXs, aggregators, etc., the derivatives market has a more independent ecology and user groups, and the generation of liquidity and the demand for public chain performance have opportunities to become a rollup ecosystem The expansion of the derivatives track is in line with the industry trend of stable growth of on-chain assets and users | Depin, a decentralized infrastructure network | Use token incentives to build a protocol layer for a network of decentralized technology facilities, including resources such as storage, computing, data, and idle hardware For example, Hellium, Render, Meson Network, Livepeer, etc The value of the protocol network is clear, and the cost advantage of token incentives is used to leverage decentralized restricted resources, which is a very clear use case for distributed networks, and the market ceiling is high With the rapid expansion of on-chain DAPPS and public chain scenarios, the decentralization of the network protocol layer has a better development environment There are hardware devices, nodes and other links, similar to the attributes of POW mining coins, which have a stable audience in the market for a long time, and have star projects with FDV of more than $5 billion in each cycle, such as Theta in 2018, Hellium, Render, etc. in 2021 | Payment | Blockchain payment scenarios include clearing and settlement systems, the use and payment scenarios of cryptocurrencies, and financial support, that is, payment middle platform modules For example, Alchemy, Moonpay, etc. | The continuous improvement of L2 infrastructure, the growth of institutional customers, and the diversification of payment scenarios in cryptocurrencies are the main growth melodies The advancement of payment scenarios is an important foundation for the mass adoption of Web3 applications as a whole Digital currency clearing and settlement network; the exchange of digital currency with fiat currency; Digital currency coverage for standardized payment scenarios such as business travel, servers, and advertising; Improvement of the functions of the financial middle office; On-chain streaming payment protocol However, at present, there is no outbreak of strong network effects in the entire payment track, mainly tool-based and software-based coverage

Rely on user scenario breakthroughs or operational experience to bring large-scale traffic

| | | | | --- | --- | --- | | Subdivision track | Description | Opportunity & Characteristic Analysis | | Fully on-chain Game，Automouse World | In the full-chain game, all game logic and state (assets, etc.) are implemented on the chain, through smart contracts, as an open system, the state synchronization of the game is completed by decentralized infrastructure, regardless of the client For example, Loot Ecosystem, Dark Forest, Dojo, etc At present, this track can be regarded as the only area that can be regarded as paradigm innovation in this round of bear market The modularly built open ecosystem is very much in line with the technical environment of blockchain innovation, and the open and highly combinable attributes greatly expand the boundaries of game possibilities, allowing gamers to participate in the construction of the game experience instead of relying on the official team At present, the core development ecology is dominated by Loot and Dark Forest, and each ecosystem has about several hundred core developments and about 30 ecological projects However, there are only about 2,000 core ecological users of the game on the whole chain, and it is difficult to have the opportunity for large-scale traffic. Therefore, the project team should have fine thinking in terms of ecological leverage and operational priorities The current infrastructure is still very imperfect, coupled with the difficulty of obtaining traffic, most ecological projects are built with communities or tool plug-ins as the main body to meet the low-cost development of major games | AI + Web3.0 | There are four core ideas of AI + Web3.0:

1. Blockchain empowers the AI infrastructure layer, and token incentives provide decentralized computing resources, datasets, data, etc. for the infrastructure layer to optimize cost or efficiency
2. AIGC reduces costs and increases efficiency for content production products, and expands the functions of To C-end products, such as AI NPCs, generative art NFTs, automated trading agents, etc
3. Improve productivity and lower the threshold, such as the combination of AI and security audits, automatic contract execution, AI on-chain data analysis, etc
4. zkML and on-chain AI inference: AI agent behavior monitoring and rights and responsibilities constraints; Leveraging zkML's technology to ensure that AI systems are operating without revealing critical data or sensitive information, it is possible to demonstrate to regulators or stakeholders that their AI is performing a specific task without revealing actual data or internal models The current supply of AI startups is very weak in Asia, and almost all of the main entrepreneurial groups and narrative resources are distributed in North America At present, the main difficulty of application projects is that they are too involuted, and they have not yet found an effective way to quickly establish moats or network effects, and often encounter a large number of competing products after verifying PMF, and the bear market environment is not conducive to the construction of network effects Web3 + AI entrepreneurship requires a team with comprehensive capabilities, not only to deliver AI products, but also to have high requirements in financing, operation, cost control, ecological resources, etc From the trend point of view, AI has a natural demand for blockchain, and AI needs blockchain to provide real resilience for its own development | Social & Creator Economy | The most promising development direction of the Web3 creator economy is CreatorFi, which combines social networking and content creation, that is, a positive externality economic model formed by individual or collective content creation based on decentralized ownership technology and community interaction as the core For example, Friend.tech, Mirror, Lens Protocol | The pure social track has not performed as expected in the bear market cycle, and has not yet found a PMF other than a scoring tool, and the creator economy represented by Friend Tech is easier to open the cold start stage than pure social, and currently does not see a good opportunity for C2C social, but is more content-driven Combining the creator economy with decentralized ownership technology is more conducive to the transformation of creators' achievements, forming an aggregation effect, and smoothly forming a channel of "drainage + monetization". Taking Friend.tech as an example, the early speculation and KOL effect led to the rapid growth of the number of product users, the circle breaking effect was obvious, and the project DAU was active | NFT | Provide trading platform, lending services, custody services, and community management services for NFT transactions; developing an NFT derivatives marketplace; Lower NFT transaction thresholds or fees For example, Opensea, Looksrare, BendDao, Blur, etc The development of the project is less dependent on the price of Bitcoin; The market consensus is high, and it is easy to have better capital heat in the next cycle At present, there are more brands in traditional industries entering the layout However, the overall NFT market is still in an extremely shrinking state, and the money-making effect is weak, and the market needs new application scenarios and operational strategies to drive the activity of the NFT market, and then there will be a boom in financial instruments | TelegramBot | Based on the Telegram ecosystem, it reduces the investment threshold and use cost of on-chain copying for users, and facilitates users to conduct convenient copy trading according to real high-yield on-chain addresses For example, Maestro, Banana Gun, Unibot | In the bear market, the number of new users far exceeded that of other track products, and the average daily fee income of the top product Maestro exceeded 100,000 US dollars To provide users with a convenient solution for on-chain copying, which is similar to the current real-world copy business of centralized exchanges, and because the on-chain data is more credible, it is a business model with high cash flow Telegram is currently the largest traffic product in the blockchain field, and there is a TON public chain in the ecosystem; At the same time, it is also the main scene of gray industry information circulation, and the imagination space lies in further asset circulation The official investment in the on-chain ecology is gradually increasing, and the market value of TON's tokens has stabilized in the top 20 |