Bitcoin’s 20% rise in 2023 has drawn cautious optimism from investors as investment in crypto projects gains momentum.
The year 2023 has started positively for crypto projects as Bitcoin’s breach of the $20,000 mark and cooling inflation set the stage for a comeback from 2022’s implosions.
Investor Confidence in Crypto Boosted by Ethereum Upgrades
Investor confidence seems to be thawing after the collapse of several major centralized entities in 2022 rattled confidence in the crypto industry.
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 like FTX.
However, several smaller VC firms see a future in Ethereum after developers changed 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’s from miners to validators. Validators send 32 ETH to a staking contract on the Ethereum network to have a chance at securing the network. Those who cannot afford to pledge 32 ETH can contribute fewer ETH to institutional or decentralized staking pools. Ethereum stakers are incentivized to keep their tokens on the network to earn annual returns.
The upcoming Shanghai upgrade that enables withdrawals of staked ETH from the network’s Beacon chain could 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 proposer Flashbots, which provides software to help Ethereum validators maximize returns, has invited investment of $30-$50 million across two tranches. A percentage of each tranche will go toward “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 grants.
Proof of Market protocol developer The Nil Foundation today concluded a $22 million funding round led by Olaf Carlson-Wee’s Polychain Capital. Nil develops technology to help layer two blockchains create so-called zero-knowledge (ZK) validity proofs to confirm the accuracy of their transactions to their layer one base chain. Rollups reduce transaction fees by executing transactions off the base chain and then posting them on layer one.
ZK layer twos or rollups are complex to build and sometimes require sophisticated hardware. Ultvenna, a rollup hardware company, recently raised $15 million from Paradigm and Bain Capital Ventures, The Block reports.
Conversely, optimistic rollups post transaction data to layer one, hoping the data is true, hence the name. Unlike ZK-rollups, optimistic rollups use so-called fraud proofs to post transaction data on layer one accurately. Bad actors are disincentivized from submitting bad transactions or incorrect fraud proofs.
Startup Investor Leads Seed Round for New Wallet
Aside from infrastructure developments, investors are also focusing on the mass adoption of web3 technologies.
While many investors have been denied access to funds secured in bankrupted exchange’s private wallets, there is an increasing call for crypto market participants to custody their crypto. Without technical expertise, however, most self-custodial wallets present a daunting learning curve.
Cypher, a new multichain Web3 wallet focusing on a smoother user experience, recently secured $4.3 million from a seed round led by startup investor Y Combinator. In addition to UX improvements, Cypher allows users to bridge crypto between EVM and Cosmos networks. 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 Web 3 credential protocol Gateway. Gateway stores information proving that a person has certain accolades or characteristics on the decentralized storage platform Arweave.
Investment Funds Target Mass Adoption Tools
While little investment has been made in centralized companies, some investors are targeting centralized blockchain applications for mass adoption.
While more centralized, layer one blockchain solution Venom Foundation recently co-launched a $1 billion fund to encourage the development of payment, remittance, 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 targets mass crypto adoption in emerging markets. The investment firm has previously invested in layer two crypto protocol Polygon and Animoca Brands.
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