Q3 2023 Crypto Market Funding Overview: Infrastructure, DeFi, and Gaming Continue to Gain Favor
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Q3 2023 Crypto Market Funding Overview: Infrastructure, DeFi, and Gaming Continue to Gain Favor
The third quarter marked a new low in both total fundraising amount and number of deals since the fourth quarter of 2020.
Navigating Web3 tides with focused insightsWritten by: Chase Devens
Compiled by: TechFlow
Crypto's performance during the ongoing bear market may best be illustrated by fundraising data in the sector. The third quarter of 2023 did not break away from the consecutive quarterly downward trend observed since early 2022—the third quarter recorded new lows in both total funds raised and number of deals since Q4 2020. The quarterly total was slightly under $2.1 billion across 297 deals, a 36% decline from the previous quarter.
Stage-Based Fundraising
Analyzing transaction stages in Q3, we see that most deals were concentrated in early rounds. Seed funding accounted for the largest share of total funds raised, with $488 million raised across 98 rounds. The trend in deal count shows a clear shift from later-stage to earlier-stage projects compared to three years ago.
Early-stage deals (Pre-Seed, Seed, and Series A) increased their share of total transactions from 37% in Q4 2020 to 48% in Q3 2023. Meanwhile, late-stage deals (Series B or later) decreased from 8% in Q4 2020 to just 1.4% in Q3 2023. This suggests investors are targeting projects with significant upside potential to achieve higher return multiples when market sentiment eventually turns positive.
The third quarter also saw substantial capital entering via strategic investments, such as $200 million invested into Islamic Coin’s corporate and private equity deals. Strategic financing has been steadily increasing during the bear market. At the peak of the bull market in Q4 2021, strategic rounds made up only 0.2% of total fundraising. By Q3 2023, this share had risen to 22%, indicating harsh market conditions are forcing projects to seek short-term bridge financing or face eventual acquisition by larger players.
Fundraising by Sector
Sector Trends
Q3 sector fundraising distribution mirrors patterns seen over the past 12 months. Chain infrastructure, DeFi, and gaming have consistently been the best-funded sectors during this period. The services sector—defined by supporting business functions such as marketing, incubators, security, and legal services—was the only sector averaging more than $100 million per deal over the past year. Although other sectors are important for overall crypto development, these four continue to attract the majority of investor attention.
Another notable trend over the past year has been the increasing proportion of funding going to infrastructure-based projects relative to user-facing applications. This is demonstrated by grouping consumer, DeFi, and gaming into an "applications" category, while categorizing application infrastructure, chain infrastructure, custody, and DePIN as "infrastructure."
When examining the ratio of funds raised between these two buckets, we observe a subtle shift from user-facing applications toward infrastructure projects. This trend is supported by steady fundraising for infrastructure projects compared to the higher volatility seen in application-focused areas. However, this trend may not last long, as more investors realize that without successful user-facing crypto applications, infrastructure investments are unlikely to generate the returns they expect.
Leading Sectors
Fundraising across sectors in Q3 was relatively evenly distributed. Chain infrastructure captured the largest share of funds at 18%, while DeFi led in the number of funded deals with 67. Gaming once again performed strongly, attracting nearly $250 million in investment this quarter.
Chain Infrastructure
Despite only 21 deals, the chain infrastructure sector secured the largest share of Q3 fundraising. One-third of these transactions occurred in the smart contract platform subcategory, highlighted by Fhenix raising $7 million to build fully encrypted smart contracts.
Scaling solutions accounted for 43% of the sector’s fundraising, reflecting an ongoing shift from smart contract platforms to scaling solutions. Q1 2022 marked the first time scaling solutions surpassed smart contract platforms in fundraising, driven by Polygon’s $450 million raise for its scaling solution. In the past four quarters, three have exceeded that historical high. The ratio peaked at 7x in Q4 2022, primarily due to reduced investment activity in the smart contract platform category that quarter.
Over 40% of chain infrastructure fundraising in Q3 came from the Optimism Foundation selling approximately 116 million OP tokens at the end of September to further advance its mission. Other notable deals included Flashbots’ $60 million Series B round to continue developing SUAVE, and Bitmain’s $54 million strategic investment in Core Scientific, a leading Bitcoin mining company.
DeFi
DeFi had the highest number of funded projects in Q3, with 68 deals. Investment in this sector was highly concentrated, with trading-related categories accounting for 38% of all invested capital across 33 deals. Overall, DeFi projects raised $210 million, averaging $3 million per deal.
Binance Labs was an active investor in the DeFi space during Q3, participating in seven deals, including $10 million strategic investments in Helio Protocol (a liquid staking platform on BNB Chain) and Radiant Capital (a money market built on LayerZero). The largest DeFi deal of the quarter was Brine’s $16.5 million Series A raise; Brine is an order-book DEX built on Starkware.
Three of the top four DeFi investors in Q3 were ecosystem entities. Binance Labs, the Base Ecosystem Fund, and Polygon collectively participated in 16 deals.
Gaming
The gaming sector attracted several early-stage deals, making it the third-highest funded sector in Q3, raising $249 million across 33 deals. Gaming accounted for 67% of funding within the broader consumer segment of user-facing applications.
The vast majority of gaming sector deals came from the long tail of investors. Only seven entities participated in two or more deals, while 104 investors made single-project investments in the sector.
The largest gaming deal in Q3 was Futureverse’s $54 million Series A round. Futureverse is a platform combining AI and metaverse worlds. Other metaverse-based gaming projects such as Mocaverse and Mahjong Meta also secured funding this quarter. Finally, Proof of Play raised a $33 million seed round from lead investors a16z and Greenoaks. This blockchain-based game studio was founded by Amitt Mahajan, co-creator of Zynga’s Farmville, who believes blockchain games can follow a similar growth trajectory to early free-to-play mobile games.
Investors
In Q3, the most active crypto investors conducted 144 investments. Nevertheless, this group accounted for only 7% of all investor deals, indicating that cryptocurrency fundraising remains dominated by the long tail of investors.
Outlier Ventures and Binance Labs were by far the most active investors—they executed 23 and 22 deals respectively in Q3, more than double the next closest investor, Robot Ventures. Outlier Ventures focused primarily on payments (six deals) and DeFi (five deals).
As we highlighted in August, Binance Labs has been actively investing throughout 2023, focusing on DeFi and gaming sectors. Additionally, projects developing zero-knowledge and privacy technologies are key targets for Binance Labs. Notably, 12 of Binance Labs’ 22 deals involved projects from its accelerator program. Even excluding those, Binance Labs’ remaining 11 investments still tie it with Robot Ventures for transaction activity in Q3.
Finally, 54% of active investors in Q3 were based in the United States. This figure aligns with the quarterly average over the past four years (55%). Despite founders gradually leaving the U.S. for more crypto-friendly jurisdictions, the U.S. remains home to the majority of recognized crypto investors.
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