Coinbase Ventures Q3 Investment Report: A total of 49 investments, with Web3 infrastructure accounting for the largest share

Author: Coinbase Ventures
Translation: Yu Shunsui

Coinbase Ventures has grown to become one of the most active VC investors in the crypto space. In the third quarter, Coinbase Ventures made a record 49 investments, averaging a new deal approximately every 1.8 days. This is an increase from 28 investments in the second quarter and 24 in the first quarter. As of the third quarter of 2021, the Coinbase Ventures portfolio includes over 200 companies and projects.

Cumulatively, 90% of Coinbase Ventures' investment capital has been deployed from the beginning of 2021 to date, reflecting an accelerated pace in its fourth year of operation. 50% of the unique new "Logos" in its portfolio also emerged in 2021.

Motivation and Philosophy

The primary mission of Coinbase Ventures is to support the growing crypto ecosystem, thus broadly investing in strong entrepreneurs driving cryptocurrency development. Coinbase Ventures hopes for the crypto ecosystem to thrive rather than focusing solely on specific outcomes (which is typical of corporate venture capital).

Ultimately, Coinbase Ventures views cryptocurrency as a rising tide, where the development of the ecosystem lifts all participants, including Coinbase. Traditional strategic interests (such as business partnerships and potential acquisitions) are certainly beneficial, but Coinbase Ventures believes they are icing on the cake.

Investment Categories

Coinbase Ventures' investment range spans from six-figure seed round investments to multi-million dollar growth round investments. There are many ways to categorize investments, but Coinbase Ventures segments the market into the following categories: Protocol + Web3 Infrastructure, DeFi, CeFi, Platform + Developer Tools, NFT/Metaverse, and Others.

Specifically, among the six major investment categories of Coinbase Ventures, Protocol + Web3 Infrastructure (29%) holds the largest share, followed by DeFi (24%), CeFi (18%), Platform + Developer Tools (15%), NFT + Metaverse (9%), and Others (5%).

Key Themes and Insights

In its most active quarter to date, Coinbase Ventures observed significant developments in U.S. CeFi, Layer 1/Layer 2 (L1/L2), cross-chain protocols, and Web3 tools. Here are some key themes observed by Coinbase Ventures:

Regulators and Centralized Players Deepen Engagement in Cryptocurrency

Regulators became more prominent in the third quarter as the U.S. Securities and Exchange Commission (SEC), the Treasury Department, and the Financial Action Task Force (FATF) intensified their involvement across the crypto ecosystem. This brought certain forms of regulatory risk to early protocols and teams. On the other hand, the largest market cap crypto asset, BTC, received positive support, with the SEC approving BTC futures exchange-traded funds (ETFs). Coinbase Ventures believes this will allow potential capital to enter the crypto market, leading to significant trading volume, inflows, and interest.

Web 2.0 companies like Square, Twitter, Stripe, and TikTok also expanded their crypto strategies in the third quarter. Square announced a Bitcoin-based financial services platform, Twitter revealed plans to integrate the BTC Lightning Network and NFTs in the future, Stripe announced its return to the crypto space through a dedicated new crypto team. TikTok announced a partnership with ImmutableX to launch a creator-led NFT series.

Meanwhile, with support from Coinbase Prime, Coinbase Cloud, and other third-party platforms, banks, fintech companies, and broker-dealers began further integrating cryptocurrencies into their products. Overall, the crypto industry made significant progress in maturity and institutional adoption over the past quarter.

Rapid Development of Multi-Chain Ecosystems

After years of developing solutions aimed at alleviating Ethereum's bottlenecks, scalability has finally been achieved with the rise of a series of Layer 1 and Layer 2 ecosystems. The current main driver is the utilization of EVM (Ethereum Virtual Machine) compatible solutions, allowing users and developers to migrate to new environments with relatively low switching costs. Users can access EVM-compatible L1s like Avalanche with their existing wallets, or sidechains/L2s like Polygon, Arbitrum, and Optimism. Solidity smart contracts can often be copied and pasted to any EVM-compatible L1/L2, facilitating the deployment of popular DeFi applications across multiple chains.

As CeFi exchanges integrate with these new L1/L2s at a slow pace, Coinbase Ventures sees the appeal of newly launched cross-chain bridges. These bridges facilitate the transfer of billions in funds from Ethereum to various L1/L2s.

While the appeal of EVM-compatible applications written in Solidity was greatest on L1 and L2 in the third quarter, other ecosystems are bringing more expressive programmability to desktop applications. New primitives focus on more familiar programming languages like Rust (Solana, Polkadot), Golang (Cosmos), and Move (Facebook Diem, Flow), which may usher in a new wave of Web 2.0 developers to the industry.

Improved Web3 UX on the Horizon

In the third quarter, Coinbase Ventures saw further development of Web3 tools that will simplify the Web3 interaction experience. XMTP is leading the messaging standard across Web3 addresses. Spruce is standardizing the "OAuth" (Open Authorization) protocol, allowing users to securely share digital credentials, private documents, and sensitive media content with Web 3 applications. Snapshot simplifies access to governance forums and decision-making across DApps.

At the same time, significant work is underway to create additional security for Web3 applications. OpenZeppelin's decentralized project Forta is making progress in real-time security monitoring of smart contracts, aiming to provide more transparency in smart contract code execution, error detection, and ultimately real-time prevention of hacks. Similarly, Certik is offering "quick and easy" automated auditing tools to help DApps launch in the market faster.

Meanwhile, as the technical and legislative creation patterns of on-chain communities begin to take effect, the DAO tech stack continues to evolve. Syndicate (and other projects) aims to become the "crypto version of AngelList" by creating decentralized investment protocols and social networks.

NFT 2.0 and Crypto Gaming Flourishing

The third quarter also saw a significant amount of development focused on NFT creator tools, which will ultimately expand the use cases and audience for NFTs while creating new social features.

At the same time, led by Axie Infinity, NFT-based gaming continues to accelerate, as its play-to-earn model has gained immense popularity in emerging markets (Philippines, Brazil, India, etc.), attracting 2 million DAUs (daily active users) and generating over $200,000 in revenue. The Loot Project has also captivated the entire industry through a reverse game development model, which involves first releasing NFT-based game assets to the public to guide the community and incentivize further development.