December 2021

We would like to wish everyone a very happy new year from the Woodstock Fund! We’d like to take this opportunity to reflect and express our gratitude to all of our readers and subscribers for supporting and motivating us on this journey.

RECAP – 2021

2021 was a roller coaster ride. Each week was jam-packed with new investments, technological advancements, regulatory shifts, and new learnings. Venture capital funds poured a record US$ 30 billion — more than every other year combined — into crypto investments in 2021.  Last year, the average day saw blockchain-related startups raise $20 million, and the average seed raise has increased from $1.5 million in 2020 to $3.3 million.

Venture Capital in Blockchain

It’s been both exhilarating and exhausting! The digital asset space is undergoing rapid development and advancement at this point and 2021 has been nothing short of an exciting adventure. Not only has the global digital asset market capitalization surpassed all previous records, but the blockchain ecosystem as a whole has evolved dramatically to support an increasing number of real-world use cases. The majority of active users in the first seven months of 2021 interacted with DeFi dApps and protocol. However, blockchain games dominated the second half of 2021. As the trade volumes increased across platforms such as Axie Infinity, blockchain games gained traction. The blockchain gaming industry grew by 765% year-over-year in 2021. 

New dApps, protocols, and games were hosted by layer-1 chains and layer-2 solutions. Layer-1 networks such as Binance Smart Chain, Solana, Avalanche, and Terra, among others, have established themselves as viable Ethereum alternatives. Meanwhile, layer-2 scaling solutions such as Polygon, Arbitrum, and ImmutableX have sparked a multichain ecosystem trend.

Looking at 2022, there could be short cycles of punctuated and exuberant euphoria due to Regulations (Stablecoin, Privacy, FATF, ESG), Maturity (of L1/L2 & some middleware), Fatigue (Investor & Founder), Macro uncertainty (Fed, geopolitical, COVID variants). Expect 2022 to be more chaotic than 2021.

Multichain Future – Bridges and Middleware

An ecosystem once defined by its close-knit community and exclusivity has expanded to include governments, businesses, institutional investors, and individual investors, all of whom are becoming more optimistic about the evolving space. With this new popularity, a crossroads has emerged and we have reached a point where the number of people using decentralized technology has exceeded the functionality of the technology itself. As a result, networks are frequently congested, and there is a high demand for solutions. A lot of the problems we’re having could be solved with scaling solutions like bridges, middleware parachains, and other features that make it easy for Web 3.0 users to move between different types of blockchains. We will cover bridges and middleware in detail in next edition of our monthly newsletter.

A slew of different blockchains like Elrond, Solana, Avalanche, Polkadot, and many more gained significant traction in 2021 and quickly took over the market. All of these blockchains are working to improve user experience and address speed and cost scalability issues in order to gain widespread adoption. However, it seems unlikely for a single chain to be able to meet the needs of all the decentralized applications. Consequently, cross-chain protocols and bridges will play a crucial role in developing this multichain future. The blockchain space will go from being an “interesting new technology” to an essential, high-growth industry as a result of this emerging trend of cross-chain communication.

In a multichain world, instead of competing, projects will connect new chains so that the overall user experience is better. In the future, anyone could build anywhere. It is dependent on cross-chain solutions, some of which are already in production. Ethereum Virtual Machine (EVM) compatibility solutions are becoming important parts of the ecosystem, too. These solutions let different blockchains talk to each other without the help of middlemen, just like how the internet works now.

To prepare for Web 3.0, which will be used by over a billion people, we believe that a multichain approach is a way to go, as it will simplify transactions and the lives of end-users. 

A few projects working towards building a multichain future include:

  • SUSHI and Curve: Sushi Swap has been launched on 13 different blockchain networks and Curve Finance has been deployed on 7 networks. Both these exchanges aim to offer the best swap rates to the end-users.
  • Aave: It is an open-source, non-custodial protocol to earn interest on deposits and borrow assets across multiple blockchains.
  • Beefy Finance: It is a Multi-Chain Yield Optimizer platform that allows its users to earn compound interest on their crypto holdings on 10 different blockchain networks.
  • Multichain (formerly known as anyswap): It is a Cross-Chain Router Protocol (CRP) aiming to become the ultimate router for Web3. Multichain already supports token transfers and swaps across 12 blockchains.

Gaming and Metaverse

A big part of our future lives might be spent living in virtual, interconnected worlds also known as the metaverse. NFTs will become the primary building blocks for everything in these Metaverses. Users don’t want to live in a virtual world where their entire identity is at the mercy of a Big Tech company. This idea becomes intuitive when anyone switches social media platforms and has to build back an audience and reputation from zero or when users purchase virtual goods in a game and realize that the game maker controls all of the trading rules, and gamers can’t sell any goods they’ve earned or take them elsewhere.

People also don’t want to live in a virtual world where everyone looks the same, and there is no recourse for identity theft. So there will arise a need for some third-party applications to avoid “sameness” and help us build unique decentralized identities. We need scarce digital objects and people willing to pay talented creators for provably scarce and unique goods.

Axie Infinity, the pioneer of the play-to-earn model has shown signs of growth slowing down. But the play-to-earn gaming trend it has pioneered will be here to stay as it has proven itself to be among the best models of customer acquisition. The funds raised by gaming projects in the tail end of 2021 have them set up for a full cycle of research, experimentation, and development regardless of whether the trend subsides or not. a16z invested in a fundraising round of $150 million into Mythical Games. Enjin announced a $100mm gaming fund. FTX invested $21 million in Faraway Games.

The traditional gaming infrastructure doesn’t allow users to transfer their efforts, asset collections from one game to another. Imagine building a great gaming profile by playing one title e.g. CS:GO for 1000s of hours but being required to start from the very basics when shifting to another title e.g. Call of Duty. The loot project brought the conversation about “composable” NFT primitives for gamers as a potential solution to this problem. We believe there will be a superior play-to-earn version of the Loot project that employs a meritocratic, cross-game fair transfer of goods.

One might argue that we already live in P2E & already stepping into Metaverse.

P2E is not new. Ever since the capital markets matured in US (in 1980s) and further accelerated irreversibly when the first QE happened (in 2008) the world has been in P2E mode dabbling in various assets and liquidity flowing across multiple asset classes & geographies. Most of us have been combating inflation on one side to protect our livelihoods and optimizing our returns on another side to improve our lifestyle. As Moore’s law caught up – high compute possibilities at reasonable cost emerged both in high definition viewing and processing. That led to the emergence of portable and highly immersive gaming. With the convergence of the incentive layer & tokenomics of digital assets, the explosion of P2E in gaming happened led by the resounding success of Axie Infinity.

As global liquidity remains untethered, we will experience convergence, financialization, and virtualization on a scale. Thus, creating a space for Metaverse to rise. Currently, most of us spend a large part of our daily lives virtually – Metaverse will create an immersive interconnected virtual world that will compel us to experience the virtual world more real than the real world.

Welcome to dystopia!

Emergence of Layer 2 Scaling Solutions

Ether, the second-largest cryptocurrency after Bitcoin, surpassed the $500 billion market cap for the first time in October. Scalability has been a key issue for Ethereum as the applications and number of users continue to grow, owing to the explosive growth of decentralized finance (DeFi) and non-fungible tokens (NFTs).

In the last few months, innovative experiments like Metaverse, NFTs, blockchain gaming and DeFi 2.0, have noticed high user interest from not just the cryptocurrency frontiers but also from mainstream users. In the coming months, current transaction times will be unable to accommodate the number of active users and investors that will flood P2E games, NFT gaming, metaverse platforms (The Sandbox, Decentraland, Roblox).

As the momentum continues to build for these innovations, scalability— which most layer 1 blockchains currently lack— will be a catalyst for adoption and this is where layer 2 solutions come in, as they would help eliminate entry barriers— low transaction throughput and high gas costs, democratizing access.

Layer 2 is the future of Ethereum scaling and the only safe way to scale Ethereum while maintaining the decentralization that is so central to the blockchain, according to Ethereum creator Vitalik Buterin in a speech at the 2021 Shanghai International Blockchain Week. Buterin also stated that the current cost of transferring ETH on Polygon Hermez(Layer 2) is $0.25 as opposed to $6.84 on Ethereum. 

Polygon, Loopring, ZKSync, Optimism, and Arbitrum One are some of the Layer 2 solutions that have been released so far and a few more are still experimenting. 

PROJECT HIGHLIGHT – BICONOMY

Biconomy’s mission is to solve User Experience in Web3. Biconomy simplifies blockchain transactions for applications to build on. Biconomy’s tools allow developers to build optimum UX for their users. It’s the invisible underlying layer powering the Web3 ecosystem.

The Biconomy team has 3 brilliant products, each on a journey of its own, yet they never stop building. Biconomy has always been flexible to change, proactively taking feedback from developers and users, upgrading their existing suite of products, and building new ones. If you know of any critical dev tooling product that can be built, do reach out to the team, and be rest assured Biconomy will set up a working group within a week. We have a firm belief in the team’s ability to build world-class products and help accelerate digital asset adoption to billions. Read our investment thesis to know more about the project.

WOODSTOCK IN THE NEWS

  1. Pranav Sharma, Founding Partner of Woodstock Fund, participated in a panel on India’s Crypto Story, hosted by YourStory as a part of the Metaverse Summit.
  2. Pranav Sharma also appeared on the NDTV show “Coffee and Crypto,” where he discussed the decentralized nature of the Web 3 space.
  3. Woodstock was the investment partner of the India Blockchain Accelerator hosted by the Government of Telangana, CoinSwitch Kuber, and Lumos Labs.
  4. Hacken, a cybersecurity firm, entered a strategic partnership with Woodstock. They will be a preferred security vendor for our entire portfolio of 40+ companies.
  5. We partnered with Questbook to host a web 3.0 meet-up in Bangalore.

MARKET NEWS 

  • MicroStrategy purchased US$ 94.2mn worth of Bitcoin in December-2021. This brings up the company’s Bitcoin treasury to 124,391 tokens.
  • Google’s ex-CEO, Eric Schmidt, joined Chainlink Labs as an advisor. He will advise the company on its scaling strategy. 
  • MasterCard’s engineering team helped ConsenSys in the launch of “ConsenSys Rollups”. These rollups can reach a TPS of 10,000 on a private chain.

DeFi

  • The US Senate held a hearing titled “Stablecoins: How Do They Work, How Are They Used, and What Are Their Risks?”. This is another step in the road to developing a sustainable regulatory framework for DeFi.
  • Aave, a lending marketplace, added a new market using real-world assets by partnering with Centrifuge, a tokenization platform for trade receivables and invoices.
  • RadioShack, an electronics retailer, has pivoted to building DeFi solutions.

NFTs

  • The Seattle NFT museum, one of the first physical NFT galleries, will house 30+ high-quality NFTs. 
  • Pepsi launched its NFT collection called Mic Drop. The collection showcased 1893 designs marking the birth year of the company.
  • OpenSea, the largest NFT marketplace, hints at doing an IPO. They hired Brian Roberts as CFO who earlier took Lyft public in 2019.

MARKET DASHBOARD

*Updated on 1st January 2022

Total Market Cap (1 Yr)
BTC Dominance (1 Yr)
ETH Dominance (1 Yr)

Key Market Assets/Indices

Source – Coingecko
Source – Non-Fungible

 Market Movers

*Top 100 coins by market cap

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Questions? Feedback? We’d love to hear from you! Simply reach out to us at contact@woodstockfund.com

Warm Regards,
Woodstock Team

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