With 2021 being a landmark year for the global digital asset market and Web 3.0 ecosystem, the Fundamental Labs team has seen an incredible combination of talent and capital flow into this space. While all-time highs (ATHs) were printed across crypto markets there were several trends that commanded even more attention. The emergence of NFTs, the Metaverse, and GameFi set off a massive wave of innovation (and investment) in the underlying decentralized technology stack and “Web 3.0” rose from being an ambiguous buzz word to become an inevitable trend that promises to substantially change to our work and daily lives.
This change is exciting and rich with opportunities. As Fundamental Labs continues its mission to help entrepreneurs to accelerate their fundamental innovation and mass adoption, we would like to shed light on how to empower Web3.0 and seize the opportunities ahead.
Web3.0 and Crypto
Web 3.0 is the next phase of the evolution of the internet. It aims to be a decentralized version of the virtual world, where users can interact and collaborate intelligently without worrying about the central Web 2.0 servers. To make the web evolution more inclusive and less biased, blockchain technology will be a foundational resource to focus on.
In Benedict Evans yearly presentation, 'Three Steps to the Future'. Web3 means a user can read, create, control his/her data.
Benedict further articulated that Web 3.0 is literally the Great Rebranding of cryptocurrencies and blockchain technology.
This is fascinating to consider and opens a myriad of ways to create value and business ideas. There are several areas that we believe are ripe to excel in 2022. To understand these trends, it's a good starting point to see where we've come from in 2021 and how that shapes our outlook for 2022:
Crypto Mainstream
In 2021, crypto markets (beyond simply Bitcoin) gained mainstream popularity as global leaders like Elon Musk, Tom Brady, Kevin Durant, and others began endorsing crypto on public forums. Meme coins like Shiba Inu and Dogecoin dominated public conversations, with Musk notably shilling his favorites over social media.
As a result, digital assets emerged as one of the hottest alternative investments in recent times.
In keeping with this momentum, total crypto market cap exceeded US$3 trillion for the first time on Nov.8th, 2021, and Bitcoin ($BTC), Ethereum ($ETH), Solana ($SOL) and several other cryptocurrencies touched their ATHs this year.
In fact, a recent report by blockchain data giant Chainalysis revealed that global crypto adoption has grown over 2,300 percent since Q3 2019. As of 2021, Chainalysis estimated global crypto ownership rates at an average of 3.9%, with over 300 million crypto users worldwide.
Coinbase, the largest US cryptocurrency exchange and one of Fundamental Labs' portfolio companies, made its public market debut on the Nasdaq on 14 April, 2021. It was a breakthrough moment for digital assets investors, adding to a sense that the asset class has become “mainstream”.
With more investment comes more innovation, and with more innovation the entire ecosystem will only grow, exponentially, as we move headlong into the future.
As we covered earlier on the rapid adoption of Web 3.0 it's movement towards becoming mainstream had a much different trigger than the rising price of Bitcoin and other coins. It was fueled by NFTs which attracted unprecedented flows of capital in 2021, and will continue into 2022.
NFT Mania
“NFT” was ranked as the top trending Google search in 2021. NFTs, or Non-Fungible Tokens, took the world by storm in 2021 with the sale of an NFT by digital artist Beeple (Mike Winkelmann) for US$69 million, opening the floodgates for scores of other NFT sales by various artists, musicians, actors, and regular users.
The trading volume of non-fungible tokens (NFTs) surpassed $13 billion in the year 2021, according to The Block Research. That figure is a massive 42,988% increase compared to 2020 NFT trading volumes.
The excitement in the market showed us that NFTs are a burgeoning asset class within the space. More than just avatar JPEGs of Punks and Apes, they've become an important part of contemporary art conversation and collections. In the summer digital payments giant, Visa, jumped into the market with the purchase of a CryptoPunk.
NFTs are not limited to showing ownership of a unique PFP, or digitization and tokenization of artworks like Beeble's "Everydays: The First 5,000 Days.", the scope of NFTs has expanded to include music, games, sports and any digital or real-world asset — that can be tokenized while still holding their value and providing unique ownership into the metaverse.
The rise of metaverses has kept NFTs firmly in the spotlight having spawned a new breed of real estate investors looking to grab a piece of digital land through non-fungible tokens. One NFT blue chip is Decentraland ($MANA), an investment made by Fundamental Labs in 2017, which continues to hold its first-mover advantage from NFT to thriving metaverse. To kick off 2022, electronics giant Samsung opened 837X, a virtual replica of its flagship 837 store, in the heart of Decentraland.
The demand for NFTs insatiable and offering creatives and rights holders new avenues to protect their intellectual property and create value. Initially the NFT space has been the domain dominated by Ethereum, powering much of the development. However, as NFTs prosper, they are no longer limited to the Ethereum chain for success, as we have witnessed a number of our portfolio companies with diversified protocols built on other Layer1 chains thriving:
- RMRK.app, the protocol for the next generation NFTs, The RMRK protocol is a system of NFT Legos which allows developers and designers to build composable, equipable, multi-resource NFTs which are multi-chain by default by virtue of being launched on Kusama, the center of a multi-chain universe.
- Metaplex is a Solana-powered protocol that allows for the creation and minting of non-fungible tokens, auctions, and visualizing NFTs in a standard way across wallets and applications, comprised of two core components: an on-chain program, and a self-hosted front-end web2 application.
- Mintbase, the Shopify for NFTs, built on NEAR chain, is a global platform that allows anyone to create NFTs without worrying about technical complexities. Artists can create NFTs to sell digital art, musicians can use them for music, and event organizers can use them to sell tickets for their next event.
The prime watershed moment for NFTs that followed the metaverse narrative is through GameFi protocols.
GameFi:Play-to-Earn
GameFi is the intersection of DeFi and Play-to-Earn (P2E) blockchain gaming inside the Metaverse. GameFi encompasses the economies that become possible by passing ownership of assets to players and incentivizing greater loyalty, engagement, and positive stewardship of these gaming communities - thus changing the types and rules of games.
Axie Infinity's Play-to-Earn (P2E) model — coupled with Guilds' is the real game changer.
According to Token-Terminal, Axie recorded 1.3b$ revenue which dwarfed any other Dapps ever.
The traditional games market in 2021 generated total revenues of $180.3 billion, so even 10% of the traditional "pay-to-play" or "play-to-win" model shifting to "play-to-earn" will bring handsome profits to Web 3.0 users. We are super bullish to see traditional gaming players joining the GameFi craze. Below are a few recent investments supported by Fundamental Labs that we see following this trend:
- Genopets is the first Move-to-Earn MMORPG that rewards the user for exercising his/her mind and body. Transform the real-life movement into $KI tokens to use in battle, craft valuable items, or upgrade the Genopet's style and performance.
- StarSharks is an NFT-GameFi ecosystem based on the BSC chain developed by game players, governance committees, and game developers.
- Solchicks is an ambitious new project aiming to be the leading fantasy NFT PvP and Play to Earn gaming ecosystem on the Solana blockchain. The ecosystem is built around adorable Solchick collectable NFTs.
- NASH Metaverse is a cross-chain galactic Sci-fi crypto game — has integrated Chainlink Verifiable Random Function (VRF) on the Binance Smart Chain (BSC) mainnet.
- Ajuna Network is the First decentralized gaming platform in the Polkadot ecosystem, with an in-house game studio.
- Tristan is a sandbox RPG main game with simulation, PvE, PvP and user generated instance. Tristan aims to lower the barrier to entry to the GameFi revolution and build an ecosystem where players and creators get rewarded.
- Bullieverse is “The Bull Metaverse”. An open metaverse island that focuses on enhancing the experiences of players and creators in the metaverse. Bullieverse is unique in its approach to offer players a platform to form meaningful and cherished connections in a digital place, the Metaverse, the future.
The advent of GameFi has led to the Metaverse taking off in 2021, which is a great credit of Web3.0 infrastructure readiness. If we compare the state we are in with Web 3.0 with the days of DApps (circa 2018) - most of the DApps failed. With the benefit of hindsight, this failure was a result of the difficulties to build something of value when the ideas were so far ahead of the supporting infrastructure. But it's the natural course.
Infrastructure Stack
We are always in a cycle with the sequence full of “reflexivity” in Web 3.0 course. Nick Grossman from USV explained this perspective in his article ‘The Myth of The Infrastructure Phase'. Apps-infrastructure cycle: first, apps inspire infrastructure; then, that infrastructure enables new apps.
Layer1 is the base layer for Web 3.0 infrastructure stack, most of our applications are built on Layer1 chains like Ethereum.
One of the prevailing trends of 2021 has been the growth of Layer1 blockchains and their ecosystems, Total Value Locked (TVL) for various chains was played out in 2021 as follows:
In 2021, Ethereum yet accounted the majority of TVL (63%) of total market, but other chains have seen exponential growth: Terra TVL YoY growth (356x), Polygon TVL YoY growth (17,100x). All of those Layer1s launched their incentive programs to grab market share from Ethereum and employed a variety of strategies to build their own ecosystems.
The “multi-chain” narrative was strong in 2021 and could extend to the whole year of 2022, as various Layer 1 blockchains and Layer 2 scaling solutions emerged to address the scalability problems that have historically plagued Ethereum.
Fundamental Labs is an advocate for multi-chain to increase the blockchain scalability as a whole, the portfolio of Layer 1 is comprehensive, including NEAR, Avalanche, Polkadot, Kusama, Stacks, Nervos, Conflux, PlatON,Binance Coin, etc.
Interoperability is another dimension for Layer 1 chains prosperity. We noticed a lot of development of key infrastructure like Oracles, cross-chain bridges, those middleware have played a pivotal role in the growth of Layer-1 and Layer-2 platforms.
Fundamental Labs has been an early investor of Chainlink, intended to be used to facilitate the transfer of tamper-proof data from off-chain sources to on-chain smart contracts, now has emerged as critical enterprise-grade infrastructure for connecting blockchains to the real world. deBridge, commenced during the Chainlink Spring 2021 Hackathon, is a cross-chain interoperability and liquidity transfer protocol that allows truly decentralized transfer of assets between various blockchains.
Decentralized storage is a niche Web3.0 infra at the intersection of Metaverse and Web 3.0. The current main decentralized storage solutions are the IPFS/Filecoin and Arweave. IPFS pioneered the introduction of the incentive layer Filecoin to ensure the reliable storage of data within the agreed period; and Arweave, through technological innovation, achieves permanent storage of data on the chain.
Stratos is another interesting project backed by Fundamental Labs. Stratos aims to provide scalable, stable, self-balanced storage, database, and computing networks, as well as a robust platform for Web3.0 data processing.
Looking beyond 2022
The apps-infrastructure cycle explains when apps or infrastructure can be built, but it doesn't necessarily explain when to invest in apps versus when to invest in infrastructure. As a result, Fundamental Labs' investment philosophy is anchored around being a long-term, strategic, value investor. Short-term speculation is not our approach.
In July 2021, we announced we would roll out Fundamental Labs Fund V – the fifth of our serial funds that kicked off in 2016. It was constituted within one month with a medium size of $50M refining the thesis of our vintage. Looking ahead into 2022, we will have a new fund with a decent sized $200M AUM to encompass more of the exciting Web3.0 application and infrastructure projects.
Despite the turbulent markets to start 2022 and the prospects that the Fed will remove stimulus, Fundamental Labs maintains an active and positive outlook on the market and continued growth across the trends we've shared. There is no perfect time, therefore we never hesitate to make investments when opportunities arise. Within the first week of the New Year, we have already closed a few new deals and can proudly share some of the areas that we are watching most closely for further investment in the near future:
Web Social
The next frontier of crypto and Web 3.0 is Web Social. New Web Social projects will likely combine DeFi, NFTs & DAOs together—Value moves up the stack to the social layer, Web Social tokens would become even bigger than the governance tokens.
Discussions of Web 3.0 typically focus on user privacy, corporate transparency, and data ownership. But it will also revolutionize a promising industry: the creator economy. The creator economy comprises content creators of all kinds: influencers, artists, journalists, gamers and anyone else making content and connecting with fans.
Web Social applications will provide easier content creation, smarter tools, and new opportunities to publish work. In the world of Web 3.0, content creators will be able to drive revenue through new channels and what's more, it creates absolute transparency regarding a piece's worth and provenance, a more transparent business model. We have just completed a few recent investments:
- RSS3, derived from the best out of RSS, RSS3 is an open protocol designed for content and social networks in the Web 3.0 era.
- SOCOL, a protocol powered by Starknet and ImmutableX, where creators and fans unite forces to create a community-driven DAO.
Those recent investment have great synergy with our existing Web 3.0 portfolio ecosystem: Steem, Theta, Brave(BAT), Dora Factory(DORA), Status (SNT), as well as our portfolio and strategic ecosystem partner Mask Network(MASK).
Decentralized Finance (DeFi)
We were particularly excited by the prospects that Decentralized Finance offers to its users, in 2021, we have seen a few interesting DeFi2.0 projects like Abracadabra, Convex, Olympus, and Tokemak.
Protocol Control Value entails Web 2.0 projects to acquire funds to support their financial applications and protocol goals, rather than simply tapping users' funds through enticing liquidity mining rewards. Compared with DeFi 1.0, the total value locked in DeFi 2.0 is still small.
We anticipate institutions will be increasingly interested in participating in DeFi in 2022. DAOs that offer unregulated, decentralized finance and a new regulated centralized- decentralized finance (CeDeFi) will offer less complex financial services based on DeFi but will hold hands with the regulators of financial markets and banking. This new dynamic will boost the whole market.
Most DeFi platforms are built on Ethereum. Once Ethereum shifts entirely to the PoS consensus in 2022, its network value might increase manifold. Other Layer 1 chains like MATIC, Avalanche, Solana, Terra, NEAR, etc. will strive to divide the load of the DeFi sector. We think it is worth to bet on those DeFi protocols built on other Layer 1 chains.
We have just backed three projects in DeFi space in the first week of 2022:
- Treehouse, one of the most comprehensive DeFi portfolio trackers, leverages quantitative data and analytics to build risk management products and the most comprehensive dashboard in the DeFi space.
- Neptune Mutual, explores new avenues to create user-centric hedging products on the blockchain. By offering stablecoin-based cover pools for accurate risk management, Neptune Mutual aims to attract a steady userbase and growing liquidity to the platform.
- Zecrey protocol provides the most secure cross-chain bridge solution based on zkRollup as well as multichain asset management.
Those recent investments complement our existing DeFi portfolio ecosystem: Loopring, Kybe Network, Math, Sentre, Slope, Qilin, Suterusu, ICHI, BoringDAO, Bounce etc.
In 2022 and moving forward, we anticipate DeFi entrepreneurs will push open the new economy's possibilities to reach new heights.
DAO
Over the course of 2021 we saw DAOs become more mature and mainstream. More people will join DAOs with the same vision or goals, prompting an almost inevitable change in how we define employment moving forward.
The Future of Work is Not Corporate — It's DAOs and Web3.0 Networks
DAOs are a new coordination layer which will eventually replace the traditional model. A DAO is an internet-native organization with core functions that are automated by smart contracts, and with people who do the things that automation cannot (e.g., marketing, software development). DAOs as open economies will power the X-to-earn trend, which will make work more flexible, fluid, and playful than the 9-to-5 regimen we are accustomed to.
One of Fundmental Labs' portfolio companies, SuperDAO, is an operating system for DAOs. SuperDao OS maintains the real-time status of DAO ownership, including tokens, NFTs, promises of future equity, allocation plan, governance structure, and custom roles.
That is certainly an exciting fresh start to work with SuperDAO in building DAOs and the future-of-work. We anticipate more people will be joining DAOs and jumping into Web 3.0 full-time in 2022.
We see 2022 being the year that DAOs shine—like DeFi in 2020 and NFTs in 2021.
Wrap-up
“The future is already here, it just isn't evenly distributed”.
The promise of Web 3.0 is an infinite game. New technology such as crypto assets, Web Social, DeFi, NFTs, Metaverse and the DAOs support the free flow of users, identity, data, and value which is facilitating collaboration and constituting an open digital economy - and ultimately a fairer, more stable and sustainable society.
We hold a super optimistic view of the potential of Web 3.0. There will be giant leaps taken with new projects and aspiring entrepreneurs joining the space as traditional, centralized and decentralized worlds converge. Fundamental Labs remains an active and willing partner to back the boldest entrepreneurs. Together we can build a brighter future.