Funding Focus: Q2 2023

Published: July 10, 2023   |   Last Updated: January 25, 2024
Andrew Cahill
Andrew Cahill
Data Analyst

Key Takeaways

  • VC investment in crypto and blockchain is “down but not out”. Crypto projects/companies raised an estimated $1.6B in Q2 2023. 
  • Infrastructure and Web3 projects snagged the most funding. They raised ~$720M and ~$360M, respectively.
  • DWF Labs has emerged as a major crypto “investor”. Its $200M+ token buying spree is interesting to say the least. 

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    Key Takeaways VC investment in crypto and blockchain is “down but not out”. Crypto projects/companies raised an estimated $1.6B in Q2 2023.  Infrastructure and Web3 projects snagged the most funding. They raised ~$720M and ~$360M, respectively. DWF Labs has emerged as a major crypto “investor”. Its $200M+ token buying spree is interesting to say the…


    The Macro Picture

    When crypto prices go down, funding of crypto projects goes down. Even the Milk Man knows that. According to data from Messari, crypto projects/companies raised ~$1.6B in Q2 2023. 

    On a year-to-date (YTD) basis, total funding of crypto projects stands at $4.2B.  The bad news? Funding in 2023 is on pace to be a lot lower than the ~$28B raised in 2022 and the ~$25B raised in 2021. Womp. The good news? YTD funding of $4.2B is already 20% higher than total funding in 2020 and 55% higher than total funding in 2019. That’s called “looking at the milk glass half full”, frens. 

    Digging one layer deeper, here’s how things panned out across categories:

    Infrastructure and Web3 projects scooped up ~$720M (~45% of Q2 funding) and $360M (~22% of Q2 funding), so they’re first and second on the Milk Man’s delivery route this quarter. But another category started to emerge this quarter. It’s that “AI” thing people have been talking about. That’s third on the Milk Man’s delivery route. 

    For those thirsty for insights across other categories, the full Q2 funding data set used in this article is here for your consumption. 


    Building a global network of blockchains that are scalable, secure, decentralized, and interoperable is no small feat.  Anyone that has used crypto this year knows that blockchain infrastructure is still in need of some TLC. Luckily, funding data shows that VCs are still keen on funding projects working to improve crypto UX. 

    Wallets/Custody ($185M)

    “Not your keys, not your crypto ” is easier said than done.  Storing seed phrases, evading phishing scams, and signing confusing transactions are all still anxiety-inducing challenges that crypto users face in 2023. Crazy, we know. 

    This quarter’s controversy surrounding Ledger showed how even hardware wallets could be subject to security vulnerabilities. The faceplant (and likely fraudulent practices) of a regulated custodian, Prime Trust, provided another reminder of just how ugly custody can get when poorly managed. So, it’s not surprising that VCs continue plowing money into projects working to alleviate these pain points (and make money along the way).

    Unchained Capital was the biggest custody/wallet funding recipient this quarter. It raised $60M to continue building out its suite of Bitcoin financial services which includes a multi-sig custody platform securing ~$2B in customer assets. 

    “Clients share control of their bitcoin between private keys they hold themselves and private keys held by Unchained and other financial services companies … The underlying causes of recent collapses at FTX or BlockFi cannot happen to Unchained’s clients because the company is not able to singularly move or rehypothecate client funds and clients can verify this for themselves at any time.”

    Unchained Press Release (April 2023)

    Magic was the second biggest custody/wallet funding recipient. It raised $50M to build out its non-custodial wallet-as-a-service (WaaS) platform. Woah that’s a lot of words. Magic’s goal? To make Web3 user experiences more akin to Web2 user experiences by abstracting away seed phrases and browser extensions. 

    “Once Magic’s SDK is implemented in a vendor’s code base, wallets can be instantaneously user-created through existing email, social, SMS, or federated logins.

    Magic Press Release (May 2023)

    Interoperability ($155M)

    The Milk Man loves blockchains. But you know what he would love more? Blockchains that can talk to each other. And tokens that can move easily and securely between those chains.  Bridge hacks accounted for more >$2B of lost funds in 2022 alone. So, crypto projects remain focused on building better bridges. And VCs remain bullish on this increasingly important layer of the Web3 infra stack. 

    LayerZero Labs topped the charts as one of the biggest funding recipients this quarter. It announced a $120M raise at a $3B valuation in April.  Like most interoperability projects, LayerZero is aiming to connect all the chains in the blockchain ecosystem. If the Milk Man were a betting man, he’d say that somewhere in the fundraising agreement, the word “token” appeared. 


    Robust blockchain infrastructure sounds good. But usable applications on top of that infrastructure sounds “gooder”.  Web3 projects raised $360M in funding this quarter. Legggo!

    The biggest recipients of this funding were gaming/metaverse projects (~$150M), identity projects (~$115M), and Web3 social platforms (~$50M). 

    Gaming / Metaverse ($151M)

    Web3 gaming has had a big problem: the games simply aren’t fun. On top of that, the “ponzi-like” token models of play-to-earn games like Axie Infinity have left many gamers/investors with a bad taste in their mouth.  But with time (and money), crypto VCs think that could still change. They have continued “spraying” bets across a range of web3 gaming projects. 

    Just this quarter, the Milk Man counted 16 gaming projects that received ~$150M in funding. 

    The VC bet? (Hopefully) one of these games or platforms ends up being the “trojan horse” that onboards the masses to crypto. They should get some clarity on how good or bad these bets were in the next 12-18 months:

    “We’re going to see 40% of the web3 games [ever] built go live over the next 12 to 18 months, which will be a huge amount of attempts or shot-on-goal to have that 100 million players,”

    Robbie Ferguson, CEO at Immutable (TechCrunch, March 2023)

    Identity ($117M)

    One identity-focused project raised a lot of coin this quarter: WorldCoin. The company was co-founded by CEO of OpenAI, Sam Altman, and raised $115M in its Series C.  WorldCoin’s goal is to become a global identity and financial network by verifying humans with retina scans and rewarding them for their actions with native tokens. Eyeball-scan-to-earn, anyone? 

    Critics have raised concerns about the project’s invasion of user privacy and its data security. Just this quarter, some of the project’s third-party infrastructure providers suffered a hack. However, some still feel WorldCoin has the ability to crack the web3 identity nut. Here’s what Blockchain Capital, the lead investor in the Series C, had to say: 

    What at first appeared to be a dystopian attempt to create a global currency with privacy violating (and capital intensive) hardware was actually something else altogether: an entirely privacy preserving solution to an increasingly pervasive problem.”

    Blockchain Capital Blog (May 2023)

    Social ($51M)

    Everyone’s got some sort of beef with the current social media landscape. Privacy, data ownership, fake accounts, and misinformation are just a few of the many bones people have to pick with it. Truly being able to own, monetize, and control your own data is an exciting pitch. And it’s one of the reasons that Web3 social companies raised ~$50M last quarter.

    Lens Protocol, a Polygon-based social media platform, topped the Web3 Social category with a $15M raise this quarter. Lens uses NFTs to represent profiles, followers, posts and all of the actions on its platform. Think of it like a decentralized version of [insert giant centralized social media platform]. 


    All signs point to some sort of AI <> crypto crossroads emerging. What shape it will take still remains uncertain.

    Based on a look at this quarter’s deals, here’s what we know:

    The AI/Blockchain Compute Play ($127M)

    VCs are expressing their “bullishness” on AI and crypto by investing in projects that will supply compute to power AI models and blockchains. Two projects building in the space, Auradine and Gensyn, raised $81M and $43M, respectively this quarter.

    Pinpointing what exactly these companies will actually do is a bit challenging. “AI” is a great marketing tagline, innit?  Here’s what the Auradine fundraise press release had to say:

    Auradine is leveraging technologies like energy-efficient silicon, zero-knowledge proofs and AI to deliver unmatched value to the decentralized applications that are changing how we share and shield our data, think of finance, and build businesses.”

    Auradine press release (May 2023)

    Details surrounding Gensyn were a bit easier to come across. The project is building an on-demand compute protocol aiming to democratize access to the (hard to come by) chips needed to power AI models.

    The realization of its (AI’s) potential requires huge computational power … We’re harnessing the electricity of a new age and making it available to everyone at unlimited scale and fair market prices.

    Ben Fielding, Gensyn co-founder (Gensyn press release, June 2023)

    It also uses a crypto verification network that allows users to determine that machine learning work shared over the protocol has been finished correctly. Gensyn’s economy will be powered by a Substrate-based (i.e., Polkadot ecosystem) layer-1 blockchain that’s slated to go live on testnet later this year. 

    The AI Application Play ($14M)

    The race to build out usable AI <> crypto apps has begun. 

    This quarter Social Future, Orbifi, and Kaito all raised to build out applications that aim to bring the “best of both worlds” to their users. 

    • Social Future’s “Meet Another You” metaverse project will enable users to generate ownable (i.e., NFT-based) 3D virtual worlds and avatars that convey real-time expressions and voices using AI. 
    • Orbifi will allow users to leverage AI to create tokenized (i.e., NFT-based) video game and media assets. 
    • Kaito is building an AI-powered search engine. It will enable users to search the entire crypto social landscape including platforms like Twitter, Discord, governance forums, Mirror, Medium, and podcast transcripts.  

    Last up: WTF is going on with DWF?

    WTF Is Going On With DWF?

    The Milk Man perused every deal this quarter. #doitfortheproaders During his milk-induced deal scanning binge, he noticed something. Out of nowhere, a new (big) investor came onto the scene: DWF Labs.

    WTF Is DWF?

    DWF Labs is a Singapore-based crypto investment company founded in September 2022. It was spun out of Digital Wave Finance, a high frequency crypto trading firm. In just the first half of the year, it has plowed over $280M into crypto projects. 

    That’s a lotta cheddar. Even for someone in the dairy trading business. 

    Where did a company that was founded less than 1 year ago come up with all that dough? It’s a question that many have asked. And DWF has come up with some answers. The company’s Managing Partner, Andrei Grachev, told CoinDesk the funding comes from the “money earned from profits of the high-frequency trading business”

    That could very well be the case. But still, that’s a lot of investments. Does DWF know something other investors don’t? Are they offering some sort of “sweetener” to crypto projects that other investors aren’t? After doing some more digging, the answer seemed to be “yes, they are offering some sort of sweetener”. 

    The deals that DWF participated in fell into two categories:

    1. “Weird ones” – Token sale deals where DWF directly purchased an already established crypto project’s tokens. 
    2. “Normal ones” – Typical early-stage venture deals where DWF purchased the equity (and perhaps tokens as well) of a new crypto project. 

    Let’s get weird.  With the exception of the Yield Guild Games (YGG) token sale, DWF was the sole investor in each of these “weird ones”. Each of these deals entailed DWF purchasing tokens directly from crypto projects with some purchases being as big as $50M. 

    The Milk Man is no mind reader. But if he had to guess, the token sale negotiations probably went down something like this:

    DWF Labs: Yooo sup?! Y’all got some illiquid tokens sitting around?

    Crypto Project: Yoo funny that you ask. Yerrr we got bags 4 dayz. 

    DWF Labs: You like US Dollars? 

    Crypto Project: Yerrr.

    DWF Labs: Hmmm … How ‘bout we give you dollars for some of them tokens? 

    Crypto Project: Perfecto. Take them off our hands at par, right?

    DWF Labs: Nah, chill son. We like tokens. But only at discounts. 

    Crypto Project: Word word, not ideal. But … F it. Let’s make a deal. 

    This is not too dissimilar from how crypto venture funding works at project inception. Crypto projects need to pay developers to code. They need to pay for smart contract audits. And US dollars (or other currencies/tokens besides their pre-launch token) can certainly come in handy.

    But what’s different with DWF is that a lot of these companies and projects have been around for a while.  The Milk Man would classify some of them *cough* EOS *cough* as spoiled milk

    As a percentage of liquid token supply, DWF’s purchases account for an estimated 2% to as high as 20% of the circulating supply of certain tokens. In deals where DWF was not the sole investor (i.e., Yield Guild Games), token purchases represent ~50% of circulating supply. That’s what we call “a new whale in town”. 

    DWF’s value proposition to these crypto project teams is easily summed up:

    “DWF Labs invests in digital asset companies and supports existing markets, enabling digital asset companies to sell their tokens for up-front capital without adverse price impact” – DWF press release (CoinDesk, September 2022)

    If you’re a crypto project in need of cash, DWF can help you out, pronto. This cash can be used by projects to “keep the lights on”, invest in their technology, and fund ecosystem projects. 

    What Does This Mean For Token Holders?

    DWF’s value proposition to individual token holders (or lack thereof) is not as straightforward. An institutional investor buying tokens that you bought at par at an undisclosed discount doesn’t sit great. Nor does the fact that many of these tokens are likely being taken out of project treasuries and inflating token supply.  But hey, life crypto investing isn’t always fair.

    DWF has crafted the messaging around these token purchase announcements to virtue signal their long-term commitment to their partners. But at the end of the day, all they really care about is how much they bought the tokens for and how much they could offload them for. Depending on how steep those discounts were, an attractive exit price could look pretty different for DWF than it does for long-term retail holders.  Some whales are killer whales.   

    How Have DWF Purchases Impacted Price?

    Over the medium term, most of the tokens DWF has purchased have been in a downtrend.  Out of DWF’s five biggest token purchases, here are how the tokens have performed (through 6/30/2023) since DWF invested:

    • ConFlux (CFX) rose as much as ~140% after DWF announced its first purchase in March 2023. But it has since retraced and was only up ~4% from where it was before DWF announced its purchase. 
    • Orbs (ORBS) was down ~28% since its DWF announcement. 
    • Synthetix (SNX) was down ~31% since its DWF announcement. 
    • EOS (EOS) was down ~45% since its DWF announcement. 
    • Algorand (ALGO) was down ~15% since its DWF announcement. 

    Could these declines be due to altcoins in general taking a beating? Maybe.  Could they be due to DWF selling these tokens en-masse? Also, maybe.  DWF has moved a lot of these tokens to exchanges directly after purchasing them. 

    We transfer coins to exchanges, but we never dump it … If we send coins to exchanges, it doesn’t mean that we sell these coins immediately or in a near period of time. We always send coins to exchanges because we store coins on the exchanges

    DWF’s Managing Partner Andrei Grachev (The Block, Apr 2023)

    So it could very well be the case that they are dumping them – even if they’re denying that. 

    Please Don’t Be A Scam, DWF

    DWF’s emergence on the funding scene could be just what DWF is trying to make it sound like: an opportunistic investor extending a lifeline to these (mostly beleaguered) projects and looking to make a buck along the way.  All the cash they’ve invested could have come from their prior business success. It could even represent funds that are “recycled” from earlier purchases and sales. 

    But there is still one thing keeping the Milk Man up at night. 

    Not only is DWF an investor. It’s also a “market maker”.  It has publicly stated that, for some projects, it has purchased tokens and entered into market making agreements. 

    “We have pure investments without market making, we have market-making [agreements] without investment, and we have [them] combined … As a market maker, of course we support our portfolio. If we invest, we will provide much more liquidity to the project compared to if we don’t invest

    DWF’s Managing Partner Andrei Grachev (CoinDesk, April 2023)

    That smells a lot like sour milk “conflict of interest”. 

    The ins and outs of crypto market making are complex to say the least. Most tokens, even some in the top twenty, need a market maker to make sure their tokens are (somewhat) liquid. So, DWF market making for these projects, in and of itself, is not necessarily a bad thing.  But suffice to say that some market makers hold themselves to higher ethical and legal standards than others.  Just like any token holder, DWF wants the tokens that it has purchased to go up. But whether or not it’s market making in a “less than ethical way” to try to make that happen is another question. That would sound a lot like the practices of another firm. Hint: it starts with “Ala” and ends with “meda”. Plz, DWF, don’t pump and dump these tokens. 


    This article is for informational purposes only and should not be relied upon as a basis for investment decisions, nor is it offered or intended to be used as legal, tax, investment, financial or other advice. You should conduct your own research and consult independent counsel on the matters discussed within this report. Past performance of any asset is not indicative of future results.

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