Venture Capital

Crypto Biz: A peek into BlockFi’s secret financials (it’s not pretty)

How much exposure does BlockFi have to Sam Bankman-Fried failed enterprises? A lot, according to accidentally leaked financials.

Crypto lender BlockFi has had a highly tumultuous 12 months. After getting caught up in the Terra fiasco, which resulted in one of the most prolific asset death spirals of all time, the company managed to avoid bankruptcy after receiving a $400 million lifeline in July 2022. The problem? Its lender was FTX US, and we all know what happened next.

Although BlockFi has attempted to separate itself from Sam Bankman-Fried’s fraud in the aftermath of FTX’s collapse, its secret financials tell a different story.

This week’s Crypto Biz delves into BlockFi’s uncensored financials, the likelihood of “Celsius token” ever seeing the light of day and the latest high-profile funding deal in blockchain.

Breaking: BlockFi uncensored financials reportedly shows $1.2B FTX exposure

Just how bad are BlockFi’s financials? For starters, the bankrupt crypto lending firm reportedly has $1.2 billion in assets tied up in Sam Bankman-Fried’s failed companies — FTX and Alameda Research, to be specific. According to CNBC, BlockFi made these details public by accident, adding insult to injury. Nevertheless, the documents show that the company had $315.9 million worth of assets linked to FTX and $831.3 million in loans to Alameda as of Jan. 14. Although BlockFi has attempted to separate itself from SBF’s companies, it looks like it’ll continue to circle the same drain as FTX and Alameda.

BlockFi to sell $160M in Bitcoin miner-backed loans: Report

BlockFi is reportedly looking to sell $160 million in loans backed by 68,000 Bitcoin (BTC) miners as part of its bankruptcy proceedings. That sounds like a good strategy to raise liquid funds, right? Unfortunately, some of these loans have already defaulted and are likely undercollateralized following Bitcoin’s year-long bear market. A legal expert interviewed by Cointelegraph cautioned that the loans are probably “not worth their paper value anymore.” Let’s hope for BlockFi’s sake that the value of the mining equipment used in the collateral isn’t worth less than the value of the loans.

New ‘Celsius token’ may be used to repay creditors: Report

Months before FTX collapsed, crypto lender Celsius filed for bankruptcy after its degen crypto portfolio failed to survive the bear market. Billions in customer deposits now hang in the balance as the company looks for an optimal reorganization strategy. This week, it was reported that Celsius was considering issuing its own token to repay creditors. Of course, this means relaunching its platform. Apparently, Celsius wants to wrap this up in a new publicly-traded company that is “properly licensed.” I’m not sure Alex Mashinsky will ever succeed in crypto again, but here’s hoping Celsius creditors get something in return for trusting him in the first place.

Injective launches $150M ecosystem fund to boost DeFi, Cosmos adoption

If you’re looking for a silver lining in crypto this week, take solace in the fact that companies are once again raising hundreds of millions in venture capital (VC). Chief among them is Injective, the layer-1 blockchain protocol built on Cosmos SDK. This week, Injective announced a $150 million ecosystem fund backed by Pantera Capital, Kraken Ventures, Jump Crypto, KuCoin Ventures, Delphi Labs and others. The fund will support developers building on the Cosmos network — specifically infrastructure solutions, trading platforms and proof-of-stake technology. Will crypto VC rebound strongly in 2023? Only time will tell.

Before you go: Why is crypto pumping?

Bitcoin’s price crawled back above $23,000 this week and appeared to have entered a higher range — raising cautious optimism that the bottom is in. But does anyone know why BTC and the broader crypto market are pumping? In this week’s Market Report, I sat down with fellow analysts Marcel Pechman and Joe Hall to discuss whether the current pump is sustainable. We also explored what could be in store for digital assets in the coming months. You can watch the full replay below:

Crypto Biz is your weekly pulse of the business behind blockchain and crypto, delivered directly to your inbox every Thursday.

DCG companies have laid off over 500 employees as contagion spreads

Cryptocurrency exchange Luno fired 330 employees on Jan. 25, joining other DCG companies in cutting headcounts.

Hundreds of people have lost their jobs at companies owned by crypto venture capital firm Digital Currency Group (DCG), as the long crypto winter, made colder by the FTX collapse, continues to affect the sector. 

Amid the recent layoffs, London-based cryptocurrency exchange Luno announced on Jan. 25 a reduction of 35% in its workforce, letting go of nearly 330 professionals as a result of turbulence in the tech and crypto industries, which affected the firm’s overall growth and revenue numbers.

Luno was part of DCG’s portfolio, alongside HQ Digital, an asset management subsidiary incubated by DCG since 2020 that managed $3.5 billion in assets as of December 2022. HQ’s operations were shuttered in January 2023, affecting at least 26 employees, according to its LinkedIn profile. In a letter to shareholders on Jan. 10, DCG CEO Barry Silbert noted that “while we still believe in the HQ concept and its outstanding leadership team, the current downturn is not conducive for the near-term sustainability of that business.”

Related: Gemini and Genesis’ legal troubles stand to shake up industry further

The current downturn cited by Silbert also affected DCG employees. The company downsized by nearly 13% at the start of the year, cutting 66 jobs. The crypto conglomerate said it was looking to revamp its finances and promote several senior executives as part of a restructuring process. 

Another 115 jobs were axed by DCG’s Genesis subsidiaries. On Jan. 5, Genesis Global Trading announced it was cutting 30% of its team, or 63 employees, less than six months after disclosing plans to trim 20% of its staff, or 52 employees, in August.

Facing liquidity issues after the FTX collapse, Genesis’ lending entities — Genesis Global Holdco, Genesis Global Capital and Genesis Asia Pacific, collectively known as Genesis Capital — filed for bankruptcy protection on Jan. 19, estimating liabilities of up to $10 billion. Genesis Global Trading and Genesis’ spot and derivatives trading entities remain operational.

DCG’s portfolio also includes digital currency asset manager Grayscale, trading platform Tradeblock, financing and advisory company Foundry, and media outlet Coindesk, which is reportedly considering a sale to strengthen DCG’s balance sheet.

The liquidity crisis at Digital Currency Group has sparked fears of upcoming crypto company crashes and their contagious effects on traditional finance. While the industry was experiencing a bull market in November 2021, DCG’s valuation topped $10 billion with the sale of its shares to SoftBank, Alphabet’s CapitalG, and Ribbit Capital. A year later, the company was seeking to raise $500 to fund its portfolio amid liquidity issues.

“We’ve been aggressively cutting costs over the last few months in reaction to the current state of the market, which has included cutting operating expenses, and regrettably, reducing the DCG workforce,” Silbert explained to DCG’s shareholders.

Venture capital investments into blockchain continue to free-fall: Report

Q4 2022 saw investment capital inflows of $2.3 billion, continuing the trend since April sparked by the collapse of Terra and subsequent fallout.

Cointelegraph Research has analyzed all the deals and trends from venture capital in the blockchain industry during the fourth quarter of 2022. The second half of 2022 saw a dramatic decline in capital inflows across all five major sectors of the blockchain industry: decentralized finance (DeFi), centralized finance (CeFi), nonfungible tokens (NFTs), infrastructure and Web3. The first half of 2022 brought in just under $30 billion of investment, while the second half only saw $7.3 billion — a dramatic plunge.

As the crypto industry moves into 2023, Cointelegraph Research has looked at the data from its Venture Capital Database, which contains comprehensive details on deals, mergers and acquisition activity, investors, crypto companies, funds and more. Using this database, Cointelegraph Research crunches the numbers to find the most important trends in the industry. Its latest report explores Q4 2022 and how it relates to the broader picture of 2018 through 2022.

Download the full report here, complete with charts and infographics.

Investments declined starting April 2022

After the fallout from the collapse of Terra in the first part of 2022, the blockchain industry could not seem to attract venture capital back into investing in this industry as it did in 2021 and the start of 2022. There was $30.5 billion invested in 2021, and 2022 was on pace to double that — right up until April 2022, when everything began to decline. September saw a brief bounce in capital investment, but it did not sustain as the year ended, with the last three months staying below $1 billion in investments.

The number of deals also dropped considerably, down to just 182 in Q4. While previous months saw large deals that were always over the $100 million mark, there were only five in Q4 above $100 million. The focus for those 182 deals stayed within the Web3 sector — which comprises subcategories like metaverse, GameFi, identification and a host of others — followed by infrastructure and DeFi. NFTs and CeFi were the least popular in terms of the number of deals, but just looking at those numbers can be misleading.

The most active and least active sectors tie for investment

Web3 was the most popular sector of the blockchain industry for investment, with 616 individual deals, while CeFi was the least popular, with 201 deals. Yet, both sectors brought in a total of $9.2 billion in 2022. The average deal for Web3 was $15.4 billion, compared with CeFi’s average of $46.6 million. Blockchain and crypto projects looking for VC or investment funding in the future may want to pay attention to which sector they fall into so they can better prepare.

This report pulls from Cointelegraph Research Terminals’ expansive database along with analysis from Michael Tabone, senior economist for Cointelegraph Research. Tabone has an extensive background in economics, business, finance, cryptocurrency, blockchain technology and emerging technologies. Besides working for Cointelegraph Research, he is a Ph.D. candidate completing his dissertation, which is focused on the theory and application of DAOs.

Keychain Ventures is a crypto investment firm that invests in different funds in the blockchain space. Keychain Ventures, along with Cointelegraph Research, will be presenting quarterly interviews with VC firms as well as crypto and blockchain projects that have recently gone through a funding round. These interviews will reveal various viewpoints on investment practices from all parties involved.

The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.

Injective launches $150M ecosystem fund to boost DeFi, Cosmos adoption

“DeFi has proven to be a resilient and reliable option for users in the face of the overarching CeFi collapse in 2022,” said Eric Chen, CEO of Injective Labs.

Injective, a layer-1 blockchain protocol founded in 2018, has launched a $150 million ecosystem fund to support developers building on the Cosmos network.

The so-called ecosystem group is backed by a large consortium of venture capital and Web3 firms, including Pantera Capital, Kraken Ventures, Jump Crypto, Kucoin Ventures, Delphi Labs, IDG Capital, Gate Labs and Flow Traders. According to Injective, the consortium is the largest assembled within the broader Cosmos ecosystem.

Developers selected for the fund will receive support through “bespoke token and equity investments,” in addition to mentorship, technical assistance, business development and marketing, Injective said. Projects building decentralized finance (DeFI) and interoperability infrastructure will be given the highest priority. Funds have also been earmarked for projects building trading platforms, scalability solutions and proof-of-stake infrastructure.

When asked how funds would be allocated, Injective Labs’ co-founder and CEO Eric Chen told Cointelegraph, “The ecosystem initiative’s approach to allocating funds is to focus on finding the right fit for each project, rather than being too stringent on a set number for funding.” He added:

“[I]n terms of stage, the group is primarily targeting early-stage projects (seed to Series B), but follow-on funding can also be considered on a case-by-case basis. The size of the funding awarded will vary depending on the stage and needs of the project, with the goal of providing the right level of support for each project to succeed.”

Injective, also known as Injective Protocol, is a decentralized smart contracts platform built using Cosmos SDK, a development kit that promotes faster and more cost-effective infrastructure than Ethereum. Chen said Cosmos provides more versatility, customization options and horizontal scalability than other blockchains.

Cosmos has a market capitalization of roughly $3.7 billion, making it the 20th largest blockchain network, according to CoinMarketCap.

Related: DeFi problems and opportunities in 2023: Market Talks

DeFi entered public discourse in the summer of 2020, with several prominent projects kicking off the crypto bull market shortly after Bitcoin’s quadrennial halvening. Although DeFi activity has slowed over the past year, the sector has been largely immune from the issues plaguing centralized finance, or CeFi, platforms.

“The decentralized nature of DeFi protocols allows for more transparency and true ownership over funds, which will always be a key advantage over centralized finance,” Chen further explained.

Blockchain developer QuickNode raises $60M at $800M valuation

Like other blockchain developers, QuickNode is pivoting sharply into Web3 — a sector that has attracted keen venture capital interest.

Blockchain development platform QuickNode has closed a $60 million funding round as part of a global expansion intended to onboard more users and developers to Web3 applications. 

The Series B raise, which valued QuickNode at $800 million, was led by venture capital firm 10T Holdings, with participation from Tiger Global, Seven Seven Six and QED, the company announced on Jan. 24.

QuickNode’s management said the capital would fund its global expansion and streamline the transition to Web3 “at scale,” which includes providing developers with the deployability required to onboard new blockchain users.

The Series B was the company’s most significant funding round since October 2021, when it raised $35 million as a seven-month-old startup. Between raises, QuickNode claims to have increased its user base by over 400%. The company currently provides infrastructure services for over 16 blockchains, including Ethereum, Matic, Optimism, Arbitrum and Solana.

Venture capital funding for blockchain projects has dried up recently, but Web3-focused plays continue to garner interest. As reported by Cointelegraph, Hong Kong investment fund HashKey Capital recently closed a $500 million funding round to back up-and-coming projects in the Web3 arena.

When asked about the current environment for venture capital, QuickNode’s chief operating officer Jackie Kennedy told Cointelegraph “The funding climate has indeed shifted where funds are changing their criteria on who and what to invest in […] Investors are focusing more on efficiency metrics like breakeven, gross margins and burn over growth at all costs.”

Related: Crypto could solve venture capital’s due diligence problem — VC exec

By the third quarter of 2022, Web3 projects accounted for roughly 44% of blockchain funding deals, according to Cointelegraph Research. The caveat is that a universally agreed-upon definition of Web3 remains illusive. For now, the concept refers to some future iteration of the internet that’s more decentralized, permissionless and user-focused.

In a written response to Cointelegraph, QuickNode co-CEO and co-founder Dima Shklovsky described Web3 as a “version of the web which leverages blockchain technology to enhance ownership, trust, governance, value exchange, and privacy,” adding that “It is the Internet for the modern world.”

FTX VCs liable to ‘serious questions’ around due diligence — CFTC Commissioner

The lack of recordkeeping of FTX coupled with “an auditor no one’s ever heard of” forces the CFTC to ask questions about the mindset of the institutional investors.

Amid ongoing investigations around the defunct crypto exchange FTX, the Commodity Futures Trading Commission (CFTC) questions the due diligence conducted by institutional investors and their accountability regarding the loss of users’ funds.

CFTC Commissioner Christy Goldsmith Romero stated that VCs that had to write down their investments in millions of dollars to nearly zero raises “serious questions” about the due diligence conducted over the last year, speaking to Bloomberg.

CFTC Commissioner Christy Goldsmith Romero questioning the VCs that once backed FTX. Source: Bloomberg

She raised concerns about FTX CEO John Ray’s revelations in court about not having any records and controls over the exchange’s financials.

The lack of recordkeeping coupled with “an auditor no one’s ever heard of” forces the CFTC to ask questions about the mindset of the institutional investors. In this regard, Romero asked a series of questions:

“How is that possible? So do they turn a blind eye to it? Were they just distracted by this promise of innovation?”

FTX founder and former CEO Sam Bankman-Fried used trust as a marketing technique to gain investor confidence. However, Romero echoed the current investor sentiment while stating that “We know now that that’s not true.”

As a result, she believed that the VCs backing FTX ignored the red flags when it came to due diligence, further questioning their involvement.

“So was there some conflicts that prevented them (VC backers) from really paying attention to the due diligence and the facts that they were uncovering?” asked Romero while concluding the topic at hand.

Related: FTX reboot could falter due to long-broken user trust, say observers

Shark Tank star and investor Kevin O’Leary, who once supported FTX, warned against the possible fall of unregulated crypto exchanges. He stated:

“If you’re asking me if there’s going to be another meltdown to zero? Absolutely. One hundred percent it’ll happen, and it’ll keep happening over, and over and over again.”

As Cointelegraph previously reported, based on a report by the National Bureau of Economic Research, up to 70% of the trading volume on unregulated exchanges is wash trading.

Crypto Biz: SBF’s newest Excel spreadsheet reveals all

FTX’s debtors are applying “Herculean” effort to unearth the exchange’s remaining assets. Meanwhile, Sam Bankman-Fried claims FTX US is solvent.

Large enterprise businesses spend tons of money keeping track of their financial dealings — think accountants, financial analysts, consultants and enterprise-grade accounting software. Sam Bankman-Fried, meanwhile, used Microsoft Excel. 

On Jan. 17, in another sloppy Excel spreadsheet, SBF revealed that FTX US was solvent. The Excel file purportedly showed customer balances, bank deposits and assets held in cold storage. “S&C forgot to include bank balances” of roughly $428 million, SBF said, referring to FTX’s former legal counsel Sullivan & Cromwell. “Once you add those back in, you get in the neighborhood of my prior balance sheet” of around $350 million, he said.

This week’s Crypto Biz explores the “Herculean investigative effort” to identify billions in liquid FTX assets. We also give you the latest on the ongoing Digital Currency Group saga.

FTX: It took ‘Herculean investigative effort’ to identify $5.5B in liquid assets

SBF wasn’t the only one seeking to unearth FTX’s remaining balances. The bankrupt exchange’s debtors have identified $5.5 billion in liquid assets, including $1.7 billion in cash, $3.5 billion in crypto assets and around $300 million in securities. “We are making important progress in our efforts to maximize recoveries, and it has taken a Herculean investigative effort from our team to uncover this preliminary information,” said FTX CEO John Ray. Before you get too excited, know there is still a “substantial shortfall of digital assets,” according to FTX’s debtors. This means FTX users shouldn’t expect to be made whole anytime soon.

Silvergate reports $1B net loss in the fourth quarter of 2022

The fallout from crypto winter continues to reverberate across the industry, with digital asset bank Silvergate reporting a massive $1 billion net loss in the fourth quarter. In a report published by the United States Securities and Exchange Commission, Silvergate disclosed $7.3 billion of customer deposits in Q4, down from roughly $12 billion in the third quarter. After getting wind of the news, credit rating agency Moody’s Investors Service downgraded Silvergate’s rating from Baa2 to Ba1. That’s junk status for those of you keeping track. It’s all starting to make sense why Silvergate laid off 40% of its staff in early January.

Digital Currency Group halts dividends in an effort to preserve liquidity

The bad news surrounding Digital Currency Group, or DCG, continues to mount after the capital market company informed investors it would halt quarterly dividend payments indefinitely. It’s no secret that DCG is facing liquidity constraints tied to its Genesis Global Trading subsidiary. The issues surrounding Genesis have been dragged out in public by Gemini co-founder Cameron Winklevoss, who penned a letter to DCG’s board accusing the company of orchestrating “a carefully crafted campaign of lies” to hide the massive hole in Genesis’ balance sheet. At last check, it was estimated that DCG owed its creditors over $3 billion.

Hong Kong investment fund raises $500M to push mass adoption in Web3

Month after month of “down only” in crypto markets has left many of us jaded about the industry’s future. But behind the scenes, venture capital continues to pour millions into promising crypto-focused use cases. This week, Hong Kong investment manager HashKey Capital announced a $500 million fund to support the future of Web3 adoption. The new FinTech Investment Fund III will invest primarily in projects at the intersection of blockchain infrastructure, toolings and applications that can harness Web3 technology. “Web3 is growing too fast to be ignored,” HashKey investment director Xiao Xiao told Cointelegraph. “Many traditional institutions and internet giants are interested in crypto. Some are learning how to participate in this paradigm shift.”

Before you go: Is Bitcoin in a bull run or bull trap?

Bitcoin’s (BTC) price shot up more than 25% over the past week, marking its biggest seven-day rally in nearly two years. Naturally, investors are asking whether the bear market is over. Although there’s a decent chance that Bitcoin has bottomed, I wouldn’t get too excited about a prolonged bull rally just yet. In this week’s Market Report, I sat down with fellow analysts Marcel Pechman and Joe Hall to discuss BTC’s short and medium-term outlook. You can watch the full replay below.

Crypto Biz is your weekly pulse of the business behind blockchain and crypto, delivered directly to your inbox every Thursday.

Former FTX US president raises $5M for new crypto software firm

Brett Harrison departed FTX US roughly two months before FTX Group filed for bankruptcy, citing “cracks” in his relationship with SBF.

The former head of FTX US is launching a new cryptocurrency software company and has raised $5 million from several investors, according to Bloomberg. 

Brett Harrison, who served as president of FTX US between May 2021 and September 2022, has received backing from Coinbase Ventures and Circle Ventures to launch a new software startup. SALT Fund, Motivate VC, P2P Validator, Third Kind Venture Capital, Shari Glazer of Kalos Labs and Anthony Scaramucci also participated in the seed round.

His new startup, dubbed Architect, will develop trading software for large institutions looking to access crypto markets. He told Bloomberg that he hopes Architect “will allow people to get their confidence back in trading in this industry.”

Harrison departed FTX US months before the company collapsed under the shoddy guidance of Sam Bankman-Fried, who headed the global FTX cryptocurrency exchange and several other companies under its purview. FTX US was one of the roughly 130 companies under FTX Group to file for bankruptcy in November.

In a lengthy Twitter thread on Jan. 14, Harrison explained why he departed the crypto exchange. He claimed that “cracks began to form” in his relationship with Bankman-Fried six months into his tenure and that the former FTX CEO exhibited “total insecurity and intransigence” anytime he was confronted with conflict.

Related: FTX profited from Sam Bankman-Fried’s inflated coins: Report

Bankman-Fried faces eight criminal charges and up to 115 years in prison for allegedly defrauding investors and violating campaign finance laws, among other infractions. On Jan. 5, he pled not guilty on all counts.

Crypto venture capital began to dry up in the second half of 2022 as the bear market took its toll. The collapse of FTX and its contagion effects appear to have placed further pressure on capital raises as crypto markets reorient to the new reality. According to Bloomberg, Harrison initially aimed to raise as much as $10 million for Architect at a $100 million valuation.

Crypto could solve venture capital’s due diligence problem — VC exec

Due diligence has always been an issue in the venture capital space according to a VC executive, but crypto offers a solution: A public and immutable ledger.

Venture capitalists battling with the difficulties of proper crypto firm due diligence should be looking at getting back to the basics — to “trust the chain,” a crypto-focused venture fund executive argues. 

Speaking to Cointelegraph, John Lo, head of digital assets at Recharge Capital — a $6 billion fund with crypto and decentralized finance (DeFi) projects on its portfolio — said that FTX shook the “confidence in this industry.”

“There will be a lot of soul-searching,” he said. According to Lo, due diligence has always been a problem in the venture space, even outside of crypto.

He said the action plan taken by crypto venture capitalists in response to the FTX collapse will be a crucial deciding factor for either an effective recovery or a deepening of the industry crisis.

However, Lo argues that the crypto industry provides the world with a step toward a solution, a public and immutable ledger, arguing:

“Crypto VCs specifically need to go back to crypto principles – trust the chain. We’re going to see a lot more businesses operate on-chain, and VCs rely on on-chain data to perform more thorough diligence.”

“We’re going to see better tools to distill and track on-chain data, in fact, we may even see entire on-chain businesses wrapped into NFTs and sold, optimizing arduous M&A processes,” he added. 

The total funding raised in the crypto venture capital last year exceeded 2021, with $30.3 billion secured by crypto projects, Cointelegraph Research’s VC Database shows.

The last quarter of 2022 saw the lowest capital inflow to the industry in two years with only $2.8 billion allocated across 371 deals according to a Jan. 1 tweet from Alex Thorn, head of research at Galaxy Digital.

FTX’s meltdown caused a negative sentiment across the industry, but the funding decline also reflects the macroeconomic scenario, said Lo.

“A high-interest environment does not bode well for risk-on industries. Venture usually lags, and we’re likely to see markdowns,” noted Lo. He believed as 2023 goes forward and the macroeconomic landscape stabilizes, the industry will regain stability as well.

“It is probably a good thing bad actors and bad practices are shaken out earlier rather than later.”

As the year progresses, Lo predicted the industry will see more capital deployments than inflows with an emphasis on on-chain products and services rather than tokens.

A number of challenges that surfaced during the bull market will likely be in the spotlight too, including user experience, wallets, user onboarding and compliance.

“Key narratives are forming regarding blockchain scalability, liquid staking, real-world assets, decentralized exchanges and platforms,” Lo stated.

“These optimizations after a frenzied period of experimentation will be key to growth, and as always, there are teams working in stealth on groundbreaking products yet to be seen,” he said, adding:

“Crypto is alive and well.”

Crypto could solve venture capital’s due diligence problem — VC exec

Due diligence has always been an issue in the venture capital space according to a VC executive, but crypto offers a solution: A public and immutable ledger.

Venture capitalists battling with the difficulties of proper crypto firm due diligence should be looking at getting back to the basics — to “trust the chain,” a crypto-focused venture fund executive argues. 

Speaking to Cointelegraph, John Lo, managing partner of Digital Assets at Recharge Capital — a $6 billion fund with crypto and decentralized finance (DeFi) projects in its portfolio — said that FTX shook the “confidence in this industry.”

“There will be a lot of soul-searching,” he said. According to Lo, due diligence has always been a problem in the venture space, even outside of crypto.

He said the action plan taken by crypto venture capitalists in response to the FTX collapse will be a crucial deciding factor for either an effective recovery or a deepening of the industry crisis.

However, Lo argues that the crypto industry provides the world with a step toward a solution — a public and immutable ledger — arguing:

“Crypto VCs specifically need to go back to crypto principles – trust the chain. We’re going to see a lot more businesses operate on-chain, and VCs rely on on-chain data to perform more thorough diligence.”

“We’re going to see better tools to distill and track on-chain data, in fact, we may even see entire on-chain businesses wrapped into NFTs [nonfungible tokens] and sold, optimizing arduous M&A processes,” he added. 

The total funding raised in the crypto venture capital last year exceeded 2021, with $30.3 billion secured by crypto projects, Cointelegraph Research’s VC Database shows.

The last quarter of 2022 saw the lowest capital inflow to the industry in two years, with only $2.8 billion allocated across 371 deals, according to a Jan. 1 tweet from Alex Thorn, head of research at Galaxy Digital.

FTX’s meltdown caused a negative sentiment across the industry, but the funding decline also reflects the macroeconomic scenario, Lo said.

“A high-interest environment does not bode well for risk-on industries. Venture usually lags, and we’re likely to see markdowns,” noted Lo. He believed as 2023 goes forward and the macroeconomic landscape stabilizes, the industry will regain stability as well.

“It is probably a good thing bad actors and bad practices are shaken out earlier rather than later.”

As the year progresses, Lo predicted the industry will see more capital deployments than inflows with an emphasis on on-chain products and services rather than tokens.

A number of challenges that surfaced during the bull market will likely be in the spotlight too, including user experience, wallets, user onboarding and compliance.

“Key narratives are forming regarding blockchain scalability, liquid staking, real-world assets, decentralized exchanges and platforms,” Lo stated.

“These optimizations after a frenzied period of experimentation will be key to growth, and as always, there are teams working in stealth on groundbreaking products yet to be seen,” he said, adding:

“Crypto is alive and well.”