Understanding OKX Ventures' Investment Landscape in 2021: Expanding into Growth Tracks, with a Focus on NFT Infrastructure Platforms

Author: OKX

Original Title: "OKX Ventures 2021 Investment Review: Covering Hot Tracks and Supporting the Ecological Construction of Leading Projects"

2021 was a year of rapid development and historic breakthroughs in the crypto ecosystem: influenced by the macroeconomic environment, Bitcoin reached a historic high of $69,000. Driven by institutional funds and market sentiment, the total market capitalization of the crypto market also surpassed $3 trillion; diversified on-chain activities, led by GameFi, showed a prosperous scene, with metrics like TVL steadily climbing; Ethereum, starting from the London upgrade, moved towards the grand goal of ETH2.0 (also known as the consensus layer), while the Layer2 sector emerged, and many new public chains rose rapidly.

OKX Ventures has long been committed to promoting the prosperity of the Crypto Ecosystem, aiming to support the development of quality projects, having invested in hundreds of projects covering core tracks such as NFT, GameFi, DeFi, Layer2, and Web3.0, participating in the ecological construction of over 90% of leading projects. At the same time, OKX Ventures, in collaboration with popular public chains like Solana, Near, Polygon, and Avax, established an ecological fund to support their ecological projects.

Below, we will review the development process of the market in 2021, deduce future trend judgments, and provide examples of some projects that OKX Ventures has laid out under different trends.

DeFi's Unabated Popularity

In 2021, the DeFi ecosystem continued the rapid momentum of the previous year's "DeFi Summer." According to data from The Block, the total value locked (TVL) in protocols soared from $16.1 billion to $101.4 billion, with user data also reaching new highs. Meanwhile, the market saw the emergence of a large number of high-quality native on-chain projects, with the total locked value (TVL) of DeFi protocols reaching $247.12 billion.

High-quality DeFi projects continued to emerge, with more diverse Dapp applications, more mature economic models, and a more user-friendly interactive experience, sufficiently meeting users' increasingly rich on-chain activity needs. In this field, OKX Ventures invested in promising DeFi projects such as Acala, Deversifi, Swivel, Persistence, and SSV.

The Prosperity of Layer2 & Public Chains

As the leader of the Dapp ecosystem, Ethereum maintained its leading position in terms of capital accumulation and financial innovation over the past year, with both market capitalization and the number of Dapps reaching new highs. With the ongoing transformation towards ETH2.0, the prospects are promising.

This year, the on-chain ecosystem experienced rapid growth, with the user base multiplying. However, the issues of congestion on the Ethereum main chain and high Gas Fees remained unresolved, with performance issues continuing to hinder user participation and limit ecological development. Restless market funds sought greater profit margins, developers pursued a more open and inclusive development environment, and users were eager for a better trading experience. Thus, Layer2 scaling solutions and new public chains became the new hotspots of 2021.

Layer2 refers to a series of off-chain scalability solutions that do not affect the public chain itself, achieving scalability improvements through other means, i.e., off-chain enhancements. These solutions include state channels, sidechains, Plasma, and Rollups. Moreover, Layer2 scaling is not a compromise of an intermediate state but a long-term solution; after the successful launch of Ethereum 2.0, the Layer 2 scaling mechanism can coexist with Ethereum 2.0's sharding expansion.

Therefore, OKX Ventures focused on scaling projects, investing in Arbitrum, zkSync 2.0, Connext, Aurora, and Metis, which are dedicated to scalability solutions.

Taking Arbitrum, the largest Layer2 project on the ETH network, as an example: its total locked value reaches $280 million, accounting for 51.74% of the L2 market share, leading in TVL. Arbitrum builds sustainable infrastructure by reducing costs and improving efficiency, powering DApps with greater throughput in an efficient and secure manner.

Matter Labs' zkSync also performed well:

So far, zkSync's TVL has reached $58.51 million. With continuous improvements in zkSync's functionality and an increasing number of users migrating to zkRollups for a better trading experience, this figure is expected to grow further.

Data source: https://l2beat.com/projects/zksync/

In addition to the rise of Layer2, the overflow of Ethereum's ecological resources has also provided many emerging public chains with opportunities to rapidly rise by building Dapp ecosystems. This year, emerging public chains attracted a large number of developers and users by enhancing performance and lowering transaction costs and barriers, officially ushering in an era of coexistence and mutual prosperity of multiple chains.

According to TVL share, the top six public chains in the past year were Ethereum, Fantom, Terra, Binance, Avalanche, and Solana.

Although Ethereum's DeFi protocols remain the most active, innovative DeFi applications on other public chains also have great development potential and imagination space. OKX Ventures, together with public chain ecological funds, has strongly supported and invested in these projects.

The Complementary Relationship of the Metaverse Giants: NFT and GameFi

2021 is known as the first year of the Metaverse. On one hand, it is inseparable from significant advancements in technologies such as VR and 5G, the increasing demand for digital activities under the pandemic environment, and the "All In" strategies of tech giants like Facebook. On the other hand, it can be attributed to the rapid development of the two foundational modules of the Metaverse: NFT and GameFi. NFTs solve the issue of rights confirmation in the Metaverse world, while GameFi builds the economic model of the Metaverse, providing more references.

GameFi refers to presenting decentralized financial products in a gaming format, gamifying the rules of DeFi, and turning game items into NFTs. A notable feature is that users' assets become equipment or tools in DeFi games, allowing users to earn profits or rewards while participating in the game.

With the popularity of Axie Infinity, a new Play-To-Earn economic model has emerged. Currently, most GameFi gameplay mainly includes role-playing, virtual space, nurturing and combat, and multiplayer construction. Compared to the previous liquidity mining model, GameFi projects offer stronger interactivity, experience, and immersion with users, as well as higher fun. For example, many games use NFT pets for breeding, use NFT equipment to enhance skills, stake NFTs for profits, or introduce PK battle modes, allowing users to earn money while playing games.

The rise of GameFi not only showcases the progress of on-chain finance and the potential for innovation in social production relationships but also reveals the embryonic form of the Metaverse economy.

OKX Ventures is optimistic about the long-term development of the GameFi track and began to focus on this field in early 2021. OKX Ventures founder Dora believes: GameFi can be simply understood as NFT + DeFi, but it leans more towards DeFi. On one hand, GameFi integrates DeFi into games, gamifying DeFi to make games more interesting, thereby promoting the development of the Game ecosystem; on the other hand, GameFi provides players with more entry methods and opportunities to earn more profits through liquidity mining and other means.

GameFi is the concept of "gamified finance" under the integration of DeFi and NFT, presenting financial products in a gaming format and gamifying the rules of DeFi.

GameFi is an inevitable result of the development of DeFi and NFT, and its value lies in enabling participants to enjoy the fun brought by games while also obtaining real profits. Compared to the traditional game's "Deposit to Play," GameFi is "Play to Earn," where the former involves spending money to recharge and then play, while the latter allows users to earn money while playing games, representing a revolutionary difference.

Therefore, OKX Ventures has focused on the upstream and downstream industries of GameFi, investing in high-quality GameFi projects such as Big Time Studios, Relay, Dehorize, Gods Unchained, and Chain Guardian.

In 2021, the total number of global gamers approached 3 billion, marking a 5.3% year-on-year increase compared to 2020, indicating that the gaming industry is experiencing strong growth momentum and still has significant room for upward movement.

Although the combination of gaming and blockchain still has a significant gap compared to the user base of traditional gaming, the speed of data growth is also remarkably fast. DappRadar data shows that a total of 1,334 gaming Dapps have been launched and deployed across the network.

Since July 2021, data from blockchain games has surged, with the number of players growing from 80,000 in early April to 1.248 million in December, and daily trading volume increasing from around $500,000 in early April to an average of around $200 million, with the highest daily trading volume exceeding $850 million.

With the rapid growth of both blockchain game projects and player numbers, two sub-tracks have emerged:

First, the characteristics of blockchain games dictate that their on-chain interactions are very frequent. High Gas fees and on-chain congestion are pain points that both players and developers find hard to endure, leading people to seek infrastructure platforms with superior performance. Public chains with more user-friendly interactive experiences and development environments have begun to gain favor, and some new gaming platforms have emerged. For example, WAX has become one of the most popular blockchains for chain games.

Second, the total financing scale of the GameFi sector approached $4 billion in 2021. In addition to traditional institutions and companies launching special funds to support the development of the GameFi ecosystem, many gaming guilds, essentially DAOs, have also become new financing channels and are actively involved in the construction of the GameFi ecosystem. Today, gaming guilds like Yield Guild Games have become an indispensable part of the GameFi ecosystem.

In terms of gaming guilds and platforms, OKX Ventures has invested in high-quality projects such as YGG SEA, Blockchainspace, Infinity Force, Lootex, Gamee, and Kollect.

GameFi, through its gamified setup, has given NFTs more practical value. The NFT items within it are no longer just goods waiting to be sold on NFT trading platforms but can also be traded directly in-game markets, with the entire trading process being simpler than in traditional games. These factors directly contributed to the explosion of the entire gaming NFT sector in 2021.

As one of the two foundational modules of the Metaverse, NFTs not only serve as tools or equipment in blockchain games but have also achieved remarkable results in areas such as art, collectibles, avatars, and film music.

In 2021, the NFT market saw the emergence of influential and wealth-generating phenomenon products like CryptoPunks, BAYC, and Loot, with auction prices for NFT artworks reaching new highs at a terrifying speed. Leading companies across various fields, such as Disney, Porsche, Coca-Cola, and Burberry, have all made moves in this space; celebrities like Curry, O'Neal, Yu Wenle, Lin Junjie, Jay Chou, and Pan Weibo have also ventured into NFTs and publicly voiced their support.

According to data from Footprint Analytics, by the end of 2021, the cumulative trading volume of NFTs reached $21.5 billion, while before 2021, the cumulative trading volume was only $120 million, marking a 200-fold increase in just one year. Against the backdrop of the increasingly booming Metaverse, NFTs have also been referred to as the key to the Metaverse world.

NFT infrastructure and platforms are also key areas of focus for OKX Ventures, with well-known projects like waxp, efinity, metadojo, Bit.Country, and AlchemyNFT receiving funding and traffic support.

Web3.0: A Crucial Period for Internet Transformation

Web1.0 can be simply understood as a read-only network, Web2.0 as a read-write network, while Web3.0 promises to provide a read-write network without intermediaries, i.e., a decentralized internet. Web3.0 is more ambitious than Web2.0 because Web2 is about companies trying to extract value from people, while Web3 is about communities creating value for people.

Over the past decade, the internet-based Web2.0 has tended towards centralization. For example, Google provides the fastest and most convenient search service, controlling 74% of search traffic.

Facebook built the largest social network, gaining control over the online identities of 2.2 billion people. However, with the emergence of more monopolistic internet companies and issues like information privacy breaches, Web2.0 has come under significant scrutiny. Once convenient internet companies have accumulated excessive power, and under this centralized storage system, users seem to be mere tools contributing traffic and data.

In the world of Web3, people can control their data through personalized accounts, seamlessly switching from social media to email to shopping, creating public records of all these activities on the blockchain. Therefore, Web3.0 is more open, trustless, and permissionless. Blockchain-based social networks, transactions, and businesses will grow and thrive in the coming years, democratizing the internet, creating a fairer competitive environment, and changing the lives of many.

In the realm of Web3.0, OKX Ventures has invested in projects like Pocket Network, Octopus, and Joystream, demonstrating confidence in the development of the next generation of the internet.

Future Trend Judgments About the Market

In 2021, the crypto industry witnessed numerous milestone events: Bitcoin and Ethereum both broke new price and market capitalization records; Coinbase went public on NASDAQ; NFTs became the buzzword of the year, creating an exceptionally explosive out-of-the-box effect; Tesla announced support for Bitcoin and Dogecoin payments; the U.S. passed its first Bitcoin futures ETF; El Salvador declared Bitcoin as legal tender; and the blockchain game Axie generated daily revenues surpassing Honor of Kings…

In 2022, the development trends of the crypto industry are particularly important for investors and institutions.

Trend 1: Accelerated Expansion of the Metaverse

The term Metaverse has become an undeniable presence. The Metaverse is a large network focused on social connections in a 3D virtual world, encompassing both the physical and virtual worlds and integrating with the virtual economy. It not only utilizes material information from the universe but also frees itself from the complex laws of nature, maximizing human subjectivity.

In an ideal state, the Metaverse allows users to engage in any experience or activity, leading to many application scenarios, such as virtual office platforms, virtual shopping malls, and video games in the business sector, field trips without location and time constraints in education, and virtual house tours in real estate. What is lacking in the real world can be supplemented in the virtual world through computer means, and with the advancement of computer technology, the application scenarios of the Metaverse continue to expand.

If the Metaverse was previously just a distant imagination, the rapid emergence of foundational components, NFTs, and GameFi is bringing the accelerated realization of the Metaverse closer to possibility. Facebook's rebranding to "Meta" seems to mark just the beginning of the Metaverse becoming a market theme.

Trend 2: Web3.0 Continuation of Development

Web3.0 is the identity layer of the internet, allowing users to own their identities online and have absolute control over the degree of information disclosure, without having to relinquish ownership of personal information due to the monopolization of social media networks. Additionally, Web3.0, based on blockchain technology, allows users to enjoy the dividends brought by the expansion of platform ecosystems without worrying about privacy and security issues. In other words, the value generated during user interactions will belong to the users rather than the developers.

The essence of Web3.0 is the process of returning operational power to users, at which point various decentralized internet applications will be managed by users instead of developers.

Currently, Web3.0 is still a topic of considerable debate, with even the very accommodating Elon Musk expressing skepticism about its application scenarios and value. However, it is undeniable that the traditional internet has entered a clear bottleneck, and Web3.0 is the keyword for a paradigm shift and a remedy for the pain points of the current Web2.0.

Although the practical applications of the Web3.0 concept are still limited, mainly focusing on storage, decentralized social networking, payments, and domains, it is believed that as more teams and companies join the development of Web3.0 and more composable applications integrate into it, this currently somewhat vague concept will gain more mainstream acceptance.

Trend 3: New Cooperative Organizations - DAO

Decentralized Autonomous Organizations (DAOs) are a form of digital world organization based on blockchain technology. They possess characteristics such as information transparency, community autonomy, and freedom of openness. It can be said that the flat organizational structure of DAOs can integrate the dispersed individual powers through smart contracts, maximizing collective intelligence and avoiding biases and errors in centralized decision-making. At the same time, the structure and characteristics of DAOs also give them an advantage in flexibility.

2021 was a year of rapid development for DAOs, with the ecosystem taking shape (the cumulative number of organizational members and token holders exceeding 1.3 million) and showcasing unlimited potential as a new cooperative method. According to statistics, as of January 2022, there were 4,157 DAO organizations in the industry, covering investment, application, and governance directions, encompassing various fields such as development tools, services, social networking, creation, and collectibles.

Currently, DAOs still face issues such as governance attacks due to vulnerabilities in smart contracts. However, it is believed that with the further development of modular operating systems for DAOs and the improvement of various services, the DAO ecosystem will advance in interoperability and composability, continuously expanding its boundaries. Major organizations and institutions will also participate in this experiment of shifting cooperative organizational paradigms.

Trend 4: The Explosion of DEX Derivatives

Derivatives are one of the key elements of all mature financial systems. Looking at the development of traditional financial markets, derivatives have been one of the main forces driving the entire financial industry forward since the 1970s, with the volume of derivatives in traditional finance being 40 to 60 times that of spot trading, while in the crypto market, the trading volume of derivatives accounts for less than half of the entire digital asset market. In comparison, the development of derivatives still holds enormous imaginative space.

Beyond the volume comparison, mature players and institutions in the market are also beginning to explore using derivatives to hedge risks and capture more value. It is estimated that the current daily trading volume of DeFi derivatives is only about 1/6 of that of DeFi spot trading, equivalent to 1/100 of CEX derivatives trading volume.

Although people tend to prefer operating in CEXs for derivatives trading due to considerations of interaction experience and depth, the permissionless and decentralized characteristics of DeFi derivatives, along with the involvement of professional liquidity teams, give us reason to expect a breakthrough in the market share of derivatives DEX.

Conclusion

The Federal Reserve's interest rate hike warnings and the uncertainty of the macroeconomic environment have made the start of the year in the crypto market appear rather bleak. However, we should recognize that in 2021, which continuously set new market capitalization records, there were also many corrections, risks, and impacts from the broader environment. The consecutive explosions of sectors like GameFi, NFTs, DAOs, and Layer2 have laid a solid foundation for 2022.

We realize that the speed of industry development has already surpassed most people's imaginations, and in the face of this change, all industry practitioners should be better prepared.