Coinbase Ventures Q2 investment summary: optimistic about the user experience of chain games is everything

As in previous recessions, critics are once again confidently declaring that cryptocurrencies are dead. However, Coinbase believes that, judging by their standing in the industry, outstanding founders are still tirelessly pushing the technology forward.


  • Coinbase Ventures saw a 34% quarter-over-quarter decrease in investment in second-quarter deals, reflecting the overall pace of the venture capital space today, but deal activity remained up 68% year-over-year, a steady increase from last year’s venture business.
  • Among the key trends observed, we believe that Web3 games will usher in the next wave of crypto users, and experienced founders from Web2 games will continue to flock to the space.
  • We’re excited that the Web3 User Application can disrupt the Web2 “enforcement model” and give users control over their audiences and communities.
  • The Solana ecosystem continues to show impressive momentum and developer traction.
  • The crypto industry is making massive improvements to the user experience that will eliminate complex operations and provide a Web2-equivalent experience.
  • The US remains home to the majority of companies in our portfolio, with impressive innovation hubs established in Singapore, the UK, Germany and India.
  • CeFi lenders have underperformed this year, and DeFi lending platforms are resilient.
  • Current price action aside, we still firmly believe that the opportunities in crypto and Web3 are far greater than most people realize.

The first half of 2022 has been volatile for all markets. The Dow and S&P had their worst first-half performances since 1962 and 1970. The Nasdaq had its worst quarter since 2008. Bitcoin had its worst quarter since 2011, with DeFi TVLs down 70% from their highs, and June NFT sales falling to unprecedented levels in a year.

A core part of the crypto market chaos stemmed from the collapse of the $60 billion Terra ecosystem in May. This led to the implosion of a $10 billion crypto fund (Three Arrows Capital). Additionally, it was revealed that Three Arrows Capital borrowed heavily from some of the largest cryptocurrency centralized lenders, some of which were forced into bankruptcy due to the inability to recoup these loans.

The macro market downturn has also permeated the venture capital arena.

Venture capital market situation

The broader venture capital market began to show signs of cooling in the first quarter, with total funding falling for the first time since the second quarter of 2019. That trend continued in the second quarter, with total venture capital down 23%, the biggest drop in a decade. The quarter also saw funding from late-stage companies like Klarna This is a further sign of the times.

Crypto VC investment still set a record in the first quarter, but as we wrote in our last article, we are already starting to see signs of a slowdown expected in the second quarter. Sure enough, data from The Block’s John Dantoni shows a 22% drop in crypto VC funding: the first quarterly decline in two years.

In the second quarter, Coinbase Ventures continued to be among the most active investors in the crypto space, but transactions were also slow, with the total number down 34% quarter-over-quarter, from 71 to 47. Despite a slowdown from the frenetic pace at the end of ’21 and the first quarter of this year, our Q2 activity was up 68% year over year; indicating overall growth in our venture capital business.


The decline largely reflects overall market conditions – as the market fluctuates, we’ve seen many founders reconsider or pause their funding rounds, especially in later rounds. We’ve seen many companies walk away from raising capital unless absolutely necessary, and only if they’re confident they can show the growth necessary to justify a new round.

The bleak macro environment aside, there are still plenty of high-quality founders raising capital at our most active seed stage. Leaving aside the price action in our investment universe, we can see the scope of the actual utility that is continuing to be built, and paint a promising picture of the future: one with a dynamic set of Web3 user applications, improved User experience, robust DeFi marketplace, scalable L1/L2 ecosystem, and all the tools developers need to build the next killer app.

Below is a breakdown of our activity in the second quarter.


Now, let’s look at some prominent themes. (* denotes a Coinbase Ventures portfolio company)

The coming era of blockchain gaming

With the rapid rise and subsequent decline of the Axie Infinity event, many pundits are quick to gloat over blockchain gaming as a fad. As we wrote last September, Axie was going through a positive feedback loop that could turn negative if the enthusiasm driving the game fades, which finally happened. Regardless, Axie achieved nearly $1 billion in sales in a month and attracted 2 million DAUs with a near-zero marketing budget. This made the entire gaming world take notice of the power of this new vertical.

With an estimated 3.2 billion gamers worldwide, we strongly believe that Web3 gaming will usher in the next massive wave of crypto users. Web3 gaming remained a significant investment area in the second quarter, raising more than $2.6 billion in funding, according to estimates by The Block. Our activity over the past few quarters has only strengthened our belief.


As we saw in the first quarter, founders with a proven track record in Web2 gaming continued to embrace the category. For example, Azra games* are made by the creators of the over $1.4 billion mobile game Star Wars Galactic Heroes. Their goal was to create a fighting RPG game with a strong in-game economy that still had mainstream appeal. The space also attracted Justin Kan, co-founder of game streaming platform Twitch, which sold to Amazon for $1 billion. Kan’s new company, Fractal*, is building a marketplace for NFT gaming assets.

Companies like Venly* will use a suite of tools to allow Web2 game developers to seamlessly transition to Web3. Established gaming giants have even begun to emerge, such as Fortnite creator Epic Games now allowing NFT-based games into its play store.

It will take a while for the industry to mature, but it is increasingly clear that blockchain gaming will be a huge category in the future. Coinbase is expected to focus more on sustainable economics and gameplay, infusing NFTs with a more familiar Web2 gaming experience.

Rewire Web2

Beyond gaming, the next generation of Web3 user applications is working to upend Web2’s enforced model and give users control over their audiences and communities. One company we are particularly excited about is Farcaster*: a fully decentralized social network founded by Coinbase alumni Dan Romero and Varun Srinivasan. Their early product was similar to Twitter, but the main difference was giving users a relationship with their audience.

Farcaster is an open protocol, similar to email (SMTP). While Farcaster has built the first social apps on the protocol, other developers can build competing clients, just as we have Gmail and Apple iCloud. While you can’t bring Twitter followers to TikTok, someone could build a TikTok alternative on the Farcaster protocol, where Farcaster users can bring their followers to a new and differentiated platform. Not only do users better maintain ownership of their audiences, but it also opens the door to more consistent monetization. Most ad spend goes directly to social platforms like Twitter, Instagram, and Farcaster users with large followings can monetize their audience directly across platforms.


Another investment we’re excited about is*, which sits at the intersection of the Web3 and music boom. Highlight will let musicians create their own web3-enabled fan club/community (no coding required), including token thresholds, access to NFT airdrops, merchandise, and more. Highlight joins other Coinbase Ventures portfolios including Audius*,*, Mint Songs* and Royal*, all of which offer musicians new ways to connect with and monetize their fan base.

All in all, we’re still excited about the potential of Web3 to reimagine established Web2 models for social media, music, and more, and ultimately put the power back to creators.

The rise of Solana

Notable in our Q2 event is the continued momentum behind the Solana ecosystem. While Ethereum and EVM remain the kings of developer traction and compatible apps, we’ve noticed a clear trend in early teams’ emphasis on Solana. All told, we closed 10 Solana-based transactions in the second quarter.


Given that Solana smart contracts are programmed in Rust rather than EVM’s Solidity and language, the founding team usually chooses one or the other. More and more teams are choosing to support both EVM and Solana from the start – such as the recent additions of Coherent and Moralis. We’ve seen other companies start with EVM and choose to fully transition to Solana, whereas Fractal, mentioned above, chose to build on Solana from the start.

Additionally, multiple large funds have publicly expressed support for the ecosystem, showing that Solana’s staying power is real. However, the viability of the public chain (Solana’s ability to stay online) remains a top priority for the Solana team to address.

User experience is everything

The overall clunky and disjointed crypto user experience has long been a barrier to adoption. Think about what a user has to do to execute a typical transaction: convert fiat to cryptocurrency, transfer cryptocurrency to wallet, bridge cryptocurrency to the network of their choice, and finally execute the transaction.

During the second quarter, we invested in multiple teams (not yet announced) working to simplify and verticalize the entire retail trading process. Soon, developers building in Crypto and Web3 will be able to deploy entire transaction stacks with a few simple lines of code and a standard set of APIs.

The final future result will be that, for example, users can perform DEX transactions with a single click, and in the background, fiat currency will be converted to cryptocurrency, transferred to a wallet, bridged to L1/L2, and then perform an exchange and escrow assets in their chosen in the wallet. All the complexities will be obfuscated and we will have a user experience comparable to Web2 – a huge potential will be unlocked.

Where are the builders?

This quarter, we looked at where the founding teams of our investments are located. While crypto is a global industry, unsurprisingly, the largest concentration of our founding team is from the US – 64% of our 356 portfolio companies are from the US; regulators have more reason to promote rather than inhibit this rapid growth industry.

Singapore has become a base for many team building in Asia. Meanwhile, the UK and Germany are home to growing hubs, with policymakers actively working towards greater regulatory transparency. We are impressed with the founding team in India, and we expect them to play a major role in future crypto adoption (CBV portfolio company Frontier, with 30 engineers in India, has built a great mobile-first DeFi aggregation , which supports more than 20 chains and more than 45 protocols).

This quarter, we were also pleased to support five teams founded by former Coinbase employees, including the aforementioned Coherent and Farcaster, as well as three others yet to be announced. We are proud to continue to support the world-class crypto-educated employees at Coinbase as they continue to build world-class companies and projects.


While there are many exciting things ahead, there are also many lessons to be learned now. The current crypto crisis is similar to what we see in traditional finance. The opacity of centralized lenders and Three Arrows’ operations prevents lenders from properly assessing their counterparty risk. Lenders do not know how much others have borrowed from 3AC, nor how much leverage and risk 3AC is taking on. Investors have no idea how much risk they face in total. When the market goes against both the lender and the 3AC, a huge hole in the lender’s balance sheet emerges, and investors can’t do anything about it.

However, compared to centralized lenders facing bankruptcy, it is important to note that blue-chip DeFi lenders Aave, Compound, and MakerDAO are running smoothly. Every loan and its terms are kept transparent on-chain for all to see, and when collateral levels fall below a threshold, the collateral is automatically sold via smart contracts and the lender is repaid. The same code also prompted Celsius to be forced to repay $400 million in loans to Aave, Compound, and MakerDAO—without a court order (though overcollateralization played a role). All in all, it is a strong proof of decentralized finance.

It’s just to say that it’s easy to get discouraged by the current price action and forget how far we’ve come in the short term. When the last bear market hit, the most popular user app was Crypto Kitties. Today, there are innovations that are deeper and more impactful than we can count. DeFi, NFT, and the rich DAO ecosystem have only emerged in the past two years, and have even come together to have a real impact on the world stage. At the same time, the Layer2 scaling solution is finally here, which can take us from the dial-up stage to the broadband stage, capable of supporting rich user applications, and starting with a simple UX.

As in previous recessions, critics are once again confidently declaring that cryptocurrencies are dead. However, from where we stand in the industry, we are heartened to see outstanding founders tirelessly pushing this technology forward. As the entire financial system and world digitizes, we remain convinced that the opportunities in crypto and Web3 are far greater than most people realize.

Posted by:CoinYuppie,Reprinted with attribution to:
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