The State of Decentralized Applications (dApps) — H2 2021 Review
What an exceptional year 2021 was for not only decentralized applications (dApps) but the entire blockchain & greater web3 ecosystems. This phase change of our digital lives has allowed dApps to amass record communities, active users, and revenues quickly. This year showed momentum beyond expectations, setting the stage for an even more transformative 2022 that will bring scalable infrastructure, new financial (i.e., GameFi) & governance (i.e., DAOs) mechanisms, & a greater focus on security driven by wallet-led authentication tools.
The dApps Landscape Today:
I’m excited to share with you that we’re now seeing 440+ companies concentrating on developing the required infrastructure layers that are powering today’s industry and the applications of Web 3.0. This is a year-over-year increase of 33% from Q4 2020. In terms of venture capital, we saw more than $5.5Bn invested in dApps infrastructure, including more than fifteen $100M+ funding events at the end of 2021.
Venture Capital & Funding:
The second half of the year continued growth in capital deployed throughout the landscape, with over 62 publically announced investments over Q3 & Q4 and $100M+ fundraisings in ConsenSys (Nov), Alchemy (Oct), DeSo (Sept), Blockdaemon (Sept), and Dapper Labs (Sept).
We saw a new leading venture capital fund within the landscape, with Coinbase Ventures taking the top spot, followed by Digital Currency Group (DCG), Andreessen Horowitz (a16z), Pantera Capital, and CoinFund.
We also welcomed new venture funds from Variant Fund ($110M, Fund II), Paradigm ($2.5B Fund II), Borderless Capital ($500M Fund II), Chapter One ($40M), and new ecosystem funds from Solana, Polygon, and Oasis Protocol — who added another $40 million this week for a total fund size of $200 million.
Furthermore, we saw over $30 billion invested (~$15.5B in the first half alone) throughout the broader blockchain landscape, roughly 4.85% of the total $621B venture capital deployed in the year.
The Landscape Breakdown:
Building dApps requires different methodologies than the previous web2 & mobile generations before them. For that and ease of navigation, I’ve broken this landscape map down to a few key sections that, when reading left to right, will help guide you through the building blocks or “layers” as you’ll see them referred to for developing your dApps.
- L0+1/ Infrastructure (Blockchains, Protocols, Nodes+)
- L2/ Scaling (L2s, Rollups, Storage, Query, etc.)
- L3/ Contract (Smart Contracts, Oracles, Auth, etc.)
- L4/ Application (APIs, Wallets, DNS, etc.)
When I initially presented the landscape on December 15th, 2021, I mentioned some key themes we saw taking shape in the second half of the year — many of which quicking saw progression in the first few weeks of January 2022 that require noting that I’ll quickly breakdown.
- 1/ Protocols
- 2/ Rollups
- 3/ DNS (.ENS .BTC & .SOL)
- 4/ DAOs
- 5/ Contract Languages — Solidity vs. Clarity
- 6/ Wallets as Authentication
Protocols. We’ve continued to see developments unfold in the theme & category of the landscape as more protocols are launching and progressing from testnet to mainnet before and becoming more theme-focused. For instance, the CityCoins protocol, where developers can create a “CityCoin” (ex. MiamiCoin & NYCCoin) providing communities the power to improve their cities while providing crypto rewards to individual contributors and city governments alike — all powered by Stacks, a blockchain that enables smart contracts on the Bitcoin network.
Rollups. Both Optimistic & Zero-Knowledge (zk) will be a significant headline theme for 2022 between protocols staying competitive and dApps requiring added security. We saw ConsenSys launch ConsenSys Rollups with Mastercard and layer-2 solution Polygon acquired Mir (now, Polygon Zero) for $400 million in December.
Domain Names as Identity. I’ve spoken on this topic in previous analysis calls; however, the Q4 2021 to January 2022 transition showed us the beginnings of how these new domains (.ETH, .BTC, .SOL, .crypto, etc.) can be used beyond a website or wallet address, but a means of identity AND authentication. For instance, Unstoppable Domains launched a “Login with Unstoppable” feature to provide a single sign-on service using non-fungible token (NFT) domains for Ethereum and Polygon. This will allow users to sign into applications with an NFT (such as “yourname.crypto”), enabling a user to control the data shared or shown to the application taking another step towards a “user-owned internet.” I expect to see a surge of activity in the year ahead around this particular theme between more membership=based NFTs (LinksDAO, Poolsuite, RAD Live) and domains (.ETH, .BTC, .SOL, .crypto, etc.) as the ease of access grows.
The Turning Revisited:
In my last dApps summary covering the first half of 2021, I referred to what was happening in the industry as “The Turning” — the moment when technical adoption becomes the default and decentralization is a target milestone for more than less. It appeared I was onto something and decided to revisit a portion of the previously presented themes with reflections from what happened in the second half of 2021, along with predictions for 2022. I’ll revisit this in Q1 2022 for a full review to continue strengthening my thesis around the future of dApps:
- Protocols and their foundations partner with traditional venture capital to build ecosystem-focused funds. [Q4 Revisited — We saw MORE and LARGER ecosystem funds — Hedera’s $5Bn in grants, Oasis’s $200M, NEAR Protocol’s $150M (Jan ‘22)+ $800M in grants, Polygon+AU21’s $21M, Harmony’s $300M, and so on. I’m expecting this to be a more significant trend in 2022, heating a competitive battleground for networks to win over developers and new dApps as more continue to enter the industry with recording setting 34,391 developers joining web3 in 2021(per Electric Capital). This should, in theory, also accelerate bridging between networks as developers will want to engage with communities cross-chain.]
- Venture capital adds “dApps” to their thesis and launches new funds specific to/for protocols. [Q4 Revisited — In Q2, dApps was a part of many investor theses, in H2, we saw a shift towards broader keywords “Web3” “infrastructure tooling” or more specific such as “ownership economy” “Play-To-Earn” “GameFi” “Blockchain-Gaming” “DAOs stack” and “Non-Fungible Tokens/NFTs.”]
- DAOs (decentralized autonomous organizations) are taking an early position from investor syndicates & governance to an alternative corporate structure and a milestone for many DApps. [Q4 Revisited— We saw this theme play out more aggressively than excepted with PleasrDAO’s purchase of Wu-Tang Clan’s album for $4M, ConstitutionDAO who raised over $40M in a week to purchase a piece of the U.S. Constitution, and things go not so positive in the instance of SushiSwap. I and many others believe 2022 will be a significant year for DAOs between new tooling, use cases, and applications.]
- We’re seeing the re-emergence of investing through SAFT(tokens), and token launches, however different than that of the 2017–2019 boom — traditional venture capital & other institutional investors are playing at scale. [Q4 Revisited— In short, we saw over $30 billion invested throughout the landscape, I’m expecting this and tokens to be a part of core theses for a software-focused venture in the future. If you and your firm haven’t begun to consider how these new methods of funding fit into your thesis, I recommend you do — feel free to reach out to discuss together as well.]
- Exchanges are positioning to own NFT ecosystems (i.e., Binance, Korbit (Korea), Wazirx (India), FTX, etc.), expanding to alternative assets and traditional.
- Needs for security and stability with the underpinning or leveraging of Bitcoin’s blockchain network. Bridges are being built at rapid speed to allow for exchanging between blockchains not yet interoperable. [Q4 Revisited —I touched on this above but expect to see more bridging between networks in 2022. The last quarter of 2021 brought us insight into what we can envision will happen as development scales on many of the early networks.]
- Consensus mechanisms expanding beyond Proof-of-Work (PoW) & Proof-of-Stake (PoS) to the likes of Proof-of-Transfer (PoX), Agreement (PoA), etc.
- Cloud companies are in acquisition mode as they’ve been unable to match the pace of decentralized infrastructure developments. [Q4 Revisited —This theme could start to heat up in 2022 and without question in 2023, primarily as dYdX’s downtime on AWS made headlines in December]
- More corporations, governments, and small businesses add digital assets to their balance sheets.
- Business models like “Play-To-Earn” (P2E) will drive greater mass adoption faster and with the desired UX. [Q4 Revisited —In addition to 2022 being the year for DAOs, I expect P2E and blockchain gaming to be the most prominent theme of the year and share in the mindset that they together will onboard the next billion into the world of crypto + web3. To that, I also anticipate seeing more “XYZ-To-Earn” models rising in many industries.]
If you’re a developer considering your options of where to begin building your dApps and on which network, here’s a great snapshot into 2021’s developer activity that can help, provided by the team as Electric Capital.
The year ahead of 2022 will be an exciting one for the reasons mentioned above and many other themes that are just beginning. Please reach out if you’re building a dApp, web3 infrastructure surrounding the themes above or want to discuss more of our decentralized future.
A full breakdown is now available as a video recording with an in-depth overview of the dApps landscape map, significant H2 2021 trend analysis, new companies, areas of opportunities, use-cases, predictions, and a blueprint for building in 2022. Also, you can find the broader Blockchain landscape map and analysis breakdown here.
⬇️ Download for the hi-res PDF is available! Enjoy!