Below is a written and abridged version of the annual presentation we recently shared with TCG Crypto investors.

Two years ago, we launched TCG Crypto with the belief that blockchains could catalyze new user behaviors for consumer businesses. While many investors in this category were focused on lower-level infrastructure alone, we turned our attention instead to what we believed the technology would unlock: net new consumer platforms, experiences, and behaviors.

We built a dedicated team with subject matter expertise and a pointed focus on consumer, following The Chernin Group’s decade-plus history of investing in the area. Our strategy since the beginning has been to identify disruptive consumer trends and understand how new technology can both evolve existing arenas of consumer passion and help to create net new ones. To date, we have allocated a majority of our invested capital to leading early stage funding rounds.

While our high-level thesis remains the same (you can see it outlined in the annual letter we shared last year), we have also continued to shape our point of view. At TCG, we view technology as a means to drive innovative consumer behaviors and businesses. As we’ve shared previously, we believe the most durable consumer businesses are built around passion, where new technology accelerates existing experiences and fosters the creation of net new ones.

Along this vein, our position is that when crypto works for consumer, it doesn’t necessarily interfere with the existing business but rather adds net new benefits on top. Like the waves of technology that came before it, crypto can be expansive for consumer businesses.

You may remember this barbell framework that we shared in one of our quarterly letters this year and later published more broadly. We created this framework to help analyze the spectrum on which consumer crypto applications are built.

We commonly hear this notion of “web2.5” as an intermediary between incumbent consumer products and web3. In many cases, this actually feels like a distraction. Instead of spending time in the “middle” of this barbell, we look to the edges, with existing consumer businesses supercharged by blockchain on the left, and net-new, blockchain-native consumer businesses on the right. Companies on both sides of this spectrum are exciting to us. On the left side, crypto is largely abstracted away, used primarily as a tool for an existing passion vertical, like gaming, sports, or music. And on the right side of the spectrum, passions are new and crypto-native, where the audience of people obsessed with the functions and culture of crypto is large and growing.

We continue to believe we are unique in seeing the ecosystem through this lens. What we’ve found over the last few months is that each side of this barbell has become increasingly hyperbolic: blockchain-native consumer behaviors have become even more niche and experimental, and blockchain-light consumer products have continued to further abstract signs of the technology away through infrastructure like embedded wallet providers and fiat onramps.

To reflect this shift, an extension of our barbell framework is that crypto is either expansive or disruptive. You can see on this slide how this bifurcation breaks out for a sample of our portfolio companies. For companies on the left side, business models are expanded by blockchain but still architected on traditional rails. For example, Medallion is an artist platform that uses NFTs as a tool for cross-platform identity and membership, while Sphere leverages “universal settlement” afforded by blockchain to make merchant payments faster, cheaper, and more global. Capsule provides the infrastructure for seamless and consumer-friendly crypto wallets, streamlining the user experience by keeping the complexity of blockchain entirely under the hood. All of these businesses use the technology to enhance and expand their existing value propositions.

For companies on the right side, business models are disrupted by blockchain through native incentive or engagement models. For example, Outdefine connects top enterprises with global tech talent, using a tokenized incentive model to reward referrals and successful job placements. Flamingo is a decentralized investment collective, managing one of the largest repositories of digital goods through a radically transparent, member-driven approach to decision-making. And Jia provides blockchain-based financing to small businesses in emerging markets, rewarding borrowers who repay with ownership. This past month, Jia shared a borrower spotlight with a spice vendor in Githurai, Kenya, who uses Jia’s flexible financing to grow his business:

Similar to the introduction of other new technologies, crypto has gone through phases of quiet building, gradual awareness, retail mania, and eventual blow-off tops with overly optimistic expectations. It’s not a coincidence that we often start to hear about crypto in the media every few years when prices are yet again passing all-time highs.

Many popular projects from the 2018 top cycle were no longer around in 2021’s moment of euphoria. We view this as a healthy natural progression that will repeat for cycles to come. Crypto is a reflexive market. When tech companies IPO on the stock market, they’ve been building for years, at minimum. Due to the permissionless, 24/7 nature of crypto, we see projects speedrun cycles.

This framework plays a critical part in our investing thesis. If you compare sentiment only from a market top to an ensuing bottom, your frame of reference is based on unrealistic aspirations at the top and overly pessimistic views at the bottom. When assessing fundamental progress, it’s important to compare the successive bottoms at each cycle, investing through phases with context of the past. With this approach, you can rationalize sentiment relative to price and you’ll find that, just like people typically overestimate outcomes at the top, we tend to underestimate progress at the bottom.

Our goal is to remain rational through cycles. We prioritize quantitative improvements like developer count and user conversion, with a goal to add risk in moments of uncertainty and reduce our exposure in mania phases.

Instead of looking solely at the crypto-native market, we expand our viewpoint to examine blockchain technology as a tool, providing value to both new and existing markets. On this front, we work to identify companies building both applications and infrastructure purpose-built for consumer scale.

After two years in market, we know venture-scale consumer opportunities in blockchain are still early because the technology and adoption itself remains nascent. What we’ve found is that many companies building consumer applications today have also worked to build complementary infrastructure in parallel. In practice, many of the most exciting crypto applications today couldn’t exist without infrastructure built just six to twelve months ago. This foundational progress is part of what grounds our current interest in both expansive and disruptive consumer use cases.

We’ve seen this phenomenon often in gaming. For many games today, blockchains provide an additive layer of verifiable ownership that sits on top of the existing business. While the consumer experience looks similar to a traditional game, greater flexibility of your in-game items at the application layer requires infrastructure-level improvements.

Companies like Altered State Machine (now part of Futureverse) are unlocking new ownership primitives for the NFT gaming space while growing the base of applications that can leverage their IP. Similarly, on-chain game studios like Curio are building both infrastructure and application-level experiences in parallel. Curio recently launched the Keystone framework, an infrastructure solution built to make on-chain games just as performant as their web2 counterparts. Players can introduce dynamic relationships like secret treaties or item delegation with no drop-off in quality or experience relative to a traditional AAA title. In addition to this infrastructure, Curio has launched Treaty, a fully on-chain strategy game.

Outside of gaming, we’ve invested in two other infrastructure-focused companies this year that share our vision of bringing the next billion users on-chain. Capsule, a developer toolkit, enables application developers to offer a safe and intuitive crypto user experience by reimagining transaction signing, one of the core pieces of infrastructure that has held crypto back from mainstream adoption. Sphere is rebuilding the global payments infrastructure stack on blockchain rails, providing out-of-the-box features that make it easy for application developers to integrate payment solutions at a cheaper cost to legacy providers.

New game frameworks, wallet providers, and payment solutions are just a few examples from our portfolio bringing blockchain to consumers through emerging infrastructure and applications.

Over the last two years, we’ve focused heavily on durable forms of blockchain utility, applied both in crypto-native consumer bases and existing areas of consumer interest. This is emblematic of our barbell strategy: we don’t believe there is only one type of consumer in crypto. In fact, we believe focusing on crypto as an exclusive consumer category risks missing the forest for the trees. When thinking about investment opportunities in this space, it’s important to zoom out and understand what has been created so far, what has staying power, and what can expand to a broader landscape.

Disruptions always start as something that appears inferior but gets better over time. Over the last two decades, the greatest consumer disruptions all focused on democratizing creation, connection, and distribution. They barreled through the walls of the existing status quo, broke them down, and worked to build them back up again. In these situations, it can feel tempting to focus on maintaining the existing structure of business and consumer relationships — what we call playing defense. But psychologically, as emerging technologies spread, we feel the train has already left the station. We believe energy should instead be hurled towards accelerating the means and modes of disruption, breaking down the existing boundaries and seeing how it all fleshes out. This is the formula for how consumer products evolve over time.

Here, we look to find inspiration in the chaos. For those who lived it, you remember what Napster did to the music industry. People stole music, made it digital and easy to distribute, and this was to be The End for the music business. As an observer, it’s easy to think people just wanted music for free, but really, it was something bigger than that — consumers took control and showed us their desired relationship with music in an internet-first world.

We see a similar pattern playing out today in the forms of selling “monkey JPEGs,” managing one’s finances more directly, and even collectively buying sports teams. Users are leveraging new technology to showcase their desire to be in control. They want to connect more deeply, transfer value in new modes, gamify their online experiences, and build and invest alongside one another.

The natural result for Napster’s disruption should have been a long run for iTunes. People prefer the convenience and access of digital music, so we evolve to that format and move to buying songs digitally. But it wasn’t. The end result was streaming — something completely unpredictable at the time. Once consumers got a taste of this (better) experience and an ability to control what they wanted to listen to, the genie was already out of the bottle. Consumers didn’t just stop stealing music… they actually started paying for it!

This wasn’t a death blow to the music business as predicted, but instead a catalyzed shift in value accrual and purpose. While the business was traditionally monetized around the song, internet-native distribution turned the song into the means of discovery to drive engagement down the funnel — go see a live show, purchase merchandise, or connect more closely to your favorite artists across a variety of platforms.

Of course, this isn’t new. Innovations in technology create new consumer behaviors and new business models. Credit cards experienced similar disruption and friction in their onset where, at the time, no one could fathom the idea of taking on debt in order to buy a cup of coffee. In 2022, credit card spend exceeded $13 trillion, or 26% of all global cashless transactions. We see this time and time again. Platforms like YouTube were once a haven for unlicensed content and comment trolls. Now it’s the largest streaming platform, changing the way we create and consume, from our basement to Hollywood.

When you see emerging platforms and behaviors that are counted out and aggressively challenged, you shouldn’t turn away. In fact, you should do the opposite. Double click. Like the sentiments around the disruption of music, Hollywood, and banks, we believe blockchain is catalyzing similar consumer shifts. There is something happening here, and it is worth paying attention to.

We don’t claim to be able to predict what the outcome will be for these disruptions, but we do aim to be on the ground floor as they emerge — and we are confident it will result in a monumental change across a wide range of consumer value. As we’ve done over the last two years, we plan to continue to study the past, learn from previous consumer evolutions, and leverage our unique vantage point to be predictive and open-minded for what the future might hold. Thank you for your continued partnership and support. We couldn’t be more excited for 2024.

Team TCG Crypto

Disclaimers

None of the information discussed herein is intended to be or should be construed as financial advice, or an offer to sell or a solicitation of an offer to buy an interest in any security. Certain companies referenced herein are included by way of example and are not companies in which TCG Crypto has invested to date nor companies in which TCG Crypto intends to invest. The information set forth herein has been obtained or derived from sources believed by the author to be reliable and has been provided solely for informational purposes. Nevertheless, the author does not make any representation or warranty, express or implied, as to the information’s accuracy or completeness.