Timing In Consumer Crypto

Last week, Chris posted a thread on why consumer founders should not want to build in consumer crypto at this time.

He attributes this to 7 “tactical issues”: 

1. The market size is too small

2. The userbase is horribly mercenary

3. The signals and metrics are wrong

4. PMF is near impossible to find

5. There is nothing to iterate on

6. It’s a hard environment to design & build on

7. Hyper-financialization is bad for building

In this blog post I will analyze each of Chris’ issues and conclude with why I believe today is the best time to build in consumer crypto. 

1/ Market Size. Yes, the total active daily wallets on BTC (1M) and ETH (500K) is a small pool relative to the opportunity available to web2 founders. However, crypto users are younger, more internet native, and wealthier than the average web2 user. They tend to transact more regularly and in larger volumes, leading to a far higher potential ARPU and the ability for small startups to negotiate partnerships with major companies and brands. Moreover, crypto users are extremely engaged and quick to offer feedback, enabling founders to ship with high velocity, get quantitative signals and qualitative feedback, and build a better product. These are tailwinds for founders to build generational businesses.

2/ Mercenary Userbase. Crypto users are very internet-native, open to new ideas, and not afraid to pivot to a different product when something better comes around. In other words, crypto is incredibly ripe for innovation and rapid iteration. Consider the speed with which Blur built and delivered an excellent UX to a neglected userbase (NFT traders) and took market share from OpenSea – the fact that users are “mercenary” is more of an opportunity/positive than a challenge/negative for founders who want to operate in a blue, meritocratic ocean that isn’t saturated by entrenched, monolithic web2 behemoths operating stale walled garden-style business models.

3/ Wrong Signals. I generally agree here. Crypto’s obsession with TVL, token prices, and market cap are distractions from what is most important for founders to focus on – the product. The industry is young and, in its current state, extremely reflexive and driven by narrative rather than fundamentals. Users must have more patience (and not give founders anxiety and drive them to Ketamine), and we’ve got to get much more nuanced with how we measure the value of crypto projects. While there’s no right answer, and it’ll likely vary for different projects, I quite like David Phelps' idea to think of crypto projects as nation-states with their own currencies, taxes, governance, and GDP (rather than as companies, valued based on cash flows and via a DCF). 

4. PMF. I think Chris is generalizing and overlooking large parts of crypto here. For instance, the NFT sector, with a market cap exceeding $7B, demonstrates PMF through various successful startups, including marketplaces (OpenSea, Art Blocks, SuperRare, Blur), financialization platforms (NFTfi, Blend, MetaStreet), and discovering and tracking apps (Interface, Floor, Gallery). Moreover, new standards have unlocked new use cases and made NFTs more accessible – NFT compression enabled DRiP to distribute millions of NFTs to >800K wallets. While finding PMF in crypto can indeed be challenging, it shouldn’t detract from founders. Imo, early adopters are the ones who reap the biggest rewards, and, as a founder, betting on crypto now is akin to betting on the early internet or mobile. 

5. Iteration. I agree that consumer crypto currently requires the invention of new categories because the benefits of moving existing things onto crypto rails are limited. However, I challenge the notion that this should deter founders from building in crypto. Consider the early stages of the internet: social media, streaming, and online shopping all emerged because pioneers didn’t just iteratively improve on existing ideas but created entirely new products. This pattern is typical in any revolutionary technology and is fantastic news for founders! Crypto is ripe for innovation and there’s a huge opportunity to imagine what could exist!

6. Hard environment. I’m not technical, but my understanding is that, unlike fragmented and siloed web2 data, composability is the counterfactual. DRiP on Solana or Interface on Ethereum didn’t have to build standards themselves – they created highly scalable products enabled by cheaper infrastructure. Moreover, the ever-growing social graph being built in real-time on protocols like Farcaster will only accelerate (literally every crypto transaction is technically UGC) and make it easier for consumer founders to build new and interesting products. As Amanda outlines in her recent post on Consumer Crypto’s Breakout Cycle, an incredible amount of infrastructure has been built in recent years, including low-fee blockchains, embedded wallets, on-ramps/off-ramps/bridging, identity protocols, and distribution channels. If you subscribe to Union Square Ventures’ The Myth of the Infrastructure Phase thesis, now is the best time to build in consumer crypto!

7. Hyper-financialization. Speculation is a feature, not a bug. This applies not only to crypto but to almost any area of innovation. Indeed, in his book How Innovation Works, Matt Ridley argues that “innovation happens when people are free to think, experiment, and speculate”. I acknowledge that shilling can become an inauthentic ponzu, but generally when a user is excited and bullish on something, it's great that they’re sharing it, creating buzz, and driving engagement back to the project (and aligned to do so). In some cases, excessive shilling can even lead to a huge wave of new users that test the limits of your tech and your business model and help make things more anti-fragile and robust (e.g. after Berachain launched on testnet last week, they paused the faucet due to a huge inbound of users. this gives them an opportunity to work with technical partners to upgrade the network and improve their tech for mainnet). For founders, regardless of whether they build in web2 or web3, gamification is behind a lot of the core loops of popular apps and, in web3, the opportunity is in finding a balance between financial upside and gamification.

Thus far, I’ve mostly disagreed with or tried to add nuance to the challenges Chris presents as reasons why founders should not build in consumer crypto. However, what I disagree most with Chris about is not the existence of these challenges but rather that these challenges make it a bad time to build in consumer crypto. The opposite is true – these challenges are precisely what makes it an incredible time to build in consumer crypto.

As Josh argues, we’re all here because we believe a fundamental platform shift is happening where all digital value, objects, and applications will move into blockchain rails. But “we’re still early” – the space is nascent, and there isn’t competition and product saturation like there is in web2. This presents an incredible opportunity for founders across every category – to pioneer entirely new products, use cases, and business models.

As a founder, would you rather wait, see the industry mature, and miss the opportunity, or face these challenges and lead a new platform shift? If the early days of mobile or the internet are anything to go by, the greatest rewards will go to those who stick around the longest and are bold enough to continue to build and experiment through both the good and bad times. 

As a VC in consumer crypto, I find this an incredibly exciting time to invest, especially considering the recent advancements in scalability, security, and user experience that have laid a strong foundation for innovation. For those already in or considering entering the consumer crypto space, I hope this perspective offers some insight. If any of the above resonates, I’d love to chat! Please feel free to DM :)