Investing in The Barbell Effect World of Crypto
The barbell effect reshapes value creation by polarizing it between two key pillars: distribution and complexity, necessitating a strategic shift for both founders and investors.
In my recent essay, "The Barbell Effect and Sources of Defensibility in Crypto," I explored how this phenomenon is fundamentally reshaping value creation, distribution, and capture in the crypto ecosystem. In the composable world of Web3, we're witnessing a polarization of value accrual towards two core pillars: distribution and complexity. This bifurcation not only redefines traditional moats, but also demands a strategic recalibration from both founders and investors.
The Allure and Limitations of Complexity-Centric Focus
Historically, venture capital has gravitated towards infrastructure plays, drawn by the allure of complexity-centric defensibility. This trend is not accidental; complexity often translates into strong technical moats, which equip projects with advantages in distribution. In a B2B context, this can mean facilitating enterprise contracts, while in the broader market, it can attract a thriving developer community, driving user adoption in turn.
However, the sustainability of purely complexity-focused projects is not guaranteed. Even the most technically sophisticated solutions ultimately require distribution to thrive. This reality is starkly illustrated in the protocol landscape, where most L1s and L2s face the task of crossing the "crypto chasm" to bridge the gap between initial interest and widespread adoption – a concept I explore here. Without distribution, even protocols with robust foundation treasuries risk becoming ghost cities.
The Trojan Horse of Distribution-First Strategies
While complexity-centric defensibility remains a powerful moat, the true game-changers in crypto may be those that masterfully transition from distribution-focused strategies to building sophisticated ecosystems. This is where the 'distribution trojan horse' strategy comes into play. By initially focusing on user-friendly, widely appealing products, these projects attract users through a simple and engaging front-end. This distribution-first approach acts as a trojan horse, allowing projects to quietly lay the groundwork for more complex technical features or networks to emerge over time. As the project matures, this hidden complexity evolves into a fully-fledged ecosystem, creating lasting value while seamlessly onboarding users who may not have realized the depth of the project at the outset.
The ability to leverage the distribution trojan horse strategy is why consumer crypto projects are particularly appealing to me. Projects that can onboard mainstream users while simultaneously building robust ecosystems have the potential to unlock enormous value in the crypto space.
Compelling Investment Themes in the Barbell Effect World of Crypto
With this interplay between distribution and complexity as context, several compelling investment themes come to mind:
Bet on Vertical Integration Potential: Identify projects that show strong product-market fit and have the potential to reach mainstream consumer audiences, even if their current product is not yet deeply integrated with crypto. As these projects mature, they can leverage their user base to create powerful ecosystems by guiding users across a suite of products and vertically integrating down the stack. Projects like Telegram, with its launch of the $TON network, exemplify this strategy of leveraging an established user base to create a comprehensive, crypto-enabled ecosystem.
Invest in Community-as-Core Projects: Invest in ecosystems where community engagement catalyzes organic brand growth and distribution. Projects like Botto exemplify this evolution, showcasing how community-driven creation forges unique brand identity and turns engaged users into creators and ambassadors.
Identify Greenfield Pioneers: Look for startups creating entirely new market categories around emerging consumer primitives, with a focus on those delivering exceptional, novel user experiences. Seek teams that differentiate through intuitive, user-centric designs innovating in under-explored areas, such as pump.fun or friend.tech.
Back Scalable Complexity: Identify projects coordinating complex decentralized resource networks or pioneering service models bridging on-chain and off-chain worlds. Prioritize networks with passive supply sides, where resources can be contributed with minimal ongoing effort, as these tend to scale more efficiently and create stronger network effects once critical mass is achieved.
Empower the Longtail: Back tools democratizing Web3 development for solopreneurs and small teams. As the barbell effect predicts the rise of niche players in Web3, the right tools can start as a resource for solopreneurs and small teams and evolve into a recognized ecosystem or protocol that serves as the backbone of the longtail.
While this list isn't exhaustive, the investment themes outlined above highlight the potential for investors to identify projects that can navigate the barbell effect landscape by leveraging distribution advantages to build complexity moats. Looking forward, the most promising crypto investments will likely exhibit the ability to harness complexity for unique value creation, achieve large-scale distribution, and adapt along the complexity-distribution spectrum to find lasting success.
