Ben1098

Remove the spark plug.  Rotate the engine until the piston is at the top of travel by using a copper wire (soft 10 AWG with rounded end down) and watch the travel up and down.  When very close to TDC, the piston will stop going up and "stall" for a bit and then start to fall back down.  Rotate "between these two positions" and you have TDC.  Easier said than done.  A dial indicator can also be used if you have the set up.  Getting into the fan side is a pain with the cover.....bolt screw nut inserts usually "spin".  Easiest is to take off the belt cover exposing the drive clutch pulley.  On the rim of the pulley you can make an narrow ink mark (or tape with a ink pen line).  Do the rock back and forth to find the "going up"   and    the "going down" location on the case.  Mark the two locations.  In the middle is TDC.  Also, try to see if you can find the timing marks noted in the service manual and mark both with paint for future use.
I had a simple trick (POSTED) to hold the chain in place and keep it from falling off the crank sprocket when installing the cam gear.....string pulled for a 3rd hand.  I like to do a double check after timing the cam and then rotate to the OVERLAP (EXHAUST VALVE closing and INTAKE VALVE just opening) at the other TDC than Compression.  Always rotate slowly by hand to check for valve interference.  If something is wrong, you don't bend any valves.  Rotate the decompression flyweights against the spring return to avoid being fooled by the cam's AUTO decompression mini-cam/button hitting the cam follower.

Shine pen light into chain and lower sprocket cavity.....just to be sure the chain in on the sprocket.  Keep tension on the chain and tie a nylon twist string (not braided as they do not stretch) to the "top" of the timing chain with the other end tied off on the roll cage.  The top tie point must be very close to the position the cam gear will install to.  Slide in the cam gear and milk the chain around the gear and then keep the chain and gear tight so the chain cannot jump of the lower sprocket.  Mount gear to cam and verify the timing dots and sling weights.  The 3 hand fix.   BEN

What you found is the hardened sealant put on the output shaft/coupling cup.  It only looks like a manufactured part as it was "molded" to almost make it look like a 2 stroke rod bearing cage.  Clean it good as in getting all the hardened sealant "needles" and oil off.  Apply sealant sparingly to the outside of the shaft spline (you don't want a goober pushed into the engine/tranny case).  Next, give a good coating to the coupler spline inside (this will be pushed outward to the threaded end when pushed onto the output shaft).  This seals the spline/coupler interface.  Next coat the washer face surface of the coupler and add some to the cleaned washer face also.  Slide on the washer, smashing out a blob of sealant to seal the washer to the coupling and also have some seal to the nut when you buzz down the nut.  Use a quality NON-HARDENING SEALANT.