The power of aggregation: How Layer 3 brings crypto to the masses

Original article by: Joel John and Siddharth

 

In March 2022, I first wrote about Aggregation Theory in a crypto context. Since then, I have closely watched how aggregation platforms have performed in several investment institutions’ portfolios.

 

●    Hashflow has surpassed $18 billion in trading volume.

 

●    Gem was acquired by OpenSea.

 

●    Layer3 has scaled to 4.5 million wallets.

 

Layer3 is particularly special because it was the last trade I processed from LedgerPrime before FTX collapsed. I wish I could claim this was a result of superb foresight, but in reality it was somewhat random. However, in hindsight, it is worth revisiting Aggregation Theory and exploring patterns that founders can exploit to scale their businesses.

 

For today’s story, we are excited to be working with Layer3. They generously opened up their internal datasets and provided us with access to VCs and their top users. Over the past few weeks, we have been looking at how a business can become an attention grabber, just like Google was in the early 2000s. In today’s post, I will first refute some of the arguments I made in 2022, and then explain what aggregator platforms must do differently to build for scale.

 

We often think that consumer applications in crypto cannot scale. Yet Layer3 as a product has 4.5 million wallets and has completed 100 million tasks. In the process, they have driven nearly 120 million on-chain operations. The scale is there, it’s just that these stories are not widely disseminated or studied.

 

Today’s post will walk you through the inner workings of how similar results are produced.

 

The Power of Aggregation

 

Before the internet, the most difficult aspect of building any product or service was reaching customers. If you were making a consumer product, you could only sell it through physical stores. This inherently limited the number of consumers you could reach. The internet’s key advantage is its ability to aggregate global demand.

 

This aggregation gave rise to many of the giants that are now household names: Google, Netflix, Amazon, and Meta, all of which follow some, if not all, of the characteristics of aggregation theory.

 

A supply chain has three key elements: suppliers, distributors, and consumers.

 

● Suppliers: The side of the network that seeks distribution, such as advertisers on Google and Meta, retailers on Amazon, and content creators on Netflix

 

● Distributors: The distribution channel through which the supply side reaches the final consumer

 

● Consumers: The demand side of the network, the final purchaser of the product or service on the supply side

 

Aggregation theory refers to the integration of supply, distribution, and demand to improve processes, reduce costs, and increase efficiency. Aggregators have three characteristics:

 

1. Directly related to consumers:The platform directly owns the consumer’s time and attention. For example, consumers visit Amazon to buy goods or visit Netflix to consume content.

 

2. The marginal cost of serving new users is zero:As more users join the platform, the platform incurs no incremental costs. For example, Spotify or Netflix can distribute their content to 1 or 1 million users at no additional cost (except for the serving infrastructure).

3. Network Effects:Users go to an aggregator, which makes suppliers more willing to publish on that platform, which attracts more users due to the increased supply. For example, users come to Amazon to buy goods, which attracts manufacturers to sell through Amazon, which in turn attracts more users due to the diversity of supply. .

Not all aggregators have every characteristic. For example, Amazon, while an aggregator, incurs marginal costs for serving each additional user.

 

Ultimately, aggregators capture tremendous value because they improve efficiency and user experience on both sides of the market.

 

Now, let’s turn our attention to cryptocurrencies to understand the emerging aggregators. The supply chain is as follows:

 

●  Suppliers:The supply side in crypto consists of layer 1 or layer 2 blockchains and dApps with native tokens. The former seek to allocate block space, while the latter provide products to consumers. These players are all pursuing efficient distribution to reach and acquire users.

 

●  Distributors:Distributors are any channel that has a direct relationship with consumers. This includes wallets, exchanges, and the emerging models we will discuss further below.

 

●  Consumers:Developers, institutions, or retail investors who have demand for block space or on-chain applications are all consumers.

 

The supply side of the market is increasingly fragmented, with hundreds of Layer 1 and Layer 2 public chains and thousands of dApps. Many of these projects have raised tens of millions of dollars in venture financing and have hundreds of millions of dollars worth of funds. These assets will be used for distribution as all projects compete to reach their target audience.

 

In a 2019 panel discussion, Chamath Palihapitiya pointed out that for every $1 raised in venture capital, $0.40 goes to Google, Facebook, or Amazon. We believe this phenomenon will repeat itself in the crypto space, except that most teams will distribute their native tokens instead of cash. Another way to think about the total available market potential (TAM) is to look at the value of the native tokens in the protocol team's treasury.

 

As of June 2024, the top 20 blockchain ecosystems collectively hold over $25 billion worth of tokens dedicated to distribution to users and stakeholders. This value is expected to grow as thousands of projects issue their own tokens in the coming years.

 

As the market value of these tokens rises, they will become the primary incentive tool on the Internet.

 

We also believe that there are a handful of applications that have the ability to become the primary distribution channel for such spending.

 

Today’s post focuses on a business that is at the heart of these factors. During our research, we spoke with multiple top users who explained that Layer3 has become the “Google of crypto” for many new users. Users bookmark its pages to find new products or simply find the right link they frequently use. In other words, this product has crossed the chasm of needing to retain users and has evolved into a habit-forming product among its user base - something few startups in the industry can do today.

 

Behind these behavioral patterns are some very solid business fundamentals. To understand these fundamentals, we need to go back to early 2022.

 

Wild Times

 

Before the collapse of Luna, 3AC, and FTX, the industry thought it had crossed the chasm. Purchasing stadium naming rights was seen as a path to mainstream penetration. However, when it came to user acquisition, the experience was quite fragmented.

 

Despite the public acceptance of cryptocurrencies, most projects were unable to run direct ads on Twitter or Google. Product discovery still relied heavily on Twitter users talking about the product.

 

The advent of ownership through tokens has brought a new dynamic to the industry. In the crypto space, tokens effectively act as a customer acquisition cost (CAC). As the industry evolved, these tokens were used to acquire users in a variety of ways. Initially, users were acquired through ICOs, then rewarded through airdrops, and finally incentivized through liquidity mining. However, these methods have all proven to be inefficient.

 

New distribution channels like Layer3 emerged and sought to distribute tokens in a more efficient way to attract users. This is where "task platforms" come into play. The value proposition is simple: instead of spending money on advertising, brands can directly reward users.

When early adopters are looking for new products, they just go to the task platform and spend their time. The more products users engage with, the higher the token rewards they receive.

 

Founding Layer3

 

Layer3 was founded in 2021 by Brandon Kumar and Dariya Khojasteh. For those who remember, Layer3's initial landing page read "Earn Crypto by Doing Things." The basic premise is to create a protocol marketplace that can coordinate user behavior using its tokens. Interestingly, the duo raised their seed round using a website built on two no-code platforms, Webflow and Airtable.

The platform has now expanded into one of the fastest growing aggregators in the industry. Fueling this growth is a technology stack that solves pain points in user identification, asset allocation, and user ownership.

 

Prior to joining Layer3, Brandon was an investor at Accolade Partners, a multi-billion dollar asset manager and one of the largest VC and PE capital allocators in the world. His experience as an investor positions him well to manage the supply side of the business. Building relationships with protocol builders and cross-selling across dozens of VC-backed portfolios ensures the supply side of the network is strong. Of course, this requires a world-class product, and this is where Dariya comes in.

 

Dariya is an experienced application developer who has previously built and scaled multiple consumer applications. He was able to design the product experience that Layer3 is renowned for today. The thoughtful gamification and effective UX strategies he implemented resulted in a highly engaging and addictive consumer experience.

 

Essentially, Brandon focused on the B2B side of the business, onboarding protocols, while Dariya focused on the B2C side, onboarding consumers. This complementary approach was key to building Layer3 into a leading aggregation platform.

 

Solving the Cold Start Problem

 

In the early days of Layer3, there was a classic “chicken or egg” problem. Exploration platforms only have the ability to control prices if they have scale. Much like aggregators in the traditional world, your ability to control value depends on what you have on the demand side. Amazon can negotiate better prices with suppliers because it has users at scale.

 

But what do you do when you don’t have users? How do you compete in a space with multiple incumbents? This was the challenge Layer3 faced in its early days. They knew that they would have a hard time commanding pricing power until they had enough users. So their initial focus was on onboarding core believers.

 

Layer3’s earliest mission was focused on newly launched protocols — protocols whose applications were still in their infancy and that users would explore out of pure curiosity.

 

Layer3’s initial mission was to discover and showcase new products before the market discovered them. The focus was on curation, not monetization. Users quickly began to flock to the product because they knew it was a reliable source for finding cool things on-chain. A similar pattern emerged with the web in the mid-2000s.

 

As users moved online, Google gradually became the homepage for many users. Why? Because remembering websites is a hassle.

 

You can find social networks simply by visiting Google and typing in a query like “Face Book.” While researching this article, we came across multiple users whose primary motivation for using Layer3 was to discover new protocols in a safe and enjoyable way.

 

One strategy Layer3 adopted early on was to run tasks on a specific protocol before contacting them to pitch them a Layer3 product. Often, this would lead the founder to notice a large influx of users from the third-party product, which would make them inclined to work with Layer3.

 

Data specific to the Optimism chain

 

At the time of writing, Layer3 is one of the most used applications on Arbitrum , Base , and Optimism . As of June 29, they have helped users from 120 countries complete over 120 million on-chain operations. Nearly 4.5 million wallets have interacted with the product.

 

Today, Layer3 is powering the growth of 31 different chains and over 500 protocols across gaming, AI, DeFi, and NFTs.

 

According to the team, they receive onboarding interest from 60-90 protocols per month that are interested in joining their distribution network.

 

As we mentioned above, without the demand side, you can’t attract the supply side of the network. Now, let’s focus on user behavior and Layer3’s relationship with the end consumer.

 

Aggregating Demand

 

Layer3’s impressive growth and engagement metrics didn’t happen overnight. The company raised significantly less funding than its peers in 2022, but thoughtful gamification has enabled it to scale quickly. Drawing heavily from the Octalysis Framework , Layer3’s platform has become the benchmark for building industry-leading consumer experiences.

 

The Octalysis framework, developed by Yu-kai Chou, breaks down the complexity of gamification into eight core drivers that motivate human behavior. It forms the foundation for the Layer3 team to think about its products.

 

 

First, Layer3 inspires a quest for epic meaning and mission by allowing users to take ownership of protocols and projects. This gives users a sense of contributing to something greater than themselves. The drive for development and achievement is addressed through the platform’s XP system and rewards center, where users can accumulate experience points by completing activations (missions, competitions, and streaks), thereby maintaining a competitive advantage and unlocking more opportunities.

 

The drive for creativity and feedback is satisfied by letting users strategically spend gems within the platform store, promoting creativity and strategic planning. Ownership and possession is an important focus, and Layer3 ensures that users have a strong sense of ownership over their digital assets and identities through CUBE and ERC-20 tokens. More on this later.

 

This sense of ownership deepens user engagement and loyalty.

 

Layer3’s Leaderboards

 

In the process of writing this article, we interviewed several of their key users to understand their views on the platform.

 

Social influence and relevance are exerted through the leaderboard feature, which showcases top users and creates a competitive environment where users strive to improve their rankings and gain recognition. Scarcity and impatience are created through the implementation of time or participant capped tasks, contests and limited season durations, encouraging users to act quickly to reap the rewards.

 

Layer3 also leveraged unpredictability and curiosity by introducing treasure chests and loot boxes, enticing users to continue engaging with the platform to discover rewards they might unlock. Finally, the drive for loss and avoidance was addressed through a daily streak feature, incentivizing users to return to the platform regularly to avoid losing progress.

Some of the platform’s oldest users continue to use the product for over two and a half years due to the fear of losing their lead.

 

The Google of Crypto

 

When the web first emerged, its potential for profit was unclear. In the late 1990s, analysts speculated that people would check how many times a Microsoft page loaded to gauge the likelihood of an ad being served on that page. Attention was being digitized, but the mechanisms to measure its value did not exist. As large numbers of users began to concentrate on a few platforms, a solution emerged.

Google, Facebook, and Amazon created massive silos of data that could predict user sentiment, preferences, and curiosities.

 

These datasets were siloed and not publicly accessible to developers to target users. Ads on the web were like a tax paid to platforms for attracting users. The more time users spent on Facebook, the more likely Facebook was to show them ads. The more ads they saw, the more likely they were to buy. Facebook had an incentive to keep users hooked longer because their revenue depended on it.

From 2010 to 2020, the internet became a honeypot for attention, keeping us glued to our screens

 

Blockchain as a payment network enables advertisers to reward users directly

 

Incentives often explain why systems work the way they do. On products like Meta’s Instagram, WhatsApp, or Facebook, we share our most intimate details. In the mid-2010s, we checked in to restaurants, shared photos, and kept detailed records of our emotional states.

What we didn’t know was that the platforms incentivized us to hand over our data without us realizing what was happening.

 

As mobile devices became more powerful, networks no longer required us to log into their products. We gave away our data through Google searches, GPS coordinates, and sometimes even chats.

 

Layer3 disrupts this model in two powerful ways.

 

Users Own Their Data

 

Unlike the traditional advertising model, consumers on Layer3 own their data through CUBEs. These credentials are portable and held permanently by the user. Once issued, Layer3 cannot take them back. CUBEs are ERC-721 tokens that users receive when they complete activation on Layer3. Each CUBE contains custom metadata that unifies the user's on-chain session data. This enables users to own their on-chain footprint and helps the protocol better target the right users.

CUBE is the most popular NFT among Base, Optimism, Arbitrum, and zkSync, with over 1.5 million wallets holding Cube NFTs on various chains, according to Growthepie.xyz (as of June 17, 2024)

 

Cubes are on-chain credentials that grant users a certain action

 

Unit economics are good for consumers

 

In addition to owning their own data, users actually gain ownership of the protocols they use through Layer3. For example, if a consumer completes an Optimism activation on Layer3, they will receive OP. If they complete an Arbitrum activation on Layer3, they will receive ARB. This process is facilitated by Layer3's distribution protocol, which dynamically rewards users based on their on-chain footprint.

We’ll discuss this particular dynamic in the next section.

 

The result is a strong moat around consumer adoption and attention that enables Layer3s to attract a large audience and enables them to onboard more protocols, which in turn attract an even larger audience.

 

A few years ago, Jesse Walden published a blog post titled The Ownership Economy. The basic premise is that as individual contributions to platform value creation become more common, the next evolutionary step is toward software that is built, operated, funded, and owned by its users. This ownership is unlocked through tokens.

 

We believe in this future, but acknowledge that it has not yet materialized due to the lack of effective infrastructure for distributing ownership until recently. Mechanisms such as airdrops and liquidity mining have attempted to address this problem but have generally performed poorly.

 

One of Layer3's core value propositions for the protocol is to provide a more efficient way to distribute tokens to acquire users. The protocol routes tokens through Layer3 so that they reach the right user at the right time.

 

Milestones feature enables developers to require users to complete a series of actions over a period of time before they can receive rewards

 

Going a step further, last month, Layer3 launched a product called Milestones . The product observes user behavior over time and rewards users not for a single transaction, but for multiple activities. For example, a user may need to deposit funds into a smart contract for 30 days, or make five trades on Uniswap in a month.

Unlike the traditional airdrop model that focuses on a single event or cumulative transactions, Layer3's Milestone product allows developers to mix and match on-chain interactions that drive value.

 

To me, this highlights a key difference between scaling businesses in Web2 and scaling businesses in crypto. Unlike Google or Meta, Layer3 has little monopoly on their users’ data. As mentioned before, anyone can query it. They don’t even have a monopoly on how users get value. Anyone can query CUBE holders and send them tokens. Layer3 accrues value in two main ways:

 

● Long-term relationships with users:Transactions on the blockchain cannot be forged. Layer3 is able to curate users with years of transaction data through exploration on its platform, which is a significant moat.

 

● Curate the best products:Their ability to curate the best products stems from their user scale. In the early days, they had to do outreach, but today, products reach out to them. In the many user interviews we conducted, users often mentioned that they trust Layer3 as a product discovery engine. At the time of writing, Layer3 has partnered with nearly 500 different products.

 

Users benefit greatly from this model.

In the Web2 advertising model, users benefit very little from the multitude of products they are exposed to. They spend their most scarce asset — their time — hoping to find relevant content. Layer3’s approach is the opposite. Products compete with each other in token rewards for the user’s attention. The more valuable the user, the higher the reward for that user.

 

This bidding for users also happens in Web2, but most of the value is captured by platforms like Google rather than end users.

 

In contrast, Layer3 passes most of the value to the end user. Now, you might ask, “What’s the difference between Layer3 and the rest of the pack?” Remember when I explained that aggregation theory in crypto requires community? That’s the main ingredient. In products that form large communities, part of what keeps users coming back is their loyalty and relative standing within the community. This translates into long-term, timestamped proof of user activity on-chain.

 

Sure, you can find a million active wallets using a tool like Etherscan. But finding a curated list of users who have timestamped proof that they were early adopters of a new product and have a website where they can find you requires a platform. That’s where Layer3 is currently.

 

While researching this post, I stumbled across a blog by one of the Layer3 founders. Dariya wrote an article on his personal website titled "Attention is all I have." In a paragraph at the end of the article, he elaborated on the reasons for Layer3's moat. Attention, coordination, and distribution are all interrelated. Can you reach the crowd and get them to do things that are good for your ecosystem? A few analogies can solidify this: attention is oil, distribution is kerosene, and coordination is gasoline. On the Internet, value is usually accumulated only on the platform that gathers your attention. But at Layer3, our goal is to subvert this phenomenon. You own the network, you accumulate value. Projects issue value to you directly or indirectly, as shown by Layer3 users capturing 20.4% of the entire Arbitrum airdrop. In the past sixty days, more than two dozen projects have issued incentives directly through the protocol.

 

In other words, Layer3 can capture value while disrupting the historical relationship that has existed between ad networks and products. To me, this is the definition of a disruptor.

 

Moats, Value, and Habits

 

In my years of writing, I have learned that cryptocurrency will become a value network. At its core, blockchain facilitates the transfer of value. The primary use case is transactions that can occur on a global scale. Layer3
serving 4.5 million wallets in nearly 120 countries is the closest thing to a fully functional and scalable "value transfer network" that I have seen.

 

During the evolution of the web, advertising was a necessity to enable billions of users to use the internet. But we’ve passed that stage. Users are here today. What we need now is a better form of monetization and targeting. Layer3 sits right at the intersection of this shift — from attention networks to value networks. We’re moving from an era where users contribute their time and data to an era where users own their data and receive economic value.

If users can receive value (in the form of tokens or NFT minting), then platforms will inevitably have to compete to offer the best returns. This is where the Layer3 business model has a strong moat.

 

With the number of people currently using its product, Layer3 will be able to continue to attract users and build incentives for them. A large protocol like Uniswap may have no incentive to work with a new task platform with less than 100,000 users. But what if you can target 5 million wallets?

In terms of scale, this is the size of the entire DeFi market in 2021. This is where Layer3 is positioned. A similar example would be getting on the front page of Google Play or Steam in early 2012.

 

This will change the way developers think about launching an app. Products launched in crypto often face the cold start problem - finding an initial sticky user base to collect data is extremely difficult. Historically, products would partner with a well-known network like Polygon or Solana to solve this problem. However, with platforms like Layer3 offering distribution from day one, the reliance on the network is greatly reduced.

 

Developers can use Layer3 to run advertising campaigns, find a core user base, and reward them for being early adopters. In my opinion, this is the Google Ad Manager moment for crypto - developers realize that they can effectively invest resources into platforms that provide meaningful targeting, rather than investing resources into influencers.

 

Of course, such targeting has its advantages. The scale at which Layer3 operates means they can expand into their own product space. They can integrate with exchanges, with hundreds of millions of dollars flowing back and forth as users swap tokens within their products. They can even launch their own exchange or launch platform.

 

Data shared by Layer3 investors. The data tracks the number of transactions performed by users using Layer3 and users not using Layer3 in a specific time period. It was observed that Layer3 users were more active in each time period.

 

Attention is higher than liquidity. Layer3 has largely aggregated the former. The more transactions users make in their ecosystem, the greater the surface area they have to increase user lifetime value. The natural extension is to expand into verticals where users have demand. For example, Jupiter will take 1% of the token supply to issue new tokens.

 

What stops Layer3 from doing the same? It will create a flywheel where users flock to the product in hopes of getting in on new projects early, and new projects will use Layer3 to help scale.

 

Around 2003, Google decided to just index the web. Over the next five years, they IPO’d, launched GMail, acquired YouTube, and acquired Android. These moves laid the foundation for the internet we know today. Google was driven by the fact that more and more attention was pouring into the web and waiting to be monetized. Google was positioned to help spot these acquisitions by identifying where demand was going. That’s the advantage that comes with positioning.

 

Layer3 is in a similarly advantageous position. They are motivated to expand into new verticals because they can clearly see where users are spending the most time and resources. While blockchain data is public and visible to anyone, not everyone can activate the same user base because they lack Layer3’s direct relationship with users.

 

Layer3 has the distribution power needed to launch new product lines and expand value. The only thing missing is time and the compounding effect that comes with it.

 

When I met Brandon at TOKEN2049 in Dubai, one of the questions we discussed was how many of today’s protocols will last over the next decade. This view embodies how Brandon and Dariya think about their business. Most founders worry about the price of their token next quarter; these people are playing a decade-long game.

 

This doesn’t mean that the future is all bright for Layer3. Building value networks requires developers to accept offering token incentives in exchange for usage rights — a proven business model that has yet to see the light of day. As other consumer areas such as artificial intelligence gain public attention, the on-chain user market may shrink, or the total number of protocols willing to work with Layer3 may saturate.

 

All of these are real challenges. But if the past two years of Layer3’s operations are any indication, I’d bet Brandon and Dariya will still be around for the next decade, continuing to realize their vision of tokenized attention.