Acknowledgement: This article was written with help from multiple prominent Layer3 users and insights from the folks at Greenfield Capital - Mateuz, Claude and Markus. We would like to thank everyone above for taking the time to help with the research for this article.

Hello!
In March of 2022, I first wrote about Aggregation Theory in the context of crypto. Since then, I have seen it play out in several portfolio companies up close.

• Hashflow has done $18 billion+ in volume.
• Gem was acquired by OpenSea.
• Layer3 has scaled to 4.5 million wallets.

Layer3 is particularly special as it was the last check I signed out of LedgerPrime before the FTX fallout. I wish I could claim we predicted these outcomes with genius foresight, but it was somewhat random. However, with the benefit of hindsight, it’s worth revisiting Aggregation Theory and exploring the patterns founders can tap into for scaling their own ventures.

For today’s story, we had the pleasure of collaborating with Layer3. They were kind enough to open up internal datasets and provide access to VCs and their top users. Over the past weeks, we have studied how a business can become an attention sink, much like Google did in the early 2000s. In today’s issue, I will first refute some of the claims I made in 2022 and then proceed to explain what aggregators must do differently to build to scale.

We often think consumer applications in crypto don’t scale. But Layer3 as a product has 4.5 million wallets that have completed 100 million quests. In that process, they have driven close to 120 million on-chain actions. Scale is here. It’s just that these stories are not as widely distributed or studied.

Today’s issue will take you through the inner workings of producing a similar outcome.

The Power of Aggregation

Before the internet, the most challenging aspect of building any product or service was reaching customers. If you were to manufacture a consumer good, you could sell it only through physical brick-and-mortar stores. This inherently limited the number of consumers you could reach. The internet’s key unlock was its ability to aggregate demand globally.

This aggregation gave rise to many of the behemoths that are household names today: Google, Netflix, Amazon, and Meta, all of which follow some, if not all, of the characteristics of Aggregation Theory.

There are three key elements to supply chains: suppliers, distributors, and consumers.

• Suppliers: the side of the network seeking distribution, such as advertisers for Google and Meta, retailers for Amazon, and content creators for Netflix
• Distributors: the distribution channel through which the supply side reaches the end consumer
• Consumers: the demand side of the network, the end purchasers of the product or service from the supply side.

Aggregation Theory refers to the integration of supply, distribution, and demand to improve processes, reduce cost, and drive efficiency. Aggregators have three characteristics:

1. Direct relationship with consumers: the platform owns the consumer’s time and attention directly. For instance, consumers visit Amazon to purchase goods or Netflix to consume content.
2. Zero marginal costs for serving new users: the platform doesn’t incur incremental costs as more users come to the platform. For instance, Spotify or Netflix can distribute their content to 100 or 1 million users without additional costs (service infrastructure notwithstanding).
3. Network effects: users go to the aggregator, making it more appealing for suppliers to be on the destination and thus attracting more users because of the increased supply. For instance, users come to Amazon to purchase goods, which attracts manufacturers to sell through Amazon, which in turn attracts more users because of the diverse supply.

Not all aggregators meet every characteristic. For instance, Amazon is an aggregator but incurs marginal costs for each incremental user it serves.

Ultimately, aggregators accrue tremendous value because they improve efficiency and user experience for both sides of the marketplace.

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

• Suppliers: the supply side of crypto is constituted by Layer 1 or Layer 2 blockchains, as well as dApps with native tokens. The former seeks to distribute blockspace whereas the latter offers a product to consumers. These players are all in pursuit of efficient distribution to reach and acquire users.
• Distributors: a distributor is any channel with a direct relationship with consumers. This includes wallets, exchanges, and an emergent model which we will discuss further below.
• Consumers: developers, institutions, or retail participants in demand of blockspace or on-chain applications are consumers.

The supply side of the market is increasingly fragmented, with hundreds of Layer 1 and Layer 2 blockchains and thousands of dApps. Many of these projects have raised tens of millions in venture financing and have treasuries worth hundreds of millions of dollars. Those assets will be spent on distribution as all compete to reach their target audience.

In a 2019 panel, Chamath Palihapitiya famously pointed out how $0.40 of every $1 raised in venture capital goes to Google, Facebook, or Amazon. We believe the same dynamic will occur in crypto, except instead of spending cash, most teams will distribute their native tokens. Another way to think of TAM is the value of native tokens sitting in the treasuries of protocol teams.

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

As the market value of these tokens rises, they will become the primary tool for incentivisation on the internet.

We also believe there are a handful of applications well-positioned to emerge as the primary distribution channel for this spend.

Today’s issue looks at a business that is at the heart of these factors. We spoke to multiple top users during our research, and they explained that Layer3 has become the Google-for-crypto for many new users. They bookmark the page as a mechanism to find new products or simply find the right links for ones they routinely use. In other words, the product has crossed the chasm from needing to retain users to one that has developed habits among its user base—a claim very few startups in the industry can make today.

Underlying those behavioural patterns are some extremely sound business fundamentals. To understand what those are, we need to go back to early 2022.

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Wild Times

Before the crash of Luna, 3AC, and eventually, FTX, the industry briefly thought it had crossed the chasm. Buying stadium naming rights was seen as the way to break into the mainstream. However, when it came to user acquisition, the experience was quite fragmented.

Despite the public’s acceptance of crypto, most projects could not run direct advertisements on Twitter or Google. Product discovery still relied heavily on Twitter users talking about a product.

The emergence of ownership via tokens created a new dynamic in the industry. In crypto, tokens effectively serve as Customer Acquisition Cost (CAC). As the industry evolved, these tokens have been used in various ways to acquire users. Initially, users were acquired through selling to the community (ICOs), then by retroactively rewarding users (airdrops), and finally, by rewarding capital alignment (liquidity mining). However, all these methods proved to be inefficient.

New distribution channels, like Layer3, emerged and sought to distribute tokens to acquire users in a more efficient and performant way. This is where ‘questing’ platforms came into play. The value proposition was straightforward: instead of brands spending money on advertisements, they would directly reward users.

Early adopters looking for new products would simply go to questing platforms and spend their time. The more products a user engaged with, the higher the token incentives they received.

Founding Layer3

Layer3 was founded in 2021 by Brandon Kumar and Dariya Khojasteh. For those who remember, Layer3’s original landing page read ‘Earn Crypto by Doing Shit.’ The basic premise was to create a marketplace for protocols to leverage their tokens to coordinate user behaviour. Funnily enough, the two raised their seed round using a website built on Webflow and Airtable, two no-code platforms.

The platform has since scaled into one of the industry’s fastest-growing aggregators. Aiding that growth is a tech stack that is able to address pain points across identification of users, distribution, and user ownership of assets.

Before Layer3, Brandon was an investor with Accolade Partners, a multi-billion dollar asset manager, and one of the largest capital allocators to VC and PE globally. His experience as an investor positioned him well to manage the supply side of the business. Building relationships with protocol builders and cross-selling across dozens of VC-backed portfolios ensured the network’s supply side was robust. Naturally, this required a world-class product, and this is where Dariya came in.

Dariya, a seasoned app developer, had previously built and scaled several consumer apps. He was well-positioned to design the product experience that Layer3 is now renowned for. The thoughtful gamification and effective UX strategies he implemented led to highly engaging and addictive consumer experiences.

In essence, Brandon focuses on the B2B side of the business, onboarding protocols, while Dariya focuses on the B2C side, engaging consumers. This complementary approach has been key in establishing Layer3 as a leading aggregator.

Solving Cold Start Problems

During Layer3’s early days, there was a classic chicken-and-egg problem. Questing platforms have the power to command prices only if they have scale. Much like aggregators in the traditional world, your ability to command value is determined by what you have on the demand side. Amazon can negotiate for better pricing from its vendors because it has users at scale.

But what do you do when you have no users? How do you compete in a sector with multiple incumbents? This was the challenge faced by Layer3 in its early days. They knew they would struggle with pricing power until they had a critical mass of users. So, much of their initial focus was on bootstrapping core believers.

Layer3’s earliest quests were focused on newly launching protocols—ones where applications were still in their infancy and that users would explore out of sheer curiosity.

Layer3’s initial quests aimed to discover and surface new products before the market discovered them. The focus was on curation more than monetisation. Users quickly began to flock to the product, as they knew it was a reliable source for finding cool things to do on-chain. A similar paradigm occurred with the web in the mid-2000s.

As users came online, Google gradually became the homepage for many users.
Why? Because remembering websites was a pain.

You could simply go to Google and enter queries like “Face Book” to find the social network. Over the course of researching this piece, we came across multiple users whose primary motive for using Layer3 was for discovering new protocols in a safe and enjoyable way.

One early tactic Layer3 employed was to run quests for a given protocol before reaching out to sell them on the Layer3 offering. Oftentimes, this led to founders noticing a significant influx of users from a third-party product, which inclined them to collaborate with Layer3.

Data specific to Optimism chain

At the time of writing this, Layer3 is one of the most used apps on Arbitrum, Base, and Optimism. As of June 29, they had helped complete over 120 million on-chain actions with users from 120 countries. Close to 4.5 million wallets have interacted with the product. Today, Layer3 drives growth for 31 different chains and 500+ protocols across gaming, AI, DeFi, and NFTs.

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

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

Aggregating Demand

Layer3’s impressive growth and engagement metrics didn’t happen overnight. In 2022, the company had raised much less than its peers, but thoughtful gamification enabled it to scale quickly. Drawing heavily from the Octalysis framework, Layer3’s platform has become a benchmark for creating an industry-leading consumer experience.

The Octalysis framework, developed by Yu-kai Chou, breaks down the intricacies of gamification into eight core drives that motivate human behaviour. It forms the basis for how the team at Layer3 thinks about their product.

First, Layer3 taps into the drive for Epic Meaning & Calling by allowing users to earn ownership in protocols and projects. This gives users a sense of contributing to something greater than themselves. The drive for Development & Accomplishment is addressed through the platform’s XP system and Rewards Hub, where users accumulate experience points by completing activations (Quests, Races, and Streaks), thus maintaining their competitive edge and unlocking more opportunities.

The drive for Creativity & Feedback is catered to by enabling users to use gems strategically within the platform’s shop, fostering creativity and strategic planning. Ownership & Possession is a significant focus, with Layer3 ensuring that users feel a strong sense of ownership over their digital assets and identities through CUBEs and ERC-20 tokens. More on this in a bit.

This sense of ownership deepens user engagement and loyalty.

Layer3’s leaderboard. We spoke to several of their leading users to understand how they think of the platform over the course of writing this story.

Social Influence & Relatedness is leveraged through the leaderboard feature, which showcases top users and fosters a competitive environment where users strive to improve their ranking and gain recognition. The drive for Scarcity and Impatience is created by implementing time- or participant-capped quests, races, and limited season durations, encouraging users to act quickly to reap the benefits.

Layer3 also taps into Unpredictability & Curiosity by introducing chests and loot boxes, which entice users to continue engaging with the platform to discover what rewards they might unlock. Lastly, the drive for Loss and Avoidance is addressed through the daily streak feature, motivating users to return to the platform regularly to avoid losing their progress.

Some of the platform’s longest standing users have continued to use the product continuously for over two and a half users as they are worried of losing their lead.

Google for Crypto

When the web first emerged, its monetisation potential was unclear. Analysts in the late 1990s were speculating on the number of times a person would see the Microsoft loading page to assess the possibility of running ads on it. Attention was going digital, but the mechanisms to measure its value did not exist. The solution emerged as large numbers of users began concentrating on a handful of platforms.

Google, Facebook, and Amazon created massive silos of data that could predict users’ moods, preferences, and curiosities.

These data sets were siloed and not openly accessible for developers to tap into and target users. Advertisements on the web function as a tax paid to platforms to reach a user. The longer a user spent on Facebook, the higher the probability that Facebook could show them ads. And the more ads they saw, the higher the probability of a purchase. Facebook was incentivised to keep users hooked for longer because their revenue depended on it.

Between 2010 and 2020, the internet devolved into an attention honeypot that kept us glued to the screen

Blockchains being money rails, enables advertisers to directly reward users.

Incentives often explain why systems operate the way they do. On products like Meta’s Instagram, WhatsApp, or Facebook, we shared our most private details. During the mid-2010s, we checked into restaurants, shared photos, and wrote at length about our emotional states.

Unbeknownst to us, the platform incentivised giving up our data without us fully recognising what was happening.

As mobile devices became increasingly powerful, the web no longer needed us to sign into their products. We give up our data through Google searches, GPS coordinates, and sometimes even our chats.

Layer3 inverts this model in two powerful ways.

User-Owned Data

Unlike traditional ad models, consumers on Layer3 own their data via CUBEs. These credentials are portable and held by the user in perpetuity. Once issued, Layer3 cannot take them away. CUBEs are ERC-721 tokens users receive when completing activations on Layer3. Custom metadata is included in each one that unifies a user’s on-chain session data. This allows users to own their on-chain footprint and helps protocols better target the right users.
According to Growthepie.xyz (as of June 17, 2024), CUBEs were the most popular NFTs across Base, Optimism, Arbitrum, and zkSync, with over 1.5 million wallets owning Cube NFTs across chains

Cubes are on-chain credentials given to users for carrying out a certain action.

Positive Unit Economics for Consumers

In addition to owning their data, users actually earn ownership of the protocols they use through Layer3. For instance, if a consumer completes an Optimism activation on Layer3, they earn OP. If they complete an Arbitrum activation on Layer3, they earn 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 powerful moat around consumer adoption and attention, that allows Layer3 to build a large audience and enables them to onboard more protocols, which attracts an even larger audience.

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

We believe in this future but acknowledge that it hasn’t materialised yet due to the lack of good infrastructure for efficient ownership distribution until recently. Mechanisms such as airdrops and liquidity mining have attempted to solve this problem but have generally underperformed.

One of Layer3’s core value propositions to protocols is offering a more efficient way to distribute tokens to acquire users. Protocols route tokens through Layer3 to reach the right user at the right time.

Milestones empower developers to require a mix of actions to be done by a user over a period of time before a reward is offered.

Taking this a step further, last month, Layer3 launched a product named Milestones. This product observes user behaviour over time, rewarding users not for single transactions but for a mix of activities. For instance, users might be required to park capital in a smart contract for 30 days or perform five transactions on Uniswap over a month.

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

To me, this highlights the primary difference between how businesses of scale in Web2 will differ from those in crypto. Unlike Google or Meta, Layer3 holds little monopoly on its users’ data. As mentioned earlier, anyone can query it. They don’t even hold a monopoly on how their users can derive value. Anybody can query CUBE holders and send them tokens. Layer3 accrues value in two key ways:

• Long-standing Relationship with Users: you cannot fake past transactions on a blockchain. Layer3’s ability to curate users with years of transactional data through questing on their platform is a significant moat.
• Curating the Best Products: their ability to curate the best products stems from their scale of users. Early on, they had to do outreach, but today, products reach out to them. In multiple user interviews we conducted, users frequently mentioned their trust in Layer3 as a product discovery engine. At the time of writing, Layer3 has collaborated with close to 500 different products.

The user benefits greatly from this model.

In Web2 advertisement models, users gain little from the many products they are bombarded with. They spend their most scarce asset—time—hoping to find relevant content. Layer3’s approach is the opposite. Products compete with one another in terms of token rewards for the user’s attention. The more valuable a user is, the higher the user’s reward.

This bidding for users happens in Web2 as well, but much of that value is captured by platforms like Google, and not the end user.

Layer3, in contrast, passes much of that value to the end user. Now, you might ask, “What differentiates Layer3 from its peers?” Remember the part where I explained that Aggregation Theory in crypto requires community? That is the primary element. In products where large communities form, part of what keeps a user coming back is their loyalty and relative status within a community. This translates to long-term, time-stamped proof of a user’s activity on-chain.

Sure, you can find a million wallets with activity on them using a tool like Etherscan. But finding a curated list of users with time-stamped proof of being early to a new product and having a single website where they can find you require a platform. And that is where Layer3 is today.

In researching this piece, I came across a blog by one of Layer3’s founders. Written by Dariya on his personal website is a piece titled ‘Attention Is All I Have.’ In a paragraph towards the end, he drives home his reason for Layer3’s moat.

Attention, coordination, and distribution are all interrelated. Can you get to people, and can you get people to do the things beneficial to your ecosystem? A few analogies will solidify this: Attention is oil. Distribution is kerosene. Coordination is petroleum. On the internet, value typically only accrues to the platform that aggregated your attention.

But with Layer3, we aim to flip that on its head. You own the network, you accrue the value. Projects issue value directly or indirectly to you, as demonstrated by Layer3 users capturing 20.4% of the entire Arbitrum airdrop. And twenty more issuing incentives directly through the protocol in the last sixty days.

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

Moats, Value, and Habits

In all my years of writing, I have understood that crypto will become a network of value. At its core, blockchains facilitate value transfer. The primary use case is a transaction that can happen on a global scale. Layer3 servicing 4.5 million wallets across nearly 120 countries is the closest I have seen to a functional and scaleable ‘network of value transfer’.

When the web was evolving, ads were necessary to make the internet accessible to billions of users. But we are past that phase. The users are here today. What we need now is a better form of monetization and targeting. Layer3 fits right at the juncture of that transition—from a web of attention to one of value. We are moving from an era where users give their time and data to one where they own their data and receive economic value.

If users are able to receive value (as tokens or NFT mints), then platforms would inevitably have to compete to offer the best rewards. This is where Layer3’s business model has strong moats.

By virtue of the number of people that use their product today, Layer3 will be able to continue to onboard and structure incentives for their users. A large protocol like Uniswap may have no incentive to work with a new questing platform that has fewer than 100K users. But what if you could target five million wallets?

For scale, that is the size of the whole DeFi market in 2021. That is where Layer3’s positioning is. The parallel would be making the front page of Google Play or Steam in early 2012.

This would change how developers think of launching applications. Products launching in crypto routinely face a cold-start problem—finding an initial sticky user base to gather data from is incredibly difficult. Historically, products would align with prominent networks like Polygon or Solana to solve this. However, as platforms like Layer3 offer distribution from day one, reliance on networks reduces significantly.

A developer could spin a campaign with Layer3, find a core user base, and reward them for being early adopters. In my mind, this is the Google Ad Manager moment for crypto—a pivotal point where developers realize they can spend resources effectively on platforms that offer meaningful targeting instead of spending them on KOLs.

Naturally, such positioning comes with its advantages. The scale at which Layer3 operates means they could expand into their own product offerings. They could integrate with an exchange and see hundreds of millions of dollars flow back and forth as users swap tokens within their product. They could even launch their own exchange or a launchpad.

Data shared by a Layer3 investor. Data tracks number of transactions conducted over a specific period of time between users that used Layer3, and ones that did not. Layer3 users were observed to be more active across time periods.

Attention comes before liquidity. Layer3 has substantially gathered the former. The more transactions users make within their ecosystem, the higher the surface area for them to increase the lifetime value of a user. The natural extension would be to scale into verticals where their users show demand. For instance, Jupiter takes 1% of token supply for launching a new token.

What’s stopping Layer3 from doing the same? It would create a flywheel where users flock to the product in hopes of being early to new projects, and new projects would use Layer3 to help find scale.

Around 2003, Google decided it was done solely indexing web pages. Over the next five years, they would issue their IPO, launch GMail, acquire YouTube, and buy out Android. These moves set the foundation for what we know as the internet today. Google was driven by an understanding that an increasing amount of attention was coming online and waiting to be monetized. Google’s positioning helped discover these acquisitions by recognizing where demand was heading. This is the advantage that comes from positioning.

Layer3 is in a similarly advantageous position. They have the incentives to expand into new verticals as they can evidently see where their users are spending the most time and resources. While blockchain data is public and can be seen by anyone, not everyone can activate the same user base because they lack the direct relationship Layer3 has with its users.

Layer3 has the distribution needed to launch new product lines and scale to value. All that’s missing is time and the compounding effects that come with it.

When I met Brandon at TOKEN2049 in Dubai, one of the things we discussed was how many of today’s protocols would last the next decade. This perspective captures how Brandon and Dariya think about their business. Most founders are worried about their token’s price next quarter; these guys are playing a decade-long game.

This is not to imply that Layer3 has a trail of roses ahead. Building a web of value requires developers to embrace giving away token incentives in exchange for usage—an established business model yet to be seen. The market for on-chain users could dwindle as other consumer segments like AI grab public attention, or the total number of protocols willing to work with Layer3 could saturate.

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

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