I first wrote about Aggregation Theory in the context of crypto in March 2022. Since then, I have closely observed how aggregation platforms have performed in several investment institutions’ portfolios.
● Hashflow’s transaction volume has exceeded $18 billion.
● Gem was acquired by OpenSea.
● Layer3 has expanded to 4.5 million wallets.
Layer3 is particularly special because this 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.
We’re excited to be working with Layer3 on today’s story. They’ve generously opened up their internal datasets and provided us with access to VCs and their top users. Over the past few weeks, we’ve been looking at how a business can become an attention grabber, much like Google was in the early 2000s. In today’s post, I’ll first rebut some of the arguments I made in 2022, then explain what aggregation platforms must do differently to build for scale.
We often think that consumer applications in crypto don’t scale. Yet Layer3 as a product has 4.5 million wallets and has completed 100 million tasks. In the process, they drove nearly 120 million on-chain operations. The scale is there, it’s just that these stories aren’t widely disseminated or studied.
Today’s post will walk you through the inner workings of how to produce similar results.
The power of aggregation
Before the internet, the hardest aspect of building any product or service was reaching customers. If you were making a consumer product, you could only sell it through brick-and-mortar 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.
There are three key elements in a supply chain: suppliers, distributors, and consumers.
● Suppliers : The side of the network that seeks distribution, such as advertisers for Google and Meta, retailers for Amazon, and content creators for Netflix
● Distributor : The distribution channel from the supplier to the final consumer
● Consumer : The demand side of the network, the final buyer of the product or service of the supplier
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: The platform incurs no incremental costs as more users join the platform. For example, Spotify or Netflix can distribute its content to 1 or 1 million users at no additional cost (other than serving infrastructure).
3. Network effect: Users go to the aggregation platform, which makes suppliers more willing to list on the platform, thereby attracting more users due to the increase in 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 is an aggregator, but it incurs marginal costs for serving each additional user.
Ultimately, aggregator platforms capture tremendous value because they improve efficiency and user experience on both sides of the marketplace.
Now, let’s turn our attention to cryptocurrencies to understand the emerging aggregation platform. Its 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: A distributor is any channel that has a direct relationship with consumers. This includes wallets, exchanges, and emerging models that 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 noted that for every $1 raised in venture capital, $0.40 goes to Google, Facebook, or Amazon. We believe this phenomenon will repeat itself in crypto, except that most teams will distribute their native tokens instead of cash. Another way to think about total addressable market potential (TAM) is to look at the value of the native tokens in the protocol team’s coffers.
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 this type of 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 user retention and evolved into a habit-forming product among its user base — something few startups in the industry today can do.
Behind these behavioral patterns are some very solid business fundamentals. To understand them, we need to go back to the beginning of 2022.
Wild Times
Before the collapse of Luna, 3AC, and FTX, the industry thought it had crossed the chasm. Buying stadium naming rights was seen as a path to mainstream success. However, when it comes to user acquisition, the experience is quite fragmented.
Despite the public acceptance of cryptocurrencies, most projects cannot advertise directly on Twitter or Google. Product discovery still relies heavily on Twitter users talking about products.
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 has grown, these tokens have been used to acquire users in various ways. Initially, users were acquired through ICOs, then users were rewarded through airdrops, and finally liquidity mining was used to incentivize capital participation. However, these methods have proven to be inefficient.
New distribution channels such as Layer3 have emerged and seek to distribute tokens in a more efficient way to attract users. This is where the "task platform" comes into play. Its value proposition is simple: instead of spending money on advertising, brands can directly reward users.
When early adopters are looking for new products, they simply 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 original landing page read "Earn Crypto by Doing Things." The basic premise was to create a protocol marketplace that leverages its tokens to coordinate user behavior. Interestingly, the duo raised their seed round using a website built on two no-code platforms, Webflow and Airtable.
The platform has now expanded to become 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 that the supply side of the network is strong. Of course, this requires a world-class product, and this is where Dariya comes into play.
Dariya is an experienced app developer who has previously built and scaled multiple consumer apps. He is well-placed to design the product experiences that Layer3 is renowned for today. His implementation of thoughtful gamification and effective UX strategies has resulted in highly engaging and addictive consumer experiences.
Essentially, Brandon focuses on the B2B side of the business, onboarding protocols, while Dariya focuses on the B2C side, onboarding consumers. This complementary approach is key to establishing Layer3 as a leading aggregation platform.
Solving the cold start problem
In the early days of Layer3, there was a classic "chicken or egg" problem. Discovery platforms can only 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 a large user base.
But what do you do when you have no 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 gaining pricing power until they had enough users. So their initial focus was on onboarding core believers.
Layer3’s earliest missions focus on newly launched protocols — protocols whose applications are still in their infancy and which users 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 for the web in the mid-2000s.
As users surf the Internet, Google becomes the homepage for many users. Why? Because remembering websites is a hassle.
You can find social networks simply by going to Google and typing in a query like “Face Book.” While researching this article, we came across multiple users whose primary motivation for using Layer 3 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 founders to notice a large influx of users from the third-party product, which would make them inclined to work with Layer3.
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 more than 120 million on-chain operations . Nearly 4.5 million wallets have interacted with the product.
Today, Layer 3 drives the growth of 31 different chains and over 500 protocols across gaming, AI, DeFi, and NFTs.
According to the team, they receive access interest from 60-90 protocols per month that are interested in joining their distribution network.
As we mentioned above, without the demand side, you cannot attract the supply side of the network. Now, let’s focus on user behavior and the relationship between Layer 3 and the end consumer.
Aggregate Demand
Layer3’s impressive growth and engagement metrics didn’t happen overnight. In 2022, the company raised far less money than its peers, but thoughtful gamification enabled it to scale quickly.
’s platform draws heavily from the Octalysis framework and has become the benchmark for creating 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 basis for the Layer3 team to think about its products.
First, Layer3 inspires people to pursue epic meaning and mission by allowing users to gain 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 (tasks, competitions, and streaks), thereby maintaining a competitive advantage and unlocking more opportunities.
The drive for creativity and feedback is met by letting users strategically use gems within the platform store, thereby 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.
In the process of writing this article, we interviewed several of their key users to get their thoughts on the platform.
Social influence and relevance are leveraged through a leaderboard feature that 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, competitions , and limited season durations, encouraging users to act quickly to reap the rewards.
Layer3 also leverages unpredictability and curiosity by introducing treasure chests and loot boxes, enticing users to continue engaging with the platform to discover rewards they may unlock. Finally, the drive for loss and avoidance is 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 more than two and a half years out of 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 assess the likelihood of placing an ad on that page. Attention was being digitized, but the mechanism for measuring its value did not exist. As large numbers of users began to converge on a few platforms, solutions emerged.
Google, Facebook, and Amazon have created massive silos of data that can predict user sentiment, preferences, and curiosities.
These data sets are siloed and cannot be publicly accessed by developers to target users. Advertising on the web is like a tax paid to the platform for attracting users. The longer a user spends on Facebook, the more likely Facebook is to show them ads. The more ads they see, the more likely they are to buy. Facebook has an incentive to keep users hooked longer because their revenue depends on it.
From 2010 to 2020, the internet became a honeypot for our attention, keeping us glued to our screens.
Incentives often explain why a system works the way it does. 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 documented our emotional states in detail.
What we don’t know is that the platforms incentivize us to hand over our data without us even realizing what’s happening.
As mobile devices become more powerful, networks no longer require us to log into their products. We give away our data through Google searches, GPS coordinates, and sometimes even chats.
Layer3 disrupts this model in two powerful ways.
User owns data
Unlike traditional advertising models, consumers on Layer3 own their data through CUBEs. These credentials are portable and permanently held by the user. Once issued, Layer3
Cannot be withdrawn. CUBEs are ERC-721 tokens that users receive when they complete Layer3 activation. 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.
According to Growthepie.xyz (as of June 17, 2024), CUBE is the most popular NFT among Base, Optimism, Arbitrum, and zkSync, with over 1.5 million wallets holding Cube NFTs on various chains.
Good unit economics 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 discuss this particular dynamic in the next section.
The result is a strong moat built around consumer adoption and attention, enabling Layer 3s to attract a large audience and enabling them to onboard more protocols, thereby attracting 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 to move 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 been realized because effective infrastructure for distributing ownership has not existed 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 protocols is to provide a more efficient way to distribute tokens to acquire users. Protocols route tokens through Layer3 so that they reach the right user at the right time.
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 traditional airdrop models that focus 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, Layer3s have little monopoly over 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. Layer3s accrue value in two main ways:
● Long-term relationships with users: Transactions on the blockchain cannot be forged. Layer3 is able to manage users using years of transaction data through exploration on its platform, which is an important 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 worked with nearly 500 different products.
Users benefit greatly from this model.
In the Web2 advertising model, users gain little from the multitude of products they are presented with. They spend their most scarce asset — their time — hoping to find relevant content. The Layer3 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 the 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, Layer 3 passes most of the value to the end user. Now, you might ask, “What differentiates Layer 3 from the rest of the pack?” Remember when I explained that aggregation theory in crypto requires community? This is 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, time-stamped proof of a user’s activity on-chain.
Sure, you can find a million active wallets using tools like Etherscan. But finding a curated list of users who have timestamped proof that they were exposed to a new product early and have a website where they can find you requires a platform. That’s where Layer3 is currently at.
While researching this article, I stumbled upon a blog post by one of Layer3’s founders. Dariya wrote an article on his personal website titled “ Attention is Everything to Me .” 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 people 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 generally only accrues to the platform that aggregates your attention.
But at Layer3, we aim to subvert this. You own the network, you accrue 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, Layer 3 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, Values, and Habits
In my years of writing, I have learned that cryptocurrency will become a value network. The core of the blockchain is to facilitate the transfer of value. The main use case is transactions that can occur globally. Layer3
Serving 4.5 million wallets in nearly 120 countries, it’s the closest thing to a fully functional and scalable “value transfer network” I’ve ever seen.
During the evolution of the web, advertising was a necessity to enable billions of users to use the internet. But we are past that stage. Users are here today. What we need now is a better form of monetization and targeting. Layer3 is right at the intersection of this transition - from attention networks to value networks. We are 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 gain value (in the form of tokens or NFT minting), then platforms will inevitably have to compete to offer the best returns. This is where Layer 3 business models have a strong moat.
With the number of people currently using their products, Layer3 will be able to continue to attract users and build incentives for them. A large protocol like Uniswap may not have the motivation to cooperate 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 fits in. 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 applications. Products launched in the form of cryptocurrencies often face the cold start problem - it is very difficult to find an initial sticky user base to collect data. Historically, products would partner with well-known networks such as Polygon or Solana to solve this problem. However, with platforms such as Layer3 providing distribution from day one, the dependence on the network is greatly reduced.
Developers can use Layer3 to run ad campaigns, find a core group of users, 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, this positioning has its advantages. The scale of Layer3 operations means they can expand into their own product areas. They can integrate with exchanges, and hundreds of millions of dollars flow back and forth as users swap tokens within their products. They can even launch their own exchanges or launch platforms.
Attention is higher than liquidity. Layer3 gathers the former to a large extent. The more transactions users make in their ecosystem, the greater the surface area they increase the lifetime value of users. The natural extension is to expand into verticals where users have demand. For example, Jupiter will extract 1% of the token supply to issue new tokens.
What stops Layer3 from doing the same thing? It will create a flywheel where users flock to the product in hopes of getting involved in new projects early, and new projects will use Layer3 to help achieve 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 as we know it today. Google was driven by the fact that more and more attention was pouring into the web and waiting to be monetized. Google’s positioning helped spot these acquisitions by identifying where demand was going. That’s the advantage that comes with positioning.
Layer3 is in a similar advantageous position. They are motivated to expand into new verticals because they can clearly see where users spend 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 the direct relationship that Layer3 has with its users.
Layer3 has the distribution capabilities needed to launch new product lines and scale 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 of Layer 3 is all bright and rosy. Building value networks requires developers to accept token incentives in exchange for usage rights — a mature 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 Layer 3 may become saturated.
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 be around for the next decade, continuing to realize their vision of tokenized attention.
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