Written by: Joel John, LedgerPrime Translated by: Yangz, Techub News
In March 2022, I wrote my first article on Aggregation Theory in the cryptocurrency space. Since then, I have watched the performance of related companies:
Hashflow’s transaction volume exceeds $18 billion
Gem is acquired by OpenSea
The number of Layer3 interactive wallets reached 4.5 million
Layer3 is particularly special because it was the payee of the last check I wrote at LedgerPrime before the FTX crisis. I would like to say that we predicted the success of Layer3 with genius foresight, but to some extent, predictions are random.
Only, in hindsight, it’s worth revisiting Aggregation Theory and having a deeper conversation about how founders can use it as they scale their businesses. We are excited to partner with Layer3. They opened up their internal dataset and provided access to VCs and their top users.
Over the past few weeks, we’ve looked at ways that Layer3 can become a hub for attention, much like Google did in the early 2000s.
In this post, I’ll first debunk some of the claims I made in 2022, then explain what aggregation platforms must do differently to scale. We often think of consumer applications in crypto as unscalable. But Layer3 is a product that has 4.5 million wallets interacting with it and completing 100 million tasks.
In the process, the app has driven nearly 120 million on-chain operations. This is the scale of consumer cryptocurrency adoption, it’s just that these stories are not widely spread and studied. This article will walk you through the inner workings of how this scale is achieved.
The power of aggregation
Before the internet, the biggest challenge in building a product or service was reaching customers. If the product was some kind of consumer good, you could only sell it through physical stores. This inherently limited the number of consumers you could reach. The internet’s critical role is its ability to aggregate global demand.
This aggregation capability has given rise to many of today’s household names: Google, Netflix, Amazon, and Meta, all of which follow some or all of the characteristics of Aggregation Theory. There are three key elements in a supply chain: suppliers, distributors, and consumers.
Supplier: The party in a network that seeks distribution, such as advertisers in the case of Google and Meta, retailers in the case of Amazon, and content creators in the case of Netflix.
Distributor: The distribution channel through which suppliers reach end consumers.
Consumer: The demand side of the network, that is, the final purchaser of the supplier's products or services.
Aggregation theory refers to the integration of supply, distribution and demand to improve processes, reduce costs and increase efficiency. Aggregation platforms have three main characteristics:
Direct relationship with consumers: The platform directly owns the consumer’s time and attention. For example, consumers visit Amazon to buy goods, while they visit Netflix to consume content.
The marginal cost of serving a new user is zero: the platform incurs no incremental costs as it adds more users. For example, Spotify or Netflix can distribute content to 1 or 1 million users with no incremental costs (although there are costs for the serving infrastructure).
Network effect: Users’ willingness to go to the aggregation platform will attract more suppliers to the platform, and the increase in suppliers will attract more users. For example, users will go to Amazon to buy goods, which will attract manufacturers to sell through Amazon, and in turn Amazon will attract more users due to the diversification of its supply.
It should be clear that not all aggregation platforms meet all characteristics. For example, as an aggregation platform, Amazon incurs marginal costs for each incremental user it serves. In general, aggregation platforms can improve the efficiency and user experience of both sides of the market, thereby accumulating huge value. Now, let's turn our attention to the cryptocurrency industry and learn about emerging aggregation platforms. The supply chain situation in the cryptocurrency industry is as follows:
Suppliers: Suppliers of cryptocurrencies consist of L1 or L2 and dApps with native tokens. The former aims to distribute block space, while the latter provides products to consumers. These players are all pursuing efficient distribution to reach and acquire more users.
Distributors: Distributors are any channel that has a direct connection to consumers, including wallets, exchanges, and the emerging models we discuss further below.
Consumers: Developers, institutions, or retail participants who have demand for block space or on-chain applications are all consumers.
The cryptocurrency market is increasingly fragmented with hundreds of L1s, L2s, and thousands of dApps. Many of these projects have raised tens of millions of dollars in venture funding and have hundreds of millions of dollars in war chests to distribute to reach a wider target audience. During a 2019 panel discussion, billionaire Chamath Palihapitiya noted that for every $1 of venture funding raised, $0.4 goes to Google, Facebook, or Amazon. We believe a similar dynamic will play out in crypto, except that most teams are distributing native tokens instead of cash. Another way to think of TAM (total addressable market size) is the value of native tokens in the treasury of the protocol team. As of June 2024, the top 20 blockchain ecosystems hold over $25 billion worth of tokens in their treasuries, earmarked for distribution to users and stakeholders. This value is expected to grow over the next few years as thousands of projects issue native tokens. As these tokens grow in market capitalization, they will also become the primary incentive tool on the internet.
Additionally, we believe that there are a handful of applications that have the capabilities to become major distribution channels. It is at the heart of this channel that we are going to discuss today. During our research, we interviewed several senior users who said that Layer3 has become the Crypto version of Google for many new users. They will bookmark Layer3’s homepage to find new products, or simply use it as a tool to open the correct product link. In other words, the product has crossed the gap between user retention and cultivating user habits (which few startups in the industry can currently do). Behind this is Layer3’s extremely sound business fundamentals. To understand these fundamentals, 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 of “mainstream adoption.” Purchasing stadium naming rights was seen as the primary path to mainstream market entry. However, when it comes to user acquisition, industry experience is still extremely fragmented. Despite the high public acceptance of cryptocurrencies, most projects are unable to advertise directly on Twitter or Google. Product discovery still relies heavily on discussions among Twitter users. The emergence of token ownership has brought new vitality to the industry. In cryptocurrency, tokens are actually customer acquisition costs (CAC).
As the industry has evolved, these tokens have been used to acquire users in various ways. Initially, projects acquired users by selling to the community (ICO), then various retroactive rewards (airdrops), and finally rewards for staked capital (liquidity mining). However, all of these methods have proven to be inefficient. As a result, Web3 task platforms (such as Layer3) have emerged as new distribution channels, seeking to distribute project tokens in a more efficient way and help them acquire users. The value proposition of these platforms is simple and direct: brands no longer spend money on advertising, but directly reward users. Early users looking for new products only need to go to the task platform to experience various products to get various rewards. The more products they participate in, the more token rewards they get.
The Creation of Layer3
Layer3 was founded by Brandon Kumar and Dariya Khojasteh in 2021. The initial landing page read "Earn Crypto by Doing Shit". The basic idea of Layer3 is to create a market for protocols and use its native token to coordinate user behavior. Interestingly, this website built with two no-code platforms, Webflow and Airtable, completed a $2.5 million seed round of financing in September of the same year. Later, the platform also developed into one of the fastest-growing aggregation platforms in the industry, and what helped Layer3 achieve growth was its technology stack that could solve pain points such as user identification, distribution, and user asset ownership.
Prior to joining Layer3, Brandon was an investor at Accolade Partners, a multi-billion dollar asset management firm and one of the world's largest venture capital and private equity (PE) capital allocation firms. With his extensive investment experience, Brandon has managed the supply side of the business well, building relationships with protocol builders and cross-selling across dozens of venture-backed portfolios to ensure robust network supply.
Of course, Layer3’s success also relies on world-class product design, which is what Dariya contributes. Dariya is an experienced application developer who has developed multiple consumer applications and successfully achieved user expansion. Layer3’s now acclaimed product experience is due to Dariya, whose gamification and efficient user experience strategies have brought consumers an extremely attractive and even addictive experience. In essence, Brandon focuses on the B2B side of the business, that is, engaging with various protocols, while Dariya focuses on the B2C side of the business, designing good products, and then attracting consumers. This complementary relationship is the key to making Layer3 a top-level aggregation platform.
Solving the cold start problem
In the early days of Layer3, there was still the problem of "which came first, the chicken or the egg". Only when the task platform has a certain scale can it have the ability to set prices for various tasks. Just like the aggregation platform in the traditional world, the ability to capture value depends on the strength of demand. Amazon can negotiate better prices from suppliers because it has a large user base. But what if there are no users? How to compete in a field with multiple existing companies? This is the challenge faced by Layer3 in its early days. Layer3 knows that it will be difficult to have pricing power before it has a sufficient number of users.
Aggregate Demand
In terms of "Social Influence & Relatedness", Layer3 has set up a ranking mechanism to showcase top users, create a competitive environment, and motivate users to work hard to improve their rankings and gain recognition. In terms of "Scarcity and Impatience", Layer3 encourages users to act quickly and gain benefits by setting tasks and competitions with time or participant limits. In addition, Layer3 activates the driving force of "Unpredictability & Curiosity" by introducing treasure chests and loot mechanisms, attracting users to continue to participate in the platform and explore rewards that may be unlocked in the future. Finally, by setting up a "daily winning streak", Layer3 encourages users to return to the platform regularly, triggering the driving force of "Loss and Avoidance". The team said that some old users on Layer3 have been using the product for more than two and a half months in a row because they are afraid of losing their long-accumulated advantages.
Crypto’s version of Google
Incentives often explain how systems work. On Meta’s Instagram, WhatsApp, or Facebook, we share our most personal information. In the mid-2010s, we checked in at various restaurants, shared photos, and wrote our own reviews. Platforms encourage us to provide data, and we have no idea what is happening behind the scenes. As mobile devices become more and more powerful, our data has been leaked through Google searches, GPS coordinates, and even chat history without logging into various applications. Layer3 subverts this model in the following two ways.
Data is owned by the user
Positive unit economics for consumers
In addition to owning their own data, users can also obtain ownership of the protocols they use through Layer3. For example, if a user completes Optimism activation on Layer3, they can obtain OP. Correspondingly, if Arbitrum activation is completed on Layer3, users can obtain ARB. Layer3's distribution mechanism dynamically rewards users based on their footprint on the chain. This also forms a strong moat for Layer3 around consumer adoption and attention, helping it build a large audience base, and attracting more and more audiences as more and more protocols join.
In my opinion, this highlights a key difference between the Web2 space and scaled businesses in the cryptocurrency space. Unlike Google or Meta, Layer3 has almost no monopoly on users' data. As mentioned before, anyone can query it. Furthermore, Layer3 does not even have a monopoly on users' access to value. Anyone can find a CUBE holder and send them tokens. Layer3 accumulates value in two main ways:
Long-term connection with users: No one can forge transaction history on the blockchain. Layer3 is able to demonstrate user characteristics by querying years of transaction data on its platform, which is its important moat.
Curating the best products: Layer3’s ability to curate the best products stems from its user base. In the early days, Layer3 had to proactively reach out, but now products reach out to it. In interviews with multiple users, a common point users mentioned was their trust in Layer3 as a product discovery engine. At the time of writing this report, Layer3 has worked with nearly 500 different products.
Of course, in addition to the protocol itself, users can also benefit a lot from this model. In the Web2 advertising model, although users spend the most valuable time to find relevant content, it is often difficult to gain revenue from many products. Layer3's approach is just the opposite. Products compete for users' attention through token rewards. The more valuable the user, the higher the return to the user. This behavior of competing for users also occurs in Web2, but most of the value is obtained by platforms such as Google, rather than end users.
In contrast, Layer3 transfers most of the value to the end user. You might ask: "How is Layer3 different from its peers?" As I have explained before, the aggregation theory in the cryptocurrency industry requires community as the first factor. For products with large communities, part of the reason why users are willing to use them repeatedly is because of their loyalty and relative status in the community. This can be translated into long-term timestamped proof of user activity on the chain. It is true that any project can find a million active wallets using tools like Etherscan. However, to find a carefully curated list of users, prove that they are early users of a new product, and allow these users to find you on a website, you need a so-called aggregation platform. This is exactly what Layer3 is all about.
While writing this article, I stumbled upon Dariya’s blog. Dariya published an article on his personal website titled “Attention Is All I Have”. At the end of the article, he mentioned the fundamentals of Layer3’s moat: "Attention, coordination, and distribution are all interrelated. You can reach users, but can you get users to do things that are good for the ecosystem? The following analogy can illustrate this point well: attention is oil, distribution is kerosene, and coordination is oil. On the Internet, usually only platforms that aggregate attention will generate value. But at Layer3, our goal is to subvert this view. Users own the network and users create value. Projects provide value to users directly or indirectly, as demonstrated by Layer3 users capturing 20.4% of the Arbitrum airdrop. In the past 60 days, more than 20 projects have issued rewards directly through Layer3." In other words, Layer3 can capture value while subverting the historical relationship between ad networks and products. In my opinion, this is the definition of a disruptor.
Moats, Values, and Habits
For many years of my writing career, I have always believed that cryptocurrency will become a value network. At its core, blockchain facilitates the transfer of value. The main use case is transactions that can be conducted globally. Layer3, which serves 4.5 million wallets in nearly 120 countries, is the closest to a functional and scalable "value transfer network" that I have seen. In the early days of the web, the existence of advertising was a necessary prerequisite for billions of users to access the Internet. But we have passed this stage, and now that the users are in front of us, what we need is better ways to monetize and target. Layer3 is at a critical moment in the transition from an attention network to a value network. We are moving from an era where users pay for their time and data to an era where users own their data and receive economic value. With the number of users currently using its products, Layer3 will continue to attract users and build incentive mechanisms 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 about 5 million wallets?
In terms of scale, this is equivalent to the size of the entire DeFi market in 2021, and this is where Layer3 is positioned, similar to being on the front page of Google Play or Steam in early 2012. The rise of platforms like Layer3 will change the way developers think about launching applications. Launching products in the cryptocurrency space often faces the cold start problem. In the past, products would work with well-known networks such as Polygon or Solana to solve this problem.
Attention comes before liquidity. Layer3 has already gathered a lot of attention. The more transactions users make in its ecosystem, the more lifetime value it adds to users. A natural idea is that Layer3 can expand its functionality to other verticals of user demand. For example, Juipter takes 1% of the project's token supply as a commission when listing a new token. What stops Layer3 from doing the same thing? Obviously, this approach can create a flywheel, allowing users who want to participate in new projects as early as possible to flock to Layer3, and new projects can also use Layer3 to expand their own scale.
Around 2003, Google decided to do more than just index web pages. Over the next five years, they IPO’d, launched GMail, acquired YouTube, and acquired Android. Google knew that there was more and more attention on the web waiting to be monetized, and its positioning helped to discover this attention because it recognized the direction of demand. This is the advantage that good positioning brings to Google. Layer3 is in a similar advantageous position. Layer3 can expand into new verticals because it can clearly see in which areas users spend the most time and resources. Although blockchain data is public and visible to anyone, not everyone can activate the same user base. What they lack is the direct relationship between Layer3 and users. Although Layer3 has the capabilities needed to launch new product lines and expand value, the only thing it lacks is time and the corresponding compounding effect.
One of the topics Brandon and I discussed at the TOKEN2049 conference in Dubai was how many protocols will survive the next decade. Brandon’s focus on this topic happens to reflect the two founders’ obsession with their business. Most founders worry about the price of their tokens in the next quarter, and they are playing a ten-year game. This is not to say that the prospects for Layer3 are bright. Building value networks requires developers to sacrifice token rewards in exchange for user usage (a mature business model that has not yet been seen by the public), and as other consumer areas such as artificial intelligence attract more public attention, the on-chain user market may gradually shrink, or the number of protocols willing to work with Layer3 may become saturated. All of these are real challenges. But if Layer3’s operations over the past two years are any indication, then I bet that Brandon and Dariya will continue to speak out in the next decade and they will continue to move towards the goal of tokenizing attention.
Author: TechubNews; from the ChainDD content open platform "DeDeHao", this article only represents the author's point of view, not the official position of ChainDD. For all "DeDeHao" articles, the originality and authenticity of the content are guaranteed by the contributors. If the article is plagiarized, falsified, etc., the legal consequences will be borne by the contributors themselves. If there are any infringements, violations, or other inappropriate remarks on the DeDeHao platform, please supervise the readers. Once confirmed, the platform will be offline immediately. If you encounter any problems with the content of the article, please contact WeChat: chaindd123
