Inverting the traditional advertising model in crypto
Layer3 co-founder interview
Welcome to the alpha please newsletter.
Gm friends, today we are exploring Layer3.
Layer3 is emerging as an important platform that bridges the gap between builders and consumers in the crypto ecosystem. It is one of the leading consumer platforms in crypto with 1M+ active users across 31 blockchains.
In this interview, the co-founder of Layer3 shares insights into how the platform is transforming the way users interact with crypto protocols and dApps and how they are inverting the traditional advertising model by creating an environment of user-owned data.
Layer3 might even be the Google/Facebook ad manager moment for crypto.
We also talk about the airdrop meta, and Brandon provides his insights on this as a distribution mechanism.
The Layer3 token also launched today, so if you have been minting cubes then you might be eligible to claim the token and can check here.
Disclosure: I am an investor in Layer3 and have some locked tokens.
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How would you say Layer3 contributes to the growth and adoption of Crypto?
The crypto market largely has two participants: builders and consumers. Builders are typically layer one, layer two, or dApp developers, and they represent the supply side of the network. These are people who are either building block-based applications or applications that need consumers. On the other side, you have consumers who have various needs and interests. They want to do certain things on-chain, such as swapping assets through a DEX, providing liquidity, purchasing NFTs, or playing games.
For most of the history of this industry, the only way consumers would discover new protocols was either through Twitter or Discord, which is fragmented compared to how the traditional internet works. For many people in the early internet days, Google was their homepage because it enabled them to discover whatever they wanted to do online, whether it was social media or finding information.
In many respects, we view layer3 as the platform that connects these two sides. We work with many of the large layer one and layer twos, as well as all the dApp builders, to help them get their protocol or ecosystem in front of the right user. On the consumer side, we're trying to offer a platform with a few very important value propositions.
The first is discovery, or the ability to find protocols relevant to their needs and interests in a curated way.
The second is education. There is a cohort of consumers in crypto who are either new to the industry or don’t know how to do certain things on-chain, such as revoking contract approvals or making swaps. We create activations on Layer3 that teach them how to do that.
The third value proposition is ownership. One promise of crypto is that we're moving from an internet where platforms typically accrue a lot of value to one where users accrue value for their contributions as early participants in a network. Historically, teams have distributed their tokens through airdrops or liquidity mining. While these methods have their roles, our tech stack enables a protocol or dApp to use their token more iteratively and deploy incentives to the right user at the right time.
All of this drives efficiency. We're creating a more efficient way for users to find protocols that are relevant to their needs and interests. We also like to say that we’re bringing in an era of user owned value. We're making it far easier for real, high-quality users to earn ownership. In doing so, we've created a platform that accelerates growth and adoption because consumers can spend more of their time navigating the industry through Layer3. This makes it easier for us to work with large ecosystems, like Linea, to help them reach users.
How do you ensure the users of Layer3 are real, and protocols using the platform aren’t just acquiring a load of bots?
Yeah, I think this is a really important point. For better or worse, the industry has a negative connotation of some of our peers. Platforms like Zealy or Galaxy often attract a lot of bots. One of the important things we've tried to do is create the right system so that if you are a protocol using your token on Layer3 to acquire users, you're getting real users.
There are a few ways we do that. We introduced a credential called Cube, which stands for “Credential that Unifies Blockchain Events”. When a user completes a quest, the Cube captures the metadata behind that transaction. For example, if a user makes a swap, we take the transaction hash data and encode it as an ERC-721 token to prove the action came through Layer3. The Cube also has a small cost associated with it, usually around 25 cents, depending on the price of ETH.
As users collect more Cubes, they establish their on-chain proficiency and credibility based on their actions. With each additional Cube, we enhance our value proposition to protocols, allowing them to target users with specific attributes in their Cube. This increases the likelihood that these users will retain, be higher value, and they are actually real users. There’s a self-reinforcing mechanism at play: the longer Layer3 is around and the more it grows, the more valuable the Cube becomes.
You can see this in the retention data. One of our investors ran an analysis to determine if users become more active in a protocol after being activated on Layer3, and the answer was always yes. If we help you acquire a user, that user will go on to be more active within your ecosystem. This is distinct from platforms that simply ask users to join Discord or follow someone on Twitter. While we have some of those elements, our focus is on getting users to do something valuable on-chain. This helps mitigate sybil behavior and reduces the negative impact of airdrop farming because we're bringing in users who will actually use the protocol over time.
Additionally, we work with third-party anti-sybil mechanisms. We've integrated the Coinbase KYC attestation product and Gitcoin Passport. For instance, if Uniswap comes to us and says they only want to run a quest for users who have 100 Cubes with certain attributes, a Gitcoin Passport score over a certain amount, and KYC on Coinbase, we can target that very specific audience. This is a huge unlock for any protocol builder because it allows them to target a niche, specific audience.
What makes Layer3 stand out compared to competitors like Galaxy and Zealy? Is it the Cube mechanism, the tech stack, the philosophy, or something else?
Yeah, so there are a few elements here. The philosophy at a high level is that everything starts with the consumer experience. This is a very important point because, with Galxe, everything starts with the protocol experience. They try to make it easy for any protocol to show up and deploy a space. The byproduct of that is there are a lot of really low-quality, spammy projects out there. These low-quality projects create spaces on Galaxy, asking users to follow them on Twitter or join their Discord. Lower quality users flock to those actions, creating a negative cycle where low-quality projects attract low-quality users. If you're a high-quality project, you can't stand out.
What we've done is create a more curated experience. We only want to work with the best ecosystems or the best dApps. We have a few criteria: the quality of their ecosystem, the number of live applications, and whether they have audited contracts. We also have a rigorous testing process. Whenever a project reaches out to us, we stress test their protocol and front end. This ensures that when we run an activation, the user gets a high-quality experience. This curation stems from our philosophy that everything starts with the end consumer.
Most of our activations are directed towards getting the user to do something valuable on-chain. This filters out low-quality users who are only interested in gaining points for social actions. Teams want high follower counts and large Discord communities to get listings on platforms like Binance, but this doesn’t help the industry. Users need to use the product and the protocol.
Introducing the Cube creates a self-fulfilling flywheel on both sides. The more users adopt Cubes, the more valuable they become as a targeting mechanism. We don't make it easy for bots to get a Cube because there's a cost associated with it. Users willing to pay the cost improve their on-chain experience and qualify for specific activations, like those by Uniswap. This targeting starts with the philosophy of making the user experience world-class.
The final point, which I think is a bit harder to quantify, is that our product has a better user experience. We use thoughtful gamification, with daily streaks, leaderboards, and a strategy around using gems, our in-game currency. We have a seasonal component too. All these aspects create a unified on-chain experience for the end consumer.
I'd like to dig into Cubes a bit deeper. Where are they at currently and where do you see them in say, two to three years time?
We introduced Cubes in February of this year, and over 22 million credentials have been minted since then. To give some context, when the internet first emerged, analysts in the late 1990s speculated about the number of times a person would see a page like the Microsoft homepage to assess the potential for running ads. Fast forward to today, we spend a lot of time on platforms like Google or Facebook, sharing our data in exchange for free services. These platforms own that data and they monetise it.
We thought, can we create an environment where users pay a small fee to prevent bot behavior, but in doing so, they own their data in perpetuity. Once a user emits a credential, we can't take that data back, even if we wanted to. This exposes some risk, as any protocol could theoretically reward tokens to users based on the Cubes they hold, independent of Layer3. However, what has happened is that we act as a central distribution mechanism for teams wanting to distribute tokens to users who earn Cubes, maintaining the relationship with the end consumer.
So the users own their data, and that data that they own also enables them to unlock really interesting experiences. We’re inverting the traditional advertising model by creating an environment of user-owned data.
When you spend time on Facebook, you don't get any economic value; you don't earn Facebook stock or get cash paid by advertisers. With Layer3, you get both. You earn payment from the advertiser—such as Uniswap spending UNI to acquire users on Layer3—and instead of Layer3 taking the bulk of that UNI, most of it goes to the user. So, users own their data, get paid, and earn L3 tokens the more they use the platform.
What are your thoughts on the current airdrop meta in the crypto space?
So maybe let's take a step back. Why did people even introduce tokens in the context of a protocol or an application? There are a few different reasons. Some say it's to govern the protocol, others to unlock an era of user-owned value. Jesse Walden, one of the founders of Variant, famously put out a piece called "The Ownership Economy" which discusses this.
When we think about tokens, we see them as a customer acquisition cost. It's a way to acquire users into your community and protocol, and hopefully, align the economic interests of that protocol with the end consumer
.When airdrops were first introduced, Uniswap was probably the most famous example. Users were surprised by the airdrop, and that fostered a lot of loyalty in the community because it was unexpected.
While many of the airdrop recipients eventually sold their tokens and some aren't even active anymore, it’s still regarded as a very successful airdrop. Along the way, builders realised they could announce an airdrop to accrue market share. Projects would say they’re launching a token in a year and will give part of it to the community, which lead to airdrop farming. Users around the world would spin up multiple wallets hoping to earn the airdrop and then move on once they received it.
Because of how human psychology works. If you expect a reward but don’t know exactly what it is, you’re likely to invest more time. This is why airdrops, at least in the short term, can help acquire more excitement leading into a token launch. However, it’s a problem because teams allocate 5-10% of their total supply to users, 90% of whom will churn. The question then is how to use the remaining token allocation to acquire users effectively.
So, coming back to Cubes - we have introduced a system that allows for more precise targeting. If you’re building a perps protocol, you can target users who have interacted with similar protocols based on Cube data, reward them, and monitor retention data to tweak your approach.
This is similar to using Facebook Ads Manager, which has evolved to serve ads extremely efficiently. If you’re Nike trying to sell some shoes - your ad won’t be shown to women over the age of 60. Rather, your ad is going to be shown to athletic men between the ages of 18 - 25, who are much more likely to buy the product.
We aim to achieve similar precision in crypto. If you’re going to spend your token, spend it on users likely to retain. We recently introduced a feature called Milestones, which is programmatic over a longer period. For example, does the user provide liquidity over 30, 60, or 90 days? They’ll get 10, 20, or 30 tokens as they hit those milestones, adding more programmability moving forward.
Today, the top 20 projects have about $24 billion in native assets in their treasuries, earmarked for growth in some capacity. If we can capture a percentage of that spend, Layer3 can be a very valuable platform.
I don’t think airdrops are going away, but I do think they will improve. We might see them as a smaller percentage of total supply, with teams better understanding who will retain. The remaining allocation can be used more thoughtfully, rather than on conference booths and advertisements, deploying those tokens iteratively through distribution infrastructures like Layer3.
Can Layer3 be used for larger scale airdrop distributions, or is it more suited for marketing and acquisition campaigns with smaller token allocations?
It's a combination of both. One inevitable fact is that there needs to be a certain percentage of tokens trading on day one. Right now, airdrops are the best way to get those tokens to the market. If you don't do that, the tradable tokens have to go somewhere, which means they end up in the hands of insiders. The market doesn't really like that, so you do need a base level.
What we have seen over the past six months is Layer3 as a platform has received a percentage of the total token supply to then be iteratively distributed post TGE over another six-month period. We've become sort of this de facto pre-token launch and post-token launch platform for engaging users.
If you look at the data, it's probably not a huge surprise that when users receive an airdrop, they don't retain. But if they are active through Layer3 over a six-month period, they retain at a much higher percentage. Teams are increasingly getting comfortable with the fact that maybe they can increase the airdrop to 5% or 7%, and then what they would have allocated to more users is instead reallocated to Layer3 because we can get more sustained usage.
We're formalizing this with a feature we're going to be announcing soon called the Launchpad, which will launch alongside our token launch. There will be a series of ecosystems that users can participate in Layer3 activations to earn the token of that ecosystem and also earn L3. It's a win for the consumer because they are contributing to a specific protocol's growth, earning tokens over time, and earning value from Layer3. So, it's a double economic win, creating a nice flywheel around it. But still, I think at the end of the day, you'll have some hybrid where a percentage goes towards the airdrop to users who have retroactively used the platform, and a percentage goes to users who activate on Layer3 in the future.
What role will the Layer3 token play in the ecosystem?
Let me start at a high level. Going back to my comparison to Facebook, if you're a consumer on Facebook, you don't actually earn any ownership of the platform. Point number one is that we want to solve that. Our success is predicated on the scale and activity of the consumers using Layer3, and everything starts with the consumer. We want to ensure that the consumer gets rewarded. They will earn L3 tokens as a result of their activity on the platform. Activity on the platform is defined by the number of activations you're completing, like completing quests, participating in races, participating in our daily offers, bridging, and swapping through our platform. You'll earn proportionately to the contribution you bring to the network.
The second element is staking. Without the token, you can still earn on Layer3 because if you do something on Optimism, you'll earn OP, for example. Staking introduces another layer. If you stake the Layer3 token, you'll passively earn staking yield as you would with any other asset. This is what we refer to as layer one staking, and there are three layers to it.
The second layer is if you stake on Layer3 and actively use the platform, you'll be able to access certain earning opportunities. You'll be able to earn third-party tokens like OP or ARB. The third layer is if you're staking and actively using the platform, you'll earn more L3 tokens. This means you get ownership of the protocols we work with, in addition to the Layer3 ecosystem. All of this is wrapped up in a burn mechanism. As Layer3 generates revenue, we will be buying back and burning the asset, creating deflationary pressure based on the revenue generated by the ecosystem.
There's an interplay between the value and utility of the token and the growth of the network. We want to ensure that those who are earning it are most aligned with its long-term success. Long-term alignment is crucial because we don't want to create an incentive structure that can be gamed. That's why staking is so important.
On the consumer side, staking and active use of the platform are rewarded. On the B2B side, as you deploy incentives through Layer3—say you're a creator incentivizing people to mint your tokens—we offer something similar to Optimism's retroactive public goods funding for protocols that use Layer3 to acquire users. If you are Uniswap or Linea, deploying a lot of incentives through Layer3 also contributes to the value of the network. We want you to earn ownership as you deploy, creating a developer-facing aspect in addition to the consumer-facing aspect. This is meant to establish a moat where those who contribute the most to Layer3 earn the most of the network itself.
Did you look to any other platforms for inspiration when designing your tokenomics?
Yeah, I mean, I think any platform that ties the growth of the platform back to tokenomics in some capacity is what we drew inspiration from. Metaplex is another example of a protocol that generates revenue and uses that revenue to burn the token. The problem with many protocols is that they simply don't generate revenue.
What we've tried to do is create a direct correlation between the two. When we think about the growth of Layer3, we want this protocol to be one of the most dominant in the industry ten years from now. That meant driving sustainability into the tokenomics from day one. It's very clear: if you hold this asset and actively use the protocol, it will produce economic value for everyone involved.
There are too many projects that try to get their token to trade on narrative, which is one of the broken parts of the industry. We've tried to create something actually sustainable. We're ultimately trying to create a Facebook or Google-like product here. The people who have the most conviction in Layer3 recognize that if crypto goes where we expect it to go, Layer3 will accrue similar economic value to those platforms because of our role as a key aggregator. We want to ensure that the token itself captures that value in a true economic sense.
Resources
• Layer3 app - try out some quests and mint cubes
• Layer3 docs - Learn more about the way the platform works
• Layer3 staking - Stake L3 tokens
And that’s your alpha.
Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Crypto currencies are very risky assets and you can lose all of your money. Do your own research.