Decomposing the Value-Capturing Structure of L3, Layer3’s Native Token

Introduction

Layer3 is a protocol that provides smart contract infrastructure for ecosystems such as Optimism and the greater Superchain. It innovates on how users engage with decentralized applications via its quest mechanism and comprehensive omnichain product offering, including cross-chain swaps, bridges and a launchpad. The protocol helps solve two significant pain points in Web3 — building sustainable user acquisition channels for decentralized protocols and allowing users to have rewards for their otherwise complex blockchain interactions.

Layer3's core functionality lies within its engagement model, which consists of interactive quests, credential-based achievements (CUBES) and a bespoke token economy driven by L3. It has powered millions of transactions on Optimism by itself, driving the adoption of many OP-Stack chains such as Base and Zora. The platform offers a "Layered Staking" mechanism where a series of roles for agents are well-structured: L3 Stakers, Builders and Platform Users, Layer3 establishes a system where active participation and long-term alignment are rewarded, while protocol value accrues to those who contribute most meaningfully to the ecosystem.

The L3 token is at the core of this ecosystem, implementing two primary value capture mechanisms: Value Transfer that reflects the exchange of the token for platform services, and a newly devised Value Capture Mechanism called. The newly invented mechanism comprises of three sub-VCMs: Generalized Governance to facilitate the direction of the protocol, Yield-Bearing Stake for economic alignment, and Stake-Based Access to boosted APYs, exclusive activities (campaigns, quests, incentives), and airdrop multipliers.

Key Roles and Agent Coordination in Layer3's Ecosystem

Layer3 brings together three key participant groups whose interactions drive its quest-based engagement ecosystem:

1. Builders: Populate the platform's engagement opportunities through quest creation and incentives deployment. They codify interactive mechanics, establish reward parameters, and create credential-based achievements (CUBEs) to motivate user activity in their chosen blockchain environment. By staking or burning L3 tokens to acquire these capabilities, builders have an economic incentive to help expand Layer3's utility across ecosystems such as Optimism.

2. L3 Stakers: Shape the protocol's direction through a unique "Layered Staking" mechanism to align long-term value capture with active engagement. Participants stake L3 for tiered rewards across three layers: passive staking yield, access to exclusive quest opportunities, and multipliers on protocol distributions based on the level of engagement. Through governance, they direct protocol parameters and resource allocation decisions that shape Layer3's evolution.

3. Users: They are the lifeblood of the ecosystem as they participate in quests, earn credentials and build on-chain reputations. These users generate activity in the ecosystem, completing challenges across multiple chains, receiving airdropped rewards in several tokens and progressively unlocking more significant benefits through consistent participation.

The truly dynamic nature of Layer3's ecosystem goes beyond the definition of each role in isolation; instead, it comes from the interaction between builders, stakers and participants interacting with one another in pursuit of their own goals while collectively contributing to the protocol's growth. To understand these relationships and their role in Layer3's success, we've diagrammed our analysis of how incentives are directed through the structure, where behaviours line up or at odds, and the ways in which the protocol design enables a positive sum game amongst participants below. This maps how Layer3's distinctive quest-based engagement model and layered staking system create natural feedback loops that strengthen the ecosystem over time:

Figure 1

The Layer3 ecosystem showcases an interplay of three core participants, revealing several key dynamics:

1. Multi-layered Value Creation: All roles add distinct types of value in aggregate to the ecosystem - Builders generate engagement opportunities, Stakers provide protocol governance and stability through long-term alignment, and Users generate activity. This leads to a positive feedback loop in which more user activity pulls in more builders, developing more opportunities for stakers to govern.

2. Aligned Incentive Design: The Layered Staking creates a natural alignment between all participants. Long-term commitment is rewarded by staking tokens that encourage active involvement and participation. Builders are required to stake or burn tokens to ensure quality contributions. At the same time, Users benefit from continuous involvement with the community aided by multipliers and improved access as core users.

3. Cross-Role Dependencies: There are interdependencies between roles - Users require Builders for opportunities, Builders require Users for activity, and Stakers require both for protocol value. This leads to natural checks and balances in the system.

4. Dynamic Reward Distribution: The protocol's reward structure scales with participation, where multipliers and further benefits from participation in all roles apply. This creates a balance between short-term incentives and long-term ecosystem viability.

5. Scalable Infrastructure: When supported by cross-chain interoperable incentives, this quest-based model provides a flexible framework that can expand with the ecosystem — without sacrificing alignment among all participants through the L3 token.

While these mechanisms have demonstrated successful growth for Layer3 within their supported chains such as Optimism, challenges remain in maintaining sustainable reward economics and balancing accessibility with value creation.

The value-capturing of $L3

To appreciate the inherent worth of the L3 token, the Value Capture Theory (VCT) framework is adopted to analyze the attention-based engagement model of Layer3 and its translation into token value. Through this three-tiered framework, we can examine how L3 captures value from its position as the key coordination mechanism within the quest-based engagement ecosystem, focusing on its fundamental value drivers, the mechanisms through which this value is realized, and the specific implementation patterns that enable sustainable protocol economics.

Origins of Value (OoVs)

1. Value Transfer (1)

Represents the value derived from using protocol services through their acquisition via L3 tokens, including quest creation, incentive deployment, and CUBE credentials system utilization. This transfer of value or “exchange” enables participation in the protocol's engagement ecosystem and associated value streams.

2. Risk Exposure (7)

Represents the value derived from committed protocol participation through token staking, where participants accept market volatility and opportunity costs to gain platform privileges and rewards.

3. Future Cashflow (2₁)

Represents the value derived from continuous token emission rewards distributed through the 'Layered Staking' system to participants who support protocol operations.

4. Access (4)

Represents the value derived from accessing Layer3's additional platform features, including the launchpad, exclusive activities (campaigns, quests, incentives) and airdrop multipliers. This access enables users to acquire additional rewards and token utility.

5. Conditional Action (8₁)

Represents the need to actively complete quests and engage with platform activities to earn enhanced rewards through multipliers.

6. Future Cashflow (2₂)

Represents value captured through activity-based airdrop multipliers, where users earn enhanced L3 rewards based on their level of engagement (e.g., 1.5x multiplier for completing 10 quests, 2x for 20 quests).

7. Conditional Action (8₂)

Represents the value derived from active protocol participation through specific required actions, including governance participation through voting and proposal creation.

8. Governance (3)

Represents the value derived from controlling protocol development through treasury management, revenue distribution decisions, and parameter setting within Layer3's three-stage governance process.

Several Origins of Value (OoVs) interact and complement each other. At its foundation, Value Transfer (1) plays a fundamental role as it enables an exchange function to acquire core protocol offerings, which in turn drives value creation throughout the ecosystem. The relationship between Future Cashflow (2₁), Access (4) and Risk Exposure (7) is particularly notable in the context of staking - users must accept opportunity costs and encumber their tokens through staking to maintain their base cashflow stream and exclusive access rights via staking.

A parallel value stream emerges through the interaction between Future Cashflow (2₂) and Conditional Action (81), where users' active participation in completing quests directly enhances their reward potential through multipliers. The governance mechanism demonstrates another interplay of OoVs: to participate in on-chain governance (3), users must both risk their tokens through staking (7) and engage in Conditional Action (8₂) by actively participating in voting and proposal-making processes. This Conditional Action (8₂) serves as the key mechanism through which Governance value (3) is realized, as it enables active participation in the protocol's decision-making processes.

Value Capture Mechanisms (VCMs)

Figure 2

A stand-alone primary VCM that facilitates the exchange for acquiring core protocol features. The mechanism is of notable utility value as it allows the ability to acquire the service of posting quests, deploying incentives, and acquiring cube credentials, all of which serve as the bedrock of ecosystem growth and engagement. This value capture mechanism incentivizes protocol utilization by directly tying token expenditure to core service offerings, driving sustained demand through active usage.

The Value Transfer VCM follows the simple structure:

Equation 1

Figure 3

The primary value-capturing structure of Layer3 outlines the three sub-mechanisms jointly conditioned on staking (the central Risk Exposure element):

1. Yield-Bearing Stake VCM $[7, 2_1]$: This sub-VCM is the mechanism that captures value via the staking rewards, but the token holders need to agree to the opportunity costs and risk of encumbering their tokens (as well as locking if they so choose to do). This mechanism provides an economic incentive for the pledge to remain with the protocol over the long term.

2. Stake-Based Reward Access VCM $[7, 4, 8_1, 2_2]$: This sub-VCM represents value generated through gated access to Layer3's additional platform features and their associated rewards. Users who stake L3 tokens gain the ability to access the launchpad, exclusive activities (campaigns, quests, incentives) and airdrop multipliers. The value capture process is straightforward: users must maintain a staked token balance to access these features, with different forms of functionality.

3. Generalized Governance VCM $[7, 8_2, 3]$: This sub-VCM represents the central mechanism for token holders to participate in protocol governance by staking and voting with their tokens. This creates a system where those who assume the risk of staking have proportional governance over treasury management and revenue distributions and provides a clear incentive to align longer-term behind the development of the protocol.

The Composite VCM adheres to the following structure:

Equation 2

Value Capture Implementation Patterns (VCIPS)

There are four technical patterns that the Layer3 protocol adopts which represent their value capture mechanisms in their implementation. The implementations take the abstract value capture mechanisms and translate them into concrete smart contract systems that emerge as the building blocks of the Layer3 ecosystem:

1. Value Transfer

The CUBE.sol credentials contract implements core value transfer functionality through its token acquisition mechanism. The contract utilizes EIP-712 signature verification to process L3 token transfers in exchange for credential NFTs via mintCube().

The value transfer flow is managed through processL3Payouts(), which handles the distribution of L3 tokens from users to the treasury and fee recipients.

The contract supports fee distribution through a basis points system, where processL3Payouts() first allocates any referral amounts to specified recipients before transferring the remaining balance to the treasury address. All token transfers are verified with success checks to ensure proper value capture.

2. Yield-Bearing Staking

The staking contract implements yield distribution through a time-weighted rewards system with variable lockup periods. Rewards are distributed proportionally based on each staker's weight, which is determined by both their staked amount of L3 and chosen lockup period (12, 18, 24, or 36 months).

The reward calculation follows a rewardPerShare accumulator pattern. The rewardPerSecond rate is used to continuously accumulate rewards, which are then distributed proportionally based on each staker's weight relative to totalWeights. Weight multipliers range from 0.25x for unlocked stakes to 1x for 36-month lockups, creating an incentive structure that rewards longer-term staking commitments.

Rewards can either be claimed directly or automatically restaked to compound returns. The contract supports both the core reward distribution logic through getReward() as well as convenience functions getRewardAndStake() and getRewardAndIncreaseStake() for compounding.

3. Staked-Based Reward Access

The CUBE credentials system implements access control through Factory.sol's quest reward distribution architecture. After users acquire CUBE credentials, the Factory contract regulates access to protocol features through distributeRewards(), which verifies staking requirements before allowing quest reward distribution.

The access control flow is coordinated between CUBE.sol and Factory.sol, where CUBE.sol emits the TokenReward event with reward parameters, which Factory.sol then uses to gate reward distribution based on staking verification.

Quest rewards are secured in Escrow.sol until staking conditions are met (facilitated by the staking contract: 0xB32a3055f6c148D82D84F44B4D04c1f8a6e6A35), supporting multiple token standards (ERC20, ERC721, ERC1155) through the TokenType enum interface.

4. Generalized Governance

The governance process implementation follows a structured three-stage system. In the Forum Stage, proposal creation requires a minimum of 3,000,000 L3 tokens, and proposals must undergo a 21-day discussion period on the Layer3 Governance Forum.

The Voting Stage leverages Tally's off-chain governance infrastructure for voting execution, where passage requires 33,000,000 "yes" votes during a 3-day voting period, followed by a 2-day timelock. Voting power is calculated proportionally, on-chain via the staking contract, based on the number of staked tokens. Finally, the Execution Stage involves Security Council review and execution, with the Council maintaining technical veto capability.

VCM-Derived Health Metrics: $L3

This section presents six health metrics for Layer3, devised using the Value Capture Theory framework. These metrics assess the performance of the Value Capturing Mechanisms (VCMs) of Layer3: Value Transfer, and the Vote-escrowed Access Composite VCM through its sub-VCMs; Yield-Bearing Stake, Stake-Based Reward Access, and Generalized Governance. These metrics range across all of the Origins of Value (OoV), including Value Transfer (1), Risk Exposure (7), Future Cashflow (2), Access (4), Conditional Action (8), and Governance (3), providing a holistic coverage of how effectively the protocol has captured value.

Protocol Service Value Flow (PSVF)

• Class (OoV): Value Transfer (1)
• Aspect: OoV-specific
• Tier: Tier 1 (Primary)
• Description: (USD Value of L3 spent on CUBE credentials + USD Value of L3 spent on quest deployments + USD Value of L3 spent on incentive mechanisms) / 7

Rationale:

• Directly measures the token's effectiveness as a medium of exchange within the protocol
• Quantifies the actual usage and demand for Layer3's core protocol offerings
• Provides insight into the velocity and utility of L3 tokens in facilitating protocol activities

Staking Yield (SY)

Class (OoV): Future Cashflow (21)
Aspect: OoV-specific
Tier: Tier 1 (Primary)
Description: (Total L3 token emissions distributed to stakers) / (Total value of staked L3) * 100, measured weekly.
Rationale:

• Quantifies the economic incentives for participating in Layer3's staking mechanism
• Provides a benchmark for comparing L3 staking yields against other protocol opportunities
• Suggests the sustainability of the protocol's token emission-based reward system

Total Value Governed (TVG)

• Class (OoV): Governance (3)
• Aspect: OoV-specific
• Tier: Tier 1 (Primary)
• Description: At the end of each period, the sum of the USD value of assets under governance control, including the protocol treasury balance, quest rewards allocation, accumulated protocol fees, and L3 token supply affected by governance decisions, is measured.

Rationale:

• Represents the financial scope of Layer3's community-driven decisions
• Expresses the protocol's economic footprint in the quest-to-earn ecosystem
• Demonstrates the scale of resources managed through L3 token governance

Staked-Quest Participation Rate (SQPR)

• Class (OoV): Access (4)
• Aspect: OoV-specific
• Tier: Tier 1 (Primary)
• Description: (Number of unique addresses completing at least one quest that requires staking L3) / (Total number of addresses staking L3 above access threshold), measured weekly.

Rationale:

• Illustrates the effectiveness of the L3 token as an access mechanism to the protocol's exclusive features
• Denotes user engagement levels with Layer3's layered staking mechanism
• Provides insights into the utility value derived from staked L3

Whale Voting Dominance (WVD)

• Class (OoV): Conditional Action (82)
• Aspect: OoV-specific
• Tier: Tier 2 (Secondary)
• Description: (Total voting power exercised by top 10% of L3 voters) / (Total voting power exercised across all voters) per period, where voters are ranked by their voting power per period.

Rationale:

• Measures the concentration of voting influence among the largest L3 token holders
• Helps assess the decentralization of Layer3's governance process
• Gives insights into potential governance capture risks and voting power distribution

Holding Opportunity Cost (HOC)

• Class (OoV): Risk Exposure (7)
• Aspect: OoV-specific
• Tier: Tier 1 (Primary)
• Description: ((Current L3 market price - L3 price at the start of lock period) / L3 price at the start of lock period) * 100, measured per period.

Rationale:

• Quantifies the potential opportunity cost for L3 stakers who choose to lock their L3 for boosted yields
• Reveals the market risk exposure taken by long-term participants in Layer3's staking system
• Provides a measure of the trade-off between staking rewards and market price volatility

These metrics share a holistic overview of the health of Layer3's ecosystem and its value capture efficiency. Each metric, from measuring the token’s useage as a medium of exchange for services, to staking incentives and governance participation to platform engagement and risk exposure, sheds unique light on various components of protocol performance. Protocol Service Value Flow (PSVF) plays a key role in measuring the demand for the platform’s services as well as business viability. Staking Yield (SY) and Total Value Governed (TVG) are metrics to assess the economic fundamentals of the protocol, whereas Staked-Quest Participation Rate (SQPR) measures the adoption of Layer3's stake-based activities. Metrics like the Whale Voting Dominance (WVD) and Holding Opportunity Cost (HOC) are designed to give meaningful insight into governance centralization and risk exposure for stakeholders. These metrics combined create a comprehensive understanding of Layer3's growth, resilience, and long-term health in the greater Web3 landscape.

Closing Thoughts

Layer3's value capture model demonstrates how a protocol can effectively coordinate multiple stakeholder groups through carefully designed token mechanics. The framework reveals 2 distinct Value Capturing Mechanisms - Value Transfer and a composite value capture mechanism, Vote-Escrowed Access comprising of sub-VCMs: Generalized Governance, Yield-Bearing Stake, and Stake-Based Reward Access - each addressing specific Origins of Value while working together to capture sustainable protocol value.

The VCM-derived metrics framework provides quantitative tools for evaluating Layer3's health across these mechanisms:

1. Protocol Service Value Flow (PSVF) measuring demand for the platform’s services
2. Staking Yield (SY) and Holding Opportunity Cost (HOC) measure the effectiveness of the Yield-Bearing Stake mechanism
3. Total Value Governed (TVG) and Whale Voting Dominance (WVD) evaluate the Generalized Governance system
4. Staked-Quest Participation Rate (QPR) assesses the Stake-Based Reward Access mechanism's performance

Layer3's implementation of these mechanisms through its quest infrastructure,CUBE credentials, Layered Staking, and its three-staged governance model creates a unique value proposition in the Optimism ecosystem. However, the protocol faces key challenges in scaling its reward economics and maintaining engagement across chains while preserving the strength of its value capture mechanisms. The success of Layer3's model will ultimately depend on its ability to balance these growth objectives with sustainable token economics.

Disclaimer: The content of this document is provided for informational, educational, or discussion purposes only and does not purport to be complete or definitive. It should not be considered as financial, investment or legal advice. While every effort has been made to ensure accuracy and completeness, the author does not guarantee that it is free from errors or omissions and may update, revise, or retract information without prior notice. Readers are advised to consult the most recent version for the latest details and to be aware of the inherent risks of cryptocurrency and blockchain technologies. The author does not make guarantees or representations regarding any discussed tokens or projects and shall not be liable for any direct, indirect, or consequential damages arising from the use or reliance on this content. Mention of any project, token, or protocol does not constitute an endorsement. By accessing this document, readers waive all claims against the author.

Acknowledgements

The authors gratefully acknowledge the financial support provided by Optimism during the Gitcoin Grants 21. This support enabled to conduct a research provide a comprehensive token design details for several selected Optimism projects, including Origins of Value (OoVs), Value-Capturing Mechanisms (VCMs), Value Capturing Implementation Patterns (VCIPs), and outline utility token metrics.

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