The competitive dynamics of crypto are novel — and unforgiving — because open composability doesn’t just enable innovation, it invites disruption. Supply in permissionless ecosystems is free for anyone to build on. This means second movers can piggyback on both the users and the supply of first movers, turning incumbents’ advantages into their own. These dynamics fundamentally reshape how moats are built — and how quickly they can erode.

What emerges is a recurring loop: apps bootstrap by tapping into open supply, then vertically integrate and try to capture it, only to be disrupted by the next app doing the same to them. This recursive cycle — of aggregating demand with open supply, integration, and re-aggregation — is the fractal pattern. It is a defining feature of competition in crypto.

In this piece, we unpack how the fractal pattern plays out and offer a playbook for projects looking to defend themselves.

Early internet apps made it essentially free for businesses to aggregate demand. Forget costly physical distribution networks — just build an app and let the users come to you. 

After these apps leveraged the open distribution of a new internet to kickstart their businesses, they kept the supply they attracted to their platforms closed. This makes it extremely difficult for new entrants to emerge, particularly because the supply side is generally the “hard side” of a network. Network effects entrench the first-movers, while new entrants face a bootstrapping problem on the supply side and steep competition on the demand side. 

For example, launching a competing ridesharing app today would be challenging because the drivers (supply) on Uber and Lyft are closed. A new ridesharing app not only faces the classic bootstrapping problem, because the app is not useful to users until it hits a substantial number of drivers, but also faces significant competition for demand. This likely results in a dead end.

But what if Uber and Lyft’s supply were open so that the new ridesharing app could integrate with them out of the gate (like through an API)? This would enable the new ridesharing app to get over the bootstrapping problem, because it could get enough driver supply to be useful to riders. The app could maintain parity on the supply side and differentiate itself by competing on the demand side. Eventually, it could aggregate so much demand that it could vertically integrate and attract its own drivers. At this point, it could sever its relationship to Uber and Lyft and siphon away riders and drivers from these incumbents.

This hypothetical “open Uber/Lyft” shows the precise dynamic that plays out in crypto. Specifically, crypto’s open and permissionless nature removes the bootstrapping problem by keeping supply accessible to new apps. A new entrant can piggyback on the supply of an incumbent to attract demand without building supply from scratch. When it attracts enough demand, it can wield that demand to attract its own supply and compete with the existing protocol. But because that supply remains open too, the cycle repeats: a new entrant can disrupt the disruptor. This recursive pattern plays out at every layer of the stack — apps, protocols, and chains — creating a fractal of continuous aggregation and re-aggregation. 

Distilled, the fractal pattern involves a 1-2 punch that plays out ad infinitum:

Step 1: An app aggregates demand by tapping into existing open supply.

Step 2: The app uses its control over demand to vertically integrate its own supply.

Morpho is a good example of how Step 1 and Step 2 play out. It started by building an app that tapped into Compound and Aave’s existing supply. The app capitalized on an inefficiency in these pooled lending protocols’ utilization-based interest rates and matched users peer to peer to improve rates. This attracted a significant number of users and liquidity to Morpho (Step 1). After it established a strong user base, Morpho vertically integrated by launching its own lending protocol (Step 2). Its relationship with the users and control over demand allowed Morpho to establish dominance in a series of lending markets, siphoning off users and liquidity from both Compound and Aave. We see this pattern over and over again in crypto.

The upshot of the fractal pattern is that the fluidity of crypto erases moats, leading to a level of dynamism that is not present in Web2. In each iteration of this fractal, incumbent businesses are at risk of disruption. Projects need to build with a constant paranoia that a competing app is going to piggyback off their open supply to aggregate demand and, eventually, siphon away demand and supply from them — even projects that successfully leveraged this strategy to bootstrap their existence.

That is, in a world where closing off supply is not the moat, projects need to find other ways to build stickiness on the supply and demand side. The remainder of this piece unpacks some strategies projects can deploy to defend against being disrupted by the fractal pattern. 

Protocols should aim to foster a normal distribution of apps that build on top of them, where transaction flow is spread relatively evenly across many interfaces, rather than a power law, where one or two apps dominate. By cultivating a broad, balanced ecosystem of apps, protocols reduce the risk of a single app amassing enough demand under Step 1 to attract the supply necessary to vertically integrate under Step 2. This strategy commoditizes the complement (the app), thereby driving value to the supply side instead of the demand side.

For example, if one app captures most of a chain’s users, it has a strong incentive to vertically integrate and launch its own chain because it has enough demand to overcome the bootstrapping problem. But if demand is spread across many apps, no single app has the requisite demand to sustain its own supply, making vertical integration through launching its own chain under Step 2 less likely.

The most obvious way for incumbents to prevent their protocols from being aggregated is to build the canonical apps for their protocols to maintain sufficient control over demand. Almost all protocol success stories involve the protocol team building the first app on top. The logic here is simple — if the protocol has the best canonical app, it’s going to be hard for competing apps to draw customers away from the protocol, dampening the ability of Step 1 to kick off. This means protocol-first projects should not neglect building a high-quality front-end experience.

Even though supply is open in crypto, an existing protocol can still build network effects around it. The goal is to make it sticky so that supply can’t be siphoned off when an app vertically integrates and offers a competing protocol under Step 2. In fact, supply-side network effects can prevent an app from vertically integrating altogether.

Thus far in crypto, supply-side network effects have typically come in the form of liquidity, though, in the future, we may see other open marketplaces emerge. Once a protocol becomes the most liquid venue for a market, it makes it difficult for a project to offer a competitive protocol on that market. Being the most liquid protocol creates a positive feedback loop that reinforces the protocol’s dominance.

Projects can create stickiness by offering proprietary features (particularly those involving network effects) that other apps cannot tap into because these features are offchain. This can take the form of proprietary data, a social graph, or access to unique liquidity flows. These traits make users/suppliers significantly less likely to migrate to another app (under Step 1 or Step 2). (Yes, projects could follow the Web2 strategy of fully closing supply by moving it from the blockchain into a custodial wallet, e.g., Coinbase, but that strategy is not the focus of this piece, which assumes open supply.)

One example of this strategy in action is apps with social or chat features, like Arena Exchange, which is a chat-first way to trade memecoins. Onchain liquidity and wallets are freely interoperable between apps, but social features and chats are often not because they are stored in the app’s database. These features can help apps lock in users.

Apple and Google’s dominance over the phone market has to date been largely impenetrable to new entrants because they control the on-ramp from the physical world into the digital world via hardware. By controlling this on-ramp, they can funnel users up the stack, e.g., into the App Store and Google Play Store. 

The takeaway is that on-ramps — the earliest point possible in the customer acquisition funnel — are extremely powerful devices for capturing users and pointing them to other vertically integrated products up the stack, building stickiness with the user. In crypto, capturing hardware is one option (e.g., Solana phone, Ledger), but because specific hardware is not required to interact with a blockchain, the next best thing is fiat on-ramps (and, by extension, the wallets that offer them), because users can literally not transact on a blockchain until they already have crypto for gas. Coinbase has demonstrated this — its fiat on-ramp has practically become a prerequisite for U.S. users to get onchain, and from there, it has vertically integrated by offering its own blockchain (Base), etc. These users become extremely sticky to Coinbase and hard for an app to peel off (under Step 1 or Step 2).

While the squishiest strategy in this list, building social consensus is one of the most powerful ways to build a moat and defend against the fractal pattern. When a project is embedded in the minds of many distributed individuals or institutions, it becomes extraordinarily difficult to disrupt.

This is most notable in money. The U.S. dollar has structural effects that make it useful, but the social elements like trust and confidence are real as well. Bitcoin’s success is almost entirely based on an ever-growing social consensus since its immaculate conception. As individuals, institutions, and entire nations continue to adopt, accept, and trust Bitcoin, it becomes increasingly difficult for other digital stores of value to challenge it.

Pump.fun has carved out a moat as a primary asset issuer, not through conventional network effects like liquidity or a social graph, but through a blend of branding and social consensus. It has solidified its reputation as the premier platform for discovering and trading coins tied to emerging viral trends, creating a self-reinforcing dynamic that draws both coin creators and buyers to its ecosystem.

Crypto’s defining feature is permissionless composability — anyone can build on top of anyone else. This creates a paradise for new entrants: supply is open, users are fluid, and moats are weak. In a world where the cost to aggregate is low and supply is always up for grabs, the fractal protocol pattern isn’t an exception — it’s the norm. The question isn’t whether this cycle will play out, but how projects can navigate it.

In this piece, we’ve unpacked several strategies projects can consider using to defend against the fractal pattern. Every strategy involves building stickiness on either the supply or demand side. As we’ve seen from the graveyard of projects that have been fractalized, the strategy of “just build a product your users love” isn’t enough to create stickiness. These projects were at one point loved by their users — otherwise they would not have attracted the requisite supply for another app to piggyback on. Projects must also understand the competitive dynamics of the fractal pattern and develop a comprehensive strategy to build stickiness with their users.

Thank you to 𝖒 (Arena Exchange), Viktor (Coinbase/Credibly Neutral), Byron (Blockworks), Mykel (Legend), Dan (Nascent), and Aaron (Felix) for their thoughtful feedback on this article.

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