Aggregation Trend: Who will become the first "aggregator" in the DeFi ecosystem?
Editor's Note: This article comes fromChain News ChainNews (ID: chainnewscom)Editor's Note: This article comes from
Chain News ChainNews (ID: chainnewscom)
Chain News ChainNews (ID: chainnewscom)
, Author: Ryan Rodenbaugh and Baptiste Vauthey, the former is the former chief of staff of TrustToken, the latter is the founder of Bitcog, compiled by: Lu Jiangfei, published with authorization.
We've been thinking a lot lately about how the DeFi industry has evolved, and whether it might repeat certain trends in the broader tech industry.
If you read the "Stratechery" blog of the well-known blogger Ben Thompson, you will find that he mentioned an aggregation theory that defines the difference between "platform companies" and "aggregators" (aggregators).
Companies like Shopify or Substack are "platform companies" that provide some application programming interface (API) or technology that allows third parties to connect with end users:
Substack connects authors and readers and takes 10% of the revenue;
Shopify connects merchants and buyers, and then charges merchants a monthly subscription fee for technology usage, as well as optional value-added services (such as payments, loan servicing, etc.).
Ultimately, however, it is up to the author or merchant to acquire users and distribution channels themselves.
And "aggregators" are companies like Google or Facebook that participate and intervene in the relationship between third parties and users. It's a bit of an oversimplification, but Facebook and Google do have a lot of information about their users and use that information to get businesses to spend their advertising dollars. In many cases, media companies or travel companies don't own the customer relationship, and they have to pay Google and Facebook to distribute the information.
If you're thinking of traveling to Tokyo, your first instinct is to Google, not a travel site like Expedia. As a result, Expedia spent $6.03 billion on “sales and marketing” in 2019, mostly on Google Ads.
In the centralized finance (CeFi) crypto space, Binance is probably the most similar aggregator to Google and Facebook. Due to their 15+ million user base, Binance is the best at distributing some of the coins, and of course they extract a lot of value ($$ ).
Project teams (supply side) are willing to pay Binance in several ways, including:
Fees for listing on cryptocurrency exchanges;
A certain percentage of its IEO financing;
Advertising (airdrops and giveaways).
The reason why project teams are willing to pay Binance in these ways is because they themselves are unlikely to achieve such wide distribution. Additionally, listing on Binance also gives these projects greater legitimacy, as users believe that Binance has done some due diligence before supporting a project.
In the cryptocurrency industry, Binance has a very strong position. With its brand, users, and maturity, even if they bring some products to the market later than their competitors, they can still occupy a large market share. Binance usually lists some tokens later than other exchanges, enters the perpetual contract market late, and only recently began to provide options trading (although it is still one-way). Even so, Binance’s listings always attract a lot of users.
If the aggregation theory is applied to the DeFi industry, we believe that this field can be divided into three categories:
Protocols (third parties): Compound, dYdX, Maker/DSR, CurveFi, Uniswap;
Platforms: Zerion, InstaDApp, Argent;
A group of emerging "aggregators": Ray, CurveFi, 1inch.exchange, dex.blue, unspent.io.
Using an analogy that has been used badly, DeFi is still in its "early Internet era", and no one can aggregate all services in a meaningful way after entering the market. Taking the Compound protocol as an example, the number of users who directly interact with this protocol exceeds the number of users served by any platform or aggregator.
In fact, the current DeFi aggregators don't quite fit Ben Thompson's definition, but if you look closely, you will find some signs that they are approaching that definition in their own way.
Where are the opportunities?
We think that one of the neutral (at least for now), UI/UX-focused platforms like Zerion, InstaDApp, Argent, or a new company, will have the opportunity to create an interface that further simplifies DeFi experience, and in the process, become a full-fledged aggregator.
Aggregators at this stage are not that easy to use, and unlike aggregators in the tech industry, they currently only aggregate the supply side and have not been successful in aggregating users.
In some respects, cryptocurrency wallets seem to be playing the role of "aggregated users". For example, Trust Wallet can be used to store users' assets, and also provides limited transactions, pledged assets, etc., and also communicates with other applications through Wallet Connect. connect. But as far as we know, it doesn't make money.
Whoever can be the first to become the so-called "DeFi platform" can monopolize the market. Metamask is a prime example, when a tool is good enough and enters the market earlier than others, it becomes a recognized brand. Almost every DeFi product on the market now will integrate Metamask first. If you don't have an option to "login with MetaMask" on your website, it's considered an immature project.
How a DeFi project can become an aggregator, we propose the following methods:
path one
A platform can transform into a "trusted platform" or app store (app store) serving DeFi financial opportunities. The platform connects its users to a variety of financial opportunities and provides a "stamp of approval" for some of the protocols it supports -- effectively telling users that they have verified the protocols to the best of their ability. The legality of the code is checked and its audit status is checked.
Amazon.com has a similar approach for third-party merchants on its platform. Amazon collects fees from merchant partners for each transaction. Merchants also need to pay a monthly subscription fee to sell on Amazon's platform.
Admittedly, it is difficult for platforms in the crypto space to collect monthly subscription fees from "merchant" (protocols/products) like Amazon (how do you bill Compound?), but they can monetize in other ways.
One possibility is to charge some new product (before it is fully decentralized) a fee that amounts to an official endorsement (as in the Binance example above). There are many new DeFi applications vying for user attention. A new team equates to high value in terms of marketing if it can get the support of the platform with the most users.
Another company worth considering is Salesforce. Salesforce captures users and then makes it possible for other companies to integrate their services within Salesforce through the AppExchange. On the AppExchange, Salesforce charges a one-time listing fee (to cover security review costs) and then takes a percentage of subscription revenue generated through its platform.
DeFi aggregators, which already have a large user base, would be in an excellent position to provide application programming interfaces (APIs) and software development kits (SDKs) for individual DeFi protocols for easy integration with them.
path two
"Path 1" will bring up a question about expansion. Are there so many applications in the DeFi space, just like Amazon's third-party merchants, or service providers in Salesforce's AppExchange? The answer is unlikely. Platforms that take this into account have another way out, which is to adopt the "freemium" model.
As far as retail users are concerned, the platform can use an intermediary smart contract between the user and the protocol it uses, so that it can take a cut from the interest generated, or charge a small bps fee based on the transaction. For users, this is like a "convenience fee".
At the same time, the platform can also provide a "professional version" (Pro version) tool (such as $500 per month), and does not charge "convenience fee", with more functions and more scalability (such as Pro version users You can integrate new products by yourself through the UI of the platform, etc.).
The Pro tool may look more like a Prime Brokerage service tailored for institutional clients. The definition of Prime Brokerage is somewhat vague. In traditional finance, it is generally a package of financial services provided by banks for hedge funds, including: lending for leveraged transactions or short-selling, transaction execution, cash management, financing introduction and consulting services, etc.
In the CeFi crypto space, people are excited about companies working on building institutional brokerages (such as Tagomi), but most have not yet succeeded. This may be due to the following reasons:
In traditional financial markets, it is almost impossible for a hedge fund to raise funds from institutional investors without going through a "prime broker", but this is not the case in the crypto industry, so the overall demand will be much lower;
Some of the current alpha gains in the crypto industry actually come from taking advantage of the immaturity of the exchange infrastructure, so all funds want to directly connect to all platforms;
"Prime Brokers" are not yet able to offer borrowing and lending to their clients (which, many would argue, is actually the most important function);
Even if a prime broker can provide margin services in its own native UI, each fund still needs to submit collateral on different exchanges. For example, OKEx will not recognize the collateral you submit on Huobi.
Regarding the above pain points, the opportunity that DeFi aggregators can grasp is to provide borrowing and lending services outside of transactions (starting through Compound or Aave). In fact, this means that market makers borrow money on one platform and lend money on another platform (similar to CeFi "prime brokers"), but in practice, this may be more like a unified trading experience, similar to Traditional prime broker.
Aggregators can also consider launching their own CeFi products or P2P lending services, so that they can more easily obtain spreads. In fact, you can follow Amazon's AmazonBasics line of products and create your own successful products.
Ultimately, a company will create a vertically integrated full-service platform that achieves winner-take-all, that is, the platform provides users with assembly-line services, accumulating most of the value on the platform in the process.
What are the benefits?
The benefit of these platform aggregators is that they help DeFi reach a wider audience. The cost of activating users to use DeFi for the first time is very high today. Even for longtime users of the crypto space, these platforms are difficult to use.
A new aggregator with a beautiful user interface and freed from abstract details can catalyze the onboarding of new users, similar to what Coinbase did for the cryptosphere in the second half of 2017.
Many people who are exposed to DeFi for the first time are intimidated when they actually try it. As you can imagine, someone with a decent IQ reads on Twitter that he can get an 8% return on investment. Then he finds a certain DeFi product, only to find that he needs to exchange USD for a stablecoin elsewhere, and then needs to create a wallet on another website before he can actually use his USD for a certain DeFi product.
What are the disadvantages?
Everything has risk. If you are using Instadapp, because it uses dex.blue to execute a transaction on Uniswap, there may be three layers (and multiple smart contracts) between you and the actual transaction. Too much abstraction and it's unlikely that users will actually understand what they're using. In this nascent industry, this security shroud can be dangerous and vulnerable to hacking. When developing an attack-resistant protocol, remember: keep it simple.
The more layers there are between users and their money, the more likely there is to be a security breach. Also, when things become more and more intertwined, it becomes harder for aggregators to audit the entire ecosystem. The BZX attack incident is a good example of what happens when multiple fragments of DeFi mix together.
image description
Above image modified from "The Simpsons - Nuclear Contamination" (Fox Broadcasting Corporation)
Take the 1inch.exchange transaction as an example. In a transaction from DAI to USDT, funds usually flow like this:
The user sends DAI to 1inch;
1inch sends DAI to liquidity pool 1 of curve.fi;
Curve.fi liquidity pool 1 deposits DAI to iearn.finance;
iearn.finance withdraws USDT to Curve.fi liquidity pool 2;
Curve.fi liquidity pool 2 sends USDT to 1inch;
However, there are two issues with this capital flow that need attention:tradeSecond, in the current policy of the blockchain, the gas cost will make the aggregation cost extremely high. For example, this 1inch
Summarize
Nearly $10 was incurred. It's a good deal if it's a deal worth thousands of dollars, but not worth it if it's a small deal. For now, the gas fee for DAI/USDT transactions using the combination of 1inch and Curve.fi is about 6 times that of using Uniswap directly ($5.13 vs. $0.855).
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