Viewpoint: Analyzing the DeFi world from the perspective of aggregators
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Ethereum enthusiasts (ID: ethfans)
Ethereum enthusiasts (ID: ethfans)
, Author: Ryan Rodenbaugh & Baptiste Vauthey, Translator & Proofreader: Min Min & A Jian, reproduced by Odaily with authorization.
Recently, we have been thinking about how the DeFi field develops and how to conform to the general trend of the technology industry.
In his blog on Stratechery, Ben Thompson uses his aggregation theory to distinguish platform companies from "aggregators".
Platform companies such as Shopify and Substack will provide some interfaces or technical solutions to realize the interconnection between third parties and end users. Substack helps authors connect with readers, and then takes 10% of the author's earnings. Shopify helps sellers connect with buyers, charges sellers a monthly membership fee and provides optional value-added services (payments, lines of credit, etc.).
In the end, it is up to the authors and sellers to acquire users and revenue.
Aggregators are companies like Google and Facebook that act as intermediaries between third parties and users. Although this model is very simple, Facebook and Google have a lot of user information in order to earn advertising fees. In many cases, media companies or travel companies do not have customer relationships and can only pay Google and Facebook for publicity.
If you're planning a trip to Tokyo, chances are you'll be searching on Google instead of Expedia. As a result, Expedia spent $6.03 billion in sales and marketing in 2019, mostly on Google ads.
In the CeFi (centralized finance) field of the cryptocurrency industry, Binance may be more like "aggregators" like Google and Facebook. With 15 million users, Binance is the largest distributor in the cryptocurrency space and makes a lot of money from suppliers (projects that want to list coins on Binance).
Project teams (suppliers) pay Binance in a variety of ways, including listing fees, IEO cuts, and advertising fees (airdrops and giveaways). The reason why these teams are willing to pay Binance through these methods is that they cannot reach such a wide user base on their own. Listing on Binance also lends legitimacy to these projects, as users assume that Binance has done due diligence on these projects beforehand.
Binance has a strong foundation in the cryptocurrency industry, established a good brand image, attracted a large number of users, and has a high degree of maturity. Therefore, although Binance’s listing speed is slower than that of competitors in the industry, it still has a large market share. Binance is generally more open than other exchanges, and it is also late to enter the perpetual futures market, and it has only recently started to offer options products (or unilateral options). Despite this, Binance’s products still attract a large number of users.
Now applying the aggregation theory to DeFi, we find that the DeFi field is mainly composed of three parties:
Protocols (third parties): Compound, dYdX, Maker/DSR, CurveFi, Uniswap
To use an analogy that is already bad, DeFi is still in the "early Internet era". Very few pioneers have a good aggregation of all services. For example, Compound has more direct users than other platforms and aggregation service providers.
Chance
Existing aggregators don't quite fit Ben Thompson's definition, but if you look hard enough, there are hints of them.
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Chance
Existing aggregators in the cryptocurrency industry are still not simple to use, and unlike tech industry aggregators, they only aggregate providers and have not yet been successful in aggregating users.
The first platform to become a "DeFi aggregator" will monopolize the entire market. When a good enough tool first appears and becomes famous, it will become Metamask today. All DeFi projects must first ensure that users can use their products through MetaMask. If a project's website doesn't have an option to "log in with MetaMask", it's going to look pretty dodgy.
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How can a DeFi project become an aggregator?
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Pathway 1
Turn the DeFi platform into a "trusted market" or application store, providing users with opportunities to participate in DeFi. In addition, the platform also needs to endorse the protocol it supports, telling users that it has done its best to verify the legality of the protocol code and conduct an audit.
Amazon uses a similar method to aggregate third-party sellers. While charging monthly membership fees to sellers on its platform, it also collects a handling fee from sellers for each transaction.
Perhaps DeFi platforms can charge fees for new products that want to be listed on their platforms (before they are fully decentralized)? There are many new DeFi applications vying for user attention. For new apps, having the support of a large platform can bring a lot of marketing advantages.
Another example is Salesforce. Salesforce captures users first, and then helps other companies integrate their services into Salesforce through the AppExchange. Through the AppExchange, Salesforce charges a one-time listing fee (which covers the cost of security clearances) and takes a cut of the revenue these companies make through its platform.
Therefore, DeFi aggregators with a large user base should provide interfaces and software development kits so that other DeFi protocols can integrate them.
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path 2
The above suggestion raises a question of scale. Will there be as many applications in the DeFi field as there are third-party sellers on Amazon and third-party services on Salesforce? Not too possible. The way platforms solve this problem is by introducing a “freemium” model.
By inserting a smart contract acting as an intermediary between the user and the actual agreement, the DeFi platform can take a percentage of the proceeds of each transaction or charge a small bps fee. Users can understand it as a "convenience fee".
At the same time, the platform can also provide a "professional version" tool without paying a "convenience fee" (for example, a monthly fee of $500), with more functions and stronger scalability (for example, users of the professional version can use the platform The user interface integrates new products by itself.)
The professional version of the tool may look more like a prime brokerage for institutional clients. Prime brokerage is not a well-defined term, but in traditional finance it refers to the package of financial services banks provide to hedge funds. The scope of services includes leveraged trading or short selling through borrowing and lending, transaction execution, cash management, fundraising introduction, consulting services, etc.
In the CeFi space of the cryptocurrency industry, there has been a surge of firms building prime brokerages (eg, Tagomi) but most have been unsuccessful. The reasons are as follows:
In traditional markets, it is almost impossible for hedge funds to raise capital from institutional investors without a prime broker, but this is not the case in the cryptocurrency industry, so there is less demand overall
The excess returns in the cryptocurrency industry are partly derived from the use of the weak infrastructure of the exchange, so funds always hope to connect directly to all platforms
Prime brokers are not yet able to offer lending services to their clients (considered by many to be the most important feature)
Among them, the role that DeFi aggregators can play is to link lending (through Compound or Aave) with transactions. Effectively, this means that market makers are borrowing from one platform and lending to another (similar to CeFi prime brokers), but this looks more like a unified trading experience similar to traditional prime brokers.
Aggregators can also consider launching their own CeFi or P2P lending services to attract customers more easily, or they can launch their own brands like Amazon Amazon created its own private label, AmazonBasics.
In the end, fully vertically integrated aggregators will lead to a “winner takes all” situation, enabling value accumulation while simplifying the user journey.
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What are the advantages?
If a new aggregator has a friendly user interface and can abstract away the mess, it can attract more new users to the DeFi space, just like Coinbase did in late 2017.
Many people who are new to DeFi are intimidated when they test the waters. Imagine that a normal person sees on Twitter that buying DeFi products can get an 8% annualized rate of return. So, he went to learn about DeFi products, and found that he had to convert the U.S. dollar into a stable currency, and then create a wallet on other websites to actually purchase DeFi products. What do you think he would think?
DeFi products still have a lot of room for improvement. We can improve DeFi products at the platform/aggregator level, so that DeFi products can continue to focus on technical improvement and security.
What are the disadvantages?
The more layers that separate users from their funds, the greater the potential for a security breach. Plus, as the system becomes more complex and intertwined, it becomes increasingly difficult for aggregators to audit the entire ecosystem. The mixing of multiple DeFi applications will reduce security, and BZX's hacking attack is a good example.
Taking the transaction on 1inch as an example, the flow of funds when DAI is exchanged for USDT is as follows:
User sends DAI to 1inch
1inch sends DAI to curve.fi pool 1
curve.fi pool 1 deposits DAI into iearn.finance
iearn.finance sends USDT to curve.fi pool 2
curve.fi pool 2 sends USDT to 1inch
1inch sends USDT to users
In the above process, we need to be alert to two risks:
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in conclusion
Second, in Ethereum's current form, gas costs make aggregation extremely expensive. For example, this transaction on 1inch costs almost $10. A $10 transaction fee is nothing if the tokens in this transaction are worth thousands of dollars, but it's not normal when the transaction volume is so low. Currently, in terms of completing a DAI/USDT transaction, the gas fee required to use 1inch and CurveFi is 6 times that of using Uniswap directly ($5.13 vs. $0.855).
