The trend of DeFi aggregation is clear, but what capabilities should an aggregator that truly captures value have?
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)
, by Jack Purdy and Ryan Watkins, both at Messari, translated by Lu Jiangfei, published with permission.
The 21st century is actually dominated by "aggregators":
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If you want to buy consumer goods, you might choose to shop on an aggregation platform like Amazon;
If you need to go to the airport to take a plane, you may choose an aggregation platform like Uber to take a taxi;
If you want to watch the hottest TV shows, you almost certainly use an aggregator like Netflix.
In fact, if we want to make a list of aggregation service platforms that are necessary for life, there must be many, many more.
It’s not for nothing that almost all online activity is powered by aggregators these days. An aggregator is usually a platform that can form a direct relationship with users, can provide users with services at zero marginal cost, and reduce user acquisition costs through a virtuous circle between supply and demand. This dynamic can create incredible network effects, creating a winner-takes-all situation, and for those winners, it means trillions of dollars of enormous value can be accumulated.
Obviously, some DeFi projects have begun to explore the path of "aggregation". Although it is still in its early stages, we can already see that some DeFi aggregators have begun to be applied in many segments, such as:
Yield-optimizer can automatically balance user deposit income according to the interest rates of different DeFi platforms;
Smart order router can provide traders with best price execution according to different DEX;
Meta-assets are trying to integrate other assets (such as USD stablecoins) to reduce the unsystematic risk of any independent entity;
Interface (Interface) is "packaging" all DeFi products into a more user-friendly application, so that they can access more advanced functions or portfolio management tools. Most importantly, these projects can aggregate user needs and then filter through different DeFi protocols.
The next question is, will DeFi aggregators become industry monopoly giants like Amazon and Uber in the real world?
Aggregated Value Properties in DeFi
The cryptocurrency industry is developing at an extremely fast pace. A hot topic today may have nothing to do with the next hot topic. Few DeFi projects can become sustainable industry topics. All of these fluctuations can have a dramatic impact on the market infrastructure, so it will make it difficult for the development of DeFi infrastructure to catch up with the development of the market, and many people who work full-time in the field of DeFi infrastructure also realize that the difficulty is not small.
Infrastructure issues are also very important for those allocating funds in the DeFi space, as this raises many other issues, such as:
Which lending platforms can give you the highest returns?
Which DEX can provide the lowest slippage?
Which Stablecoins Can Ensure Long-Term Security?
Not only that, but these variables are constantly changing, making it increasingly difficult to know the correct answers to these questions. Therefore, the appearance of DeFi aggregators at this time seems to be just right-users don’t have to worry about which DeFi platform is the most suitable, which platform can ensure the best returns in the entire ecosystem, and they don’t need to compare and choose DeFi protocols one by one. Aggregators Can automatically find the most suitable investment target. In the DeFi field, we have begun to see that some products already have a good market/product fit. This statement is not groundless, because currently about 20% of DEX transaction volume on Ethereum is routed through DEX aggregators , of which InstaDApp locked more than 7% of the total value of DeFi.
Providing Value vs. Capturing Value
There is no doubt that DeFi aggregators are providing many useful services to the market, and the development of the DeFi industry towards aggregation has become a future trend, as more and more users and funds begin to flow to DeFi. But the thing is, it’s one thing to provide value to users, it’s another to let users capture value.
In order to evaluate whether a DeFi aggregator can become a value siphon giant like "FAANG", it is necessary for us to revisit the "three elements required to become an aggregator" proposed by Ben Thompson. Take the popular project yearn.finance (YFI) as an example.
Lianwen Note: FAANG is the acronym for the five most popular and best-performing technology stocks in the US market, namely social network giant Facebook, Apple, online retail giant Amazon, streaming video service giant Netflix, and Google parent Company Alphabet.
Element 1: Can you establish a direct relationship with users?
No problem, yearn.finance users can directly interact with their app and lend their assets.
Element 2: Can you serve users with zero marginal cost?
No problem, yearn.finance costs nothing to optimize other users' deposits.
Element 3: Does the need to reduce customer acquisition costs drive multilateral networks?
yearn.finance doesn't seem to do that much at this point.
The third element means that when users come to the aggregation platform, the platform needs to become very attractive, at least allowing DeFi service providers to join and eager to get more value from it, so as to attract more users to enter , and can effectively reduce customer acquisition costs, because users will be actively attracted to the platform during this cycle, and previous users and DeFi service providers have provided a lot of value on the platform.
In this case, the DeFi service providers (which form the basis of the lending protocol) are open source, so each aggregator has one-time access to all services. Not only that, when a new user is attracted to the DeFi aggregation platform yearn, they only need to simply deposit funds, and then they can find the DeFi service provider that can provide the highest yield. While this is great, it doesn't seem to make yearn more valuable to the next person, the protocol foundation itself is evolving to have better network effects, but it doesn't make yearn itself Better results, and it doesn't cost them less to acquire the next customer.
Therefore, DeFi aggregators must carefully evaluate the three elements mentioned above. If the last element cannot be met, then the so-called "DeFi aggregator" is not actually a real aggregator.
What does "not really an aggregator" mean?
The conclusion given above is actually very important. In the DeFi field, users’ loyalty to aggregators is not high, at least not as high as the loyalty to “FAANG” aggregation services. Not only that, but DeFi aggregators do not have network effects, and employ capital (mercenary capital) with only one goal: to earn the most money. Not only that, but since the DeFi aggregator does not own user data and operates on a public database, the cost of user switching is almost zero, which means that users can exit the DeFi aggregator platform effortlessly, even if the platform can provide the best service, so the DeFi aggregator itself also has certain inherent flaws. For those DeFi aggregators who want to capture more value instead of acquiring users, they may provide users with worse service, and of course doing so will also cause a large number of users to leave.
Among the three elements of the DeFi aggregator mentioned above, the third element is very important to become an aggregator that creates a virtuous circle. If this element cannot be met, the DeFi aggregator will find itself in a very embarrassing situation. position, that is: it is difficult to capture the value created by oneself. "FAANG" aggregation platforms can easily obtain rent-seeking, because their platforms have network effects, so it is not easy for many users to quit. In contrast, DeFi aggregators cannot do this.
In order to "take away" value from users, DeFi aggregators need to provide an interface service that makes "users inseparable from themselves"-if users want to switch to other competitors' platforms, it will cost a lot of money. It is not easy to leave your platform. But the question is, what kind of service can "bind" users? It's a good idea to provide a quality user experience.
The next question is, how much value will DeFi aggregators capture? After all, market competition is brutal.
How do DeFi aggregators capture value?
Although DeFi aggregators cannot directly own network effects, they can still find a way to capture value because DeFi aggregators have a decisive position in the entire DeFi value chain. DeFi aggregators can provide high-quality convenience and efficiency, and are also the most extensive fund allocators on Ethereum, so this makes them play a very important role in the flow of funds in the entire DeFi ecosystem.
It is important for DeFi aggregators to capture value for the following reasons:
First, many DeFi protocols may assign more value to liquidity providers than the value they capture. Unlike businesses, protocols are typically designed to coordinate the supply and demand sides of the network, which means that the vast majority of value created from DeFi protocols goes to liquidity providers, who essentially fund the protocol and leverage Aggregators to manage funds. Because the aggregator is associated with funds on behalf of the user, it is necessary to provide the user with a return opportunity, otherwise no one is willing to "deposit" money in it. Of course, when the user provides liquidity to the DeFi protocol, the aggregator can take a certain amount from it. Proportional "commission". Although the commission ratio of DeFi aggregators seems small, if the amount of funds aggregated by these aggregators is huge, the income is quite considerable. Here is a reference example: Blackrock's iShares business, their fee ratio is very low, but due to the huge scale of funds, their fee income is quite high.
Second, DeFi aggregators play a decisive role in the allocation of funds in the DeFi industry. The DeFi protocol itself is very interested in holding governance tokens, so that it can influence the direction of capital flow. In extreme cases, where these flows can vary (basically between 0 and abundant capital flows), DeFi protocols may be willing to pay what the community thinks they are worth, which will also attract other capital inflows. From this perspective, the market needs to have a product that can assess how much additional value DeFi can provide, which may attract more additional funds to flow into the agreement.
The Future of DeFi Aggregators
