With Web 2.0, why do we need aggregators?
One thing in common between Web 2.0 and Web 3.0 is user demand for products and tools that increase convenience and reduce search costs.
Amazon, for example, has built an empire by creating a convenient experience for customers to buy goods and services online, optimizing costs and delivery times, while creating a global marketplace that benefits both buyers and sellers. Lowering barriers to entry and increasing competition would come at the expense of traditional business models, but it is good for the macro economy as it increases the productivity and purchasing power of retail customers.
In a parallel world where apps like Amazon don’t exist, customers looking to buy a specific product online would have to browse different stores, interact with multiple front ends, and spend a lot of time comparing prices and quality from different suppliers.
For these reasons, customers prefer to interact with Amazon rather than individual stores, and similarly Web 3.0 users prefer to interact with aggregators rather than individual smart contracts. The more complex the product variety on the chain, the greater the user demand for the aggregator layer.
How important are aggregators today?
As shown in the chart above, about 20% of the monthly on-chain transaction volume is generated through DEX aggregators, and there is a clear growth trend. The reason this number needs more attention is partly because the average aggregator represents non-robot trading volume (over 70% of aggregator volume is generated by non-robot traders). On the other hand, bot trading volume accounts for about 50% of the total on-chain trading volume, which means that almost 1/3 of the trading volume generated by ordinary traders is conducted through DEX aggregators.
To support this claim, we use transaction frequency as a proxy for bot transactions. Assuming that the transaction frequency of bots is much higher than that of ordinary traders, it is reasonable to speculate that addresses with less than 25 transactions per day are likely to be ordinary traders, while a relatively conservative assumption is that addresses with more than 25 transactions per day are likely to be bots Traders, more than 50 times are almost certainly machines.
Following this classification, as shown in the pie chart below (top), more than 72.5% of aggregator transaction volume was generated by non-bot addresses. On the other hand, the chart below shows the total on-chain transaction volume, of which about 54.8% of the on-chain transaction volume was generated by non-bots.
Total transaction volume of different user groups (Ethereum, data for the past 3 months), source: https://dune.xyz/queries/429061/817641
The main function of the aggregator
Aggregators basically perform two simple functions:
- Search convenience
- quality of execution
The former refers to the fact that, in some cases, a user may also intentionally buy some tokens offered on exchanges that he does not use frequently. With Matcha or an aggregator like 1inch, users can skip the repeated search for a place to list new tokens and buy any on-chain token directly.
These engines not only help users find newly listed tokens, but also ensure that any trades are executed in the best possible way.
For example, below is a transaction executed via 1inch. 1inch did not simply exchange more than 20 WBTC to USDC in one transaction, but through multiple exchanges and multiple gaps, including four different tokens, to provide traders with the best slippage and gas fees .
As can be seen from the above example, aggregators are very useful for whale transactions. This should not be overlooked considering that whales, despite making up less than 4% of DEX users, facilitate almost 90% of on-chain transaction volume.
Who are the leaders in the aggregator space?
Before comparing the performance of different DEX aggregators, we should first note that benchmarking them is very difficult.
Because aggregators use different methods to record on-chain data, comparing their performance before metrics are normalized may lead to inaccurate conclusions.
Typically, different aggregators measure transaction volume in their own way. For example, a user might choose to buy $1,000 worth of ETH, however due to gap trading, this action may generate a volume of over $1,000. Therefore, we have two different ways to measure transaction volume:
- Some aggregators only measure transaction volume from a user perspective, as in the example above, they would count $1000.
- Other aggregators will count all gaps as their volume.
Considering our focus on aggregators’ underlying business models, pricing power, and revenue potential, we chose to normalize the data according to the first approach. This is also because aggregators can only monetize user-generated volumes, and gap trading will not be part of their pricing.
So we first cleaned the aggregator data with exaggerated indicators. We then differentiated between protocols like 1inch, 0x API, and Paraswap, and end-user-facing products like Cowswap, Metamask, and Matcha.
The former set of protocols build their own applications in addition to providing APIs for various applications to interact with DEXs. 1inch and Paraswap support front ends under the same brand, while 0x created another brand, Matcha, which relies on 0x’s API to facilitate trading activity.
Although it is possible to distinguish the Matcha activity from the total 0x API activity, we are currently unable to separate the 1inch API from the 1inch frontend, or the Paraswap API from the Paraswap frontend activity. Therefore, when referring to 1inch and Paraswap below, we assume that the data is the total activity generated through their API.
0x API, 1inch & Paraswap
In a nutshell , 0x API, 1inch, and Paraswap provide end-user-facing applications with a direct window to on-chain liquidity, while also focusing on algorithm optimization to provide traders with the best experience.
In terms of the number of users, 1inch is currently the most competitive. However, since December last year, 0x API has gained more users than 1inch during this time. However, even if it is no longer the API favored by the most users, the 1inch API is still the aggregation period of the largest transaction volume. In fact, giant whales still tend to use 1inch.
Source: IOSG Ventures; Dune Analytics & Coingecko
Metamask Swap, Matcha & Cowswap
Although Metamask, Matcha, and Cowswap are different, we can also compare them with each other based on the fact that they ultimately serve end users. Metamask and Cowswap are already using all known APIs as well as major liquidity sources and can be called super aggregators. Matcha is a project incubated by 0x and is the front-end product of 0x API.
The interesting conclusion is that Metamask has far more users than other end-user oriented aggregators. However, Metamask’s transaction volume has been consistently lower than that of Matcha, indicating that the user profiles of the two apps are different.
Let’s take a closer look at the difference between users of Matcha and Metamask. Matcha’s trading volume is mainly driven by whales (defined as whales with an average daily trading volume of more than $100k). At the same time, Metamask is not highly dependent on giant whales, and the main trading volume comes from small and medium-sized retail investors.
We found that in the past 30 days, the top 10, 25, and 50 users of Matcha accounted for approximately 35%, 47%, and 58% of the total transaction volume, respectively. Among them, one address accounts for about 17% of the total transaction volume. For Metamask, in the past 30 days, the largest 10, 25, and 50 users accounted for about 10%, 15%, and 19% of the total transaction volume, respectively.
Which user group is more popular?
For giant whales, between Matcha and Metamask, they choose the former, so they are more inclined to choose Matcha. However, in terms of liquidity, Metamask is obviously more advantageous. Considering that its user scale is dominated by small and medium users, Metamask’s transaction volume is also more sustainable. At the same time, giant whales are more sensitive to price, and if Matcha charges higher fees, they may receive resistance from giant whales.
Metamask, as the most popular wallet on Ethereum, has a stronger moat than other user-side aggregators, so they also have the confidence to charge a fee of up to 0.875%. However, uncertainty exists on whether such a business model can support Metamask Swap to reach millions of users and CEX-level trading volume.
Risks of DEX Aggregators
Uniswap has become the most mainstream source of on-chain liquidity before the launch of v3. Even more exaggerated, since the launch of v3, Uniswap’s market share has reached 80%!
For many cryptocurrency pairs, Uniswap v3 offers the best price. Uniswap even added the function of automatic routing. By searching multiple liquidity pools, it ensures that users can get the best price, and at the same time, it also ensures that the overpaid gas fee can be used to the fullest.
Therefore, such an automatic routing function is also a form of aggregator to some extent, except that the transaction breadth is limited. So the question we think about is, in such a market where Uniswap accounts for 80% of the on-chain transaction volume and there is no slowing trend, is there still room for aggregators?
How much of the aggregator’s liquidity comes from Uniswap?
Taking the liquidity of 1inch as an example, Uniswap accounts for 60% of the liquidity source, followed by Curve, Sushiswap, Balancer and DODO.
We can understand the following data in this way: even though Uniswap is the most competitive, it is better for users to use the DEX aggregator 40% of the time than to use Uniswap directly.
Beyond that, we need to be clear that the aggregator’s smart order routing engine does not address transaction slippage caused by MEV. With the upgrade of routing technology, it is expected that more and more transaction volume will go to the source of zero transaction slippage, such as RFQ, which will threaten the status of AMM to a certain extent.
In general, although there are absolute DEX faucets at present, it does not mean that there is no need to use DEX aggregators. While the existence of an oligarchic DEX might make this requirement impractical, given that cryptocurrencies are open source and have relatively low barriers to entry, such a scenario is unlikely to exist.
Different from the above scenario, considering that the public chain will simplify the behavior on the chain, in order to make the user’s value feedback and experience better, the competition on the high-probability chain will become more intense.
In terms of automatic routing, adding more liquidity sources, such as RFQ, is an improvement on automatic routing technology. In addition, cheaper public chains and Rollup will also help the development of RFQ, and there will be more intense competition in the source of liquidity.
There are two main reasons:
- With Rollup, market makers can quote more frequently and aggressively thanks to faster block finality.
- Rollup and cheaper public chains can create a good positive cycle, increase the order flow on the chain, and attract more market makers through RFQ.
The first point is relatively easy to understand. Because RFQ guarantees 0 slippage, the longer the order processing time, the higher the risk to market makers. Therefore, the quotation of the Ethereum main chain will be much more conservative than that of L2.
For the second point, once gas fees are no longer an issue, it is foreseeable that a large number of end-user facing applications will connect to the aggregator’s API.
That is to say, more and more front-end products that are centralized, regionalized, and subject to compliance requirements can be seen in the future. These customized requirements need to be considered while solving liquidity (the aggregator API can be solved). to differentiation based on different geographic locations.
These apps can be compared to centralized exchanges, but the difference is that the design of these apps does not need to consider infrastructure, but only needs to focus on improving user experience and creating a loyal user base.
The increasing flow of orders being routed to the aggregator API will create additional incentives for market makers to access RFQs, further optimizing prices and promoting better competition.
All of the above factors will create the soil for a more competitive DEX environment, so it is logical to strengthen the market positioning of aggregators.
In the future, it is very likely that most manual traders will use DEX aggregators such as Matcha, 1inch, Cowswap or other similar products to complete transactions, while DEX acts as a backend-like application. Segmenting responsibilities, DEXs focus on capital efficiency improvements, while aggregators are oriented towards front-end user experience. Curve.fi is a similar product currently on the market.
FYI: The above picture shows the UI design of Curve.fi
On this interface, aggregators provide higher value than liquidity sources, such as attracting loyal users who are willing to pay for convenience, while mainstream liquidity sources will compete more on the underlying order flow.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/dex-aggregators-the-future-of-on-chain-transactions/
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