Our previous article discussed how multiple multi-billion dollar companies in Web3 have been built by compressing the cost of trust and verification, and in today’s issue we look at Web3 through the lens of aggregation theory. It’s a bit long, but hang in there, and we’ll break down how we think blockchain investing will happen over the next decade.
Aggregation theory was first proposed by Ben Thompson in 2015 to explain how the Internet facilitates the evolution of markets, as he described it about seven years ago.
The value chain of any given consumer market is divided into three parts: suppliers, distributors, and consumers/users. The best way to gain excess profits in these markets is to gain a horizontal monopoly in one of the three segments, or to integrate two of them, thereby having a competitive advantage in providing vertical solutions. In the pre-Internet era, the latter depended on controlling distribution.
The fundamental subversion of the Internet is to subvert this dynamic. First, the Internet has enabled the free distribution of (digital goods), synthesizing the advantages of distributors using and integrating with suppliers in the pre-Internet era.Second, the Internet has made transaction costs zero, making it possible for distributors to integrate with end users/consumers on a massive scale.
We believe this theory deserves to be revisited from the perspective of those working on Web3, and we’ve seen giants like Ramp, Stripe, and Spotify built through the collapse of distribution and collection prices. But how does it apply to Web3 companies? We propose that, in addition to the cost of collecting payments, blockchain can lower the price of verification and trust. This makes it possible to create multi-billion dollar entities. New-age blockchain-based aggregators are also helping to drive innovation at the protocol layer and enable new business models and hyperfinancialization-as-a-service.
bring the market closer
The following is an analysis of Uber through the lens of aggregation theory. Historically, the seller (supplier) <> buyer (demand) relationship was hyperlocal and had a cap on the number of customers a driver might have. That’s why they can treat you less, users have limited options when it comes to ride-hailing services. The supply side is chaotic as it has little sign of credibility, suffers from high and unpredictable prices in many cities. The emergence of Uber organized the supply side.
This is a curated subset of users whose reputations are continuously verified and tracked, rather than consisting of random drivers. Think about the information you get every time you ask for a ride. You know how many times the person has picked up, the average driver rating, and the exact amount you can expect to pay.
Why did this shift from taxi unions to in-app drivers happen? Because Uber controls the supply side through their app.Users who want to book a ride prefer the convenience of calling a ride remotely, without being turned down by a taxi driver or waiting on the street outside. This model works because the internet has enabled Uber to scale globally. It also enables Uber to collect payments and reduce fees for itself without relying on regional partners to do it for them. The rise of digital currencies has accelerated Uber’s adoption. If we still mostly pay for rides in physical cash, Uber can’t be a phenomenon.
The largest companies on the Internet today can all be linked to Aggregation Theory. AirBnB, Deliveroo, Spotify, Steam, Amazon, and Twitter have all disrupted chaotic markets through the power of the internet. Aggregators accumulate so much value because they can organize what are often large, chaotic markets. newspaper? There are thousands of newspapers publishing dissenting opinions, often with inaccurate sources.
Aggregators enable supplier reputation and moderation, and when you buy something on Amazon, you can look up reviews. In exchange, they take a cut of the transactions that happen to them. As a platform digitizes, the frequency of transactions tends to increase. This enables aggregators to operate at a much lower cost than physical experiences. Why?Because the cost of delivering a digital product (like movie streaming) is a fraction of the physical experience. Hope you have a good idea of what aggregation platforms are and how big they are, now let’s go back to Web3.
Collapsed trust cost
Just as the internet overwhelms the cost of distribution and collection, a publicly verifiable blockchain overwhelms the cost of verification and trust. Virtually all the huge businesses we see in the Web3 context are built on this principle. Blockchain enables anyone to query and verify that the digital product being sold really comes from the source it claims to be from. There is no counterparty risk in digital consumer goods sold through blockchain platforms like NFTs, as validating smart contracts ensures you Get the exact item you paid for.
What does this mean for those aggregators running in Web3? It means that the cost of validating and trusting suppliers when selling digital goods is a fraction of what it is in Web2. When Netflix or iTunes first launched, they had to spend months or years negotiating contracts to ensure they could hit the market with a large enough inventory of digital goods to attract users.
Even today, Netflix spends about $16 billion producing content internally based on user data. As these aggregators scale, they become the best place to sell digital consumer goods. Having the distribution rights gives them that advantage after a decade of hard work.
Some interactions are not possible in Web2 aggregators because of the inherent friction introduced by siloed databases and not open data. For example, you can’t browse a property listing through Zillow, then quote it, and refinance the asset on the same platform. You have to go to another place, as pictured, and go through their various compliance and onboarding procedures, which are unique to each platform.
It also makes it harder and more expensive for developers of other applications to easily take advantage of your aggregation and build new interesting services on top of it. On-chain identity, data and verification standards can solve this problem and make Web3 aggregators more efficient than Web2 aggregators.
In stark contrast, OpenSea doesn’t put much effort into worrying about licenses, they can almost instantly verify that a third-party NFT is from a legitimate source and track how it flows through their user base. So what about Uniswap? As long as the user adds the token’s address accurately, no human involvement is required to verify that the token being traded on it is legitimate.
Blockchain abstracts away the verification layer and collapses the costs incurred. Does trust in itself generate a premium? I think it will. Let’s consider a few examples of platforms with commercial rights and compare with platforms that do not.Music is a great subject, so let’s use Spotify and Soundcloud as examples.
One is the go-to platform for streaming music around the world, while the other is used occasionally to find some motivational music at the gym. It stands to reason that Soundcloud is an incredible business because of its focus on community and enabling new artists to be discovered. However, if you look purely from a revenue generation perspective, you can see how these two businesses are different.
The two businesses operate differently, with Spotify claiming 406 million monthly active users, of which about 180 million are premium paying subscribers. Their profit margin is about ±25%, so you can discount the $9 billion in annual revenue in the graph. But even with that in mind, you’ll notice that Spotify’s revenue is a huge multiple of Soundcloud’s.
As a standalone platform, Amazon has more e-commerce volume than Shopify storefronts. Steam makes more money than a single game studio. Why? It all boils down to the customer choosing the store with the most selectivity and the least friction. The greater the number of options, the more likely it is that commercial activity will be concentrated in one avenue, making it easier for platforms to offer more options while keeping costs low due to the scale of operations, this is the flywheel effect of modern commerce, Max Olson There was a nice visualization of this work on Twitter a while back.
Web3 is interesting because it changes the unit economics of verification and trust. Historically, aggregators have acquired the intellectual property of the most desirable digital consumer goods. As we’ll see soon, in emerging markets like India, where holding the streaming rights to cricket has paved the way for TV networks to scale, blockchain enables platforms to prove origins at a fraction of the cost. Attribution and distribution rights of anyone on the web. This means spending on legal fees and time spent going through bureaucracy is now replaced by on-chain verification, identity and verification. This principle will be the key to making aggregators in Web3 so powerful. do not trust me? Let’s take a look at some of the aggregators in the ecosystem today and how they are using blockchain for their own benefit.
Aggregation in DeFi
Zerion is a wallet interface focused on enabling users to track their portfolios. The product currently tracks NFTs, allows swaps, and lets users know how all the tokens in their wallets are doing, and interfaces like those offered by Zerion are fast becoming the home of DeFi. They allow users to interact with complex host applications without stepping outside the interface of a single website. Additionally, these interfaces eliminate the high risk of phishing, losing keys, and signing wrong smart contracts by allowing users to interact with them directly through their interface. They help users get features like lending and borrowing through curated protocols, and they also drive innovation at the protocol layer by offering customers more choice, offering them competitive prices and features. To be sure, billions of dollars worth of assets are managed through Zerion’s interface.
How risky is Zerion? No. They don’t keep assets, and they don’t manage smart contracts. Instead, they are responsible for embedding each of these protocols into a product, forming a super application. According to a recent press release, they are docked with around 50,000 assets across 60 protocols. Comparable companies like DeBank, Frontier, and ImTrust have been at the forefront of enabling more retail players to find their way in the complex Web3 ecosystem.
How? They reduce the barriers of trust required to use an application because end users assume that interface creators have done due diligence. Second, they enable new applications to be discovered more smoothly than through complex information networking platforms such as Twitter. Finally, they combine the capabilities of multiple DeFi DApps in one interface. As users’ needs within the industry have evolved, they have also begun to integrate on-ramps and tax software.
I’m using Zerion as an example here because it’s a centralized entity that acts as an interface to plug in with multiple Defi DApps. However, aggregation capabilities in DeFi go beyond that. Orderflow – 1inch and Matcha.xyz allow users to find the best price for the asset they need to trade without having to go to individual platforms. Instead of custodying the assets for trading themselves, they seek liquidity from third-party platforms. Matcha has taken this a step further by integrating the RFQ model into the product. To date, they have completed ~$42 billion in cumulative volume across ±900,000 orders. This feature allows centralized market makers on the backend to quote large order volumes, bringing the experience closer to what a centralized exchange like Binance can offer.
Yield – The core of DeFi has historically been the ability to provide yield. A huge risk of lending or decentralised exchange platforms is the possibility of being hacked. But what if you could build interfaces that allow users to deploy capital in the pool without necessarily holding the assets themselves? Rari, Alpaca and Yearn Finance do just that. Rari alone has a sense of scale with $922 million deployed through the Fuse pool. Instadapp has taken another step forward in terms of its user experience. The product allows users to manage debt positions or deploy assets to profitable pools using a single interface.They manage about $5 billion worth of assets through their interface, including companies like Maker, Compound, and Aave.
Aggregates of The Metaverse
From an aggregation perspective, NFTs are interesting. You have a digital commodity with transaction finality and on-chain proof of intellectual property. Given that users cannot reverse blockchain transactions, users buying NFTs will almost certainly not have to worry about their purchases being scammed unless the NFT itself is a replica. They can also verify that it’s coming from the correct source almost instantly. Unlike traditional art markets, you can almost instantly see what the floor price of an NFT is and who its past owners were. These all give NFT aggregators incredible power in their interactions with market participants.
For example, Gem aggregators themselves do not hold any of the NFTs listed on the platform, they use Dune to provide analytics results to users. Once you click on an NFT collection, it allows you to bid on listings directly in Opensea and LooksRare. Aggregators like Gem become a place for price discovery, as users are basically discovering and tracking their portfolios and bidding through them.
In the future, they will also cover features that blur the lines between DeFi and NFTs through lending and automated inventory management. Traditional art or physical markets have some of the aforementioned limitations associated with Web2 aggregators that prevent them from offering these services with low friction and low cost. Also, some other verticals, like gaming and the Metaverse, don’t even have historical analogs – the Web3 aggregator would be the first efficient marketplace to support and enable these classes of digital assets.
Over time, they are powerful enough to decide which NFTs are “discovered” because what they accumulate is basically the attention of the market. How much is this attention worth? I don’t know yet, but it’s worth enough to drive $400 million in volume through the platform. Gem is also affecting the market share of the underlying NFT market itself, as users have nothing to do with the market and will buy and sell assets whenever there is a favorable bid/offer. For example, LooksRare’s market share in NFT transaction volume has increased compared to OpenSea since the gem was launched.
Aggregated Data Marketplace
We have already discussed how aggregation theory in the context of Web3 can create entirely new markets, the aggregation models of Web3 links work because they focus primarily on digital assets, and there is an area that can be considered more “digital” than tokens and NFTs , that is the data market.
Data marketplaces in Web3 are attractive because:
- All datasets provided can be instantly queried and verified by third parties
- They embed directly into multiple third-party applications, so they can scale exponentially
- The cost of adding each new chain generally tends to decrease
- Delivery of product (data) is immediate
In the case of the agreement, the cost of maintaining the network infrastructure is outsourced. You can break this division down into two variations, one is to provide direct data access to end users through charts and queries, presenting information in a consumable way, these are centralized businesses like Nansen or Dune. Nansen built a business by focusing on the interface. Their centralization aspect involves tagging over 100 million wallets and their index chain.Nansen excels at providing users with pre-defined queries, while Dune wins by providing infrastructure that anyone can query. Nansen has built their moat based on their extensive work around tokenizing over 100 million wallets. On the other hand, Dune has built a moat through its extensive user base.
It is relatively easy for third-party platforms to replicate the data that Dune has now, but it is difficult to replicate community members without an active incentive system. The two platforms are unique in that they can (i) sell data digitally, (ii) do so almost instantly, and (iii) have limited marginal costs in expanding the number of chains they support.
Covalent, Graph, Pyth, and Chainlink are protocol-based alternatives to the same schema, each of which supports the entire ecosystem of DApps and responds to millions of queries on a regular basis. Protocols at the data layer are more attractive because they do not necessarily have the hardware infrastructure to make these datasets available. Instead, the indexing of datasets is done in third-party infrastructure, and this is incentivized by the protocol’s native token. In a traditional data enterprise, the cost of running the infrastructure eats into a company’s profitability. In the case of protocols, the perceived “value” of the network increases with each new node hosting data on those networks, as the likelihood of the entire data network going down is reduced.
The next decade of aggregation
Before we wrap up, let’s revisit the core thesis of this article: we believe that blockchain will enable a whole new class of marketplaces capable of instant verification of on-chain events, which will collapse the cost of validating intellectual property at scale, Thereby creating new business models. Today’s Web3 aggregators provide interfaces to display on-chain data and allow users to interact with smart contracts from multiple platforms. They do not own the risk of custody of these assets and generally do not bear the exponentially high cost of supporting additional networks.
The core proposition of Web3 Aggregation over the next decade will have multiple counterparties in low-trust systems, an example of which is AngelList, a platform that combines legal, banking and LP management into a single interface, from the structure simplifies the amount of friction involved in forming a VC round. How much is it worth? According to their latest funding round, around $4 billion. Large, chaotic markets with multiple moving parts are difficult to integrate at scale unless you have the time or capital. AngelList took about 8 years to build its monopoly, while Uber had to raise about $25.5 billion to become the Big Mac it is today. I believe that blockchain will collapse the unit economics surrounding this issue and make the process hyper-financial, will remove the inefficiencies that have been historically long and chaotic, while allowing people to profit from the combination of incentives stand up.
Today, it took me 5 minutes and $200 to form a DAO on Ethereum, in contrast to the fact that it took me six months and numerous phone calls to register a company in India. Part of the reason for this delay is a lack of trust and the ability to instantly verify data. Blockchain can help close this gap, we are just the makers of trust-producing machines for a trust-missing society.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/how-powerful-are-blockchain-aggregators-by-compressing-trust-and-verification-costs/
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