In today’s article, I’m going to look at the bigger picture, I’m going to look at Web3 through the lens of Aggregation Theory. This post may be a bit long, but I hope you stick with it as we detail how blockchain investing will happen in the next decade.
In 2015, Ben Thompson first proposed the concept of Aggregation Theory to explain how the Internet facilitates the evolution of markets. This is how Ben described Aggregation Theory about seven years ago:
The value chain of any given consumer market is divided into three parts: suppliers, distributors, and consumers or 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 disruption of the Internet is to put this dynamic in a different face.
First, the Internet enables free distribution (of digital goods), which neutralizes the advantages that distributors had taken to integrate with suppliers in the pre-Internet era. Second, the Internet has brought transaction costs to zero, making it possible for distributors to integrate massively with end users or consumers.
Image via original article by Ben Thompson in 2015
We believe that for those working on Web3, this theory deserves to be revisited from a new angle. We’ve seen how giants like Ramp, Stripe, and Spotify build on top of the compression of distribution and collection prices. But how does the theory apply to Web3 companies? We believe that in addition to compressing the cost of collecting payments, blockchain can lower the price of verification and trust. This makes it possible to create multi-billion dollar entities that have not been possible historically. New-age blockchain-based aggregators also help drive innovation at the protocol layer and enable a new business model: Hyperfinancialization-as-a-Service. But before that, let’s explain Aggregation Theory in detail for those who haven’t followed Ben Thompson.
bring the market closer
Below is an analysis of Uber through the lens of aggregation theory. Before Uber, the relationship between sellers (suppliers) and buyers (demands) was local, and there was a cap on the number of customers a driver could have. Also, there are limited choices in who might provide rides, which is why some drivers with bad attitudes still won’t get laid off.At the same time, the supply side of the market is also chaotic, such as it has a poor reputation, suffers from ineffective pricing in many cities and unpredictable prices. 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 rides this driver has taken, the average driver rating, and the exact amount you can expect to pay.
Why did this shift from taxi consortium to in-app drive happen? Because Uber controls the supply side through their app.Those who want to book a ride prefer the convenience of calling a ride remotely rather than waiting outside on the side of the street and being turned away by a random taxi driver. This model works because the internet has enabled Uber to build a venture from their cozy offices in San Francisco or any new hipster location and expand 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 the adoption of Uber, and if we were still mostly paying for rides in physical cash, Uber probably wouldn’t exist.
The largest companies on the Internet today can all be linked to Aggregation Theory. AirBnB, Deliveroo, Spotify, Steam, Amazon, and Twitter, for example, have upended previously chaotic markets through the power of the internet.Aggregators accumulate so much value because they organize what are often large, chaotic markets. newspaper? There are thousands of newspapers on the market with dissenting opinions, often with inaccurate sources. It’s you who replaced them with news aggregators.
How about renting a house in a small town for a few months? Airbnb makes staying in a stranger’s home “good”.Customers gravitate to these aggregators because they can expect the same level of service, quality, and standards, and there is an ample list of providers here. You get the security of a familiar platform and selectivity across the entire market.Going back to the Airbnb example I mentioned earlier, users know that they can register on the site and submit a complaint to get a refund if something goes wrong with their booking. What about Amazon? Refunds happen almost instantly.
Aggregators enable supplier reputation and fair distribution. When you buy something on Amazon, you can look up reviews. In exchange, they take a cut of the transactions that take place on their platform. As a platform digitizes, the frequency of transactions tends to increase, allowing aggregators to operate at a much lower cost than a brick-and-mortar experience. Why? Because the cost of delivering a digital product (like movie streaming) is a fraction of the cost of a physical experience (like a flight).
Users can only take one flight at a time. And on the same flight, you might see multiple movies being played by a single user. Or, if they were like us, they might have bought countless altcoins or NFTs, and maybe they would have regretted their losses after getting off the plane. Hopefully after reading this part, you have a good idea of what aggregation platforms are and how large they are, now let’s go back to Web3.
Compress the cost of trust
Just as the Internet compresses the cost of distribution and collection, a publicly verifiable blockchain also compresses the cost of verification and trust. Virtually all of the Big Macs we see in the Web3 context are built on this principle. Blockchain enables anyone to query and verify that a digital product being sold is really 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 that 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, and after a decade of trying, having distribution rights gives them that edge.
But 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 like Figure and go through their various compliance and onboarding procedures that are unique to each platform.
It also makes it harder for developers of other applications, and also spends more to easily take advantage of your aggregation and build new and 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 its movement through their user base. So what about Uniswap? As long as the user adds the token’s address accurately, there is no need for people to be involved in verifying that the token being traded on it is legitimate.
The blockchain abstracts the verification layer and compresses the resulting costs to an extreme. Does trust itself generate a premium? I think yes. Let’s consider a few examples of platforms with commercial rights and compare with platforms that do not. Music would be 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 an occasional option for finding some moving 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 in different ways. Spotify claims to have 406 million monthly active users, of which about 180 million are paying users. Their profit margins are about ±25%, so you can discount the $9 billion in annual revenue you calculated in the chart below. But even taking that into account, you’ll notice that Spotify’s revenue is much higher than Soundcloud’s.
As a standalone platform, Amazon’s e-commerce volume is larger than Shopify’s stores. Steam (the game’s top name) 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 scale of operations. This is the flywheel of modern commerce. Max Olson did a nice job of visualizing these jobs 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, holding the streaming rights to cricket has paved the way for TV networks to scale. Blockchain enables platforms to prove provenance and distribution rights from anyone on the network at a very low cost.
This means spending on legal fees and time spent going through bureaucracy can now be 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 current ecosystem and how they are using blockchain for their own benefit.
Aggregators in DeFi
Zerion is a wallet interface that focuses on enabling users to track their portfolios. The product currently tracks NFTs, allows tokens to be swapped, and lets users know how all the tokens in their wallets are doing. Interfaces like those offered by Zerion are fast becoming the “home” of DeFi. They allow users to interact with complex host applications without having to interface with 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 gain access to features like lending and borrowing through curated protocols, and also drive innovation at the protocol layer by offering customers more options at competitive prices and features. To be sure, billions of dollars worth of assets are currently managed through Zerion’s interface.
How risky is Zerion? no. They do not custody assets and do not manage smart contracts. Instead, they are responsible for embedding each of these protocols into a product, resulting in a super application. According to a recent press release, they interface with around 50,000 assets across 60 protocols. Wallet-like interfaces 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 do they do it? They reduce the barriers of trust that users need 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 web platforms such as Twitter. Finally, and most importantly, they combine the fundraising capabilities of multiple DeFi Dapps (decentralized applications) 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 plugs into multiple Defi DApps as an interface.However, aggregation capabilities in DeFi go beyond that, here are some examples:
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. It does not custody the assets for trading itself, but seeks liquidity from third-party platforms.Matcha takes this a step further by integrating an inquiry model in the product. To date, they have completed about $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 provide.
Yield – The Holy Grail 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 create an interface for users to deploy capital in the pool without necessarily holding the assets themselves? Rari, Alpaca and Yearn Finance do just that. The Rari protocol alone has deployed $922 million through the Fuse pool, which is already taking shape. Instadapp goes one step further with its user experience, the product allows users to manage debt positions or deploy assets to yielding pools using a single interface. This includes companies like Maker, Compound, and Aave, which manage about $5 billion worth of assets through their interface.
Aggregation of the Metaverse
From an aggregation perspective, NFTs are interesting. You are equivalent to having a digital commodity with transaction finality and intellectual property chain proof. Please don’t speak ill of me behind my back, I’ll explain in unskilled terms.Given that users cannot reverse blockchain transactions, users buying NFTs almost certainly don’t have to worry about being scammed out of their purchases, 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 make NFT aggregators incredibly powerful in their interactions with market participants.
For example, we can look at Gem. The aggregator itself does not hold any of the NFTs listed on the platform, and they use Dune to provide analytics results to users. Once you click on an NFT collection, the interface allows you to bid on listings directly in Opensea and LooksRare. Now, this is where it gets more interesting, aggregators like Gem become the place for price discovery, because users are basically discovering and tracking their portfolios and bidding through them.
In the future, they will also cover features that further 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 analogues – the Web3 aggregator would be the first efficient marketplace to support and enable these digital asset classes .
Over time, they will be influential enough to decide which set of NFTs gets “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 influencing the market share of the underlying NFT market itself.Because users are not tied to the market, they 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 launch of Gem.
We believe that the aggregation of NFT-connected assets will happen thematically. For example, Parcel allows individuals to bid on real estate-linked NFTs. Likewise, there will be separate markets for gaming-related NFTs. Currently, there are still gaps in the home of NFT markets related to sports, music and movies. In part, the thematic focus on asset types enables founders to curate communities around them, which creates an initial flywheel for enabling transactions through the platform itself.
Aggregated Data Marketplace
We have discussed how aggregation theory in the context of Web3 can create entirely new markets. The aggregation models of Web3 connections work because they primarily focus on digital assets. One area that can be considered more “digital” than tokens and NFTs is data markets.
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 market down into two categories. One is to provide end-users with direct data access through charts and queries, presenting information in a consumable manner. These are centralized businesses like Nansen or Dune.Nansen has built a business by focusing on the interface, and their centralized aspect involves the labeling of 100 million+ wallets and the chains they index. Users don’t create queries themselves, but Nasen’s team handles these, but once queries to extract data are crafted, they can be replicated across chains. As a result, the unit cost of scaling to each new chain is trending downward. Nasen’s initial investment was in tokenizing and setting up queries for top holders, smart contracts or wallet interactions on each 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, Dune, on the other hand, has built a moat through its extensive user base that is all-out vying for the top spot on its leaderboard .
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. These two platforms are unique in that they can (i) sell data digitally, (ii) do so almost instantly, and (iii) have limited marginal costs in scaling the number of blockchains they support .Of course, in addition to centralized businesses, there are protocol-based counterparts in this space.
Covalent, Graph, Pyth, and Chainlink are protocol-based alternatives to the same schema. Each of them 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 due to the reduced likelihood of the entire data network going down.
The next decade of aggregation
Before making the final recap, let’s revisit the core thesis of this article. We believe that blockchain will enable a whole new category of marketplaces capable of instant verification of on-chain events. This will minimize the cost of validating intellectual property at scale, 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.Covalent and Nansen are able to generate exponential value by adding each new chain (this is usually a linear spend).
The core proposition of Web3 Aggregation over the next decade will be to streamline large, chaotic processes with multiple transacting parties in low-trust systems. An example where this happens is AngelList. The platform structurally simplifies the amount of friction involved in forming a VC round by combining legal, banking and LP (liquidity provider) management into a single interface. 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 blockchain will compress the unit economics surrounding this issue and make the process hyper-financial.Combining the elimination of inefficiencies in a historically long and chaotic process with incentives that allow people to profit from it can be a powerful combination.
This is already happening in some emerging markets. In an upcoming article, we will introduce a business in Africa that executes, verifies and validates the stack required for traditional contracts. In the context of Web3, where aggregation reduces the level of corruption and inefficiency, emerging markets that have historically been rife with corruption and lack of transparency will benefit the most, think DAOs (Decentralized Autonomous Organizations). Today, it takes 5 minutes and $200 to form a DAO on Ethereum. In stark contrast, 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 my data. Blockchain can help close this gap, we are just the makers of trust-producing machines for a trust-missing society.
PS: Feel free to take this post and remix it. We are looking for in-depth research on how blockchain can converge in different markets. If you have any thoughts on this, please drop by our Telegram to discuss it.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/viewpoint-the-aggregation-field-of-web3-will-burst-into-great-value-in-the-future/
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