Aggregators, such as Google, Facebook, Uber, and Airbnb, are the biggest value capturers on the Internet. When an industry is digitized, the profits of that industry flow heavily to the aggregators of that industry on the web.
DeFi is inherently digital, so will the profits of the financial industry, or those currently confined to DeFi, flow to the aggregators in DeFi, replaying the story that has been repeated on the Internet?
Exploring this question is the reason I wrote this article. It consists of three parts, the first introducing aggregation theory, much of which is drawn from Ben Thompson’s series of articles on aggregation theory; the second discussing the peculiarities of aggregation theory when applied to the DeFi space, a peculiarity that stems in large part from the fact that DeFi’s vehicle is the blockchain rather than the Internet. The third part is an observation and reflection on aggregators in DeFi, and platforms that look like aggregators.
What is an aggregator and why does it capture value? Let’s look at what has happened to the lodging industry after digitization.
In the traditional hotel industry, as shown below, accommodation rooms and trust are integrated and users relate to this integration through booking services; but after digitization, in Airbnb, accommodation rooms and trust are split and trust and booking services are integrated in Airbnb and users relate to accommodation rooms through Airbnb.
This change has led to a shift in the value chain. In the Hotel model, hotels with integrated trust (the supply side) are differentiated and scarce, they take the initiative in the value chain and profits flow to them; but in the Airbnb model, accommodation rooms (the supply side) are modularized, and modularization leads to a large number of commoditized supplies, where the initiative in the value chain is taken by aggregators with integrated trust, acting as intermediaries between goods and users In this case, the initiative in the value chain is the aggregator that integrates trust and acts as an intermediary between goods and users, to which profits flow.
The same thing is happening in the cab industry. In the Uber model, cabs are modularized, trust and services such as dispatch and payment are integrated in Uber, the value chain changes, and profits flow to the integrator.
From these two examples, it is easy to see that when the supply of an industry is digitized and modularized, the business challenge is no longer to maximize the limited supply, but to manage the huge fragmented supply for the users. Aggregators are the inevitable and central players that will emerge in the digital market, integrating and reintegrating the value chain of the industry to capture value.
But what kind of product is an aggregator? My preferred description of an aggregator is: “Any product that creates its own customer value is not an aggregator, because ultimately its customer acquisition costs will limit its growth potential.
In a nutshell, aggregators need to meet three key characteristics. Many products meet only one or two of these characteristics, and they are not aggregators but platforms.
A direct relationship with users
The marginal cost of serving users is zero
The cost of acquiring users decreases with scale
The two ‘spectra’ shown below can help us understand aggregators in more depth. The first spectrum is the differentiation of suppliers. The closer to the left side of the spectrum, the less differentiated the suppliers are, the more typical of an aggregator, e.g. in Facebook, the suppliers are almost undifferentiated, “on the Internet, no one knows you are a dog”; conversely, the closer to the right side of the spectrum, the more differentiated the suppliers are, the more of a platform rather than an aggregator, e.g. in Microsoft, the suppliers are even specific and integrated with the product together.
The second spectrum is the internalization of network effects. The closer to the left side of the spectrum, the more internalized the network effect is, the more it is a typical aggregator, such as Facebook, whose product itself is a network of relationships and the network effect acts directly on the product and is completely internalized; conversely the closer to the right side of the spectrum, the more externalized the network effect is, the more it is a platform rather than an aggregator, such as Microsoft, which has almost no internalized network effect. The number of its users is not directly related to the utility that users can obtain from the product.
Corresponding the spectrum with the characteristics of aggregators, it will be found that: the de-differentiation of suppliers brings a large amount of commoditized supply, which in turn helps aggregators achieve “zero marginal cost of serving users”; the internalization of network effects makes the product utility positively correlated with the number of users, which in turn helps aggregators achieve “the cost of acquiring users decreases with scale”.
Aggregators on the blockchain
Whether aggregators are on the Internet or on the blockchain, they should satisfy the basic characteristics of aggregators in the first part of the article. But what are the differences of aggregators on different networks? There are three points seen so far as follows.
- trust, where trust is integrated differently. On the Internet, trust is integrated in the aggregator, which is a major reason why the aggregator can capture value; but on the blockchain, trust is integrated in the public chain, and the value of this part is captured by the public chain. From the perspective of value chain, the value chain of Internet and blockchain are very different.
- Data, the non-exclusivity of data. On the Internet, the aggregator exclusively possesses all kinds of data including user data, supplier data and operation data, which is an important reason for it to form a monopoly and then seize profits; but on the blockchain, the data is open, and it is difficult for the aggregator to profit from the monopoly through the walled garden of data.
- Modularity, active modularity. The digitization and modularization of traditional industries are generally done by the lead of aggregators, and there are aggregators first and then the supply of modularization. In this model, the interface of the module is given by the aggregator side, and then the supplier will match the aggregator’s goods access; consequently, the more suppliers access will attract more users, and the more users will attract more suppliers …… the process leads to the aggregator once it forms a scale, other similar aggregators is difficult to This process makes it difficult for other aggregators of the same type to break their monopoly, as the utility of their products will be too different.
But DeFi is inherently digital and modular; it is a modular supply before there is a demand for aggregators. In this model, the interfaces to the modules are standardized, and in addition to the supplier actively accessing the aggregator, the aggregator can actively access the supplier to itself. This means that the gap in product utility between an aggregator and an already dominant aggregator will not be insurmountable as long as the aggregator actively accesses the supply.
The internalization of network effects is the most important reason why aggregators will move towards monopoly, which hinders the entry of competitors, but on the blockchain, the way aggregators rely on network effects to establish dominance will be greatly weakened and competition is possible.
Based on the above three points, a rough derivation of the value of aggregators and profit acquisition is that
- Aggregators manage decentralized supply for users and provide them with a good experience; aggregators are located at the top of the stack and are the entrance for users and traffic. These belong to the value of the aggregator itself, and the aggregator on the blockchain will undoubtedly capture it.
- DeFi aggregator does not integrate trust, and the part of value related to trust belongs to the public chain, so in this aspect, its value may be lower than the value of Internet aggregator; trust is integrated in the public chain, so the supplier can also be trusted, and users can get goods directly from the supplier without relying on the aggregator, which may also weaken the value of the aggregator.
- The characteristics of aggregators determine that it will tend to be monopolistic, and aggregators on the blockchain are no exception. DeFi aggregators will also get additional benefits and gains from monopoly; however, aggregators on the Internet can rely on monopoly to squeeze upstream and downstream, and encroach and seize their rights and interests, but aggregators on the blockchain can be challenged to do evil, which makes it perhaps more difficult for them to profit from such behavior.
- Because of the powerful internalized network effect, most of the aggregators on the Internet will go to the situation of the strongest and one dominant, and the monopolist or very few monopolists get all the value of the industrial value chain at the aggregator; DeFi aggregator is a fully competitive situation, and although there will also be a head effect, there may be a group of head products, and they jointly get the value of the industrial value chain at the aggregator value at the aggregator.
DeFi aggregators and platforms
When mentioning aggregators at DeFi, people often think of projects like YFI (revenue aggregation) and 1inch (DEX aggregation), but with the logic of traditional Internet aggregator theory, they are not aggregators, but more of a “platform”. The Internet industry is similar to them, such as the ordering platform for organic ingredients or flowers, where the platform delivers ingredients or flowers to users every week, but the specific goods are not actively selected by users, but by the platform among some specific suppliers for users.
Specifically, YFI helps users pick their revenue options, and in this way it creates its own customer value; on a spectrum, the differentiation of its suppliers is large, the internalization of network effects is weak, its cost of acquiring users does not decrease as its scale increases, and it is closer to a platform than an aggregator. Similarly, 1inch is not a DEX aggregator, it is a DEX platform that helps users pick and choose their trading options.
In contrast, projects like Zerion and DeBank, which are often called treasury platforms, are closer to aggregators by nature. In DeFi, the custodian and the wallet are closest to aggregators in that they are user-facing and manage the supply of assets and commodities for users. The two may eventually evolve into similar product forms, where the asset management will have a wallet and the wallet will do the asset management, both evolving in the same direction to better serve users.
The diagram below is a kind of layered diagram of DeFi that I drew, with aggregators connecting up to users and down to the supply of goods/services. Unlike Internet aggregators, DeFi aggregators integrate applications as well as platforms, and platforms are incorporated into the value chain integrated by the aggregator.
Another difference is that on the Internet users generally only touch aggregators and get goods through them; in DeFi, users can get goods/services directly from platforms and applications in addition to aggregators for the reasons mentioned above: trust is integrated in the blockchain, and things on the chain are trustless regardless of which layer of the stack they are located.
While aggregators and platforms look somewhat similar and are often confused, they are distinctly different things. The former is an open system with modularized providers and internalized network effects; the latter is not. The value of aggregators is greater than the value of platforms, because they do not scale in the same order of magnitude.
This is not to deny the value of the platform, however. There are three additional things that add to the value of a platform in DeFi: first, in DeFi, many users may not know how to choose their offerings, and a platform that helps them choose their goods (providing strategies, routing, etc.) is important, unlike on the Internet where users themselves know how to choose; second, in DeFi, the platform is located in a value chain integrated by the aggregator, and it benefits from this Third, in DeFi, trust is integrated in the blockchain, and the platform is more easily adopted by users and more easily expanded.
We didn’t enter the digital age with the advent of the Internet; we entered it with the advent of aggregators. Aggregators digitized one area after another, and in turn, digitized our lives.
Aggregators bring convenience, but also the fear of being dominated and not being able to do anything about it. The problem of monopoly of aggregators is perhaps one of the most difficult problems of this era, but things on the blockchain are naturally resistant to monopoly, and DeFi is lucky. DeFi is worth waiting for.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/will-aggregators-be-the-biggest-value-capturer-in-defi/
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