Value Capture & Accrual: Aggregators, Interfaces and Protocols

Value is being created in DeFi. The question is who will capture it as it goes up & down the stack.

If there's one conversation I've been hearing over the past few weeks, it's been about how value will accrue in the decentralised web stack.

Players such as 1inch are now cleaning up over $100m in volume and so are decentralised lending protocols such as dYdX. The question on every savvy investor's mind is where to allocate capital and why. I'm not claiming to solve the answer here but want to explore this in a bit more depth.

In my mind, there's three high level parties:

  1. Aggregators - 1inch, 0x, dex.ag and the myriad of others that will come along

  2. Curators - InstaDapp, Argent, Zerion and others wallets/interfaces

  3. Protocols - Uniswap, Compound, Curve, Kyber and the places that host liquidity

Back when DeFi went live in early 2018, we were testing the viability of the protocols themselves and whether they'd work. However, due the overwhelming number of apps/products, we had curators create interfaces which allowed you to interact with these protocols and expose functionality that they didn't natively. The core reason InstaDApp grew to what it is today is simply because they allowed you to migrate your CDP to Compound in one click. As we move along in our timeline, the next evolution we saw in mid 2019 was the rise of aggregators for order books and lending protocols. 1Inch was born in ETH NY and buys/splits up orders across multiple exchanges to offer the best price for execution. Aggregators have started to eat up volume and showing growth at a very high rate.


Parties

Now that we've got all of that out the way, let's list out the characteristics for all these parties.

Aggregators:

  • Are doing very large numbers at the moment and even 10 basis points can lead to a lot of revenue generated

  • Don't directly compete with underlying protocols and order books, each new integration leads to a superior product

  • Viability about defensibility remains questionable as price isn't a sticky factor. Will monetisation result in users switching to a lower cost alternative?

Curators:

  • Closest to the user and can have a brand advantage. When crypto goes mainstream one day future consumers will flock to them to interact with the decentralised web.

  • Focus on a select few integrations to provide a superior user experience. Aggregation isn't their strong point since they offer to tailer user experiences around a particular protocol

  • Questions about defensibility is less since once users lock their funds with you, switching costs are low (subject to smart contract architecture)

  • Valuations are very high and don't make sense at the moment, paying a premium for the future is the key risk here. Argent has a $30m+ valuation with less than 3,000 users.

Protocols:

  • Power all the layers above it and earn the most through protocol fees

  • Creating a competitor requires deep expertise in protocol design, engineering prudence and more. Defensibility isn't in the core code but the team itself

  • Any strengths or weaknesses will be amplified by aggregators since they will outperform on strengths and underperform on weaknesses simply by not being chosen by algorithms

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