Aggregators

This piece (originally published on Medium) seeks to cover the emerging trend of “aggregators” within decentralized finance on Ethereum. First coined in 2017, DeFi has grown enormously since inception, unbundling the financial stack into an open, permissionless system. I will highlight the modular nature of the DeFi stack, and the role of aggregators.

In December 2017, MakerDAO launched Dai, a crypto-collateralized stablecoin built atop the Ethereum network. The Maker team has in many ways been the darling of DeFi, as Dai and Maker’s tooling have served as core building blocks for DeFi. Dai’s endured USD-peg as the price of Eth plummeted from $1400 to $80, encouraged trust and secured its role as the medium of exchange for DeFi.

A particularly interesting trend in DeFi is the shift to aggregators, the user facing products that are built atop decentralized infrastructure. Aggregators emphasize UX/UI improvements over the liquidity layer, whereas the liquidity layer is singularly focused on improving the core underlying functionality (lending, exchange, etc).

For framing, I’ve visualized the modular nature of DeFi below. The consensus layer (ie Ethereum) serves as the digital economy powering the two layers that sit atop: the liquidity layer, and the application layer. Worth noting is the open, permissionless nature of the the liquidity layer compared to closed web2 APIs. As you will see, the aforementioned ‘aggregators’ are within the application layer, since they are the last piece of the puzzle in delivering crypto-network enabled products and services to end users. This open, unbundled financial stack is being accelerated by DeFi tooling, which will be covered later in the post.

Liquidity layer

Examples: Maker, Compound, Kyber, Uniswap

The liquidity layer often uses “Eth locked in DeFi” as its KPI, which stands at an aggregate ~$500M worth of Eth at the time of this writing. MakerDAO Collateralized Debt Positions (CDPs) are the most active source of locked Eth, underpinning newly minted Dai. As CDPs are opened (and Eth is locked in a smart contract) Dai is minted, and as CDPs are closed, Dai is burnt or destroyed.

Maker, Compound and Uniswap are the three largest liquidity protocols within the layer, serving aggregators and crypto-savvy users directly. Liquidity layer smart contracts are permissionless and open source for any 3rd party (entity or individual) to use — you can think of using the liquidity layer as an API, without having the API owner’s consent. As the liquidity layer gains traction, network effects increase, leading to more competitive spreads and rates. In the context of lending, more liquidity at scale allows better rates or essentially more access to cheaper credit as lenders receive lower interest if supply outpaces demand.

Compound and others at the liquidity layer have built out user facing applications, yet also promote an array of aggregators (Argent, InstaDapp, Zerion) for access, as seen by Compound’s homepage above. There is a possibility that those at the liquidity layer expand their own user facing product efforts, or build out their own tooling (as DyDX recently introduced their own market making) — yet the DNA of building robust, crypto infrastructure at the liquidity layer is quite different than the DNA of building elegant, frictionless applications and aggregators. To this point, Dharma, which originally set out to build its own protocol and user-facing application, recently pivoted to pure aggregator status and offers end users liquidity from Compound.

Aggregators

Examples: Instadapp, Argent, Ambo, Zerion, MetaMoneyMarket, Multis, Topo Finance, DeFi Saver, Guesser.

Aggregators are tapping into DeFi liquidity to serve end users, and allow DeFi liquidity to expand beyond crypto-savvy users. Aggregators put UX/UI first, offering a far improved experience than interacting directly with the liquidity layer, thus allowing a first-class holistic experience.

Looking back, early aggregators in Ethereum were relayers like Radar Relay, which aimed to serve a more intuitive user experience than interacting directly with 0x. Relayers improved the user experience for decentralized exchanges, notably for contract fillable liquidity.

Today’s aggregators are working with far richer liquidity, and taking more user-friendly measures to bridging DeFi liquidity to the masses by abstracting gas fees, being mobile-first, and sometimes obfuscating private keys from users. As seen below, Argent leverages Compound and MakerDAO at the liquidity layer, and serves users with an elegant, mobile-first, smart-contract wallet.

As DeFi liquidity grows, aggregators will expand accordingly to serve better user experiences- an example being a savings account application, where users simply deposit USD and see interest accrual but are not exposed to underlying DeFi smart contracts or crypto-networks. Under the hood, that USD would be immediately converted to Dai, and a smart contract will route Dai to the highest yielding interest DeFi protocol.

In time, aggregators are positioned to be able to tap into centralized liquidity from the likes of BlockFi, Coinbase, and CoinList as these companies weigh opening up APIs beyond their own users.

Also, as aggregators serve users, they will be well positioned to tap into liquidity beyond Ethereum’s DeFi ecosystem, say from Tezos or Near. Aggregators will be the biggest driver of “interoperability”, allowing end users to access Tezos or Near DeFi if rates are more competitive than Ethereum DeFi (fwiw Ethereum is not AOL of crypto). With power comes responsibility, and aggregators will have to decide whether to market fixed or variable rates (in the savings account example), while also navigating the regulatory landscape.

Ultimately, aggregators may commoditize the liquidity layer in a similar vein to Ben Thompson’s Aggregation Theory as they define the user experience and control distribution — this will not happen meaningfully in the short term as aggregators are emerging and remain quite reliant on the liquidity layer (ie lending/borrowing rates). As aggregators emerge and reach larger audiences, we may see increased efforts by aggregators to fork the underlying liquidity layers — it is too early to say, and for now I defer back to liquidity layer vs. aggregator DNA comments earlier.

Tooling

The burgeoning trend of aggregators would not be possible without liquidity, but just as important, the tooling tangential to our DeFi stack earlier. Tooling has accelerated development of the application layer, enabling applications to plug and play versus building out their own liquidity, stablecoin or other crypto-native infra.

I’m excited to see more entrepreneurs experiment with tooling and DeFi’s modular and open liquidity: pooled lotteries, DAOs, and tontines are opportunities to disrupt geographically constrained, centralized offerings.

Conclusion

Ethereum DeFi liquidity and tooling is improving by the day, and its open and modular nature allows anyone to build aggregators, and use-case focused applications. This is possible on Ethereum today even at its current 12–15 transactions per second, and aggregators will hopefully have an even larger sandbox as new digital economies launch, the liquidity layer grows, and with improvements on tooling.

The path forward for aggregators is not linear, and they will be tasked to navigate the modular nature of DeFi — decentralized and open, yet potentially hazardous from black swan events that may corrupt the entire system. Some have called DeFi a house of cards, given the extreme reliance on Dai, potential oracle attack vulnerabilities, and centralized backdoors of DeFi protocols.

I am optimistic that DeFi’s modularity will not be its Achilles Heel, and the world is on the edge of of a globally accessible, permissionless system with Ethereum leading the charge. To conclude, I predict locked Eth will 2x from here by year’s end ($1B+ here) by December 2020 with aggregators serving the majority of the liquidity layer to end users.

Special thanks to Hart Lambur, Clay Robbins, and Katherine Wu for feedback on this piece.

Open Questions

1. If aggregators are main beneficiaries by owning users, who will maintain DeFi protocols? MakerDAO’s governance token, MKR seems to be a good model for incentivizing protocol participation and I suspect many liquidity layer protocols are considering their own governance, or dividend-esque token.

2. Business models, without getting into regulatory grey area is unclear for the liquidity layer. Projects that have a valid token economics argument where usage accrues to liquidity layer’s native token seem to be most interesting (similar to #1).

3. What happens when a future Ethereum upgrade breaks existing contracts at the liquidity layer? This seems to be a huge headache, and it will happen. This also limits how perpetual DeFi products can be. (You can’t build a 100yr asset on Ethereum right now because it will 100% break on Eth2.0)

4. What happens if a single liquidity layer’s network value or aggregators AUM grows larger than the value of their underlying digital economy (ie MKR’s network value exceeds ETH’s network value)?

5. Will DeFi rates outperform centralized offerings? In theory, DeFi should offer better rates than centralized offerings as middle-men are cut out, and liquidity is a competitive marketplace yet Eth interest on BlockFi (3.3%) is more competitive than DeFi offerings today (<1%).

6. Network effects at the liquidity layer can be real, and it’ll be hard to build another Compound given the liquidity head start. BUT, prices/spreads matter here… if Compound charged a lot, it in theory could be forked and liquidity migrated to the cheaper version.

Market Mapping Crypto

Since the publication of Bitcoin’s white paper 10 years ago, an entire ecosystem of entrepreneurs, companies, and capital have mobilized around crypto to create a new asset class. As the emerging asset class enters its teenage years, suites of products and services are vying to become pillars in the high-potential crypto ecosystem.

Crypto’s market map continues to grow in both its complexity and in its structure. This post seeks to present a framework of the burgeoning crypto industry, with select examples in their respective segments. It is not exhaustive.

2019 Crypto Market Map

The framework presented above separates the current crypto ecosystem into two overarching categories: crypto-enablement and crypto-native. As the crypto ecosystem continues to mature and professionalize, I expect both developments from crypto-enablement and crypto-native to begin to overlap and complement each other.

The crypto-enablement category consists of companies that are building atop centralized infrastructure. On the institutional side, companies like Fidelity and Square (at $2.5T AUM and $30B market cap respectively) are positioning themselves to be significant players in the crypto ecosystem in the long run. These large institutions, alongside centralized tech startups like Bakkt and Xapo, are offering a variety of crypto-related services such as digital asset exchanges, brokerage, and custody. In recent years, exchanges have been the early winners, largely driven by retail interest in digital assets.

Retail focused crypto exchanges, such as Coinbase and Binance have been early winners within crypto-enablement, as buying volumes hit unprecedented highs in 2017 and early 2018. Ultimately, companies that are building with the crypto enablement category will act as the funnel in educating and offering access to potentially billions of users. I expect less engrained market segments such as crypto lending (BlockFi) and crypto ETFs (subject to regulatory approval), to ramp attractively in 2019.

The crypto-native category is comprised of the actively forming crypto stack and its ancillary pieces: Layer 1 (L1), Layer 2 (L2), Layer 3 (L3), miners, stakers, and crypto-native accessories.

L1 or base layer protocols cover a wide range within the crypto-native stack, varying by account-based or UTXO, consensus mechanisms, flexibility, amongst other criteria. There are more than 60 smart contracting L1 protocols, as of September; ultimately I believe there will be no more than a dozen L1 protocols, but I’ll save that for another post.

L2 are protocols built atop L1, from privacy-focused, to domain-focused, to scalability-focused; these protocols allow dapps to scale to billions of users.Additionally, L2 may offer increased liquidity amongst dapps, effectively making on-chain activity higher in the stack more secure.

L3 — (d)apps are loosely defined given their interconnectivity to lower layers, especially Layer 2. There are interfaces built on top of an existing protocol (Veil:Augur, Expo:DyDX), and applications leveraging their own unique of smart contracts (DyDx). As L1 infrastructure increases transaction throughput and crypto education increases, I expect to see a wave of decentralized applications. Today, dapps often feel clunky for the average user, nowhere near the mobile app experience we’ve grown accustomed to. CryptoKitties, Radar Relay, Expo and others have made strides in making the user experience better —2019 will be an inflection point for crypto native adoption.

Offerings within the mining/staking segment (responsible for block production and transaction validation) will be fascinating to watch as Ethereum inches towards Proof of Stake, and highly anticipate protocols such as Dfinity, Algorand and Coda launch in the coming months. Bitmain and Bitfury will continue to be dominant in powering PoW protocols, where PoS infrastructure is just forming with Bison Trails and Staked as early contenders.

Crypto-native accessories — these may be features, standalone companies, or extensions of companies across the market map. Ultimately, they complement the crypto-native stack. I’ve accounted for 15 specific segments, although could easily add another dozen.

Crypto-native onramps — wallets, app stores, and crypto ATMs allow the masses to participate directly in the crypto-native stack, without the added step of Coinbase signup, digital asset purchase, delay, and transfer to X dapp.

Conclusion

When I made my first venture investment in crypto in 2015 (Chainalysis), the total market cap was below $5B. As of this writing, that number is roughly $100B with an additional tens of billions in enterprise value from crypto-enablement companies like Coinbase and Binance.

Startups, institutions, large enterprises, and users around the world are driving crypto to form an entirely new asset class. As on-chain transactions increase, crypto-enablement takes on a symbiotic role in delivering crypto to billions of users.

-Ash

I’m an early stage investor at Accomplice, focused on crypto networks and crypto enabled companies. Please don’t hesitate to reach me on Twitter with feedback, comments, or general thoughts.

Special thanks to Jeff Fagnan, Sarah Downey, Ivan Bogatyy, Katherine Wu and James Prestwich for reviewing versions of this post.

Footnotes

**the periphery crypto segment is primarily massive enterprises dabbling in crypto, but remain on the sidelines compared to all-in groups like Fidelity and Square.

**crypto funds/vc funds, structured as hedge funds or long-term venture funds are backing entrepreneurs within crypto-enablement and crypto-native.

**tokenized securities and security tokens as extensions of traditional equity, primarily enabled by Reg-A+ and Reg-D offerings.

**I’m excited to see how crypto will be introduced into existing marketplaces- as payment, escaping expensive fees, or earning crypto for contributing.

Perceptions of Crypto

Over the last few weeks, I’ve been on a mission to better understand how participants perceive crypto’s current user experience and interface. I teamed up with Tobia De Angelis, founder of D1 Labs, to formalize this deep dive (Twitter disagreements can be great). Our focus: the UX/UI design approaches to both Bitcoin and Web3.

Our initial starting point kicked off with a survey to better understand user perception and priorities. This survey was sent to ~100 people (though not statistically relevant; respondents are entirely focused on building/investing in crypto).

Survey Findings & Commentary

1) Are you supportive and or interested in: Bitcoin, Web3/Ethereum, Both?

20% solely interested in Bitcoin
4% solely interested in web3/Ethereum
2% interested in none

The vast majority (73%) were supportive/ interested in both Bitcoin and Web3/Ethereum.

2) How would you define the relationship between Bitcoin & Web3?

Commentary: only a small number of people actually think web3 and bitcoin are truly competitors.

3) Are Bitcoin and Web3’s success correlated?

Commentary: It was interesting to see a nearly identical split saying yes or no. Results to this answer are beginning of confirmation that users have different ideas of success for Bitcoin and Web3.

4) When designing products that aim to contribute to Bitcoin’s success, one should focus on:

Commentary: We expected security to be top choice, but better UX/UI in the form of ease of use is top priority. Security close behind.

5) When designing products that aim contribute to Web3/Ethereum success, the most important thing to focus on:

Commentary: ease of use, smoothness take the top spot for web3 which was no surprise. We think we’re in the early days of unearthing use cases of smart contracts, so glad to see creativity was close to the top.

6) For Bitcoin: how acceptable is to trade security/privacy at the app layer for a smoother UX? (0 -10 scale)

Commentary: We probably should have used a 1–5 scale here. 0,5, and 10 had most votes — 0 outweighed 10 quite heavily, ie Bitcoin users do not want to sacrifice security.

7) For Web3/Ethereum: how acceptable is it to trade security/privacy at the application layer for a smoother UX?

Commentary: we were surprised there was a lower than expected average (4.85), especially after answers on Question 5. In web3, security is still very important from users eyes.

8) For Bitcoin: a global, widespread popular adoption is necessary for it to succeed.

Commentary: Bitcoin camp was essentially split on thinking widespread adoption was necessary for Bitcoin’s success.

9) For Web3/Ethereum: a global, widespread popular adoption is necessary for it to succeed.

Commentary: Web3 camp prioritizes global adoption more than Bitcoin camp. We were surprised to see the larger than expected (32%) say that web3 does not need to be global.

10) A successful Bitcoin looks like

Commentary: Bitcoin’s narrative is increasingly moving towards “store of value and payment network”, with only a collective 16% viewing as base layer for applications.

11) A successful Web3/Ethereum looks like

Commentary: Web3 as a store of value had almost no votes, with the vast majority excited about web3 being a base layer for applications (generalized, and financial).

12) Pick the two “web3” platforms you’re most excited about (if you’re a maximalist, pick one)

Commentary: This was more of a fun question to gauge where people were excited. Ethereum is the runaway winner, surprised to see so many people excited about unnamed “other”. To note: participants chose multiple options here.

13) Pick the 2 “coins” you’re most excited about (if you’re a maximalist, pick one)

Commentary: Bitcoin, to no surprise was the top maximalist choice. It was interesting to see that ZCash had more excitement than Monero given similar value propositions. Our take: participants care about global store of value and privacy.

Conclusion

This research is a starting point in understanding user perceptions of crypto by focusing on UX/UI and what success may look like. Based off the results, it’s pretty clear that Bitcoin and Web3 are perceived to have separate narratives, alongside disparate concepts of “success”.

Having a clear understanding of both the social layer and the corresponding protocol/tech layer for Bitcoin and Web3 is crucial to design successful products that meet user expectations. Our goal is to highlight resources, create a community for existing crypto participants, and the next wave of developers and application builders in the space.

We’d love your thoughts and feedback. Please find us on Twitter @ashaeganand @tobdea. P.S. our survey is still open for new participants.

Smart Contract Protocols-- Part I

As crypto slowly evolves from investment phase to utility phase, we are on the brink of a paradigm shift within software development and distribution. We are seeing a massive talent spillover from web2 to a decentralized web or web3, and the materialization of a new and open financial system.

Three years after Ethereum’s 2015 mainnet launch, the utility phase is beginning to emerge, exampled by thousands of dapps, millions of blockchain wallets, and a global movement of entrepreneurs building towards web3. As of today, Ethereum is the clear market leader for “decentralized” app creation. However hurdles such as Ethereum scalability, transactions costs, and delayed upgrades mean shifting sands for application-focused developers.

To make the ‘utility phase’ a reality, we must understand the state of smart contract protocols, where the activity is happening, and how developers can choose where to build. The more I speak to web3 entrepreneurs, the more I realize the limited or incorrect information there is on smart contract protocols…so, I decided in early-August to embark on a research journey of alternative smart contract protocols —which meant reading dozens of smart contract whitepapers.

I will be open-sourcing my research in the coming weeks and months, and launching the initiative in this post.

Part I: All the Whitepapers

https://gist.github.com/blockchainvc/49f9fc3e70c92de21754a01f21d30cd8#file-whitepapers-tsv

High-level Insights

I included a total of 60 smart contract protocols whitepapers, although read dozens more which did not fulfill defined criteria. Of these 60…

• 30 (50%) are currently traded on exchanges.

• 6 (10%) raised funds using ERC20 smart contract.

• The top 3 keywords in Whitepaper Titles were “blockchain” (13), “decentralized” (7), and “distributed” (6).

• For whitepaper releases, 2017 was the leader with 18, while 2018 was close behind with 13. To note, 17 were undated.

In my next post, I will cover protocol 1) description in layman form, 2) consensus algorithm, 3) scripting languages, 4) ICO stats.

If you have specific requests or feedback hit me up on Twitter (@ashaegan).