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, Text: Ash Egan, reproduced by Odaily with authorization.

This article aims to explain a new trend in decentralized finance on Ethereum: "Aggregator".

Written by: Ash Egan, Accomplice VC

The term DeFi (decentralized finance) was coined in 2017 and has grown rapidly since then, breaking down various financial transactions into an open, permission-free system. This article will focus on the modular nature of decentralized finance and the role that aggregators (or “aggregators”) play in the DeFi space.

In order to facilitate the establishment of a thinking framework, we use the following diagram to represent the modular characteristics of decentralized finance: the consensus layer (such as Ethereum) serves as a digital economy and provides support for the two-layer structure above it, namely the liquidity layer and the application layer . It is worth noting that, compared with the closed Web 2API (Application Programming Interface), the liquidity layer has the characteristics of openness and authorization-free.

fluidity

As you can see from the diagram below, "aggregators" are actually located at the application layer, and they are the "last piece of the puzzle" that delivers products and services enabled by encrypted networks to end users. The tool components of decentralized finance are accelerating the birth of this open and split financial ecology. Regarding the tool components, we will discuss them in the second half of this article.

fluidity

Layer examples: Maker, Compound, Kyber, Uniswap

Liquidity layers often use "ETH locked in DeFi" as their KPI (key performance indicator), and at the time of writing, the total value of locked Ethereum tokens is about $500 million. Among the locked ETH, one of the most active sources of funds is MakerDAO's Collateralized Debt Positions (CDP), and the newly created Dai tokens are all backed by it. When the collateralized position is opened (meaning that ETH will be locked in a smart contract), new Dai tokens will be minted, and when the collateralized position is closed, the Dai token will be destroyed.

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Compound Homepage Introduction

The smart contract of the liquidity layer is permissionless, and its source code is open to any third party (entity or individual). You can consider the liquidity layer directly as an API without the consent of the API owner. As the liquidity layer becomes more attractive, the network effect continues to increase, and more competitive spreads and interest rates gradually emerge in the market. In all lending environments, the larger the scale of liquidity, the more favorable the interest rate will be, or if the supply exceeds demand, it will be easier to obtain low-cost credit services, and lenders will receive lower interest rates.

Compound and other liquidity layers have built user-facing applications, but also facilitated the exposure of a range of aggregators, including Argent, InstaDapp, Zerion, etc. (see Compound's home page above). It is indeed possible that the liquidity layer will try harder to get people to use their client-end products, or build their own tool components (such as DyDX recently launched their own market making business).

However, one is to build a robust encryption infrastructure at the liquidity layer, and the other is to build elegant, frictionless applications and aggregators. After all, the DNA required for the two is completely different. Take Dharma as an example, they initially tried to build their own protocol and provide user-facing applications, and recently started to move to a pure aggregator, providing liquidity to end users from Compound.

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aggregated application

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

Aggregators are leveraging decentralized financial liquidity to provide services to end users, allowing these services to expand beyond crypto veterans. Aggregators often put UX/UI first, effectively improving the user experience without directly interacting with the liquidity layer, thus providing a top-notch overall experience.

Looking back, the early Ethereum aggregators were more like repeaters like Radar Relay. Their goal was to provide a more intuitive user experience than direct interaction with 0x. Relays did improve the user experience of decentralized exchanges, especially is the contract fillable liquidity.

Today, aggregators can provide more liquidity and adopt more user-friendly measures, such as removing gas fees, mobile priority, and sometimes allowing users to avoid the trouble of memorizing private keys, etc. These measures are effective Bridge decentralized financial liquidity to a wider audience. As shown below, Argent weighs the pros and cons of Compound and MakerDAO at the liquidity layer to provide users with an elegant, mobile-first smart contract wallet.

As DeFi liquidity grows, aggregators scale accordingly and provide a better user experience. For example, based on a savings account application, users only need to deposit US dollars to earn corresponding interest, and there is no need to understand the smart contracts or encrypted networks of the underlying decentralized finance. In this case, the USD deposited by the user will be converted into Dai immediately, after which a smart contract will automatically distribute the Dai to a DeFi protocol with the highest interest rate yield.

Not only that, but because aggregators serve users and are well-positioned in the ecosystem, they have the potential to develop liquidity outside of Ethereum’s decentralized ecosystem, such as Tezos or Near.

Lianwen Note:

Aggregators are the biggest driver of "interoperability", allowing end users to also switch to Tezos or Near, if DeFi rates on these networks are more competitive than Ethereum's DeFi (whether true or not, Ethereum is not the crypto industry after all) America Online). Of course, power comes from responsibility, and aggregators have to weigh whether to promote fixed or variable interest rates, and at the same time, they must deal with it freely under the regulatory system.

https://stratechery.com/concept/aggregation-theory/

Lianwen Note:

Aggregation Theory by Ben Thompson is an important document on application development in the Internet age, see:

Of course, this will not happen in the short term, because aggregators, although they are emerging, are still very dependent on the liquidity layer (such as borrowing / lending rates), but as more aggregators emerge and reach a wider audience, We may see more aggregators trying to fork the underlying liquidity layer. Of course, it's still too early to say so, and my point of view is to keep the differences in DNA between the two mentioned above.

Without liquidity, it is impossible for aggregators to develop rapidly, but just as important as liquidity are the tool components that are variously related to decentralized finance. Tool components accelerate the development of the application layer, making applications "plug and play" without the need to build your own liquidity, stablecoins, or other cryptocurrency infrastructure.

Summarize

I am excited to find that more and more entrepreneurs are experimenting and exploring various tool components and modules of decentralized finance and open liquidity, such as lottery pools, DAO (distributed automatic organization) and tontines (tontines) ), etc., all of which have the opportunity to subvert those geographically restricted and centralized financial products.

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Summarize

Ethereum's decentralized finance liquidity and tools components are maturing, and its open and modular nature allows anyone to build aggregators and use-case-focused applications. This is all possible despite the fact that Ethereum currently only handles 12-15 transactions per second. With the rise of a new digital economy, increased liquidity, and improved tool components, aggregators promise to provide a sandbox of greater scale.

Of course, the road ahead of the aggregator is not always smooth, and it is destined to wade through all the modular characteristics of DeFi-decentralization and openness, as well as black swan events that may disrupt the entire system.

Some people have called decentralized finance a "house of cards" because of its excessive reliance on Dai, possible attack vulnerabilities in oracle machines (Oracles), possible centralized backdoors in decentralized financial protocols, and so on.

However, I am more optimistic, I think modularity is not DeFi's Achilles' heel, and the world is moving towards globally accessible and permissionless systems (Ethereum is rushing in this direction). All in all, it is expected that by December 2020, the year-end value of locked ETH will be double what it is today (over $1 billion), and aggregators will provide end users with liquidity on a larger scale, possibly Most proportion of fluid layer.

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

some issues worth considering

1. If the aggregator becomes the main beneficiary because of the acquisition of users, then who will maintain the protocol of decentralized finance? MKR, the governance token of MakerDAO, seems like a good model to incentivize protocol participation. I think many liquidity layer protocols are probably considering launching their own governance tokens, or tokens like dividends.

2. The business model of the liquidity layer is still unclear if it does not consider the situation of entering the regulatory gray area. Projects with effective token economics, whose use adds value to the native token of the liquidity layer, are the most interesting (similar to the first question).

3. What will happen if the existing contract of the liquidity layer is broken due to the upgrade of Ethereum in the future? This seems like a huge headache, but it's likely to happen, and it will greatly limit the lifespan of decentralized finance products (you can't currently build an asset that lasts 100 years in Ethereum, because it's 100% possible will crash on ETH2.0).