Aggregation Theory by Ben Thompson | Aggregation In Web3
Aggregation Theory by Ben Thompson | Aggregation In Web3
The aggregation theory was first proposed in 2015 by Ben Thompson. It seeks to explain how the Internet has contributed to the evolution of markets. He notes that “the value chain for any given consumer market is divided into suppliers, distributors, and consumers/users. The best way to make outsize profits in any of these markets is to either gain a horizontal monopoly in one of the three parts or integrate two of the parts to have a competitive advantage in delivering a vertical solution. In the pre-Internet era, the latter depended on controlling distribution. The fundamental disruption of the Internet has been to turn this dynamic on its head. First, the Internet has free distribution (of digital goods), neutralizing the advantage that pre-Internet distributors leveraged to integrate with suppliers. Secondly, the Internet has made transaction costs zero, making it viable for a distributor to integrate forward with end users/consumers at scale.”
So far, we have witnessed monstrous businesses rise by collapsing the price of distribution and collection of payments. A few good examples include Spotify, Stripe, and Ramp. However, what implication does this theory have on Web3 protocols?
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Some experts believe that blockchains can reduce the price of verification and trust, on top of reducing the cost of payments collection. This will enable the creation of multi-billion-dollar entities that was not possible historically. The new era of blockchain-based aggregators is also helping drive innovation at the protocol layer and enable a new business model - “hyperfinancialization-as-a service.”
Understanding Aggregation Theory
Before Uber came along, the taxi industry’s vendor (supplier) and buyer (demand) relationship were hyper-local. There was a cap on the number of customers a driver could have. There were also limited choices on who could offer a ride. The supply side was messy in that it had minimal signs of reputation, suffered from ineffective pricing in many cities, and was unpredictable. However, Uber came along and organized the supply side. The solution was a curated subset of users whose reputation was verified and tracked on an ongoing basis instead of one comprised of random drivers.
When you order an Uber, you will see the name of the driver, the number of trips they have taken, their rating, and how much you are expected to pay. As an aggregator, what drives value to Uber is the data it holds on the supply side. The coming of apps such as Uber saw passengers shift from taxis to in-app drives. Users would rather go for the convenience of remotely hailing a cab instead of waiting out in the streets. Uber’s model works because the Internet allows the company to scale globally from the comfort of its offices.
The rise of digital money has also played a crucial role in Uber’s rise. It also enables the company to collect payments and take a cut for themselves without relying on regional partners to do it for them. Interestingly, other large firms on the Internet today can also be linked to aggregation theory. These include Airbnb, Deliveroo, Spotify, Stream, Amazon, Twitter, etc. These have been able to turn around messy markets using the power of the Internet. It is safe to say aggregators accumulate so much value because they can organize what are typically large, chaotic markets.
Aggregation in Web3
Many experts believe that blockchains will enable an entirely new market category that can instantaneously verify on-chain events. This will reduce the cost of validating intellectual property at a massive scale and create new business models. For example, Web3 aggregators that exist today provide interfaces that show on-chain data and allow users to interact with smart contracts from multiple platforms. They do not own the risk of holding these assets and typically do not bear exponentially higher costs for supporting additional networks.
Therefore, the core proposition of Web3 aggregations over the next decade will be to streamline large, messy processes with multiple counterparties in systems with low trust. Currently, AngelList leads the way. The platform has structurally collapsed the amount of friction involved in putting together a venture round by combining legal, banking, and LP management in a single interface.
It is no secret that large, messy markets with multiple moving parts are hard to aggregate at scale unless you have the time and capital. For instance, it took AngelList roughly 8 years to build its monopoly, while Uber had to raise some $25.5 billion to become the giant it is today. Proponents of blockchain and Web3 dApps believe the technology will improve the unit economics around this and hyperfinancialize the process.
For example, in emerging markets, aggregation in the context of Web3 reduces the surface area where corruption and inefficiencies can act as stumbling blocks. Historically, these markets have been riddled with corruption and a lack of transparency. Think of DAOs - it only takes about 5 minutes and $200 to launch one on Ethereum today. Compare this to the tedious process of registering a firm in an emerging market that can take even months and endless calls. Part of the delay has something to do with a lack of trust and the ability to verify the data you provide instantly. Blockchains are helping collapse this gap through “trust creating machines for trust-deficit societies.”
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