Analyzing the current status of the aggregator track: What advantages does Li.Fi have?

Original Title: "Revisiting Aggregation Theory"

Author: Joel John

Translation: Kxp, BlockBeats

A year ago, we wrote about the aggregation theory in the Web3 era. In the Web 2.0 era, aggregators benefited from reduced distribution costs and brought together numerous service providers. Platforms like Amazon, Uber, and TikTok profited immensely from the services or value provided to users by hundreds of suppliers, creators, or drivers. At the same time, users gained endless choices. For creators, scale is key. I choose to tweet on Twitter instead of Lens because my followers are primarily concentrated on Twitter.

In Web 3.0, aggregators mainly rely on reduced verification and trust costs. If you use the correct contract address, you don’t have to worry about swapping fake USDC on Uniswap. Market platforms like Blur do not need to spend resources verifying whether every NFT traded on the platform is real because the network itself bears that cost.

Aggregators in Web3 can more easily check on-chain data to view asset prices or find their listing locations. Over the past year, most aggregators have focused on integrating on-chain datasets and making them user-friendly. This data may relate to prices, yields, NFTs, or asset bridging pathways.

The assumption at the time was that companies rapidly expanding as aggregator interfaces would establish monopolies. I specifically mentioned Nansen, Gem, and Zerion as examples. However, ironically, looking back over the past year, my assumption was not accurate—this is also what I want to explore today.

1. Weaponizing Tokens

Don’t get me wrong. Gem was acquired by OpenSea a few months later. Nansen raised $75 million, and Zerion raised $12 million in October. Therefore, from an investor's perspective, my assumption was correct. Each of these products is a leader in its field, but what prompted me to write this article is that the relative monopoly status I predicted did not materialize. Instead, they have all faced a surge of competitors over the past year. This is an ideal characteristic in emerging fields.

So, what has happened over the past few years? As I wrote in "The Royalty Wars," the relative monopoly status of Gem (and OpenSea) was threatened after Blur entered the market. Similarly, Arkham Intelligence competes with Nansen by combining an exciting user interface, potential token issuance, and clever marketing strategies through referral reward tokens. Zerion may feel relatively comfortable, but the new wallet release from Uniswap could erode its market share.

Do you see the trend here? Aggregators that previously had no tokens and relied on equity investors for steady growth are now facing risks from companies issuing tokens. As we delve deeper into the bear market, the concept of "community ownership" will become increasingly important, as limited consumers holding the fort want to maximize every dollar they spend. Additionally, earning rewards for using a platform instead of paying fees to use it is also novel.

Thus, on one hand, companies that have long enjoyed positive cash flow will see their revenues decline; on the other hand, they will see users flocking to competitors. Is this situation sustainable? Absolutely not, and here’s how it works:

A company launches a product that implies tokens, and it’s even better if the release is associated with a referral program. For example, Arkham Intelligence offers tokens to users visiting their platform, and considering the possibility of airdrops, more and more users will spend time on this product. This is a feature, not a flaw.

This is an incredible way to stress-test products, lower customer acquisition costs, and guide network effects within the product. The challenge lies in user retention; once token rewards are no longer offered, users who initially flocked to the project often abandon it entirely. They have no reason to continue contributing to the product after losing the incentives that initially attracted them. This phenomenon has plagued DeFi and P2E over the past two years.

Users who accumulate and hold tokens become the new "community" members, wondering when asset prices will surge so they can exit.

(I have pointed out that market participants act rationally out of self-interest.)

My initial argument was that simply consolidating the feature sets of multiple products into one interface, using blockchain as the backbone of infrastructure, would likely be a mistake. I wonder why relatively advantaged leaders are replaced by other companies in Web3. Binance overturned Coinbase, and they faced competition from FTX.

OpenSea saw competition from Blur. Sky Mavis, the maker of Axie Infinity, might face heat as new entrants like Illuvium enter the market. Why do Web3 users leave over time? How can one retain a user long enough?

In the Web3 era, when everyone can publish a version with embedded tokens, what can serve as a moat? I have been pondering this question as we live in a market of narrative shifts, with a new "hot" thing emerging every quarter. This is why the venture capitalists I follow can overnight transform from remote work experts to experts dealing with Taiwan's geopolitical tensions.

Of course, if you are merely trading between assets (by the way, this is the "use case" for most crypto people), this approach is feasible. However, if you want to build a growing asset base over time (like Google or Apple equity), rotating between assets might be a bad idea.

You ultimately want the time, money, or effort you invest to grow without needing active management. The only way to achieve this is for the product to do two things: first, retain the users they already have; second, actively expand to prevent competitors from eroding their market share. So, how can this be achieved? (When people start thinking about moats and user retention, you know it’s a bear market.)

2. Competition is for Losers

Part of this phenomenon is due to placing company rankings on a spectrum between innovation and convenience. In the early days, original products like NFTs were novel enough to attract those willing to go to great lengths to try them.

We easily handle seed phrases in our wallets because the novelty of using "digital currency" is enough to draw us in. If you notice users' curiosity about Ordinals, you will realize how patient users can be. The early profit factors are what drive users to stick around during tough times to speculate and profit.

On the other end of the spectrum are the highly convenient tools we rely on daily. Amazon is an example of an aggregator that has us hooked on convenience. Consumers may benefit from purchasing from niche stores not on Amazon, and perhaps the pricing at that merchant on Amazon is unreasonable.

However, when making decisions, the least of your worries is payment methods, delivery times, or customer support. This psychological "savings" translates into spending more attention or capital on the aggregator. Many sellers come to Amazon precisely because they understand the difference in consumer behavior when users come directly to the store.

Tim Wu summarized the effort people are willing to pay for convenience in an article in 2018:

Of course, we are willing to pay a premium for convenience, often more than we realize. For example, in the late 1990s, music distribution technologies like Napster made it free to access music online, attracting many users. But even though it is still easy to access music for free today, no one really does it because the iTunes store introduced in 2003 made purchasing music more convenient than illegal downloads.

Returning to the spectrum I initially mentioned, novel technologies often pay users to try them. In contrast, highly convenient applications make users pay a premium for the pursuit of convenience.

Most consumer-facing applications today face the challenge of being in the "valley of death," which I refer to as the middle ground. They are neither novel enough to entice users to try them nor convenient enough to be relied upon without external intervention. Skiff, Coinbase Card, and Mirror excel at replacing their traditional counterparts on this convenience spectrum.

However, for sectors like gaming, lending, or identity verification, you will see why these themes have yet to scale on-chain.

Most applications in the middle make a fatal mistake: they compete with each other. First, they increase customer acquisition costs and employment costs through advertising and hiring, and then they compete by creating memes and publishing narratives targeting peers. As Peter Thiel said: competition is for losers.

When startups begin to compete in niche markets, there are usually no winners. In his words, the only way startups can transition from the struggle for survival is to have monopolistic profits. But how can this be achieved?

3. Emerging Moats

In Web3, if a company wants to develop beyond tokens, it can focus on three aspects: cost, use cases, and distribution. There have been some instances in the past, so I will elaborate on these.

3.1. Cost

Stablecoins have become a killer use case for cryptocurrencies because they provide a better experience globally than traditional banks. In India, innovations like UPI may be more cost-effective, but transferring funds between Southeast Asia, Europe, or Africa, or even just moving balances between bank accounts in the U.S., makes on-chain transfers more reasonable.

From the user's perspective, the costs incurred are not just the money spent on the transfer amount but also the time and effort required to move funds. Debit cards serve e-commerce like stablecoins serve remittances: they reduce the cognitive costs associated with transfers. Compared to most consumer-facing yield-generating mobile applications, you can offer slightly higher yields, but considering the risk of collapse, the value proposition will fail.

3.2. Distribution

If you gather niche users in an emerging industry, distribution can become a moat; think about how Compound and Aave unlocked a whole new lending market. Few people would find it valuable to collateralize $50 with $100 of Ethereum. But many overlook that there is a market that has not been served—primarily those crypto millionaires who do not want to sell their assets in a bear market.

You would be mistaken to think that those without access to credit lines in emerging markets would drive DeFi lending volumes. In reality, it is the crypto wealthy who are the driving force, a group that previously could not access banking services. Becoming a "hub" related to a certain field can attract user attention and drive the development of a single function. Coingecko and Zerion are two companies that excel in this regard.

Given that the marginal cost for companies to encourage users to utilize new features is nearly zero, iterating on the product itself and adding new revenue streams becomes cost-effective. This is why platforms like WeChat (in Southeast Asia), Careem (in the Middle East), and PayTM (in India) often perform well.

When players like Uniswap release wallets, they are essentially trying to gather users in one interface, where they can push more features (like their NFT marketplace) at a lower cost.

3.3. Use Cases

Products like ENS, Tornado Cash, and Skiff have established loyal user bases that value the unique features these traditional alternatives cannot provide. For example, Facebook does not associate wallet addresses with user identities, while Tornado Cash offers unparalleled privacy, protecting user privacy more than banks do.

You can imagine that users of these products often stick around because there are typically no comparable alternatives. However, introducing new use cases requires educating users and raising awareness, which takes time. However, being the first to market can capture a significant market share.

In the early stages of LocalBitcoins, it was the only peer-to-peer trading platform and helped gather liquidity in emerging markets (like India), keeping it ahead until 2016.

In a bear market, scaling products by focusing on traditional growth methods is challenging. The aforementioned products have survived multiple market cycles. The success of Axie Infinity is attributed to the team's groundwork done two years before 2020, allowing them to build a strong community, manage tokens, and balance the interests of investors and users.

This is why, during market downturns, venture capitalists prefer to invest in developer tools and infrastructure. To address the lack of interest from retail users, companies turn their attention to enterprise solutions and build tools for developers to attract retail users. Coinbase has realized this, releasing tools like wallet APIs during the bear market. LI.FI is a typical representative of this trend, providing SDKs for developers to enable their applications and users to support multiple chains.

4. From Novelty to Convenience

LI.FI (short for Liquid Finance) is a multi-chain liquidity aggregator that provides SDKs for developers to enable their applications and users to support multiple chains. For example, if Metamask or OpenSea wants to allow users to transfer assets between Polygon and Ethereum, LI.FI's SDK will determine the best path across bridges and decentralized exchanges (DEXs) to transfer funds, allowing developers to focus on their core competencies.

Think of aggregators like LI.FI as building blocks placed by developers in their applications to help users move assets between chains at the lowest cost.

Despite many similar competitors in the market, LI.FI is a great example because they meet the standards I mentioned earlier, and Philipp shared these standards with me eight months ago, which I have used as the basis for this article. But let’s return to LI.FI's strategy.

LI.FI has done several things that meet the standards I previously mentioned, establishing a strong moat:

1. They focus on enterprises rather than retail, aiming to attract developers building applications that require cross-chain transfers.

2. Their product can save enterprises research and maintenance time and resources, making it relatively easy to sell in a bear market.

3. For end-users, LI.FI offers the best transfer cost basis, increasing the willingness of people to use products integrated with their SDK.

4. They are the first platform to integrate new chains, facing less competition.

5. Their target user base primarily consists of industry veterans already familiar with cryptocurrencies, requiring minimal educational outreach.

Although LI.FI is not the only cross-chain aggregator in the market, and even if they meet the standards of cost, demographics, and use cases I mentioned earlier, any aggregator would find it challenging to establish a strong moat. I am interested in how LI.FI transitions from a novel tool to a convenient tool.

In the early days, users relied on bridging aggregators because transferring assets between different blockchains was a time-consuming process that required centralized platforms and security checks. Today, DeFi users are sending billions across chains, but the average person is not interested.

So, how do you survive when the novelty wears off? If you notice how Nansen and LI.FI operate, you can find the answer by observing who they sell their product services to: LI.FI primarily sells to developers, while yesterday Nansen launched Query, a tool that allows enterprises and large funds direct access to Nansen data, claiming it is sixty times faster than the closest competitor in querying data. So, why are both companies focusing on developers?

For anyone using the Nansen query tool, the key question is whether the tool saves enough time and effort to justify its cost. If the cost of internal development tools is lower than outsourcing to a third party (like LI.FI), decision-makers typically avoid building from scratch.

To stand out as a convenient tool, companies must focus on a few high-yield users who are willing to pay for the added value of the product. By catering to these users, companies can generate enough revenue to attract more users to their products and become the preferred convenient tool.

I discussed this framework with Alex from Nansen, who offered a different perspective. Users are always seeking value, regardless of market conditions. In a bear market, large clients like enterprises and networks need specific datasets that are often unavailable from third-party vendors. By customizing products to meet their needs and demonstrating their value, companies can generate more revenue and face less competition.

5. Returning to Basics

In my previous articles, I mistakenly thought that using blockchain was a competitive advantage rather than just a product feature. Since then, many DeFi yield aggregation platforms have launched, but most have failed. If competitors can use the same features and provide a better user experience or introduce tokens like Gem, then simply integrating blockchain may not matter. In this competitive environment, we need to think about what truly differentiates products.

As I write this article, several trends are evident. First, acquiring users in a bear market is very expensive due to low interest from retail investors. Unless a product has novelty or convenience, it will be in a tough position. Second, companies focused on building products for other businesses (B2B) can achieve sustainable growth and capture market share in bull markets, like FalconX. Third, poorly designed tokens can only serve as a competitive advantage for a short time but become a burden in the long run. Only a few communities have successfully increased the value of their tokens.

When we think about retail markets like gaming or DeFi, it is clear that most people do not care about the technical details of blockchain, decentralization, or on-chain identity; they care about the value they can derive from it. While blockchain can enhance the value of end-user products, founders often fall into the trap of building and selling products for venture capitalists (VCs) or token traders without a competitive advantage based on cost, convenience, and community.