Crypto: Cure For Aggregation Theory

Web2 Platforms Don't Care About Their Users

Aggregation theory by Ben Thompson is the seminal framework to describe the rise of dominant internet companies in the past 20 years.  It explains that the internet uniquely enables software companies to pair zero marginal cost of delivery with direct relationships with customers to drive network effects.  The biggest winners of the past decade – Google, Meta, Amazon, Airbnb, Uber, etc. – played demand aggregation to perfection and now dominate how users experience the digital and real world.  With software eating the world, the internet has collapsed online distribution to a handful of platforms.  

Web2 companies leveraged aggregation theory to build monopolies that dictate what and how products and services are delivered to users. For example, any direct-to-consumer (DTC) company has to run ads on Google and Meta to reach users.  No doubt DTC startups would prefer direct relationships with customers but Google and Meta function as gatekeepers to anyone trying to reach their billions of users.  In exchange, users and customers of the aggregator receive a seemingly better user experience driven by data, cheaper prices, and content.  

While user experience is a core value proposition, the dominant aggregators are focused on maximizing network effects for themselves.  They have an ulterior motive: to impose a tax on the internet to the detriment of users and suppliers.  Power rests with the platforms, not to their users, customers, or shareholders.  

Platforms are the single choke point that everyone is required to pass through.  By virtue of owning demand (i.e. the users), aggregators can extract value from suppliers.  The textbook example is Amazon.  With millions of Prime customers, suppliers have to sell on Amazon to reach customers on the internet.  Deliberately wielding user demand, Amazon can then wring margins from the suppliers (i.e. the tax).  Focused on long-term profitability, aggregators are focused on maximal extraction by increasing direct cost to companies selling on their marketplace.

The digital native example is the Apple App Store and Google Play Store.  Both companies dominate the personal devices market with iOS and Android, respectively.  Combined, they control nearly 100% of the devices market, and by extension, 100% of the mobile app market. By virtue of selling the most popular mobile devices, Apple and Google are able to charge developers on the platform 15-30% of app sales as their cut.  Developers, regardless of size, have to pay a toll to the duopoly to reach their customers and have no practical ways of disintermediating Apple and Google from customer relationships.  If they try, Apple and Google can simply cut them off.  

Users typically do not care about monopolistic behavior by aggregators because they do not explicitly pay the price.  Users are happy to use Prime because they can get goods faster and cheaper while the app stores are easy, straightforward places to download the next mobile game.  Aggregators lull users into complacency by removing friction.  

Instead, the hidden price to users is the reduction of choice and autonomy via curated trust.  By aggregating users, platforms collect data on behavior and serve up content that is most likely to drive engagement.  Think of all the ads delivered on Meta, Instagram, Amazon, Google, etc.. Over time, users trust the platforms to deliver content and interactions that they will enjoy.  Eventually, aggregators monetize the trust by selling ads to brands and companies.   Users are tacitly fine with the exchange because they rarely see the extraction directly.  

The takeaway from aggregation theory is simple: users (demand) and providers (supply) trade away direct relationships with one another in exchange for the aggregators to provide trust.  The cost both sides pay to the aggregator is a higher price (to accommodate the aggregator’s cut) and centralization (i.e. giving up autonomy and choice via the aggregator’s curation).  

Aggregators are benevolent dictators today.  Everyone enjoys the theoretically better user experience – from the bundled Amazon Prime services to connecting with friends on Instagram to finding quick answers on Google.  But with every search query, aggregators build power for only their own interest.  Amazon relentlessly crushes businesses of all sizes in the name of lower prices for customers (mom-and-pop small stores, Toys R’ Us, Circuit City, etc.); Meta constantly copies new consumer innovation (Stories / Snap, Reels / TikTok); and Google acqui-hires top engineering talent to optimize their search algorithm to the nth degree.  The costs are not obvious because aggregators can always point to lower prices or better engagement.  Thus, power begets more power; the consolidation of the internet into FAANG is no accident.  

Consequently, if aggregators are not aligned with their customers, how do we unbundle their power?  If they’ve accumulated so much power, what’s going to stop them?  How do users even think about leaving platforms that seemingly enrich their lives?  

The answer to disintermediating aggregators is crypto.  Crypto is a minimally extractive, stakeholder focused, and coordination aligned business model.  The core value proposition of crypto is to build internet scalable businesses without trading autonomy for trust.  

Unlike web2 platforms with proprietary algorithms, crypto is built on the ethos of open source: anyone can copy (i.e. fork) and launch a competitive product.  The prime example is Uniswap, the pioneer in automated market maker.  As a core DeFi primitive, Uniswap has been forked so many times that the number of AMM forks exceeds the number of Layer 1 chains.  As a result of fierce competition, Uniswap and Uniswap forks have generally converged on a cost plus business model: typically ~0.3% (30bps) of each transaction.  With the code public, any developer can simply fork Uniswap if Uniswap attempts to increase their take rate.  While crypto projects do have network effects (liquidity, TVL, APY, number of users, etc.), the game theory of crypto forces crypto projects to constantly minimize cost.  As a result, network effects from users are disentangled from profitability.   

Crypto also removes trust, a key component of aggregator’s network effects.  Trust has driven success in web2: aggregators provide a central place for users to create content, interact with others, and curate (e.g. reviews on Airbnb and Amazon).  Crypto on the other hand is built on coordination in a trustless environment.  Smart contracts uniquely enable multiple strangers to transact.  With a series of “if this then that” statements, code creates ironclad agreements between users.  Crypto provides a medium of exchange with code, not through user generated content or extractive intermediaries. 

Finally, crypto tokens create better alignment between projects and protocols with their users.  Token holders either receive distributions from the project’s revenue by staking or are able to use the token as the medium of exchange within the project’s ecosystem.  Staking drives liquidity and liquidity drives better yield curve for projects; better yield curve drives more token holders; more token holders drive up demand; demand increases the token’s price.  The circular loop between projects issuing tokens and holders using the tokens is far better coordination than passive equity shareholders in tech companies.  Crypto expresses game theory on the internet, coordinating incentives across millions of strangers.  

Most importantly, the strengths of crypto are perfect counter positioning against web2 aggregators.  A dominant web2 aggregator will not and cannot attempt to fully incorporate crypto’s advantages.  Imagine any marketplace aggregator (Uber, Airbnb) reducing their take rate to a cost plus rate; the public markets would destroy their equity value.  Similarly, Apple would never allow open access of their platform; a key value prop is a seamless user experience driven from their closed iOS ecosystem.  Thus, crypto is well positioned to take advantage of the aggregators’ innovator's dilemma.  

The internet took 30+ years to produce the dominant winners of web2.  Building on the previous generation’s technological advances, crypto will change how the internet operates on a much faster time scale.  The rapid cycle of crypto innovation from open source, intense online competition, and novel experimentation will accelerate the erosion of aggregators and return sovereignty back to the users.  

Disclaimer: I hold investments in Apple and Amazon.  This is not investment advice. 

Note: I condensed certain concepts for the sake of brevity. Feel free to reach out to me if you want to discuss the nuances.