DeFi Aggregators

An Introduction to Aggregators

Aggregation and Financial Services

A DeFi protocol lives and dies by its liquidity. For a spot market like Uniswap, more liquidity results in better execution terms (lower slippage) for traders. Larger amounts of liquidity on a money market like Aave allow the protocol to better meet demand for loans and leverage.

There are countless projects competing to build the most robust spot market in DeFi. Assuming even 10 of them are successful in attracting enough liquidity to challenge centralized exchanges, which is already happening, traders need to know which of those 10 offers the best execution price for each asset, at any given time.

Aggregators bridge this gap by acting as the customer interaction layer between users and protocols. Instead of going to trade your tokens on a specific DEX, a reasonable trader that wants to ensure they get the best execution price would use an aggregator instead.

This same concept applies to any financial product. Aggregators can find the lowest borrowing rates/highest lending rate, the best execution terms for derivative purchases/sales, or the best yield farming opportunities.

Given the low barriers to entry, we expect that the number of individual protocols competing for liquidity will only continue to grow from here. Aggregators will connect to all of these protocols to enhance the UX of DeFi. Individually visiting various exchange frontends is far more tedious than going to an aggregator that automatically routes you to the exchange with the lowest slippage.

Aggregation in the Age of the Internet

Aggregation theory is a concept popularized by Ben Thompson that explains how internet-native companies disrupted industries by creating a more efficient and thorough marketplace. Take the example of the hospitality sector. The demand side (customers) had no way of finding the best deal without spending a significant amount of time scanning through individual hotel registries or going through middlemen. The supply side (hotels and resorts) didn’t have the ability to present their deals to every customer.

Source: Ben Thompson (Stratechery)

Then Airbnb stepped in to reinvent the market, aggregating the demand side to its platform while creating a P2P marketplace for individual sellers. Suddenly, hotels found themselves at a disadvantage because they weren’t gett