# Crypto UX Through the Lens of Aggregation Theory

Ethereum has long been heralded as the "world's computer," but for many, it still seems to be a complete black box. A revolutionary new tech it may be, but without a reliable way to foster user interactions, its promise may well go unfulfilled. It's a recurring problem in our relationship with technology.

<em>Dr. Gavin Wood giving the talk “Ethereum for Dummies” at DevCon 1, 2015</em>

The story is an old one: how do we translate machine language to natural language so that even our grandparents could use benefit from the technology

In 1948, electrical engineer Claude Shannon revolutionized our understanding of this process with [Information Theory](https://en.wikipedia.org/wiki/Information_theory). He defined 'information' as the reduction of uncertainty, a measurable quantity that could be transmitted across various mediums. The principal task, according to Shannon, was ensuring accuracy in information delivery while mitigating the 'noise' that could distort the original message. Shannon's theory laid the mental framework for what would later be developed into the concept of [Information Architecture](https://en.wikipedia.org/wiki/Information_architecture), as outlined in the book, "[Information Architecture for the World Wide Web](https://www.amazon.com/Information-Architecture-World-Wide-Web/dp/0596527349)." Here, the idea was not only to accurately transmit information but also to structure it intuitively to reduce complexity and improve user understanding. That's where our tools, our interpreters and translators, come in.

<em>Mosaic 1.2 for Unix</em>

This dual need for data interpretation and organization has informed some important inventions throughout the history of computing. Mosaic, one of the early pioneers that transformed our relationship with digital data. Mosaic took the raw, machine-level language of the early Internet and translated it into a format that was accessible and understandable to the average person.

Windows OS took this one step further. It didn't just let us read and understand data; it offered us an intuitive way to interact with our computers, giving us a digital platform where we could create, modify, and control information with ease.

Fast forward to the modern era, and we have apps like Zapier, TweetDeck, and Expedia, which continue to stand on the shoulders of these early innovators. They serve as information aggregators, distilling vast amounts of data from various sources into simple, user-friendly interfaces. More importantly, they let us interact with these systems, empowering us to input our own information, make our choices, and shape our digital experiences.

As technology progresses, we have long been devoting our efforts to engineering information aggregation devices that abstract away noises and complexities. From Mosaic, and Windows, to modern apps like Zapier and TweetDeck, these are the translators of information. They reduce entropy, turning high-noise data into low-noise presentable formats that we can understand and use. But more than that, they give us a voice, allowing us to communicate, contribute, and interact within these systems and among us.

Today, we stand on the cusp of another revolution, with Ethereum at its forefront. But to fully realize its potential, we need to build upon these lessons from history. We need interpreters and translators that not only read and interpret the EVM but also allow us to interact with it, to deliver our inputs accurately. We need a tool that goes beyond storage that brings order to the chaos. And our answer is the wallet.

## What is Crypto Wallet(Now)

### Technical Overview

A crypto wallet, at its core, is a unique address denoted by a cryptographic string generated through asymmetric encryption algorithms. This digital identifier comes as a pair: a public address, visible to others and used for receiving assets, and a private key, which is securely stored and used to sign transactions for sending assets. The generation process often involves using a mnemonic phrase, known as the private phrase, as an extra layer of security. This private phrase must be safeguarded as it provides full control over the assets in the wallet.

### Distinction from Smart Contract Addresses

While both smart contract addresses and wallet addresses are part of the Ethereum network, they serve different functions and have distinct characteristics. A critical difference is that the code field in a smart contract address is not empty, enabling the execution of code. On the other hand, a wallet address, also known as an Externally Owned Account (EOA), has an empty code field. This distinction is necessary because smart contracts cannot sign transactions. EOAs are capable of initiating transactions and interactions, whereas smart contracts are automated agents that only respond to received transactions or messages.

### Shortcomings of Current Wallet Solutions

While wallets are essential, current implementations are far from ideal. Here's why:

- **Security Risks**: Losing your private phrase is similar to losing your life savings in an instant, with no recourse for recovery. Unlike traditional banking systems that offer password recovery options, crypto wallets are unforgiving.
- **Susceptibility to Quantum Attacks**: Current cryptographic schemes like ECDSA, which underpin many crypto wallets, are not quantum-resistant. This means that with the advent of powerful quantum computers, these encryption methods might be easily broken, putting assets at risk.
- **Gas Fees as Barriers**: New users to blockchain face an immediate obstacle: gas fees. Every transaction on networks like Ethereum requires gas, paid in ETH. This presents a steep learning curve and potential deterrent for novices. Imagine a newcomer receiving tokens but being unable to move them because they don't have ETH for gas fees. This paradox creates a significant barrier to entry.
- **Lack of Sybil Resistance**: While crypto advocates often praise the privacy and anonymity offered by blockchain, this feature becomes a double-edged sword when considering use-cases like airdrops that require unique identification. The ability to generate an unlimited number of addresses undermines any attempts at Sybil resistance on-chain without sacrificing privacy.

### Enter the Account Abstraction

This gave birth to the concept of [Account Abstraction](https://eips.ethereum.org/EIPS/eip-4337), which has been contemplated since the inception of Ethereum but failed to deliver until now(2023) due to various constraints(See [Viatlik’s talk at EthCC 2023](https://www.youtube.com/watch?v=iLf8qpOmxQc&t=131s)). With account abstraction, the distinction between wallet and smart contract is blurry since every account is a smart contract. With this recent development, lots of the shortcomings frictions will be addressed:

- **Security Risk**: users will not longer need a private phrase;
- **Susceptibility to Quantum Attacks: e**very user would be free to secure their assets with whatever cryptography they like;
- **Gas Fee as Barriers**: with a special smart contract by the name of *Paymaster*, users are able to pay gas fees with stablecoins;
- **Lack of Sybil Resistance:** account abstraction by itself does not solve the problem of Sybil resistance, however, by leveraging novel standards like [ERC6551](https://www.bsc.news/post/erc-6551-the-game-changing-nft-standard) and [Worldcoin](https://worldcoin.org/), *proof of personhood* is no longer an issue(more on this later).

## What is Crypto Wallet(Future)

### Crypto UX is Doomed to be Fragmented

In essence, a wallet acts as your passport to the Ethereum Virtual Machine (EVM). Think of every interaction with the EVM—whether you're transferring funds, executing smart contracts, or diving into the decentralized apps—as starting with a transaction from a wallet address. It mirrors the function of a bank account or a website login: without it, you're essentially an outsider to the Ethereum ecosystem.

However, let's step back and think: Do users genuinely desire services bound by an authentication process? Taking Gmail as an example: it's undeniably a great software. The primary allure is Gmail itself, not the Google account you need to access it. If one were to promote Gmail by primarily emphasizing the Google account—praising its effortless login and top-tier account UX—it would be missing the point. In our opinion, lots of bad UX of using crypto stemmed from assuming users desire an account first. The account, be it abstracted or not, is a means to an end, not the primary attraction. Hence, account abstraction is merely a necessary step toward the optimal UX. So what’s an optimal UX for crypto? We can learn a lot by studying the BaaS(Banking-as-a-service) sector. [Plaid](https://plaid.com/how-it-works-for-consumers/?utm_source=google&utm_medium=search&utm_campaign=Search_G_Brand_Phrase&utm_content=plaid_fintech&utm_term=plaid%20fintech&utm_creative=642318327728&gad=1&gclid=CjwKCAjwgsqoBhBNEiwAwe5w02A3wS6lA992MEjOy1oBW2STEsjZ--o5cBAyOOKxLc09dfTro_SlzhoCjwgQAvD_BwE) and [Stripe](https://go.stripe.global/rs/072-MDK-283/images/Stripe_Finch-rise-of-embedded-finance_EN.pdf) alike are built upon idea of embedded finance, where banking service is provided as an embedded solution into other applications. Architecturally, embedded finance solutions are middlewares that abstract away the complication, such as KYC, fraud protection, risk management etc.

<em>From “Introduction to banking-as-a-service (BaaS) for software platforms” https://stripe.com/guides/introduction-to-banking-as-a-service</em>

What is the crypto’s equivalent of embedded finance? [Embedded wallets](https://zengo.com/personal-wallets-vs-embedded-wallets-who-wins/). The difference between embedded wallets and traditional embedded finance solution is that:

- Embedded wallets: created on the fly when a user firstly lands on the application page
- Embedded finance: users already have bank accounts somewhere so that the BaaS solution is merely a connection to the existing account

In short, embedded wallet creates a new account for every new user per dApp, whereas embedded finance only facilitates the account connection, but not account creation.

<em>Crossmint NFT Wallet</em>

Optimizing for UX is great, but the certain outcome of embedded wallet is

**1 app = 1 wallet = 1 public address**

Compound with multiple EVM chains and L2s co-existing with one another, a user likely will end up with tens if not hundreds of wallets and wallet public addresses with different assets spread out across tens or hundreds of different signing methods. Managing multiple accounts on different chains creates more overhead to the end-users. Account abstraction does not solve this problem out of the box.

At its core, the challenge with embedded wallets is their overwhelming abundance. In the race to offer the best UX, the market is getting crowded. Given the vast design space opened up by account abstraction, we're witnessing a market that's fragmenting. Wallets are being designed for specific niches—gaming, social recovery, cost-efficient transactions, and so on. The diversification is valid, as on-chain interactions take different shapes and forms for various use cases. To name few:

- Aggregator: finding the best liquidity given an asset
- Example: [1inch embedded wallet](https://1inch.io/wallet/)
- Fiat on-ramp: fiat <> crypto conversion
- Example: [Circle embedded wallet](https://www.circle.com/en/programmable-wallets?utm_feeditemid=&utm_device=c&utm_term=programmable%20wallets&utm_source=google&utm_medium=cpc&utm_campaign=ENV+-+G+-+Search+-+Brand+-+Circle+Brand+-+BM&hsa_cam=20563092237&hsa_grp=153084688265&hsa_mt=b&hsa_src=g&hsa_ad=674553574048&hsa_acc=2894751369&hsa_net=adwords&hsa_kw=programmable%20wallets&hsa_tgt=kwd-2178657881739&hsa_ver=3&gclid=CjwKCAjwgsqoBhBNEiwAwe5w02axTV4-tqz4_cYI4DedMPujC8RFH4DqOc_fzX-GM9CXQOWluyOcwhoCvyIQAvD_BwE)
- Social trading: buying shares of your friends on [friends.tech](http://friends.tech). One can imagine a friend token indexer embedded wallet.
- Example: [Mask Network](https://mask.io/about)
- NFT trading: mint, transfer, index NFTs all in one interface.
- Example: [Crossmint embedded wallet](https://www.crossmint.com/products/wallets)
- Portfolio management: automatic position re-balancing.
- Example: [DefiSaver](https://defisaver.com/)

:::info
Note: not every example listed above has an embedded wallet yet. Some simply allow the user to connect to their existing wallet i.e. DefiSaver. However, as the Account Abstraction ecosystem matures, each application can create a much more tailored UX leveraging ERC4337 and the [ERC-6900: Modular Smart Contract Accounts and Plugins standard](https://eips.ethereum.org/EIPS/eip-6900).
:::

With the diverse use cases and the continuous development of Account Abstraction, crypto UX is doomed to be fragmented due to the diversification of embedded wallets. The “optimal crypto UX” is in dire need of an aggregated portal.

### The Solution of Fragmentation is Aggregation

Building on the idea of wallets as entry points to EVM, to better serve the crypto curious users, we are building a wallet aggregator at Qi Protocol. Other than the reasons elaborated above, more importantly, we are faithful to the mental construct of Aggregation Theory and its application in web3.

:::info
“Aggregation Theory is a completely new way to understand business in the Internet age. Business schools suggest that with the right frameworks, an executive can understand how to manage all kinds of problems: what happens, though, when many of the inputs to those frameworks are zero? Zero distribution costs. Zero marginal costs. Zero transactions. This is what the Internet enables, and it is completely transforming not just technology companies but companies in every single industry. Old moats are gone — and new ones can be built — and Aggregation Theory helps you identify both.” - Ben Thompson, Stratechery
<em>From “Aggregation Theory” https://stratechery.com/2015/aggregation-theory/</em>

:::

The value chain of any consumer market can be segmented into three parts:

1. supplier
2. distributor
3. user

To achieve significant profits in any market, one should either dominate one of three sectors horizontally or combine two sectors to gain a competitive edge in a vertical solution. Before the Internet, this often relied on controlling distribution. Newspapers, for instance, controlled content delivery in specific regions and thus integrated content creation for substantial profits via advertising. Similarly, industries like book publishing, broadcasting, taxis, and hotels merged distribution capabilities with supply control. Notably, these distributors mostly integrated with suppliers, given that supplier relationships had more leverage due to the high transaction costs and more consumers than suppliers. However, the Internet has transformed this paradigm: it has made digital distribution free, nullifying traditional distributor advantages, and reduced transaction costs to nearly zero, allowing distributors to connect directly with end-users on a massive scale. Once integration with demand is secured, the distributor will be able to acquire the supply with an ever decreasing cost.

In today's digital era, the Aggregation Theory is evident in all successful internet businesses:

**Google:**
Before the rise of the internet, publishers managed both the publications and individual articles. Google disassembled this model by making individual pages and articles directly available via its search engine. Furthermore, by amalgamating search results with user search data and profiles, Google could offer highly effective advertising.

**Meta (and Ad Networks):**
Traditionally, content and advertisements were consolidated by publishers. Facebook(Now Meta), however, decoupled this by enabling advertisers to target their audience directly. By merging the News Feed ad inventory with user profiles, Facebook enhanced its advertising efficiency.

**Amazon:**
Earlier, book publishers were responsible for editing, marketing, and distributing their books. Amazon first disrupted this by introducing e-commerce and later through e-books. By synchronizing customer data and payment information with e-book distribution and its publishing initiative, Amazon fortified its market position. While this is most evident with books, the same principle extends to most of Amazon's business ventures.

**Uber:**
Taxi services historically combined dispatching with fleet management. Uber changed this dynamic by collaborating with independent drivers. By fusing dispatch with customer management, Uber achieved global scalability.

:::info
*Aggregation theory is fundamentally about owning the user relationship and being able to scale that relationship” - Ben Thompson, Stratechery*
:::

Crypto aggregators, much like web2 aggregators, simplify the user experience in the DeFi landscape by consolidating available options and optimizing transaction processes. They bridge the gap between supply-side protocols and end-users, guiding users towards the ideal service provider based on their specific needs. By acting as intermediaries, they significantly influence capital distribution in the DeFi ecosystem, deciding routes for swaps, capital allocation, and efficient pathways for cross-chain transactions. However, there are two critical differences between web2 and web3 in the context of Aggregation Theory

1. Web3 users are mercenaries:
- Compared to web2 products, web3 users are not loyal to any platforms. Essentially, users nowadays are in crypto mostly for realizing immediate profits. Airdrops is a good example of this kind of user behavior, where users leave the platform immediately following the airdrop
2. Web3 users pay the marginal cost due to gas and MEV:
- One of the fundamental assumptions of aggregation theory is aggregator/distributor pays marginal cost for every new user, and usually the marginal cost is extremely low. However, in crypto, users themselves need to burden the marginal cost for using new applications. Additionally, MEV is an additional tax levied on the end-users

Due to the previous constraints, it’s hard to achieve the flywheel effect of Aggregation Theory in many areas of crypto, for instance,

- dex aggregators(1inch, 0x)
- yield aggregators(Alpaca, Autofarm)
- bridge aggregators(Rango, Rubic)

One fundamental problem of all of the crypto “aggregator” projects above is they all trying to create the demand by providing a nice UI, yet in effect, they all functionally should be serving as the an intermediary layer of supply in the crypto value chain. The only component that “connect the end-user” directly by default, is the wallet. In this sense, wallet is the one and only aggregator that satisfy the precondition of Aggregation Theory. Under this new mental model,

- dex aggregators supplies the liquidity
- yield aggregators supplies the yield
- bridge aggregators supplies the bridge solutions

Thus, only the wallet stands as the genuine aggregator for the crypto value chain in the context of Aggregation Theory, while the rest act as middlewares supporting the aggregation process.

This is evident as Metamask executes almost 3 times more trade on 0x than 0x’s native interface

<em>From 0x Scan https://explorer.0xprotocol.org/apps?ordering=trades-desc</em>

**Wallet is the new DEX/Aggregator/NFT market place**

As wallet technology advances, one must ponder: Do DEXs and aggregators really require a dedicated user interface? Drawing parallels from history can provide a hint at what the future holds.

Consider the airline industry. A minority of individuals today utilize an airline's proprietary website for ticket bookings. Even fewer directly book hotels on hotel websites or secure vehicle rentals via dedicated car rental sites. Instead, platforms like Expedia and Kayak have surged to prominence. They aggregate 'liquidity' from airlines, hotels, and car rental services, presenting a consolidated interface for users. By doing so, they've cornered the market across flying, lodging, and transportation domains. Drawing an analogy, wallets can be seen as the crypto-equivalent of Kayak or Expedia. They centralize demand, vying for optimal pricing. Rewind two decades, and the process for securing flight tickets involved direct phone calls to airlines. Gradually, this evolved to physical travel agencies, which, with the onset of the digital age, morphed into online booking platforms such as Expedia. This transition perfectly encapsulates the Aggregation Theory. Delving into a specific example, [Sabre Corporation](https://www.sabre.com/) stands out. Sabre functions by pooling from liquidity providers – airlines, hotels, travel agencies, and more – subsequently offering this order book to interfaces like Kayak, Google Flights, and Expedia. Interestingly, Sabre had ventured into creating a consumer-focused site, Travelocity, in 1996. However, by 2015, it was acquired by Expedia. In essence, while they attempted to cater to both supply and demand, they were overshadowed by platforms singularly focused on aggregating demand.

It is not far fetched that in the future, wallets will be the primary point of interaction for most of the on-chain activities, where DEXs, liquidity aggregators, and NFT market places are merely liquidity providers.

**Wallet is the new sheriff in MEV-ville**

The dynamics of MEV (Miner Extractable Value) have, until recently, been dominated by MEV searchers and vertically integrated block builders, with the significant gains trickling down to the validator. On a superficial assessment, it might appear that the validator, being the supplier of the block space, holds the reins of the MEV value chain. This perspective primarily arises because the negative implications of MEV largely affect wallets and users, leading many to rely on private RPCs that safeguard user order flows. This creates the illusion that the MEV value chain is dominated by siloed private RPC providers, such as Flashbots.

However, as the landscape of MEV evolves and intensifies, the power balance is noticeably shifting. As competition burgeons among MEV searchers and block builders, users and wallets find themselves with an expanded palette of choices regarding where to direct their orders. It's crucial to understand that the very essence of MEV lies in order flow, positioning it as the linchpin of the MEV value chain. Again, by looking at the history, we can learn something new. Orderflow is the backbone of Robinhood’s business model - selling orderflow to high frequency trading shops to rebate the transaction fee for users.

Wallets, acting as the architects of this order flow, are poised to exercise a pronounced influence over the MEV ecosystem. By strategically choosing a bundler, RPC endpoint, or block builder, wallets can effectively decide who gets to benefit from the value extraction. This represents a significant paradigm shift, where power is transitioning from downstream entities to those upstream, spotlighting wallets as not just facilitators but potential arbiters in the transaction hierarchy.