Vertical Integration Capital Aggregator: How Does Web3 Build an Unbreakable Moat?

Writing: Decentralisedco

Translation: AididiaoJP, Foresight News

What makes protocols resilient against fragility today, and how tokens are used to leverage ecosystems. In the weeks following the hacking incidents, we delved into the Hyperliquid ecosystem. We quickly discovered that industry protocols are building formidable moats through vertical integration.

This article explores how leading Web3 players maintain their moats.

I often use terms like “supply-side aggregators,” “demand-side aggregators,” and “vertically integrated capital ecosystems” in this article. For clarity:

Supply-side aggregators refer to bringing together differentiated market participants to offer commodified products (e.g., Uber).

Demand-side aggregators refer to expanding products to groups that appear similar externally (e.g., Amazon).

Vertically integrated capital aggregators refer to integrating multiple parts of an ecosystem into a single financial entity that offers various products in one place.

Blockchain is a monetary track. The value of protocols lies in their economic output. Composability and real-time verifiability enable native blockchain businesses to pursue vertical integration. Tokens allow participants in the stack to be incentivized through shared media. Teams that intentionally enable each part of the stack to capture value have moats. Vertical integration accelerates capital flow within ecosystems. When done well, it becomes a revenue source.

Uber aggregates all city passengers, positioning itself as a demand aggregator, and Swiggy does the same. You might think there’s little difference between ordinary passengers or hungry people—they can be commodified. Therefore, as a platform, Uber can extract 30% from each “commodity” (i.e., human user). Restaurants dislike this, drivers dislike it. Both try to bypass the platform by encouraging direct cash payments from users.

Passengers (or myself) understand that the platform’s real value lies in its ability to implement reputation systems, not cash transactions today.

You can see similar cases on Jupiter on Solana. Its early influence came from routing orders across exchanges to offer the best prices. Unlike restaurants and drivers, Jupiter aggregates trading venues for my WIF buy orders.

However, Substack and Spotify operate on different parallel tracks. Spotify pays up to 70% of revenue to record labels. Last year, it paid rights holders $13.75 billion out of $20.22 billion in revenue. For every dollar earned, only $0.04 reaches the artist. Substack only takes a 10% cut from what I pay to newsletter authors. It doesn’t commodify readers or authors. It simply positions itself as a tool. Perhaps intentionally—if it had pricing power, authors might leave the platform directly.

Spotify, due to its partnerships with numerous record labels, is somewhat a loose supply-side aggregator. Substack positions itself as a demand-side aggregator without pricing power, relying on its reader base.

These applications aggregate different sides of the market. But their ability to accumulate capital (or pricing power) depends on how tightly they integrate within the ecosystem. We will soon see another version.

Web2 native aggregators leverage two forces that bring massive user bases:

Moore’s Law drastically lowered smartphone costs. India alone has 800 million smartphone users. Today, about 5.5 billion people worldwide are online.

The reduction in internet costs and bandwidth prices.

In contrast, the cryptocurrency economy’s TAM is much smaller. According to best estimates, about 560 million users have interacted with crypto. Last month, active DeFi wallets numbered around 10 million. These are vastly different economies with very different rule sets.

One relies on attention, the other on on-chain funds flowing within wallets. We often confuse attention economy behaviors with transactional economy. For example, user behavior on prediction markets differs from that on Instagram.

Revisiting aggregation

Three years ago, when I first wrote about aggregators, I believed blockchain lowered verification and trust costs. The original promise of the internet was access—you could sit in your pajamas in New York and buy Temu products from Shenzhen. I thought blockchain made real-time verification and low-cost settlement with suppliers possible. Or rather, I predicted the industry would develop this way.

In 2022, I wrote:

“We believe blockchain will give rise to a new class of markets capable of instant on-chain event verification. This will significantly reduce the costs of large-scale IP verification, enabling new business models.”

Since then, new markets have indeed launched. NFTs have traded around $100 billion since then. Perpetual contract settlements reached about $14.6 trillion. Decentralized exchanges settled roughly $10.8 trillion. The understanding that technology would be used for global, anonymous counterparty settlement is correct.

But it must also be noted that OpenSea’s trading volume dropped from about $5 billion at that time to around $70 million this month.

Markets emerge, evolve, then fade—like many things in life. In this process, they leave us with fuel for thought. Sid believes speculation in crypto is a feature, not a bug. All new markets are uncertain early on; participants don’t know what they’re buying or why something is valuable. Novelty is embedded in the price. When rationality returns, valuations become efficient, and bubbles become memories. NFTs and DeFi have gone through such cycles of frenzy.

These bubbles are crucial for stress-testing and validating the monetary tracks that ultimately underpin markets like Hyperliquid.

This reminds me of recent weeks’ experiences in crypto. In Drift and Kelp incidents, about $578 million was hacked in the past three weeks. Over the past twelve months, roughly $1.7 billion was stolen from DeFi and crypto protocols tracked by DefiLlama. Meanwhile, the entire DeFi protocol revenue in the same period was about $3.42 billion.

In other words, last year, for every dollar of DeFi revenue earned, about $0.50 was lost to hacks.

Meanwhile, we see more applications being launched, software itself becoming a commodity. The number of apps submitted to the App Store this quarter increased by 84% compared to last year. We also see two forces at work: more software competing for fewer user attention, while a few platforms dominate most of the revenue generated in crypto.

Now we realize that for every dollar earned in this industry, about $0.50 is lost. The slope is steep—but keep thinking with me.

If we break down the $3.5 billion in revenue created by decentralized channels, a pattern quickly emerges. About 40% comes from derivatives platforms, with Hyperliquid alone contributing around $902 million. The second-largest category is decentralized exchanges, with leader Uniswap generating about $927 million in fees. Lending platforms like MakerDAO rank third, with roughly $500 million in revenue. They all share a common trait: they are capital-intensive businesses.

Unlike products that can be built with a few lines of code on Saturday afternoon, these require patient capital coordination—capital willing to accept the risks of these platforms.

This is where you realize the main difference between Web2 aggregators and Web3 native aggregators. Because blockchain is primarily a tool for transferring funds and verifying whether transactions follow the rules set by developers—only when they can engage in capital-intensive operations do they become valuable. Perpetual exchange platforms can repeatedly deploy large sums of capital within a single day. Lending platforms take a small cut from the large revenues they generate.

For example, Aave earned about $123 million from its $920 million in revenue last year. But such aggregators can only dominate the market when they have three key things:

Supply side (liquidity)

Demand side (users)

Distribution

Hyperliquid is a unique beast in this regard. It has paid nearly $100 million in code fees to builders, but most of its revenue comes from its own native frontend. It can retain top users and expand the surface area for new users to interact with the protocol.

But what’s the underlying logic? One theory is that in Web3, distribution is a toll. Large protocols tend to own and retain their best users. When you see that decentralized exchanges generate revenue compared to on-chain order routing aggregators, it becomes clear.

On Ethereum, aggregators account for 36% of all DEX trading volume. On Solana, this ratio can be as low as about 7% depending on the month. Kyber, 1inch, CoW, and ParaSwap have collectively generated only about $112 million in fees since launch. Meanwhile, Uniswap, which dominates most trading volume as an independent exchange, has accumulated about $5.5 billion in lifetime fees. Similar phenomena can be observed on Hyperliquid.

Code from builders accounts for only about 6% of Hyperliquid’s total $1.1 billion revenue. MetaMask’s deep integration on Ethereum earned $184 million in swap fees last year. Phantom generated about $180 million, but considering the size of its ecosystem, that’s just a small part. These products only work when built on a single protocol with deep liquidity and economic activity.

They attract and retain users precisely because they have deep liquidity. From this perspective—capital in crypto is no longer a commodified product. It is the most essential component. Vertical integration of capital offers participants more reasons to stay within the ecosystem. In such systems, capital brings more liquidity because it can be deployed for productive purposes.

Capital is not a moat; it is the result of vertical integration. Vertical integration is the moat; capital is just a byproduct.

It’s important to note that this model only works when capital is not incentivized to be idle. Not convinced? Look at any pre-launch protocol with airdrop plans, or at the countless L2s striving to generate value.

Any business engaged in capital aggregation is, to some extent, a target for hacks. Drift became a target because it had about $570 million TVL. KelpDAO was targeted because it held about $1.6 billion in staked ETH. Hyperliquid’s bridge holds about $2 billion in user deposits, making it one of the most valuable attack targets in the space. Similar cases can be seen on Ronin (about $625 million) and Nomad (about $190 million).

Because native blockchain businesses require large amounts of capital to generate value, we face a dynamic: to succeed, you must remain vulnerable until security mechanisms and capital freeze mechanisms are in place.

Even with capital, large TVL alone doesn’t guarantee success. In an economy, idle or underutilized capital can become liabilities when hacked. That’s why protocols try to differentiate themselves through the economic output they can generate, starting from niche use cases.

CHIP (the company behind USDAI) issued about $100 million in loans this quarter, with $1.5 billion in pipeline. These high-risk tranches will generate about 16% APY this year.

Maple’s highest-risk pools offer APYs of around 15–20%, comparable or higher than Aave’s USDC pool at 12.6%. They aggregate borrowers capable of creating economic output from protocol liquidity.

Naturally, Hyperliquid is an excellent example of a supply-side aggregator deploying capital meaningfully. Over the past year, Hyperliquid generated about $942 million in revenue, with an average TVL of around $3.5 billion. Roughly, every dollar of capital staked in the protocol turns over about 285 times per year, generating approximately $0.30 in fees per dollar TVL. In comparison, Aave’s lending market generates about $0.05 per dollar TVL.

In a market where consumer preferences are still fluid and investor loyalty is low, capital flows to where it produces the best results. When considering hack risks, investors demand risk premiums. Currently, perpetual exchange platforms are the only places where idle capital can be repeatedly deployed on-chain to generate fees.

I initially thought Hyperliquid was just a supply-side aggregator providing capital for users willing to trade on-chain. That has always been my argument. It’s not wrong. But when you consider how it uses tokens to incentivize vertical integration, that argument no longer holds. Before we proceed, let me explain how the ecosystem of vertical integration works.

Ticketmaster handles 70% of major live events in the US. It can take a 30% cut from tickets to Justin Bieber’s Coachella performance because it owns the venues, promotes tours, ensures you can buy merch at the concert, and coordinates with sponsors. The 30% you pay is 15 times what Stripe charges for online ticket fees. But you’re willing to pay this premium because Ticketmaster has achieved vertical integration along the value chain.

You have a market illusion: artists, venues, and fans are all participants, but no one objects to Ticketmaster’s cut. Apple’s App Store is similar. Apple curates the store, takes fees, ensures device functionality, and brings millions of users accustomed to paying the “ding” for Apple Pay—even if you subscribe to yet another app you never use.

Vertical integration in crypto

Protocols have begun slowly implementing similar logic.

In Web3, without vertical integration making capital providers’ cooperation easier, capital providers can be viewed as commodities. Users won’t develop loyalty until the ecosystem’s integrated experience cannot be replicated elsewhere.

For Maple, this integration requires years of experience working with hedge funds and market makers. For Centrifuge, it includes integrating nearly $1 billion from Grove for Janus Henderson’s JAAA bond issuance. They’re not capturing loose, abstract parts of the economy but providing better products through vertical integration. In doing so, they create moats that are hard to copy overnight.

Maple’s years of underwriting experience, or Centrifuge’s moat as a trusted capital coordinator, become the only hard-to-copy assets in a world where capital and relationships are the only durable moats.

Companies pursuing vertical aggregation may routinely delegate parts of the stack to third parties. Sometimes because there’s no significant economic benefit. Maple, for example, has a custody service or issues its own cards via MetaMask, which may not generate much profit compared to the capital from swaps and credit underwriting.

But when a business grows exponentially, owning the entire stack becomes the key to building a competitive advantage. This is also part of the reason for industry M&A.

When a company achieves vertical integration, you’re not competing with a single product. The battle is over the overall experience users get. On Hyperliquid, once HIP-4 launches, users can deposit for free (via Native Markets), participate in prediction market positions, and use those positions as collateral for trading perpetual products. Its risk engine makes this possible. And even today, in traditional finance, such an experience would be impossible without merchant banks.

Hyperliquid has users, deposit channels, risk engines, trading interfaces, liquidity, and token issuance rights. Competing with it means fighting on six different fronts simultaneously.

For new applications launching, integrating even a small part of this is far better than building on a new protocol with only $2.6 billion in total perpetual trading volume spread across five protocols.

Ecosystems like Hyperliquid attract developers, more integrations, headlines, and happy token holders.

Exchanges also see this shift. Coinbase acquired Deribit, with custody services, USDC issuance with reserves, large wallet infrastructure, and deposit channels in over 100 countries. It’s also launching its own chain to pursue a vertical integration experience. Admittedly, Coinbase might be too early in pursuing a retail user base that doesn’t want to “mint” content on-chain or use Farcaster.

Coinbase’s integration exists in a loose form but behind layers of bureaucracy, regulation, and internal priorities. This may be the key difference between open systems and closed ones. As a $60 billion market cap exchange, Coinbase has little incentive to pursue marginal developers.

In contrast, Hyperliquid benefits from developing its core channels into the best trading venue, creating an ecosystem, and generating value for its native token.

In this context, tokens are part of the integration because they are the shared substrate that sustains these integrations and keeps them valuable. That’s why the industry confuses tokenized protocols with tokenized businesses. The premise of tokenized protocols is that third-party developers can easily build on them. They incentivize value flow downward—often through buybacks from the market.

Companies like Robinhood and Coinbase are powerful economic players, but they cannot replicate Hyperliquid’s core owner—its operational network.

Protocol airdrops ensure that those who own them are individuals who contribute economically. They hold enough tokens to drive value toward it. Hyperliquid commits to this by using 99% of its revenue to buy back tokens from the market. Imagine a public company buying back 100% of its employees’ ESOPs. We might see a greater acceptance of capitalism.

This is why the industry is evolving—whether we like it culturally or not. Solana focuses on immutability; Ethereum emphasizes censorship resistance and open source, but you see the industry adjusting its ideology based on business realities.

Hyperliquid, while a beautiful garden, is a walled garden. As far as I know, its source code isn’t open source. Its risk engine’s workings are also unverifiable. Maple’s risk underwriting parameters are not public. As a lender, I might not even know who underwrote the loans on USDAI.

In chaotic negotiations

If every dollar of revenue results in $0.50 lost to hacks, an economy cannot be built. If founders are asked to be responsible for hundreds of millions of dollars in TVL, they will rush toward AI. Whenever hacks happen, we’re eager to freeze stablecoins. This often leads to centralization.

A vertically integrated stack ultimately requires sacrificing full decentralization for economic progress.

This isn’t a new story on the internet. In the late 1990s, there was a strong dream of an open internet allowing free speech without consequences. Yahoo auctioned Nazi memorabilia until 2000, when the French courts intervened. Tim Wu explores this in “Who Controls the Internet?” The story of the internet, or all human commercial networks, is about how full decentralization yields to a tempered version—sacrificing some control for economic interaction.

We accept a diluted version of the original vision so that business can scale—without dilution, chaos ensues.

This massive energy expansion is reflected in how we describe those eras: “Wild West,” “Internet Bubble.” Perhaps crypto is also experiencing similar expansion and energy convergence. I explored these themes in depth in an article last year.

What does this mean for founders?

Look at MetaMask and Phantom. These businesses make more money than most L2s because they sit downstream of ecosystems with huge economic output. Building bridges and exchanges where there’s no liquidity or users is no longer a viable business—especially when coupled with the pain of hacks. Today, you should build where liquidity and users already exist.

Imitating vertical products overnight may be impossible, but you can build on top of them.

Operating systems have also followed similar patterns. When BlackBerry declined and iOS became dominant, developers had to choose where to build. We see similar dynamics in crypto. But this time, capital incentives may keep developers blind longer.

Platforms and protocols on the internet are very similar. We may dislike their rules, but they keep things functioning.

In the era of vertical integrators, we may increasingly accept certain rules so that our funds stay within our control, and the economies we invest in can continue to scale. The trend points in this direction. Stablecoins, RWA, perpetual exchanges with closed risk engines, lending platforms with unknown underwriters, and off-chain RFQ products like Derive all point to the same trend.

It’s about willing to sacrifice full decentralization for progress—by means of vertical integrated capital aggregators.