CoinExpress reported:
Author: Mason Nystrom, former investor at Unsyndicated and Variant Fund; Translation: 0xjs@
In the past 30 days, the order flow of Ethereum has exceeded $25 billion, with nearly half of the order flow coming from proprietary applications.
As the value of block space commodities continues to grow and paves the way for fat applications, the privatization of order flow will only continue to grow.
Source: Orderflow.art
But how did we get here? And where are we going?
In short, we got here through food tokens. To put it simply, the DeFi Summer gave rise to a large number of consumer and retail trades, which in turn led to the emergence of trading aggregators like 1inch. These aggregators provide users with better price execution through private order routing.
Wallets (such as MetaMask) quickly followed suit, realizing that they could monetize user convenience by adding in-app exchanges. This proved that any application that controls the attention (and orders) of end users has a valuable business model.
Source: Dune
In the past two years, we have seen two other categories of participants enter the private order flow space – Telegram bots and solver networks. Telegram bots, like MetaMask’s “convenience fee,” provide users with an easy way to trade long-tail (low-value) assets in group chats. As of June, Telegram bots accounted for approximately 21% of private order flow trades and 11% of trading volume, most of which were conducted through private mempools.
On the other hand, solver networks (such as Cowswap and UniswapX) have become the core venues for trading highly liquid currency pairs (such as stablecoins and ETH/BTC). Solver networks change the market structure of order flow by outsourcing the task of finding the best path for a given trade to solvers (market makers) in a competitive marketplace.
As a result, there is a division in trading venues, with convenient front-ends (including TG bots, wallet swaps, and Uniswap front-ends) primarily used for small trades with low value (less than $100,000), while aggregators and solver networks are preferred venues for larger trades involving stablecoins and major currencies (ETH/BTC).
With a more granular filter, you will notice that most of the private order flow comes from front-ends (TG bots, wallets, and front-ends).
When we consider that only 15-30% of Ethereum transactions go through private mempools, the privatization of order flow becomes even more apparent, meaning that a small number of trades contribute a significant portion of private order flow.
Source: Dune
In other words, valuable order flow is more important than the quantity of order flow. The power-law distribution of users and order flow leads to an inevitable conclusion – applications will occupy the largest proportion of the total value. In other words, the fat application theory still holds true.
Towards Fat Applications
While Uniswap’s protocol is clearly valuable, the more interesting story is happening at the application layer, as Uniswap strives to become a consumer application – vertically integrating its stack from expanding its interface to mobile wallets and aggregation layers. For example, Uniswap Labs’ applications – Uniswap’s front-end, wallet, and aggregator UniswapX – accounted for nearly 25% of the $13 billion in private order flow in the past 30 days, and nearly 40% of the total order flow (private and public).
In other areas of the cryptocurrency space, applications like Worldcoin account for nearly 50% of the Optimism mainnet activity, driving them towards launching their own application chains, further emphasizing the power of fat applications and the control over needs (such as users and trades).
Even top-tier NFT projects with strong brands like Pudgy Penguins are building their own chains, as Pengu CEO Luca explains that controlling the space for distribution benefits the value accumulation of Pudgy’s brand and IP.
Looking ahead, applications should focus on creating new types of order flow, whether it’s through creating new assets (such as pump and memecoins), building applications that create new user utility (such as identity) (e.g., Worldcoin, ENS), or by designing better vertically integrated consumer experiences that support valuable transactions, such as Farcaster and frames, Solana Blinks, Telegram and TG applications, or on-chain games.
Final Thoughts on Fat Applications
It is worth noting that the fat application theory has become a focus of attention in the cryptocurrency space. Since the end of the previous cycle, the application chain theory has become part of the consensus view. In my opinion, the majority of value will accumulate at the application layer of the stack, where control over users and order flow puts applications in a privileged position. These applications may combine with on-chain protocols and primitives, similar to today’s UniswapX and Uniswap Protocol, Warpcast and Farcaster, Worldcoin and Worldchain. Ultimately, these protocols, especially those that are most heavily on-chain (such as MakerDAO), can still accumulate significant value, but considering the proximity of applications to users and the off-chain components that provide more defensible moats, applications may capture more value.
Finally, I still believe that Layer 1 blockchains (such as Bitcoin, Ethereum, Solana) have a path to significant value as non-sovereign store-of-value assets, with underlying assets (such as ETH) accumulating immense value. If given enough time, applications may attempt to build their own L1, much like building their own L2, but building L2 block space commodities is fundamentally different from bootstrapping L1 and transforming tokens into commodities and collateral assets, so that may be a distant future.
The key point is that as more consumer applications create and own valuable order flow, the crypto world will reevaluate applications, as the inevitable conclusion is reached – fat applications are inevitable.
