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 increase.
But how did we get here? And where are we going?
The short answer to how we got here is through food tokens. In short, the DeFi summer gave birth to a large number of consumer and retail trades, which in turn led to the emergence of trading aggregators such as 1inch. These aggregators provide users with better price execution through private order routing.
Wallets like 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.
In the past two years, we have seen two other categories of participants enter the realm of private order flow – Telegram bots and solver networks. Telegram bots, like MetaMask’s “convenience fee,” provide users with an easy way to trade long-tail (junk) assets in group chats. As of June, Telegram bots accounted for approximately 21% of private order flow trades and 11% of trading volume, with most of them being conducted through private mempools.
On the other hand, in the market leader aspect, 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.
Therefore, trading venues have become differentiated, with convenient front-ends (including TG bots, wallet exchanges, and Uniswap front-ends) primarily used for small-value (less than $100,000) trades, while aggregators and solver networks are preferred venues for larger trades involving stablecoins and major currencies (ETH/BTC).
Through 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 considering 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 volume.
In other words, valuable order flow is more important than the quantity of order flow. The power law 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
The Uniswap protocol is undoubtedly valuable, but the more interesting story is happening at the application layer, as Uniswap strives to become a consumer application – vertically integrating key components of its stack, starting from expanding its interface, mobile wallets, and aggregation layers. For example, the Uniswap Labs applications – Uniswap’s front-end, wallet, and aggregator UniswapX – accounted for nearly 25% of the $13 billion 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 such as Worldcoin account for nearly 50% of the activity on the Optimism mainnet, driving them towards launching their own application chains, further emphasizing the power of fat application theory and the control of needs (such as users and transactions).
Even top-tier NFT projects with strong brands like Pudgy Penguins are building their own chains. Luca, CEO of Pengu, explains that controlling the block space of distribution benefits the value accumulation of Pudgy’s brand and IP.
Looking ahead, applications should focus on creating new types of order flow, whether through creating new assets (such as Pump and memecoins), building applications that create new user utilities (such as identity) (i.e., Worldcoin, ENS), or by designing better vertically integrated consumer experiences and supporting 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 theory of fat applications has become a focus of attention in the cryptocurrency space. Since the end of the previous cycle, the theory of application chains has become part of the consensus view.
My current view on the theory of fat applications is that we will see most of the value 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 more heavily chained (such as MakerDAO), can still accumulate substantial value. However, 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 reserve assets, while underlying assets (such as ETH) accumulate immense value. If given enough time, applications may attempt to build their own L1, just as they build their own L2, but building L2 block space commodities is fundamentally different from bootstrapping L1 and turning tokens into commodities and collateral assets, so this may be a distant future.
The key point is that as more consumer applications create and possess valuable order flow, the crypto world will reassess applications, as people come to the inevitable conclusion – fat applications are inevitable.