Original author: Mason Nystrom
Original translation: TechFlow
Update: August 19, corrected Orderflow data
Over the past 30 days, Ethereum has seen over $12 billion in order flow, with nearly half of that order flow coming from private or proprietary applications. Click here to read the full article.
Source: Orderflow.art
The privatization of order flow will continue to expand as the commodity value of blockspace grows and pave the way for large-scale applications.
But how did we get here, and where are we going?
In short, the reason we are here is foodcoins. A slightly more detailed explanation is that the DeFi summer gave rise to a large number of professional users and retail trading, which subsequently led to the birth of trading aggregators (such as 1inch) that provided users with better price execution through private order routing. Wallets (such as MetaMask) quickly followed suit, realizing that user convenience could be monetized by adding in-app exchange functions, proving that any application that controls the attention (and orders) of end users has a very valuable business model.
Source: Dune
Over the past two years, we’ve seen two additional categories of players enter the private order flow space — Telegram bots and solver networks. Telegram bots align with MetaMask’s “convenience fee” and provide users with an easy way to trade a long tail of crypto assets in group chats. As of July, Telegram bots account for ~17% of trades and 6% of volume, with the majority of that going through private mempools.
On the other hand, in the main part of the market, solver networks (such as Cowswap and UniswapX) have also emerged as core venues for trading highly liquid pairs (such as stablecoins and ETH/BTC). Solver networks change the order flow market structure by outsourcing the task of finding the best route for a given trade to solvers (market makers) who compete in the market.
As a result, an initial bifurcation of trading venues has occurred, with convenient front-end tools (including TG bots, wallet exchanges, and Uniswap’s front end) primarily used for longer-tail, lower-value (less than $100k) trades, while aggregators and solver networks are the preferred venues for larger trades, which often involve stablecoins and major currencies (ETH/BTC).
On a more detailed analysis, you’ll find that the majority of private order flow comes from aggregators (like 1inch) and front-end tools (TG bots, wallets, and front-ends).
The privatization of order flow becomes even more apparent when we consider that only 30% of Ethereum transactions pass through private mempools on a transaction basis, meaning that a small number of transactions contribute a significant proportion of private order flow.
Source: Dune
In other words, valuable order flow is more important than the quantity of order flow. The power law relationship between users and order flow leads to an inevitable conclusion - applications will accumulate the largest proportion of overall value. In other words, the theory of fat applications still exists.
Towards fat applications
Uniswap’s protocol clearly has value, but the more interesting story is happening at the application layer as Uniswap works to become a consumer application — expanding the capabilities of its interface, mobile wallet, and aggregation layers by vertically integrating key components of its technology stack. For example, Uniswap Labs’ application — UniswapX, Uniswap’s frontend, wallet, and aggregator — generated about 16% of the $8 billion in private order flow in the past 30 days and almost 18% of total order flow (private and public).
In the cryptocurrency space, applications like Worldcoin account for nearly 50% of Optimism mainnet activity, which has prompted them to launch their own application chain, further highlighting the power of fat application theory and control requirements (such as users and transactions).
Even top NFT projects with strong brands like Pudgy Penguins are building their own chains, with CEO Luca explaining that controlling the block space on which distribution relies is beneficial to the value accumulation of Pudgy's brand and intellectual property.
Going forward, applications should look to create new types of order flow, whether by creating new assets (like Pump and memecoins), by building applications that provide new user utility like identity (e.g. Worldcoin, ENS), or by building better consumer experiences that are vertically integrated and support valuable transactions, like Farcaster and frames, Solana Blinks, Telegram and TG apps, or on-chain games.
Final Thoughts on Fat Apps
It is worth noting that the fat app theory has been the focus of many crypto people since the end of the last cycle, as the application chain theory has developed as part of the consensus view.
My current view on fat app theory is that we will see most value accruing to the application layer of the technology stack, where control of user and order flow privileges applications. These applications will likely be combined 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 maximally on-chain (like MakerDAO), can still accumulate significant value, but applications are likely to capture more value due to their proximity to users and off-chain components, creating a more A defensive moat.
Fat App Theory and Value Accumulation in Crypto Investment
Ultimately, I still believe that Layer 1 blockchains (e.g. Bitcoin, Ethereum, Solana) are capable of capturing significant value as non-sovereign reserve assets, where underlying assets (e.g. ETH) accumulate significant value. Given enough time, applications may try to build their own L1 just like they build their own L2, but launching a commodity L2 block space is very different from launching an L1 and turning tokens into commodities and collateral assets, so This may be a distant future.
The core takeaway is that as more and more consumer applications create and own valuable order flow, the crypto world will re-evaluate applications as people will come to the inevitable conclusion - fat applications are inevitable.
