Ethereum's private order flow accounts for a significant portion, and the fat application theory is gradually taking effect

Author: Mason Nystrom

Compiled by: Shenchao TechFlow

Update: August 19, corrected Orderflow data

In the past 30 days, Ethereum's order flow exceeded $12 billion, with nearly half of the 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 with the increasing value of block space commodities, paving the way for large applications.

But how did we get here? Where are we headed?

In short, the reason we arrived here is foodcoins. A slightly more detailed explanation is that the DeFi summer spawned a large number of professional users and retail trading, which subsequently facilitated the emergence of trading aggregators (like 1inch) that provided better price execution for users through private order routing. Wallets (such as MetaMask) quickly followed suit, realizing that adding in-app exchange features could monetize user convenience, proving that any application controlling end-user attention (and orders) has a highly valuable business model.

Source: Dune

In the past two years, we have seen two additional categories of participants enter the realm of private order flow—Telegram bots and solving networks. Telegram bots align with MetaMask's "convenience fee," providing users with an easy way to trade long-tail junk coin assets in group chats. As of July, Telegram bots accounted for approximately 17% of trades and 6% of trading volume, most of which occurred through private mempools.

On the other hand, in the main part of the market, solving networks (such as Cowswap and UniswapX) have also emerged as core venues for highly liquid pairs (such as stablecoins and ETH/BTC). Solving networks have changed the structure of the order flow market by outsourcing the task of finding the best route for a given trade to competitive market solvers (market makers).

As a result, there has been an initial differentiation in trading venues, with convenient front-end tools (including TG bots, wallet swaps, and Uniswap's front end) primarily used for longer-tail, lower-value trades (below $100,000), while aggregators and solving networks are the preferred venues for larger trades, which typically involve stablecoins and major cryptocurrencies (ETH/BTC).

In a more detailed analysis, you will find that most private order flow comes from aggregators (like 1inch) and front-end tools (TG bots, wallets, and front ends).

When we consider that only 30% of Ethereum trades occur through private mempools, the privatization of order flow becomes even more apparent, indicating that a small number of trades 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 holds.

Towards Fat Applications

The Uniswap protocol clearly has value, but the more interesting story is happening at the application layer, as Uniswap is striving to become a consumer application—by vertically integrating key components of its tech stack, expanding its interface, mobile wallet, and aggregation layer capabilities. For example, Uniswap Labs' applications—Uniswap's front end, wallet, and aggregator UniswapX—generated approximately 16% of the $8 billion in private order flow over the past 30 days, nearly accounting for 18% of total order flow (both private and public).

In the cryptocurrency space, applications like Worldcoin account for nearly 50% of Optimism mainnet activity, prompting them to launch their own application chain, further highlighting the power of the fat application theory and control over demand (such as users and trades).

Even top NFT projects with strong brands like Pudgy Penguins are building their own chains, as CEO Luca explains, controlling the block space relied upon for distribution is beneficial for the value accumulation of the Pudgy brand and intellectual property.

Looking ahead, applications should aim to create new types of order flow, whether by creating new assets (like Pump and memecoins), or by building applications that provide new user utility, such as identity (e.g., Worldcoin, ENS), or by crafting better consumer experiences that are vertically integrated and support valuable trades, 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 since the end of the last cycle, the theory of fat applications has been a focus for many in the crypto space, as the application chain theory has evolved as part of the consensus viewpoint.

My current view on the fat application theory is that we will see most value accumulate at the application layer of the tech stack, where control over users and order flow places 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 maximally on-chain (like MakerDAO), can still accumulate significant value, but due to the proximity of applications to users and off-chain components, applications may capture more value, creating a more defensible moat.

The theory of fat applications and value accumulation in crypto investments

Finally, I still believe that Layer 1 blockchains (like Bitcoin, Ethereum, Solana) can capture significant value as non-sovereign reserve assets, with underlying assets (like ETH) accumulating enormous value. Given enough time, applications may attempt to build their own L1s, just as they build their own L2s, but launching commodity L2 block space is very different from launching 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 own valuable order flow, the crypto world will reassess applications, as people will inevitably conclude—fat applications are inevitable.