Analysis of the Fat Wallet Theory: Value Accumulation Beyond Protocols and Applications

Original Title: The Fat Wallet Thesis
Author: Robbie Petersen, Delphi Digital
Compiled by: zhouzhou, BlockBeats

Editor's Note: This article discusses the "Fat Wallet" thesis, which posits that wallet applications will gradually dominate the blockchain ecosystem as they control user entry points and transaction flows. As the roles of underlying protocols and applications diminish, wallets can profit by charging fees and providing promotional services. Applications like Jupiter and Infinex may become competitors to wallets, but ultimately, those who can capture user and order flows will have the greatest advantage in the crypto economy.

The following is the original content (reorganized for readability):

Throughout the history of cryptocurrency development, discussions about how value will ultimately accumulate within the blockchain ecosystem have been ongoing. Although historical core debates have primarily focused on protocols versus applications, there is a third layer in this ecosystem that has been overlooked—wallets.

The "Fat Wallet Thesis" argues that as protocols and applications continue to "thin out," individuals who possess the two most valuable resources—distribution and order flow—will gain more space. Moreover, as the ultimate front end, I believe no one is better positioned than wallets to monetize this value.

This article aims to achieve three objectives: first, to outline three structural trends that will continue to commoditize the protocol and application layers. Second, we will explore various ways wallets can monetize their proximity to end users, including Payment-for-Order-Flow (PFOF) and selling application distribution as a service (DaaS).

Finally, we will discuss why two alternative front ends—Jupiter and Infinex—may ultimately outperform wallets in the competition for end users.

Thinner Protocols and Applications

The question of how value will ultimately accumulate within the blockchain ecosystem can be simplified into a straightforward framework. For each layer of the crypto ecosystem, ask yourself the following question:

If a product in this layer increases its commission rate, will users turn to cheaper alternatives?

In other words, if Arbitrum raises its commission rate, will users switch to other protocols like Base, and vice versa? Similarly, at the application layer, if dYdX raises its commission rate, will users turn to the nth undifferentiated perpetual contract decentralized exchange (DEX)?

Based on this logic, we can identify where the switching costs are highest, and thus who possesses asymmetric pricing power. Similarly, we can use this framework to identify where switching costs are lowest, and therefore which layer will become increasingly commoditized over time.

While historically protocols have had disproportionate pricing power, I believe this phenomenon is changing. Currently, there are three structural trends that are continuously "thinning" the protocol layer:

1. Multi-chain Applications and Chain Abstraction: As multi-chain becomes a fundamental requirement for applications to remain competitive, cross-blockchain user experiences will become increasingly indistinguishable, thereby lowering the switching costs at the protocol layer. Additionally, through abstracted bridging, chain abstraction will further compress switching costs. Thus, applications will no longer rely on the network effects of a single chain but will increasingly depend on front-end distribution.

2. Maturity of the MEV Supply Chain: While MEV will not be completely eliminated, many initiatives at the application layer and closer to the base layer will continuously redistribute the amount of MEV extracted from end users. As the MEV supply chain matures, value will increasingly ascend to the upstream of the MEV supply chain and asymmetrically accumulate in the hands of those with the most unique user order flows. This means protocols will lose bargaining power, thereby "thinning out," while front ends and wallets will gain leverage, thus "thickening."

3. Development Towards an Agency Paradigm: In a world where transactions are primarily executed by agents and "solvers" rather than humans, attracting this agency flow will become key to survival in blockchain. Importantly, given that agents and "solvers" are programmed to primarily optimize for best execution, protocols will no longer compete on intangible factors like "vibe" and "alignment." Instead, transaction fees and liquidity will be the only important factors—this will further "thin" the protocol layer as protocols are forced to compress fees and incentivize liquidity to remain competitive.

Thus, revisiting our initial question—if protocols raise their commission rates, will users turn to cheaper alternatives?—while it may not be obvious today, I believe the answer will increasingly be "yes," as switching costs continue to compress.

Data Source: Dune Analytics @0xKofi

Intuitively, one might assume that if protocols become "thinner," applications must inevitably become "thicker." While this value will certainly be recaptured by certain applications, the "Thick Application Theory" alone is simplistic. Different applications in vertical domains accumulate value in various ways. Therefore, the question should not be—"Will applications become thicker?"—but rather—"Which specific applications?"

As I outlined in “Identifying New Frameworks for Crypto Market Moats”, the unique structural differences of crypto applications—forkability, composability, and token-based acquisition—have a net effect of lowering barriers to entry and customer acquisition costs (CAC) for emerging competitors. Thus, regardless of how many applications possess attributes that cannot be easily forked or subsidized, as a crypto application, cultivating moats and maintaining market share is extremely challenging.

Returning to our initial framework—if an application raises its commission rate, will users turn to cheaper alternatives?—I believe for 99% of applications, the answer is "yes." Therefore, I expect most applications will face difficulties in capturing value, as flipping the fee switch will inevitably lead users to the next undifferentiated application offering more generous incentives.

Finally, I believe the rise of AI agents and solvers will have a similar impact on applications as it does on protocols. As agents and "solvers" primarily optimize for execution quality, I expect applications will also be forced to compete fiercely for attracting agency flows. While liquidity network effects should lead to winner-takes-all dynamics in the long term, in the short and medium term, I expect applications will increasingly experience "cutthroat competition."

This raises the question: if both protocols and applications continue to "thin out," where will most of the value re-accumulate?

The "Fat Wallet Theory"

In short, the answer is anyone who possesses end users. While theoretically any front end, including applications, can do this, the "Fat Wallet Theory" posits that no one is closer to users than wallets.

Here are five sub-theories supporting this logic:

Wallets Dominate the Crypto Mobile User Experience:

In a mobile context, a good litmus test for understanding who possesses end users is to ask the following question: Which Web2 application do users ultimately interact with? While most users "trade" with the front end of Uniswap, they are actually accessing that front end through a wallet application. This means that if mobile devices increasingly dominate the crypto user experience, wallets may continue to strengthen their relationship with end users, becoming the classic application gateway.

Wallets Are Close to Users

Wallets interact closely with users, as crypto applications are essentially financial applications. Unlike Web2, almost all on-chain transactions are some form of financial transaction. Therefore, the account layer is crucial for crypto users. Additionally, there are several functions that uniquely synergize with the wallet layer: payments, native yield on idle user deposits, automated portfolio management, and other consumer use cases like crypto debit cards. Fuse seems to be at the forefront in this regard, launching features like Fuse Earn and Fuse Pay, allowing users to spend their wallet balances in the real world via Visa debit cards.

Wallets Face Ironically High Switching Costs

While switching wallets is theoretically as simple as copying and pasting a seed phrase, this remains a psychological barrier for most average users. Given the high level of implicit trust users place in wallet providers, I believe brand and "stickiness" are particularly strong defensive sources at the wallet layer.

Returning to our initial question—if products in this ecosystem raise their commission rates, will users turn to cheaper alternatives?—at the wallet layer, the answer seems uniquely to be "no"; MetaMask's 0.875% commission rate in wallet swaps reflects this logic.

Chain Abstraction

Chain abstraction is a technically complex issue, but solutions to chain abstraction at the wallet layer are more appealing. The idea of accessing any application on any chain through a single account balance feels particularly intuitive. Projects like OneBalance io, BrahmaFi, Polaris App, ParticleNtwrk, Ctrl Wallet, and Coinbase's smart wallet are all moving towards this vision. In the future, I expect more teams will cater to user needs by solving chain abstraction issues at the wallet layer.

Unique Synergy with AI

While I expect AI agents will increasingly commoditize the rest of the blockchain ecosystem, users will still need to authorize agents to execute transactions on their behalf. This means the wallet layer is most likely to become the standard front end for AI agents. Other low-barrier options for integrating AI with the account layer include automated staking, yield farming strategies, and user experiences enhanced by large language models.

Now that we have clarified "why" wallets will increasingly possess end user relationships, let’s explore "how" to ultimately monetize this relationship.

Monetization Opportunities

The first opportunity for wallet monetization is through mastering user order flows. As I mentioned earlier, while the MEV supply chain will continue to evolve, one thing will increasingly hold true—value will disproportionately accumulate in the hands of those with access to the most unique order flows.

Today, the front ends with the majority of order flows by trading volume are solver models and decentralized exchanges (DEX). However, this chart itself lacks nuance. It is important to understand that not all order flows are the same. Order flows can be divided into two types: (1) fee-sensitive flows; (2) fee-insensitive flows.

In general, solver models and aggregators dominate "fee-sensitive" flows. Since these users' trade sizes exceed $100,000, execution quality is crucial for them, and these traders will not accept more than 10 basis points in additional fees.

Thus, "fee-sensitive" traders are the least valuable customer segment—despite these front ends capturing a large portion of the market by trading volume, the value generated per $1 traded is far lower than that of other customer segments.

In contrast, wallet swaps and TG bots have a more valuable user base—"fee-insensitive" traders. These traders are not paying fees for execution; they are paying for convenience. Therefore, for these users, paying a fee of 50 basis points in a trade is inconsequential, especially when their expected outcomes are either a 100x return or zero. Thus, the revenue generated per $1 traded by TG bots and wallet swaps is significantly higher than that of other front ends.

In the future, if wallets can leverage the trends mentioned above and continue to maintain end user relationships, I expect wallet transactions will continue to eat into the market share of other front ends. More importantly, even if their market share can only increase by 5%, this will have a massive impact, as the amount generated by wallet swaps per $100 traded is nearly 100 times that of DEX front ends.

This leads to the second opportunity for wallets to monetize their relationships with end users—distribution as a service.

As the standard front end for users interacting on-chain, applications will ultimately be influenced by the distribution provided by wallet providers, especially in a mobile context. Therefore, similar to how Apple profits through iOS, wallets seem to be in a favorable position to strike exclusive agreements with applications to provide distribution services.

For example, wallet providers could establish their own app stores and enter into revenue-sharing agreements with applications. MetaMask appears to be exploring paths related to "snaps."

Similarly, wallet providers could guide users to specific applications in exchange for shared economics. This approach has the advantage over traditional advertising in that users can easily make purchases and interact with applications within the wallet. Coinbase seems to be exploring a similar path through "featured" applications and in-wallet "tasks."

Wallets can also drive the growth of emerging chains by sponsoring user transactions in exchange for some economic benefits. For example, Bearachain may want to attract users to their chain. They could pay MetaMask to sponsor bridging fees and gas fees on Bearachain. Given that wallets ultimately possess end users, I expect they can negotiate favorable terms as well.

As more users register through wallets as their primary on-chain entry point, we may see a shift in demand from "block space" to "wallet space," as attention becomes the most valuable resource in the crypto economy.

Strong "Fat Wallet" Competitors

Finally, while wallets have a clear first-mover advantage in the race to possess end users, I remain excited about the prospects of two alternative front ends.

Jupiter:

By positioning their DEX aggregator as an initial entry point, JupiterExchange has successfully established a strong relationship with end users. This has provided them with the best starting point for other related products in the crypto space, including their perpetual contract DEX, launch platform, native LST, and recently, RFQ/solver products. I am particularly looking forward to the release of Jupiter's mobile application, as this may allow them to reposition in the mobile environment, surpassing wallets and getting closest to end users.

Infinex:

As a cross-EVM chain and Solana application aggregation front end, Infinex App aims to provide a centralized exchange-like experience while maintaining principles like non-custodial and permissionless. Infinex will initially offer spot trading and staking services, with plans to integrate perpetual contracts, options, lending, margin trading, yield farming, and fiat on-ramp features. By abstracting the account layer and using Web2 familiar features like passkey, I believe Infinex also has the potential to replace wallets as the standard crypto front end.

While it remains unclear who will ultimately win the race to possess end users, it is increasingly evident that (1) user attention and (2) exclusive order flows will continue to be the most scarce and thus most monetizable resources in the crypto economy. Whether wallets or alternative front ends like Infinex or Jupiter, I expect the most valuable projects in the crypto space will be those that possess both of these resources.