Can payment for order flow monetize zero-fee wallet? / Max Sherwood

Transcript

hey everybody so I've just arrived how's the conference been so far how's the talk spin good good all right um yeah my name is Max Sherwood from Ultimate in Berlin uh we're a mobile wallet um on Android iOS uh ethereum Solana some l2s um I would describe myself as an Enthusiast of New Year's uh so back when crypto was just Bitcoin um also an analyst and a validator so at ultimate I'm a research and growth manager which means I get to basically do what my hobby used to be full-time and I've also co-founded a validator company called H2O nodes so I know a bit about validators as well

so yeah let's get straight into it Dex trading right swapping new all-time highs very exciting but still like these are these are rookie numbers right like 20 of the total volume is happening on dex's and the rest is happening on centralized exchanges so we got to pump those numbers up right when flipping once it's going to get to 100 200 percent when are we going to have many times the uh centralized exchange volume happening on dexes obviously not anytime soon it seems unfortunately so well why do you care right maybe you just hold your eth maybe you just stake your eth well I have news for you because of Mev and all those great things that we have now um Dex activity benefits stakers too so you're getting you know a variable apy

that's that's basically just a chart excuse me it's basically just a chart of like how much on-chain activity is happening how much economic activity is happening so every time there's like some big event that causes everybody to kind of reshuffle their portfolios and make a bunch of transactions you do see stakers getting a lot more apy excuse me even if it's only for like one or two days so you know even if you're just staking your eth you should also want there to be a lot more Dex activity happening so how do we get users into D5 how do we get people away from the centralized exchanges I don't think I have to explain like you know why this is important after the FTX stuff so how do we get people into D5 well probably not with uis like this no hate to curve but

um you know this is not something that feels very compelling for most users we think that mobile is the way that things have gone in tradfi we've already seen this you know probably all of our fintech apps all of our banking apps are already on our phones um but you know if I ask you like do you have a favorite Mobile Wallet probably you'd say no so we're trying to build you know a mobile first wallet that is intuitive feels as easy to use as any centralized exchange but it's self-custody it's D5 it's deck swapping uh but how do we monetize right so I was kind of naive when I started I thought oh wallet is just something that interacts with the blockchain should be pretty easy peasy to build a good wallet right a fast wallet Snappy that's not

the case you need very talented like back-end engineers and and data people and there's all kinds of caching going on and stuff so you do need to pay some very good Engineers to build this wallet that is going to feel Snappy and feel as good as you know a tradfi app um or a centralized exchange so we are a venture funded team of 30 we raised five and a half million seed round and then a 12 and a half million series a so we have money in the bank but you know we're burning through that eventually we're going to have to monetize somehow right how do wallets monetize today they just slap a fee on top of the swaps that they offer but really that's like a reason not to use a wallet right like if you can just go to you know curve and

just connect and not have any added fees you're probably going to do that rather than use a wallet that's just going to slap a you know big fee on top so for example metamask you know they're they're putting a 0.875 percent fee on top which is quite a lot um in my opinion and you know if you look at what Robin Hood did they removed all the hurdles right the question became it wasn't why should I trade with Robinhood it was why not because it was free um so we're currently not adding any fees onto swaps um the question becomes how do we monetize um you know Robin Hood obviously changed the brokerage industry forever in tradfi with payment for order flow and you know

basically monetizing the Overflow that their users created on the platform there are some other options maybe we could do like subscriptions on a monthly basis coinbase just did this for their exchange where you can trade for free if you pay like 20 25 a month um I'm not a huge fan of that personally there's also some kind of tipping mechanisms that might work but but really payment for order flow is you know probably where we're going to end up so let's unpack the uh the big Mev you know payment for overflow topic here so Stefan from flashbots wrote a piece in March called the order flow auction design space um and these are some screenshots from that blog article and uh if you'll

excuse me reading off the slide here I'm just going to read this quote from Stefan he says order flow auctions promise to return users the value they create via their orders we believe that this year will be the year of order flow auctions and we expect significant competition happening between different order for auction designs and their implementations in the next six months right so there's different kinds of order flow auctions technically an RFQ request for quote is a type of order flow auction already so Xerox API is an example but you know things are a bit more interesting with like exclusive batch auctions so maybe you've heard of like cow swap for example um and this is you know the middle point in the Mev supply chain right so the wallets are all the way on the left the users have some intents to trade

um they're gonna you know signal that intent through a wallet that's going to end up in an order flow auction where people are going to be bidding to basically make markets or provide liquidity for that and then happens all the proposal Builders stuff that we've kind of spent most of the time talking about in the last year and a half I think we've spent a lot of time talking about you know the Searchers and the builders and the relayers and the proposers but we haven't really spent a lot of time talking about the beginning part of the the MVP supply chain which is you know where we're situated as a wallet so when you look around there's not really a lot of precedent for payment for order flow with wallets because wallets don't really generate a lot of trade volume in their uh in their

built-in swaps so I don't remember exactly which Dune dashboard I found this in but it was like less than five percent of uni swap's volume coming from metamasks built-in swap feature right and and metamask is you know by far the biggest one so um today most Dex volume is still coming from the front ends it's coming from apis so people are still interacting directly with dexes or aggregators they're not really trading through the wallet um and yeah as such we haven't really seen much going on in the way of payment for order flow uh another piece of information that shows you how early we still are aggregators are pretty pretty high-tech

they're pretty nice but only about 20 of Dex volume is coming through aggregators today which I found kind of surprising and it's not really trending uh in a it's not really trending up either so um again it just shows that people are still interacting with individual dexes they're not even necessarily trading through aggregators I mentioned RFQ systems so for example 0x uh they have this request for quote system where market makers can can put in their own quotes but less than five percent of zero X's um volume comes from the RFQ systems so you know it's still very early days the question is now like will will payment for overflow create centralization um I think for a wallet to succeed it

should profit with its users and not from its users uh two of the two of the pieces that quintus wrote from from flashbots uh the first one was titled a warning order flow auctions and centralization so obviously like we want to avoid kind of this order flow dystopia right and Stefan has explained this circular chart where at the top you know if you have exclusive private order flow and you're building higher blocks and you're consistently winning you know those block building competitions that kind of justifies the exclusive order flow right so basically like if you're a market maker and or a block Builder you know it's there are like positive effects that mean that you know one

entity could end up dominating obviously decentralization is good for ethereum we want an open diverse competitive markets for aggregators and Builders and centralization is bad we don't want the combination of large Builders due to exclusive order flow so not to pick on metamask but you know consensus has a lot of different uh products all the way across the Mev supply chain so let's just spell out like what would be the worst case scenario well you know let's say all the users are using metamask and you know they're already sending all that to infuria and let's say that that consensus starts to spin up their own you know their own builder and maybe even run their own validators and uh you know basically vertically integrate this

whole supply chain you know are we even trading in a decentralized system anymore if if this is kind of how the MVD supply chain ends up looking where uh you know it's basically the same entity that just owns the entire order flow I think that's what we want to avoid so what happens next um we see aggregators like one inch coming out with a mobile wallet we see uni swap coming out with a mobile wallet so like we launched in 2021 um and since then it's gotten a lot more competition um so what's going to happen next well auction models will be tested um wallets are launching and competing for market share um so the question now kind of becomes like who will win the wallet Wars and

who should win the wallet Wars right so if a wallet chooses to capture more value then they can afford you know more marketing a bigger team Etc if they choose to return more value to the users then they might get more users and more volume so this is kind of you know who will win the wallet Wars which strategy will be the best going forward we will see but who should win the wall Wars obviously I'm talking my own book here ultimate doesn't run a DEX or an aggregator or any other piece of the supply chain um do we want wallets from dex's or Gators basically serving as their front ends and uh you know not really giving us a wide breadth of liquidity do we

want block Builders building wallets there's some conflicts of interest here that might lead to some centralization but time will tell so yeah I'm curious also to hear what you think about this and um you know it's not something that I've heard kind of discussed very much but yes in summary the entire eth economy benefits from increased Dex market share so numbers should go up defy needs Fair markets and infrastructure so basically unsophisticated Traders need access to liquidity they need protection from adversarial Mev wallets need a fair way to monetize the order flow it does cost money to build and develop a great wallet High fees on top of swaps

are unacceptable payment for order flow auctions should protect against builders centralization um so yeah let's see what the future brings and very curious to hear your questions so thank you um really interesting how do you think about one step before your wallet how do you get users to use your wallet users that you know might not be on chain just yet somebody that wants to understand what crypto is and wants to you know use a wallet how do you captured that user or is that not what you guys are focused

on I mean that's the long-term goal is to build something that's like so easy to use that someone with no self-custody experience can just pick up the phone launch the app and you know they can figure out what to do um so you know onboarding is super important um like you know one thing that we're doing which is fairly controversial is like we don't show you the seed phrase you can go find it but we don't show it to you we do give you a check box to like back it up to Google Drive or or iCloud encrypted because we've read that like 95 of people are 2fa protected anyway on their iCloud accounts so like that's a fairly controversial decision probably most of us like hardcore crypto people or like why would I ever do that that's terrible we saw all this stuff

with Ledger right I mean it's opt-in but it's like the target audience is people that have not used self-custody yet so you know we kind of think about like an onion of like you know there's probably people different experiences using like coinbase or Robin Hood and like trading crypto there right even if it's like not actually crypto and then there's the people that you know maybe they use the centralized exchange like binance but they've never written down a c phrase and then there's the people that actually know self-custody and everything and um so right now we're focusing on Traders uh building a great Dex trading product um to hopefully get you know the people that are all here and we're still here after the bear market like probably we're we're Traders or you know so um yeah that's kind of where we're at any other questions

any Mev experts in the room that want to comment on comment on any of this all right [Music]