Monetizing zero-fee wallets without centralizing Ethereum | Max Sherwood (May 2022)

yeah hey everybody uh good to see everybody some familiar faces and also some new faces here in foldout um yeah I know that the you must all be very committed you know it's a nice sunny afternoon but we're all here to learn about ethereum so it's definitely the ogs in the audience so thank you um yeah my name is Max Sherwood I work at a company called ultimate uh it's based here in Berlin uh it's a wallet um self-custody wallet for mobile focused on Dex trading so a D5 wallet um and yeah the title of this talk is can zero fee wallets monetize without centralizing ethereum um so a bit about me I guess I would describe myself as a crypto Enthusiast of many years uh an analyst of the crypto markets and everything in D5 and also a validator um so yeah my job title at ultimate is uh growth and research manager I've started putting it in the other direction because it makes me sound like less of a marketing person and more of an analyst to research and growth so we're going to go with that and I also have co-founded a validator company on the side so I know a thing or two about validators as well um so yeah let's Dive Right In um I guess just like show of hands who has made a swap on a decentralized Exchange in the last seven days on any chain all right maybe like half the audience who has made a trade on a centralized Exchange in the last seven days okay less people right OG crowd definitely um but we are not the uh we are not the majority of course so uh according to the block uh this chart shows that we've just gotten past 20 of um you know the total spot trading volume being on uh decentralized exchanges uh versus centralized exchanges but of course those are rookie numbers we need to pump those numbers up um you know I don't think I need to explain you know in the wake of FTX and everything why it's important to get people into self-custody and get people trading on decentralized exchanges um so the question is like when flipping right like when is this number going to be 100 or 200 percent because we're still quite far away if you think about you know D5 summer in in 2020 um you know we didn't even crack 15 there so it's about time that you know that number started growing how do we do that um oh this uh this slide first um yeah why should you care I guess let's say you know you're not one of those people that raise your hand you don't really trade you just hold your eth you just take your eat uh you know um well Dex activity activity benefits stakers as well so now that we have Mev boost and you know the Mev activity that's being generated on chain being passed to validators being passed to stakers who actually see the average staking apy of ethereum varying quite a lot in accordance with like how much on-chain activity there is and you can actually see some of these spikes so I've pointed them out like the FTX collapse you know there were a lot of people changing their portfolio around moving funds around doing on-chain activity the usdc DPAC in in March and I guess recently meme tokens I'm not really sure what that recent spike is um but uh it's almost like the the staking rate has become an indicator of how much on-chain activity there is and how much Dex trading activity there is so even if you're just a Staker earning the apy um you know it's also in your interest that that number goes up right so how do we do that uh probably not like this right this is the old-fashioned curve interface which some of you might remember um I think they've updated it but uh you know this was almost like a joke right I think sometimes people in crypto do stuff like this to like keep normies away um but you know that's not what we should be trying to do we should be trying to get normies to use crypto and use dexes and and do trades so normies are of course used to you know fintech apps brokerage apps web 2 apps that look a lot better uh probably they're all using mobile already you know you think about Robin Hood as 10 years old by this point so we're quite far behind in crypto and in D5 and in crypto trading um obviously you know this is what ultimate does so we've built a uh a DEX trading wallet on mobile uh with a team of about 30 people we did a five and a half million dollar series uh seed round in uh 2021 and a 12 and a half million dollar series a last year so we're Venture funded a team of around 30. most of us are here in Berlin um and when I joined I thought okay well if you want to build a wallet it's all about just getting data from the blockchain and you know interacting with the blockchain but really what I learned working there is that it takes a big team of Engineers and developers and especially like back-end engineers and data people to build an experience that's very fast because you can't query the blockchain all the time like I'm non-technical so this is probably obvious to you but to me it was like oh okay wow we actually need like a significant back end we need to work with all these RPC providers we need a lot of Engineers so it actually costs money to build a decent wallet um and you need a a good team of people who deserve to be paid well so the question is how do you monetize a wallet right and this is kind of the the you know big idea behind this talk um the obvious answer is well you can just have a built-in swapping feature and you can add fees on top of that right which is what most wallets do today but really added fees is a you know it's a reason not to use the wallet because we can all just go to the decks front end even if it looks like crap and connect with our wallet and just use it with no added fee right so you know it's it's a hurdle it's it's a it's something that's going to deter people um and to bring on you know the next wave of people to D5 we need to remove hurdles so if you think about what Robin Hood did for example you know they made it easy to trade they made it free to trade so the question became instead of asking why should I use Robinhood it's like why shouldn't I use Robinhood right um so you know metamask today has a 0.875 fee on top of swaps um which is kind of funny because they go and find you the best of five quotes in this screenshot sometimes it's even more and then they kind of ruin it by adding a fee on top so if you're a serious Trader you know adding fees on a wallet or more of a reason not to use the wallet than anything else so let's say you want to do zero fee so this is a screenshot from our website uh you know at this point we're not adding any fees onto swaps so the question is how do you monetize right um first bullet point subscriptions we just saw that from coinbase a couple days ago you know they're charging I think it was like 20 a month or something for people to use their exchange and not have any trading fees maybe that's good for advanced users who are going to do a lot of trading but again that's a big hurdle for people who don't really plan on doing that second bullet point here is tipping which is something that's worked for public.com and Dave so basically you can choose how much to tip with the transaction personally I don't you know if that's really compelling or not and the third bullet point in bold is of course payment for order flow also known as pfof which is how Robin Hood actually enabled their zero fee trading so they basically sell the order flow that the the Traders produce to a market maker um which is Citadel and they can either match the orders together or they can find liquidity outside in the marketplace for orders that uh you know don't have a match within the Robin Hood pool of of orders so in crypto we don't really have payment for order flow but we do have Mev so before I go on to the next slide like who feels like they kind of know what Mev is okay that's good all right um so yeah Mev I guess first let's just look at the bottom part with the you know I it's called the Mev supply chain I guess these days um so you know it starts with the user they have an intent to trade they create a transaction on a wallet um and then normally in the middle it goes to a Searcher uh before it goes to a builder and then the validator but what needs to happen now is there needs to be some kind of order flow auction right because we're talking about potentially paying for order flow or some kind of uh you know more sophisticated way uh to return value to the user and to the wallet so Stefan from from flashbots wrote this piece in March called the order flow auction design space and these are screenshots from his blog post and I'll just go ahead and read this quote so Stefan says order flow auctions promise to return users the value they create via their orders we believe that 2023 will be the year of order flow auctions and we expect significant competition happening between different order flow auction designs and their implementations in the next six months so he wrote that in March uh here we are a couple months later uh and there's a few different types of orderful auctions that might be relevant to a wallet like us so you've got RFQ options which is actually how Xerox API Works already and that's actually what we're using right now um and then there's like more exclusive batch order auctions like d flow or Cal Swap and maybe some of you have met some of the cow swap people here in Berlin as well so I mean I'm not going to go too deep into the different types of order flows and stuff like that but I'm just going to say like where are we kind of currently in the D5 Market well it's it's very early there's really no precedent for um you know payment for flow because the the swaps in wallets like metamask they still make up like a very minor percent of the volume that's traded today in in defy um so I don't know where I got this exactly it was probably some Dune dashboard but it says here less than five percent of uni swap's volume comes from metamask SWAP right so metamask is probably the the you know the biggest wallet out there generating the most orders in their in their swap feature but that's still less than five percent of uni swaps volume right um so really it's still early days you know um and also for aggregators so ultimate at the moment uses zero X API which is an aggregator but if you look at where Dex volume is coming from less than 20 of it is actually coming from aggregators most of it's coming directly from that dex's front end or directly from that Texas API um and another Point here hopefully I'm not confusing you now but within the 0x API they also have a request for quote systems so market makers can come and directly kind of uh you know say okay I'm willing to buy or sell this price and less than five percent of zero X's volume comes from those rfqs so really like we do have quite sophisticated tools out there for Traders but most Traders are still direct interacting directly with uni swap or directly with the Dex via front end or via their API so it's still early days for for Dex Trading so you know why should we care um you know why should you care what ultimate ends up doing for example well you know we're all kind of part of the ethereum community here I think we all share you know similar values we don't want ethereum to become centralized um and you know payment for order flow has the potential to do that uh the guys from flashbots have written to blog articles the first one is called order flow auctions and centralization a warning um so clearly there's uh some things here that we should be you know suspicious about or kind of worry about a little bit and I think um you know for a wallet to succeed it should profit with its users and not from its users right I think we can all agree on that so sometimes the flashbots people put things into like Utopia dystopia just to kind of illustrate what they're talking about so if you look at the graphic here uh you know starting at the Top If you have exclusive private order flow that leads to higher value blocks being built that means there's a consistently winning block Builder that's dominating and that block Builder because they're you know building so many blocks of high value it justifies the exclusivity agreement that they have right so it's basically like if you have a really uh you know an order flow uh deal that's going really well and block Builders are you know getting a lot of value then you know they're gonna it's gonna lead to centralization basically um and that's bad for ethereum right we don't want large Builders uh dominating due to exclusive order flow um so for example you know what would this look like well maybe metamask uh you know does start to bring in a lot more volume and they partner with a certain block Builder and then they start uh you know basically making up a lot of the the block building on ethereum so it's just easy to kind of build a worst case scenario looking at consensus because they have so many products already um you know I'm not trying to attack metamask or anything here but it's maybe just easiest for to us for us to imagine this worst case scenario so let's say that you know people use metamask their orders go to the inferior RPC and you know maybe there's a Searcher uh that consensus decides to start and a builder you know from consensus and then there's even staking products from consensus called codify so it'd be quite easy for consensus if they started their own Searcher and their own builder and their own validator to kind of start really capitalizing on that metamask order flow in a different way than they currently do so we probably don't want to have that happen so what's next well the auction models are going to be tested there's going to be more wallets launching competing for market share if you think about who will win the wallet Wars so basically like who's most likely to win well if a wallet succeeds in capturing a lot of value they can get better funding or you know they earn more money they can hire a bigger team they can do more marketing et cetera so maybe that's a positive flywheel but a wallet that decides to return a lot of you value to the user they might get more users over time and more volume because if you can get rebates for trading on a wallet you're probably more likely to use it right so for example one inch and uni swap have both announced mobile wallets in the past six months I think so that's one of them is a DEX aggregator one of them is a decks do we want them to win the wallet Wars who should win the wallet Wars uh should it be you know Texas or aggregators who basically build a front end to their own kind of liquidity Source should it be block Builders who you know a really good Mev there's some conflicts of interest to think about here but yeah the goal is not to centralize ethereum right but people like us you know we care about this stuff but the the average user probably just cares about convenience right um so this kind of question who will win the wallet Wars versus who should win the wallet Wars maybe those are two different answers so yeah that's uh the whole talk I'm really curious to see if there's any like reactions or opinions or or comments but uh in summary the entire eth economy will benefit from increased to tax market share so also stickers uh second bullet point is that D5 needs Fair markets and infrastructure because unsophisticated Traders need access to liquidity and protection from adversarial Mev um and yet while it needs a way wallets need a way to monetize order flow fairly costs money to build a great wallet High fees on swaps are not really acceptable and Order flow auctions should protect against Builder centralization so let's see what the future brings this is something that I'm researching uh but I don't feel like an expert I never somehow do there's always new stuff happening so I'm also curious to hear from you guys but uh yeah thanks for your attention [Applause] thanks a lot for that Max uh yeah question it says because I can share quite a bit information here because we're actually running a lot of the option and we look currently process seven percent of all ethereum connections you want to give me a name name for the what's the name of the the project or yeah yeah I mean I'm Martin from from gnosis um and if you it's called math blocker so if you want you can look it up on June or she went just go in tune and search for a meth blocker essentially in an RPC endpoint and currently users can connect to it directly but we have also wallets um starting yeah starting to to uh to kind of connect to it so um so those are kind of the transactions um we're having you can scroll down a bit um started just a few a month ago and we are already at um roughly five six percent of all ethereum transactions uh and how it works is yeah so we get the transactions from wallets or from users directly and we currently give them to 10 different Builders and we require the builders to not to never front run the transaction but they can back run and they if they back run they uh they have to give 90 back to the user or the wallet so the wallet can especially kind of the I mean if the user does it directly then it always goes to the user if the wallet submits it they can decide to get the background values themselves uh so yeah so yeah just adding that yeah let's chat afterwards thanks a lot for that Martin yeah any other questions there you go [Music] [Applause] and share the meds that returns to utilize that would mean that the student focus on operating on Main net can you educate me if um basically kind of strategy for for two solutions because I know I've always been wondering about MVP on any tools personally they have their own sequences and so on so what did it make said that what would be sort of the case between being only a two or several like right and uh offering or you paying actually less fees for the swaps and customers which costs responsibly less against the case of operating only in Mainland expecting you know like position redistribute to you guys like what would make more sense or I mean actually you would also launch Layer Two that would mean that the mbb you wouldn't get as much uh sort of any degree payment back so that means you can also sort of share with the users have you thought about this kind of comparison just in case and uh yeah I mean I'm not an expert on on Layer Two AV but yeah it's kind of this like conflict non-conflict of interest but it's like a yin and yang right like you don't want your users to be paying high fees and like having inefficient markets happen inefficient orders happening but you know you kind of do financially because that's how you create the Mev right um so I don't know if layer twos are going to be any you know more or less significant in terms of any Mev than layer one um you know we're already live on optimism and arbitrum because we definitely wanted a sport like low fee trading environments because most retail users like if you think about you know the intent to trade like if you want to get long I don't know you know Dogecoin or something you don't really care what chain it's on right like it's actually not even a native chain so or ethnative tokens so it's like the intent to trade it's kind of chain agnostic um and then from there you know you just want to have like the least amount of Market impact the least amount of slippage and pay the least amount of amount of fees right um so yeah there's just so many different things to think about that you know these are the things that you should probably make it easy for the user to like not have to care about right like where where's the best source of liquidity you know where am I going to pay at least amount of fees et cetera so yeah I don't really have a good answer um I guess we'll see how like layer two's pan out in the long term I don't think there's more trading happening there than l1's at least on a volume basis but it does seem like it's a better place for for retail users for sure great any last questions my understanding me I mean the inspection gets more difficult and not even possible is that right and in that case what is the moderative finance a wallet at that point do you mean when proposer Builder separation becomes like enshrined in the ethereum protocol instead of like map boost yeah I don't know that's another good question um I mean math boost has like completely changed the Dynamics like inside of a year right so it's just been crazy to see like you know maybe you kind of go from like a dark Forest to kind of a somewhat reasonably Fair place but still not completely you know safe for users I guess so when PBS gets enshrined in the ethereum protocol like I'm sure things will look completely different and we'll just have to like look at look around and see how things look at that point in time you know great uh sorry I think we need to cut it off actually is ready to change again it's like one year you can get on that strategy or like I have no idea man I mean we just have to like keep our eyes open and and keep up to date with what's going on you know I'm happy to talk about a little bit after too thanks a lot Max for giving this talk appreciate it [Applause]