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Wallet wars: who will win, and should they?

Posted on May 08, 2023 by Max Sherwood
Wallet wars: who will win, and should they?

The following is an Op-ed by Max Sherwood, who is a Growth and Research manager at Ultimate. His views are his own, and do not express the opinions of Ultimate or its parent company Unstoppable Finance. 

We’re still waiting on DeFi’s “Robinhood moment” 
It’s 2023 - the catastrophe of FTX showed that centralized exchanges shouldn’t be trusted, but we’re still waiting for trading to take off on DeFi’s decentralized exchanges (dexes). Unlike centralized exchanges, who can tailor their frontends and user experience, in DeFi it’s up to protocols and wallets to tackle the UX challenge. 

Today, many teams are building “next generation” wallets, eager to dethrone MetaMask and enable the next generation of crypto users to live a self-custody life, but we’re still waiting on DeFi’s “Robinhood moment”. 

Wallets cost money to build, and need to be monetized
Great wallets are built by teams of talented product managers, designers, and developers. That work takes time, and money. Whether a wallet is being built by a new startup or an established company, it will have to bring in revenue to evolve and grow. 

So how do you monetize a wallet? In 2021, MetaMask brought in over $100m of revenue via their built-in swap feature, which adds a 0.875% fee to every order. Is this the way forward for the next generation of wallets? Unlikely. After all, why should traders use in-wallet swapping, when they can directly connect to dexes or aggregators themselves?

Robinhood’s zero-fee trading removed hurdles for traders, DeFi can do the same.
Wallets and DeFi will win by removing EVERY hurdle from DeFi trading, including fees! Look at Robinhood, which changed the TradFi brokerage landscape forever. They did it by removing hurdles for people to trade, via not only a great mobile UX, but also free trading. Instead of asking “why trade on Robinhood”, the question became “why not?”

Robinhood took the traditional retail brokerage market by storm, and changed the norm with zero-fee trading.

In an era when brokerages charged $5 or more per trade, Robinhood was a breath of fresh air. But in crypto, we’re still living in the expensive past, due to high wallet fees and even higher gas costs.

Can wallets go zero-fee and still monetize?
For dex trading to have its “Robinhood moment”, it will have to become frictionless, and free. Robinhood accomplished zero-fee trading by partnering with market makers and engaging in payment for order flow (PFOF). Now, it’s time for DeFi wallets to explore the topic, with Stephane Gosselin & Ankit Chiplunkar writing in their March 2023 article The Orderflow Auction Design Space that "Orderflow auctions (OFA) promise to return users the value they create via their orders. We believe [2023] will be the year of OFAs and expect significant competition happening between different OFA designs and their implementations in the next 6 months."

Independent wallets like Ultimate will have to choose an auction mechanism or a market maker that is fair to the user but still generates revenue for the wallet. But what about the wallets being developed by existing protocols, like Uniswap wallet or 1inch wallet?

Wallets from dex protocols will limit liquidity to their own marketplaces
Dex traders require broad market liquidity, especially traders transacting in large amounts of niche tokens. A wallet which sources liquidity from a single dex like Uniswap, or even a single dex aggregator like 1inch, is unlikely to present the trader with the best price every time. To the credit of MetaMask, their wallet found the best price from a selection of multiple dex aggregators and market makers, before ruining it by adding a 0.875% fee.

A typical order on Metamask's built-in swap feature will return the best price from several dex aggregator and market makers.

And Uniswap already dominates the dex trading market: over 85% of dex volume trades on Unsiwap, and less than 20% of dex trading volume goes through aggregators. It’s trivial for Uniswap to convert some of their customer-base of 100k weekly swap users and 1M Twitter followers to their new wallet product. According to a tweet by Uniswap’s founder Hayden Adams, the wallet already gained 20,000 daily active users in the first two weeks following the launch. 

Metamask wallet quickly gained over 20,000 users

Wallets tethered to protocols causes regulatory confusion
When the same teams build wallets and underlying swap protocols, it leads regulators and industry outsiders to assume that they are one and the same, further confusing the already touchy topic of DeFi regulation. For example, when marketing their upcoming wallet, Uniswap ran into difficulties with the German financial regulator BaFin, who took issue with Uniswap advertising “financial services” in Germany without the proper licenses. Uniswap also struggled to appease Apple, who was unhappy with a lack of revenue-sharing for “in app purchasable content.”  

Only fair order flow auctions can keep Ethereum decentralized
Wallets that send their order flow to a single destination centralize the blockchains, to the extent that they are successful. What happens if/when a wallet succeeds in attracting a wave of new users, and begins to originate the majority of dex order flow on Ethereum via a single marketplace or market maker? That choice of marketplace, and the MEV mechanisms at play, will begin to matter quite a lot. As more wallets move toward a zero-fee model, fair and efficient order flow auctions will be critical to ensuring the ongoing decentralization of blockchains like Ethereum.

The best user experience will win, but it’s the fairest one that should win. 
As a community, let’s consider the fairest mechanisms for dex order origination and wallet monetization. We should then express our preference through our choice of wallet. But, as we know from Robinhood’s success, sometimes it’s the most convenient solution instead of the most fair one that ends up having the largest impact on a marketplace. 

Max Sherwood is a Growth and Research manager at Ultimate. His views are his own, and do not express the opinions of Ultimate or its parent company Unstoppable Finance.

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