Throughout crypto’s history, there has been ongoing discourse around where value will ultimately accrue within the blockchain stack. While historically, the core contention has been between protocols and applications, there’s a third layer within the stack that everyone is ignoring — wallets.

The “Fat Wallet” Thesis asserts that, as protocols and applications increasingly “thin-out”, more room is being freed up for whoever owns the two most valuable resources — distribution and order-flow. Moreover, as the ultimate front-end, I believe no one is better positioned to monetize this value than wallets.

This piece aims to accomplish three things. First, we will outline three structural trends that will continue to commoditize the protocol and application layers respectively. Secondly, we will explore the various avenues for wallets to monetize their proximity to the end-user including Payment-For-Order-Flow (PFOF) and selling apps Distribution as a Service (DaaS). And lastly, we will entertain why two alternative front-ends — Jupiter and Infinex — may ultimately beat wallets in the race to owning the end user.

*See full version of “The Fat Wallet Thesis” on Delphi’s Research Portal.

Towards Thinner Protocols and Applications

The question of where value will ultimately accrue within the blockchain stack can be reduced to a simple framework. For each respective layer of the crypto stack, ask yourself the following question:

If a product within this layer increases its take rate, will users leave for a cheaper alternative?

In other words, if Arbitrum increased its take rate, will users leave for another protocol like Base and/or vice versa? Similarly at the application layer, if dYdX increased its take rate, will users leave for the nth undifferentiated perps DEX.

Downstream of this logic, we’re able to identify where switching costs are highest and thus who has asymmetric pricing power. Similarly, we can use this framework to identify where switching costs are lowest, and therefore which layer of the stack will become increasingly commoditized with time.

While historically, protocols have had disproportionate pricing power, I believe this is changing. There are three structural trends today increasingly “thinning-out” the protocol layer:

1. Multi-chain apps and chain-abstraction: As multi-chain becomes table stakes for apps to remain competitive, the user experience across blockchains will become increasingly indistinguishable, and in turn, switching costs at the protocol layer will only get lower. Moreover, by abstracting away bridging, chain-abstraction will also further compress switching costs. As a result, apps will no longer remain beholden to the network effects of one chain, but instead, chains will become increasingly beholden to the distribution of front-ends.
2. Maturation of the MEV Supply Chain: While MEV will never be entirely eliminated, there are numerous initiatives, both at the application layer and closer to the metal, that will increasingly redistribute the amount of MEV extracted from end-users. Importantly, as the MEV supply chain continues to mature, value will increasingly climb up the MEV supply chain and asymmetrically accrue to whoever has access to the most exclusive user order-flow. This implies that protocols will lose bargaining power and thus get “thinner”, while front-ends and wallets will gain leverage and thus get “fatter”.
3. Towards an agentic paradigm: In a world where transactions are primarily executed by agents and “solvers” and not humans, attracting this agentic flow will become existential for blockchains to survive. Importantly, given agents and “solvers” are programmed to principally optimize for best execution, protocols will no longer compete on intangibles such as “vibes” and “alignment”. Instead, transaction fees and liquidity will be all that matters — this should only further “thin-out” the protocol layer as protocols are forced to compress fees and incentivize liquidity to remain competitive.

Therefore, revisiting our original question — If a protocol increases its take rate, will users leave for a cheaper alternative? — while it may not be obvious today, I believe the answer will be increasingly “yes” as switching costs continue to compress.

Data Source: Dune Analytics@0xKofi""> @0xKofi

Intuitively, one would assume that if protocols are getting “thinner”, applications must in turn get “fatter”. While some of this value will certainly get re-captured by applications, the “Fat App” thesis in isolation is reductive. Value will accrue differently across different application verticals. Therefore, the question shouldn’t be —“will apps get fatter?” — but rather — “which apps specifically?”

As I outlined in A New Framework For Identifying Moats In Crypto Markets, the structural differences unique to crypto apps — forkability, composability, and token based acquisition — have the net effect of lowering both barriers to entry as well as the cost of acquisition (CAC) for emerging competitors. Consequently, irrespective of the handful of apps that possess some properties that cannot simply be forked nor subsidized, it extremely difficult to cultivate a moat and sustain market share as a crypto application.

Once again, coming back to our original framework — If an application increases its take rate, will users leave for a cheaper alternative? — I would argue that the answer is “yes” for 99% of apps. Therefore, I expect most applications will struggle to capture value as turning on a fee switch is bound to cause user to switch to the next undifferentiated app offering more lucrative incentives.

Lastly, I would argue that the rise of AI agents and solvers will have a similar effect on applications as they will on protocols. Given agents and “solvers” will principally optimize for execution quality, I expect apps will also be forced into fierce competition over attracting agentic flow. While liquidity network effects should render a winner-take-all dynamic over the long run, in the near and medium-term, I expect apps will increasingly experience a race to the bottom.

This begs the question, if both protocols and apps continue to “thin-out”, where will the majority of this value get re-aggregated?

The “Fat Wallet” Thesis

The short answer is whoever owns the end user. While this can theoretically be any front-end including applications, the “Fat Wallet” Thesis asserts that no one is closer in proximity to the users than wallets. These are five sub-theses that support this logic:

• Wallets Dominate The Crypto Mobile UX: A good litmus text for understanding who owns the end-user in the mobile context is to ask the following: which Web2 app do users ultimately interface with? While most users “interact” with Uniswap’s front-end to trade, they nonetheless access this front-end through their wallet application. This implies that if mobile increasingly dominates the crypto UX, wallets may only continue to strengthen their relationship with the end-user as the canonical application gateway.

• Wallets Meet Users Where They’re At: Crypto apps are financial by nature. Unlike Web2, almost every on-chain transaction is some form of a financial transaction. Consequently, the account layer is deeply fundamental to crypto users. Additionally, there are a handful of features uniquely synergetic with the wallet layer: payments, native yield on idle user deposits, automated portfolio management, and other consumer use cases such as crypto debit cards. Fuse seems to be leading the way here with features such as Fuse Earn and Fuse Pay which allows users to spend their wallet balance in the real world with a Visa debit card.
• Wallets Are Subject to Ironically High Switching Costs: While switching wallets is theoretically as simple as copy-pasting ones seed phrase, this is nonetheless a mental sticking point for most normies. Given users implicitly place a high degree of trust in wallet providers, I would argue that brand and “lindyness” are especially strong sources of defensibility at the wallet layer. Once again, revisiting our original question — If this respective product in the stack increases its take rate, will users leave for a cheaper alternative? — the answer seems to be uniquely “no” at the wallet layer; MetaMask’s 0.875% take rate on in-wallet swaps reflects this logic.

• Chain-Abstraction: While chain-abstraction is a technically thorny issue, one of the more compelling solutions is addressing chain-abstraction at the wallet layer. The idea that I can access any application across any chain from the comfort of a single account balance seems especially intuitive. Projects such as@OneBalance_io""> @OneBalance_io,@BrahmaFi""> @BrahmaFi,@Polaris_App""> @Polaris_App,@ParticleNtwrk""> @ParticleNtwrk,@Ctrl_Wallet""> @Ctrl_Wallet, and@Coinbase""> @Coinbase‘s smart wallet are all building toward this vision. Going forward, I expect more teams will meet users where they’re at by addressing chain-abstraction at the wallet layer.
• Unique synergies with AI: While I expect AI agents will increasingly commoditize the rest of the blockchain stack, users will nonetheless need to permission agents to ultimately execute transactions on their behalf. This would imply the wallet layer is best positioned to become the canonical front-end for AI agents. Other low hanging fruit for integrating AI at the account layer could also include automated staking, yield farming strategies, as well as curated user experiences augmented by LLMs.

Now that we have laid out “why” wallets will increasingly own the end-user relationship, let’s entertain “how” they will ultimately monetize this relationship.

Opportunities For Monetization

The first opportunity for wallets to monetize is by owning user order-flow. As I alluded to earlier, although the MEV supply-chain will continue to evolve, one thing will increasingly hold true — value disproportionately accrues to whoever has the most exclusive access to order-flow.

Today, the front-ends that own the majority of order-flow by volume are solver models and DEXs. However, this chart in isolation lacks nuance. It is important to understand that not all order-flow is created equal. There are two kinds of order-flow: (1) fee sensitive flow and (2) fee insensitive flow.

Generally, solver models and aggregators disproportionately dominate “fee sensitive” flow. Given these users are trading in 100k+ size, execution matters to them. These traders won’t accept even 10 bps in excess fees. Accordingly, “fee sensitive” traders are the least valuable customer segment — despite owning the majority of the front-end market by volume, these front-ends generate far less value per $1 traded.

Conversely, wallet swaps and TG bots own the more valuable user base — “fee insensitive” traders. Instead of paying for execution, these traders are paying for convenience. Therefore, paying 50 bps on a trade is irrelevant to these users, especially when they’re expecting a binary outcome of either 100x or zero. Consequently, TG bots and wallet swaps produce far more revenue per $1 of volume swapped.

Going forward, if wallets are able to capitalize on the aforementioned trends and continue to own the end-user relationship, I expect in-wallet swaps will continue to chip away at the market share of other front-ends. More importantly, even if they are able to increase their market share by just 5%, this will have an outsized impact as wallet swaps generate nearly 100x the amount of revenue per $100 traded as DEX front-ends.

This brings us to the second opportunity for wallets to monetize their proximity to the end user — Distribution as a Service (DaaS).

Downstream of serving as the canonical front-end through which users interface on-chain, apps are ultimately at the whim of the distribution of wallet providers, especially within the mobile context. Accordingly, in a similar way that Apple has monetized IOS, wallets seem well positioned to reach exclusive deals with apps in return for providing distribution. For example, wallet providers could build out their own app-store and charge apps with some revenue sharing agreement. MetaMask seems to already be exploring an adjacent path with “snaps”.

In a similar vein, wallet providers could also steer users towards specific apps in return for some shared economics. The advantage this approach has over traditional advertising is that users can seamlessly make purchases and interface with apps all from the comfort of their wallet. Coinbase already seems to be exploring a similar path with “featured” apps and in-wallet “quests”.

Wallets could also help bootstrap growth for emerging chains by sponsoring user transactions in return for some economics. Perhaps Bearachain for example simply wants to get users on their chain. They could pay Metamask to sponsor both bridging costs and gas fees on Bearachain. Given wallets ultimately own the end-user, I expect they could also negotiated some advantageous terms.

As more users onboard via wallets as the primary on-chain gateway, we could see a shift in demand from “Block Space” to “Wallet Space” as attention becomes the most valuable resource in the cryptoeconomy.

Formidable Challengers to Fat Wallets

Lastly, while wallets have a clear head-start in the race to owning the end-user, I remain excited about the prospects of two alternative front-ends:

1. Jupiter: By using their DEX aggregator as an initial wedge,@JupiterExchange""> @JupiterExchange has been able to cultivate one of the strongest relationship with the end user. This has given them arguably the best starting point in crypto to build out other adjacent products including their perps DEX, launchpad, native LST, and more recently their RFQ/Solver product. I remain especially excited about the release of Jupiter’s mobile app as it could reposition them ahead of wallets and closest to the end-user in the mobile context.
2. Infinex: By serving as a front-end aggregator of apps across both EVM chains and Solana,@Infinex_App""> @Infinex_App aims to offer a CEX-like experience while preserving principles such as non-custody, and permissionlessness. Infinex will initially offer spot trading and staking with plans to integrate perps, options, lending, margin trading, yield farming, as well as a fiat on-ramping feature. By abstracting the account layer and using Web2-familiar features such as passkeys, I believe Infinex may also have the potential to replace wallets as the canonical crypto front-end.

While it is unclear to me today who will ultimately win the race to owning the end-user, what is becoming increasingly obvious is that — (1) user attention and (2) exclusive order-flow — will continue to become the most scarce and thus monetizable resources in the cryptoeconomy. Whether it is wallets or some alternative front-end such an Infinex or Jupiter, I expect that the most valuable projects to come out of crypto will be whoever owns these two resources.

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