Foreword

Source: Flashbots

When I share my investment logic for Infra with others, I often use this picture - it's interesting to look at different Infra projects from the perspective of the MEV supply chain (or transaction lifecycle).

Thanks to the tireless efforts of many researchers, we have transitioned from the MEV dystopia of a few years ago to a relatively clear supply chain, although there are still many challenges to be addressed.

In the context of this supply chain, order flow plays a critical role. If we compare the supply chain to a riverbed, then the order flow is the river water flowing on top of it. In this article, we will elaborate on some key points of the order flow.

Orderflow…wat do?

Source: IOSG Ventures

Quintus defines "orders" as anything that can change the blockchain state in Ethereum. To put it simply, we can also understand a transaction as an order. In the above diagram, we attempt to depict the journey of orders in the supply chain. However, the actual situation may be like this...

Source: Frontier

Of course, this article will not attempt to break down all the details. The MEV supply chain has become very large and complex, and it is almost impossible to explain all the details in a short period of time. Therefore, in this article, we mainly focus on two things: private order flow and order flow auction (OFA).

Private Orderflow Dominance

Public mempools will dry up… - Hasu

When it comes to private order flow, we usually see two terms - Private Orderflow and Exclusive Orderflow. These two terms have different meanings. For example, MEVBlocker bypasses the Public Mempool and sends the order flow directly to Top Builders. At this point, the order flow is private, but not exclusive to any one builder. In addition, OFA transactions are often not "private" because people can subscribe to OFA's order flow (although there may be permission controls) and observe the transactions. This is usually done to maximize competition among different roles in auctions.

The community has already had many discussions about private order flow, as well as how private order flow becomes a driving factor for centralization.

Source: IOSG Ventures

In the entire MEV supply chain, the Builder market is highly competitive. As the most basic production material in block construction, order flow naturally becomes a battleground. In this situation, Builders usually offer various services to attract order flow from upstream.

·Transaction pre-confirmation: For example, Vitalik mentioned in his SBC 2022 speech that Builders can publicly declare that if a user sends a transaction with a Priority Fee greater than 5, the Builder will immediately send an enforceable message to promise to include the transaction; if the Priority Fee is greater than 8, the user can even get a Post-state Root. This is very effective in some use cases where block space needs to be contested.

·Front-running protection, which is also the main selling point of most OFAs.

·Revert protection. If a Bundle fails or Reverts, the Builder will not include it (meaning the user does not need to pay Gas for the transaction). MEVBlocker's RPC endpoint provides this protection by sending the user's general transaction as a Bundle. Blocknative's data shows that only about 4.2% of private transactions Revert on-chain, while about 13.8% of public transactions Revert. This highlights the benefits of Revert protection.

Source: Danning Sui (@sui414)

In the above figure, we can easily see the relationship between Landed Blocks and private order flow.

Source: Blocknative

Recently, many studies have shown that the problem of private order flow is intensifying. According to Blocknative's data, the number of private transactions has increased from 5% before the merger to about 15% now, which means that 15% of current Ethereum transactions are sent through private channels.

Basically, private order flow can be divided into Searcher Flow and User Flow.

Searcher Flow

·Atomic Flow

Source: Titan Builder

Atomic Flow refers to DEX-DEX arbitrage, sandwich trading, and settlement transactions.

A while ago, Titan complained on Twitter that despite having 15% market share and over 50,000 built blocks within 7 days, they still did not receive about 50% of the orders from Searchers.

Titan's research shows that the market share of Builders is positively correlated with the Searchers connected to them, and this correlation is often exponential.

·Non-atomic Flow

Non-atomic Flow refers to the arbitrage between CEX and DEX.

Source: searcherbuilder.pics

With Atomic MEV, we can see that all Searchers submit their Bundles evenly to the top three Builders. However, in Non-atomic MEV, Titan, as one of the top three Builders, only has about 8.8% of the order flow share. We can see a significant difference in the above figure. This demonstrates the exclusive access of Searcher-builders from vertical integration to order flow.

Overall, Inclusion Guarantee is the most important consideration for Searchers when deciding who to send the Bundle to. This depends on whether they can realize the MEV opportunity they discovered on-chain.

·To mitigate EOF…

Exclusive orderflow has a solution. - Stephane

User Flow

Current State Summary of Orderflow Types

Orderflow Auction (OFA)

·Overview

The article emphasizes that sending private transactions through "eth_sendBundle" and "eth_sendRawTransaction" is different. Bundles without MEV are not competitive compared to other bundles, and this will cause builders to perform additional and unnecessary simulations, which may lead to worse execution speeds.

Finally, Blair mentioned the Observability Gap in OFA in his tweet. That is, as a user or wallet, how can you verify that both the auctioneer and builder are honest? In this case study, they found that 19 different transactions from users could have received rebates, but were claimed by the builder's Backrun robot. This reveals the Observability Gap that currently exists in OFA.

·Takeaways

·Users

This indicates that many users may still lack sufficient understanding of on-chain matters. Therefore, it is believed that there is considerable friction in allowing users to switch from the wallet's default RPC settings to OFA on their own initiative. There is still much work to be done in user education.

·Wallets

In order to adopt OFA, the wallet may need to make decisions on behalf of the user. Based on our communication with the wallet, we have found that:

- Most wallets see OFA as a vitamin rather than a painkiller.

- Some wallets believe that OFA is still in its early stages and lacks transparency. This lack of transparency is one of the key factors that affects their decision to integrate OFA, as they are unable to assess the associated risks behind it.

- Although some wallets recognize this as a Monetization opportunity, integrating with OFA is still not their top priority. In fact, since its launch in April this year, the total rebate of MEV Blocker is only 783 ETH, which is not much for the overall wallet. For these wallets, transaction inclusion speed and success rate are more important than potential rebates.

-Overall, wallets tend to be optimistic but cautious - currently they do not have a strong motivation to proactively adopt OFA.

According to Chainalysis' The 2023 Geography of Cryptocurrency Report, countries in Central and South Asia are leading the way in grassroots adoption of cryptocurrencies compared to most other countries. Based on our observations in the Asia-Pacific market, wallet adoption also tends to exhibit geographic trends. For example, mobile wallets in the Asia-Pacific region typically offer timely support for multi-chain and consumer applications, making them particularly suitable for the Southeast Asian market.

Therefore, in order to expand the business of the OFA platform, the focus should be on long-tail wallets that are more likely to adopt OFA than other wallets, while keeping key infrastructure like Metamask neutral. This will be the main area of concern for the OFA platform as competition in the wallet space becomes increasingly fierce in multiple existing OFA markets.

OFA has various design trade-offs, and the main challenge is to convince the upstream of the supply chain to adopt this solution. Public education is certainly a slow and long-term process. Looking ahead, we believe that OFA will gradually be adopted, possibly accounting for more than 30% of all transactions on Ethereum. Wallets play a crucial role in facilitating this transition. In this process, it is important to be cautious about centralized driving forces.

Closing Thoughts

Source: Max Resnick (@MaxResnick1)

During community discussions, the centralization risks brought by large mining pools/verification pools have always been a concern. However, upstream in the supply chain, the centralization risks related to order flow are even more hidden. Large infrastructure entities, such as Metamask and Infura, need to be aware of the bias that may exist in their decision-making. Small-scale infrastructure can explore more cutting-edge solutions and promote the expansion of the ecosystem.

In the future, we expect that competition among stakeholders for order flow will become more intense. Players upstream in the order flow will firmly grasp and gradually strengthen their pricing power. The emergence of OFA and TG Bot indicates that the entire infrastructure is constantly exploring the upstream of the supply chain. In this process, we have also found that developers are increasingly focusing on user-oriented and MEV-aware design.

In the order flow, many challenges still need to be solved. In the MEV Researchathon hosted by Flashbots, researchers proposed to jointly create orderflow.pics. Recently, Toni released mempool.pics, a website that displays private order flow and participant statistics. Winnsterx also launched the Transparency Dashboard searcherbuilder.pics. More and more researchers and developers are paying attention to the development and future of order flow, and promoting the competitiveness, fairness, and anti-censorship of the supply chain. We will also actively pay attention.

Stay tuned！