Orion Protocol and the Broker Black Hole
The true juggernauts of crypto usually begin to gain followers after a *eureka* moment, that realization that the project has an edge, feature, or function that will translate to token value in an undeniable fashion.
Bitcoin had it with programmable scarcity, Ethereum with Smart Contracts, Chainlink with Oracles…
And now, Orion Protocol, with something that I am going to call “the broker black hole”…
You may be familiar with the basic premise of Orion Protocol’s main revenue proposition (there are over 16 different ways the ORN token sucks up value from the protocol, but I only want to focus on one- the terminal). Essentially, Orion uses brokerage software and partner brokers on exchanges, liquidity pools, private market makers, and dex’s in order to aggregate liquidity and build fat order books that result in best prices for the end user. They also charge a .2% fee on every trade (plus gas fee to execute, which is chain dependent) which is either paid in ORN (for a discount) or in the token traded (which the fee is then used to market buy ORN).
.2% is a better deal than the default .3% of Uniswap, but how does it compare to Binance? Not very well for the end user. .1% is the usual taker fee, and this decreases with volume, to the point where high volume traders are looking at .02% fees. While Orion protocol claims that this fee gap will be more than made up for due to exchange competition narrowing price spreads, it’s still a high fee to trade for anyone who would be able to log into Binance and procure their desired coins.
HOWEVER — — the genius of Orion Protocol lies in the way in which orders are fulfilled. When an end user places a limit order on the exchange, the Orion broker algorithm goes out on chain and pings every liquidity source connected to the terminal (those exchanges/dexs/pmms/LPS) and combines coin spread, exchange, and gas fees to find lowest price total to fulfill the end user’s order, favoring brokers with a larger stake of ORN. It will even split the order across exchanges if need be to fulfill this. At the end of the day, the broker walks home with his .2% ORN fee, pays Binance a fraction of that to execute, and is in profit. The end user gets a coin at best price, pays a tad higher fee than Uniswap, and is comfortable that the funds never left his wallet on the Orion terminal.
But wait, you say… the end user is still paying a .2% fee? How is this anything like ORN paying you to trade? Well, my friends, this answer has three parts:
1- Payment for order flow brokers and
2- Orion’s staking mechanism
3- multiple revenue streams
First of all, many market makers in the traditional finance world employ highly sophisticated ai models and high frequency trading algorithms to execute hundred of trades each second. Because of their volume, they are able to generate enough profit on their market making spreads that they could care less about those pesky exchange fees… in fact they will literally PAY exchanges in order for the right to access the end user… a great example of this is Robinhood. One market maker is Citadel Securities, infamous for the recent GameStop debacle, that literally pays Robinhood for access to it’s end users. It can trade with such frequency and precision that it doesn’t mind reimbursing the fee to Robinhood that would normally be passed on to the end user in order to access the users for trade execution to trade against (they may or may not also play funny games with the spreads… SEC investigation pending. Rest assured this won’t be possible with Orion or other on-chain provides as liquidity is settled on-chain- yay smart contracts!). This is one reason why Robinhood pays 0 execution fees.
What bearing does this have on Orion? Plenty. Orion had over 100,000 end users clamoring to access their terminal upon production release last week. Doubtlessly, the value proposition resonates with end user traders sick of untenable spreads. Though this functionality isn’t going to be live until the end of Q2, brokers will soon be able to compete with one another on the Orion platform, including setting their own “fee rate” or fee reimbursement rate.
When HFT brokers hook up their liquidity models to the Orion execution engine, you have a rare occurrence in which literally all parties win (except for brokers who have subpar tech, no tech, poor strategies, etc.)… because, as mentioned, these HFT brokers literally do so much volume with their own engines that they will reimburse traders who execute through them in order to secure volume. This depends on how exactly the brokers have their automated strategies deployed — some exchanges have API limitations that may “crowd out” sophisticated models from sharing room with Orion’s software (this is unclear- I’m unaware of the specifics of the Orion Software at this time, since it’s proprietary, but this may be able to be multiplexed) but exchanges who are brokers themselves, private market makers, OTC desks, and darkpools that have their own interfaces won’t have this problem, nor will anyone who develops directly on Orion (this is coming).
So what happens next?
1- HFT brokers reimburse 100% of the .2% fee to their traders/the protocol in order to deploy their market making strategies to ORN’s universal terminal endpoint. This is payment for order flow. They’ll also hold the minimum required ORN (10k USD, nothing for these folks… and 2500 of another pair) this far less than the premium these types of companies at in tradfi. Because they reimburse their whole fee, this will incentivize MORE end users to stake their ORN with these brokers, CONTINUOUSLY INCREASING the algorithmic likelihood of the broker being used to execute future trades.
2- brokers still execute for best price possible, getting alpha for their volume and HFT algorithm
3- end user receives best price, with full fee reimbursement by the broker back to the end user/protocol. Not all can go immediately back to the end user, because by default, 20% of the .2% fee is returned to the Orion Staking pool.
This brings us to our next point- Orion staking. Orion token holders can stake their ORN to any particular broker or market maker in order to share in a portion of this individuals’ fees. Now, this means that, if traders are staking their tokens to brokers that employ HFT strategies, they will literally be recouping over 100% of their fees- not just the .16% that can be immediately reimbursed directly by the broker, but also the .04 percent that is returned to stakers of said executing broker.
Why will orders be executed by HFT brokers? They have the spread cornered. They’ll be able to offer quotes at ridiculously fast speeds, on chain, and on top of this, their lack of a fee means that they’ll be in an advantageous position to dominate any brokers that do charge fees by sucking up votes via NBS.
If you pick the right broker, stake with them, you’ll recoup 100% or more of your trading fee, since this HFT broker will be able to execute not just your trades, but also anyone who is staking on other, less efficient brokers. But this isn’t quite getting paid for trading…
So that brings us to part 3… multiple revenue streams. There are a number of Orion products (everything from selling advertising space on the terminal UI, from fees collected by daps built on Orion, like Bot Ocean) that generate revenue in ORN that is then redistributed to stakers. When you factor this in, it’s quite significant, as B2B customers purchase via ORN for licensing which is then burned from the open market. Leave out selecting the right broker… if you utilize the ORN staking calculator, you’ll see that even JUST with B2B solutions, stakers are going to be getting lots of ORN… it will be scarce, simply from those use cases.
So, what’s the outlook?
Long term: Eventually, you’ll have the best HFTs in the game, competing for volume against each other on the ORN terminal. Folks who stake with 0 fee brokers will be earning money for staking ORN, and businesses, Dapps, and bots will be clamoring over one another to access these huge liquidity pools on platform, and the combination of cost savings and B2B fees and license burns means anyone staking ORN is gonna have a great time….
Read this article: https://medium.com/dragonfly-research/unbundling-uniswap-the-future-of-on-chain-market-making-1c7d6948d570
The end state they describe here is quite literally ORN… the aggregator that allows for pop-up liquidity desks at any endpoint for highly successful HFT and volume firms in a decentralized and global fashion for maximum market penetration. ORN is going to be a decentralized juggernaut that locks into all liquidity pools in existence and makes a bigger pie for the best HFTs and the traders that stake in ORN. While there are other firms/projects working similar value-based projects NO ONE is doing it in a way that is both 100% decentralized and allows for such a robust ecosystem to spring up around this model, using a native token to allow brokers to literally compete for end-user’s order flow and capture value in this fashion.
Near term: a few HFT brokers will likely dominate the terminal, at least at staking launch, though it may take sometime for this to occur (HFT brokers go where volume is — if there isn’t much volume from the B2B cases/retail at first, it may heat up slowly… but it will eventually occur). When a broker offers you an 100% rebate to stake with them (since their revenue is from order flow) most retail folks will take that opportunity, and it will likely rise to the top of ORN’s execution queue. This means, that in the near term, folks who stake on these particular brokers will likely reap disproportionate rewards, at least until there is ample competition. Regardless, some discerning individuals will quite literally be paid to trade on the ORN terminal, even at this stage, by staking a bit of ORN with an effective HFT broker. Eventually, 0 fees won’t be enough… you’ll see brokers offering airdrops, incentives, etc. just to get folks to trade.
Right now, staking, and therefore broker competition, isn’t live yet. But the infrastructure is all in place. What you’ll have soon is an aggregator that can dominate in a fashion never seen before- creating value out of the “spaces in-between” current markets and passing this onto the end user- and capturing this in it’s native token. It’s a completely new model.
Let’s recap each stakeholder, the benefits brought to each, and the net result:
1- good market maker HFTs add huge levels of orders through the ORN aggregator front end. They create an “order preference black hole” by attracting greater and greater volumes of ORN to be staked with them.
2- ORN benefits from token velocity- it’s used, burned, and redistributed, and staked, in ever smaller fractional amounts as NBS stakers delegate to the successful brokers. The token sucks up incredible value.
3- end users buy for 0 fees, at best market price… even network fees to get on/ off platform dominate centralized portals as cost effective chains like BNB and EGLD are used… if they stake they are literally getting PAID for using the terminal.
4- b2b solutions, bots, etc. gain access to huge number of traders willing to buy solutions to secure alpha at best cost… this is the Orion marketplace.
In short, Orion has laid the foundation for the marketplace of marketplaces. Think a Bloomberg terminal on god-mode (and why not incorporate 24:7 derivatives and the like through other projects like INJ? NFTs with Bondly? Yep… partners). Nothing will be able to compete for the attention of the end user. ORN will become incredibly scarce as it is staked, while the requirement for ORN to pay in fees means that there will be continuous market buy pressure to keep pushing the price up, though in smaller and smaller increments of ORN as value swells.
ORN is going to be hard to beat on fundamentals, let alone speculative value once people understand the things I’ve written above.
TO MAKE THIS HAPPEN, the Orion team needs to make the front end worthy of what is coming behind the scenes. This means providing a great UX for end-users, adding pairs, and attracting the kind of volume that will, in turn, attract the goliath catalysts that will launch the ORN token out of the solar system. With decentralized, KYC-free access at hand, the day is there… it’s time for team Orion to seize it.
- DISCLAIMER NOTE- I was not paid for this article by anyone from Orion Protocol or otherwise. This is not investment advice.*
- EDIT 4/16: It was brought to my attention that in two places in this article, I unintentionally neglected decimal points. The standard ORN fee is .2%, not 2%. This makes it .1% cheaper than Uniswap, as correctly mentioned. For reasons described in this article, I fully expect this fee to drop significantly upon staking going live, to the point where ORN stakers are literally earning money to trade on the Orion Terminal. Future articles will be meticulously reviewed for such errors.
