From Messari by John_TotalValue_Locke

Key Insights

Primer

Hashflow (HFT) is a decentralized exchange (DEX) that uses a request-for-quote model with pricing provided by professional market makers. Hashflow's signature-based pricing offers traders a guaranteed execution price, MEV resistance, and no slippage. The offchain order routing enables significantly reduced costs and allows market makers to compete on price with CEXs. After launching in Private Alpha in April 2021, Hashflow fully launched in August 2021. Since initially launching on Ethereum, it has expanded to Arbitrum, Avalanche, BNB, Polygon, and Optimism.

Hashflow also offers cross-chain trading, allowing traders to exchange assets on different chains without escrowing or bridging assets between chains. HFT is the governance token for the Hashflow protocol. In early 2023, the Hashflow Foundation announced the Hashverse, a gamified experience to onboard new users, diversify HFT ownership, and promote usage. For a full primer on Hashflow, refer to our Initiation of Coverage report.

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Key Metrics

Performance Analysis

Product Usage

After the launch of the Hashverse at the end of Q3, Hashflow volumes spiked and then normalized into the end of the year. Volumes dipped at the end of November as market makers had to migrate their operations to V3. In aggregate, fourth quarter volume fell 3% QoQ, as a 7.5% rise in Ethereum volume nearly offset a 26% fall in Arbitrum volume. By the end of 2023, Hashflow activity on Ethereum and Arbitrum dominated, accounting for a combined 90% of the year’s volume. On December 5, Hashflow announced it was expanding to Solana, which could open up a large growth opportunity and add a third high-volume deployment (note: Solana data is not included in this report).

In the first half of the year, 45% of Hashflow volume originated from 1inch Network. In the second half of the year, only 17% of Hashflow volume originated from 1inch. The change in share was almost entirely due to a change in mix, as total volume from aggregators remained nearly flat, with $2.1 billion in H1’23 and $2 billion in 2H’23. The biggest gainer in volume share was CoW Protocol, rising from 11% in 1H’23 to becoming the largest aggregator volume source at 33% in the second half of the year. Hashflow received trades from 11 aggregators in 2023. Direct volume, i.e., users who traded directly with the Hashflow contracts, grew to 35% in the second half, surpassing $1 billion in volume.

The number of daily active users (DAUs) measures how many externally owned accounts (EOAs) initiate transactions that get routed to Hashflow or use Hashflow directly. However, we measure the number of direct contract interactions with Hashflow, not necessarily how many end users (i.e., EOAs) are driving those transactions. We count “Sources” to be native users and aggregation routers that use Hashflow, thus excluding EOAs that interact with an aggregator directly instead of Hashflow.

The average number of contracts transacting with Hashflow increased from 386 in Q3 to 482 in Q4. The growth was led by Polygon, Arbitrum, and Ethereum. In Q4, Polygon became the most diverse chain by the number of contracts routing trades to Hashflow with 184, while Arbitrum grew to 142.

While the breadth of sources likely reflects more direct interaction, Hashflow had a fall in the number of EOAs initiating transactions in the fourth quarter. The Q2 and Q3 DAU numbers likely benefited from the expected launch of the Hashverse, as new wallets flocked to execute transactions. EOAs executing on Hashflow fell 63% in Q4 to 1,190.

Trade count does not take into account the size of trades; instead, it largely displays the activity on rollups and alt-L1s, given their cheaper transaction costs. Ethereum was nearly 82% of Hashflow volume in Q4, and the average number of transactions per day increased by 12% from 418 in Q3 to 470 in Q4. The largest fall was on BSC, where daily transactions fell from 1,377 to 396. BSC volume increased in Q4 to $40 million, or 3% of Hashflow trading volume in the quarter. All other deployments saw the daily average number of transactions fall in Q4, driving the total number of transactions down to its lowest quarterly sum since launch.

Hashflow’s Ethereum deployment ended the year with its highest-volume quarter, executing over $1.2 billion in Q4. To add context, 50% of the quarter’s volume came in the month of October, on the back of the late September launch of the Hashverse. In November and December, Hashflow transitioned to V3 contracts, and the liquidity and market maker migration negatively impacted activity. Daily volume bottomed on December 10, with the lowest daily volume since October of 2022, but has since rebounded. Strong market action drove non-stablecoin prices higher, leading activity and volume share on Hashflow to rise. Non-stablecoins were 46% of Hashflow volume in 2023, but the category ended the year as 61% of volume in December. wBTC and stETH were large volume gainers on Ethereum, increasing 167% and 189%, respectively, in Q4.

Hashflow’s Arbitrum instance saw volumes fall for the second consecutive quarter, down 25% from Q3 to $220 million. The surge in crypto trading in October also benefited Hashflow, with October 24 becoming the highest volume day of the year at nearly $26 million. After a November slump, also tied to the contract migration, its volumes returned to a quarterly rate of around $300 million in the last week of the year.

wETH and USDT remained the most traded tokens for Hashflow on Arbitrum, accounting for 31% and 32% of the volume, respectively. Meanwhile, USDC and ARB saw volumes fall the most in the quarter, down 31% and 37%, respectively. Hashflow on Arbitrum executed over $1 billion in volume in 2023, making it the second-largest Hashflow instance by chain and accounting for 19% of Hashflow volumes.

HFT Distribution and Staking

The number of HFT stakers increased by 24% in the fourth quarter. The amount of staked HFT climbed only slightly , spiking with a large stake in the last week of the year. As discussed in the Qualitative Analysis section, the community vote to turn on fees could strongly impact the future of HFT staking. This vote would change the economics and utility of the HFT token, giving stakers a direct revenue share from protocol usage. As of writing, the team is still working on implementing the fee switch and experimenting, so to date data is sparse. This will be a key factor impacting HFT staking going forward.

The amount of HFT staked nearly doubled QoQ, due to a large stake on December 28 of 2.4 million HFT. While 42% of the staked HFT will be unlocked in Q1, the number of stakers at each distribution tells a different story: 77% of stakers, or 1,299 addresses, have locked their HFT for over a year — compared to just 2%, or 34 stakers, with shorter lockup periods that will unlock in Q1. There haven’t been any details released about how the fee share will be impacted by the longer lock durations.

Qualitative Analysis

Hashflow 2.0

In pursuit of its mission to bring the best DeFi trading experience to users, the Hashflow team announced the latest protocol upgrade in December. The previous version, launched in 2021, introduced two-sided intents to DeFi. The new version (Hashflow 2.0) builds on this success, adding Smart Order Routing, launching on Solana, and providing a new UX for traders.

Smart Order Routing

Smart Order Routing in Hashflow 2.0 is a new feature designed to optimize price discovery. It extends the platform's ability to source quotes, combining both professional market makers and automated market makers (AMMs). This feature automatically routes traders to the best available prices. Rather than checking to see if prices on Hashflow are the best available, traders can rest assured that they are receiving the best onchain execution without leaving Hashflow.

Solana Expansion

Solana has returned as the lead EVM competitor in 2023, with its fundamental activity at the end of the year rivaling Ethereum’s. Hashflow previously had no exposure to Solana, but with Hashflow 2.0, it now brings an all-in-one solution for traders who want to bridge and then transact on Solana. The expansion is perhaps the largest opportunity for growth and diversification of activity for Hashflow.

UX Improvements

Hashflow is built for traders, and as such, it has a new UX that informs traders with context and charts at the time of trade. The new UX shows swap prices on the chart with additional helpful context. The updates are based on feedback from the community and could drive stickier usage.

Heading into 2024, Hashflow 2.0 brings new growth and retention drivers for the protocol. Smart Order Routing is a key feature that increases the value proposition for traders. The updated UX should lead to stickier consumers using a free front end. And expanding to Solana brings a new cross-chain trading opportunity for traders as well as a new client base for Hashflow.

Protocol Fee Switch

The Hashflow product has proven valuable to traders, who have executed over $17 billion on the hybrid DEX since launch. Hashflow saves users by ensuring better execution prices. Based on the recent vote, the community feels there is an opportunity to charge fees for the service. The fees will go to rewarding HFT stakers who govern the protocol as well as funding the Hashflow Foundation that leads Hashflow’s building and improvement.

On October 20, the Hashflow community voted to turn on fees. The price of the fees will be dynamic and responsive to the perceived amount of savings provided by the execution prices. Fees will be trackable onchain. This fine-tuning will likely be an iterative process until the DAO and core team can determine the right implementation and level for fees.

Fees earned will be split and sent to three beneficiaries:

The impact on the token is hard to minimize. Many teams and tokens maintain value because of the perception of a future fee switch. As Hashflow enters the arena, it will test how successful a proven product can be at earning revenue for its managers. Besides driving additional value to the token, the fees will help to sustain innovation and building at the Foundation, benefiting both users and tokenholders.

Closing Summary

Hashflow’s aggregate numbers fell in Q4, but activity on Ethereum continued to grow, executing $1.2 billion in volume and 470 transactions per day. Ethereum now makes up over 80% of trading volume on Hashflow. Trading activity on Avalanche, Optimism, and Binance has also fallen consistently and slowed in Q4. The number of HFT staked returned to over 6.3 million with a large transaction at the end of the year, while the number of stakers continued to increase steadily, up 24% in the fourth quarter. Staking will likely be impacted by the October vote to turn on fees for traders.

The team is working on an implementation that would split a portion of execution savings between users and the protocol and would bring non-HFT revenues to stakers. Hashflow 2.0 was announced in December, bringing Smart Order Routing to Hashflow and a new deployment on the Solana blockchain. As the team continues to ship out new products, the upcoming fee implementation will increase HFT utility — a well-timed launch with the prospect of a bull market returning in 2024.