Articles / Announcement

(Re)Introducing DFlow

August 23, 2023

DFlow is the solution for wallets to maximize revenue and deliver best prices. On DFlow, wallets route order flow to market makers via permissionless order flow auctions (OFAs). In return, wallets receive monetary compensation in USDC and guarantee that all customer orders are executed at the best market prices.

What is order flow? Order flow are marketable orders (e.g. market orders) that originate from wallet swap platforms. A market order is a trade instruction submitted by a user to buy or sell a certain amount of token at the market price (e.g. User A places a market order to sell 1.5 ETH).

Retail traders in current DeFi landscape encounter both high explicit (e.g. LP fees, commissions) and implicit (i.e. slippage) transaction costs. DFlow is built with the understanding that retail traders are first-class citizens. DFlow enforces all trades are executed at the best market prices and incur zero liquidity fee and slippage. In addition, regular price improvements on trades result in meaningful cost savings in the long run.

Order flow monetization, decentralized

DFlow is bringing order flow monetization to decentralized markets. Order flow monetization is a market mechanism allowing wallets to route orders directly to market makers in return for USDC compensation and best-execution guarantees.

Order flow monetization is a market structure where retail traders are treated as first-class citizens. A market design that allows retail orders to be executed directly by a network of market makers breeds a fairer execution environment, free from malicious or highly sophisticated traders who will take advantage of retail orders (e.g. front-running).

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What is best-execution?

Best-execution is the promise that orders are executed “at the best prices” and “as quickly as possible”. All orders on DFlow are algorithmically required to be executed at the best prices as determined by both centralized and decentralized exchanges. Market makers who fill orders on DFlow are subject to these rules and are held accountable for malicious behaviors.

Key beneficiaries

A summary of benefits for each type of market participant on DFlow.

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Order flow auction

DFlow introduces a standardized method for wallets to route order flow to market makers. The way wallets route orders is through on-chain OFAs that represent a batch of orders from a specific source. Market makers price order flow based on a set of standardized auction parameters and submit bids into auctions to win rights to execute orders for a given delivery period. Standardization enables clear terms between buyers and sellers (e.g. notional size, delivery period etc.).

How auctions work

An order flow auction represents a batch of orders of a specific grade and runs perpetually. Wallets can create multiple auctions at the same time to auction off orders containing different tokens (e.g. ETH-USDC, ETH-BTC, USDC-USDT).

An auction is perpetual because wallets only need to set up an auction once and as orders start being delivered, an epoch number is automatically incremented to identify the vintage of the auction. An epoch is incremented based on the length, which is determined by the delivery period (one of the auction parameters) and the rate at which orders are delivered.

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Improving execution transparency

Retail traders in both traditional equities and existing DeFi markets have low visibility to how "good" their orders were executed. DFlow will release a series of products to address these pain points in the order execution cycle to help retail traders better understand how their orders were handled and executed.

Let's take a look at a number of new key stats that will be available with the release of DFlow products over the next few months.

Price improvement

Price improvement refers to the cost savings that result when an order is executed at a price that's better than the best market price. In US equities, price improvement is calculated as the signed difference (e.g. -1 for buys and +1 for sells) between order execution price and the national best bid and offer (NBBO), a consolidated tape of prices from various regulated exchanges. According to official disclosure, equities retail investors enjoy approximately $3-4 billion of price improvement annually.

On DFlow, orders are executed against a set of best-execution standards and price improvements will be calculated based on a price benchmark based on centralized and decentralized exchanges.

Market prices for order flow

When market makers bid into auctions, they are pricing order flow. The price is derived from the winning bid of an auction, which is always for one specific token pair. For example, 1millioninnotionalsizeofETHUSDCflowbetween1 million in notional size of ETH-USDC flow between 100 and $5,000 may be currently worth 1,000 USDC. The continuous bidding of auctions by market makers means price discovery of order flow is market-driven and in real-time.

Post-trade reporting

Transparency and having proper disclosures are essential for maintaining fairness and protecting retail investors in DeFi markets. DFlow intends on making significant improvements to existing reporting standards – in both DeFi and equities markets (e.g. Rule 605 and 606 under Regulation NMS). Without clear and provable reporting on execution quality, retail investors have a difficult time making informed decisions on whether they are trading on the best venues and if they received the best possible prices.

Start your integration today

Start monetizing your order flow. Integration takes under 30 minutes and is completely free!

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