DFlow is a decentralized order flow marketplace, powered by DFlow Protocol's open and fair payment-for-order-flow (PFOF) model.
DFlow is the interface order flow sources use to sell their order flow to market makers in a transparent and competitive way. DFlow provides efficient market-driven price discovery for order flow, defined as marketable orders (i.e. unfulfilled buy and sell orders that can be executed immediately). For example, Alice places an order to swap 10 ETH for 15,000 USDC. Orders like this are aggregated and tranched into decentralized auctions on DFlow.
DFlow's solution combines the transparency of decentralized finance and the efficiency of the PFOF model in traditional financial markets. The traditional PFOF model brings best execution to retail but is often criticized for the lack of transparency. The relationship between Robinhood and Citadel Securities is a representation of this – order flow is bought and sold in a closed environment with unknown variables (i.e. price).
Crypto-native brokerages access DFlow's order flow marketplace through an intuitively-designed SaaS product. This interface allows brokerages to create, manage, monitor, and analyze order flow auctions. Market makers place bids into open auctions and when the winner is revealed, payments from market makers are sent to the auction owner.
The DFlow Protocol is the suite of on-chain programs, built as a standalone Cosmos-based blockchain, and off-chain programs that together create the infrastructure defining the first open and fair PFOF model. An open and fair PFOF model means verifiable best execution, transparent order flow pricing, and open competition amongst market makers.
The Protocol is made up of two main components.
The DFlow node or validator is the on-chain entity that is responsible for validating transactions on the DFlow Chain. The DFlow Chain is intended to be run by a decentralized network of nodes. Nodes will also store auction related data, including information about auction status, order fill quality, payments made by market makers etc.
Each DFlow node will also run a signatory server, an off-chain sidecar, which hosts the DFlow API. Order flow sources interface with the DFlow API endpoints to fetch price quotes from market makers and send user-approved transactions to the DFlow Chain.
A successful PFOF model requires a system to filter for low toxicity orders and prevent institutional flow from taking liquidity from market makers. At the application-layer, information external to the order itself can reveal important clues about user intent. Order flow is best priced not only according to a set of user-defined parameters but also external factors (e.g. who is sending the order, why is the order being placed).
Therefore, in addition to order flow segmentation, DFlow Protocol requires an order flow source to add additional check(s) before sending orders to auctions through running an endorsement server. The checks can be customized to the order flow source's wants and needs.
DFlow In Practice
Let's take a look at the value prop of DFlow in the context of the current state of the market. DFlow is a liquidity source for crypto-native brokerages like wallets.
Currently, there are broadly two ways wallets can build swapping into their apps. The first option is to directly connect to one or many exchanges likes Uniswap. If the wallet decides to integrate with many exchanges, it will likely have to build an internal routing system.
The second option is to plug into a price aggregator – the price aggregator basically does the job of integrating with many exchanges and creating an efficient routing system to fetch the best price. Usually, what the wallet has to do is make HTTP requests to the price aggregator's API endpoint.
The DFlow Model
DFlow is an alternative liquidity source that uses PFOF. Wallets can access this liquidity to offer token trading within their apps.
What's the relationship between selling order flow and providing liquidity? It's important to note that in a PFOF arrangement, a wallet is incentivized to sell order flow not just to monetize orders but also to access guaranteed best-execution. By selling or routing orders to DFlow, the wallet can be confident those orders will be filled at the best prices by the market maker. Note these are orders submitted on brokerages – orders submitted directly on exchanges like Uniswap are not applicable here.
In this model, wallet orders are to be filled by the winning market maker from the DFlow order flow auction. How is best-execution guaranteed? In a way, each market maker is like a price aggregator because they are incentivized to actively find the best prices from a variety of venues. Unlike exchanges, market makers can typically provide cost savings to users by filling at better than the best price, regardless of quantity. Orders are guaranteed the best price by DFlow through a decentralized price oracle – the Consolidated Best Price.
Blockchains can be thought of as state machines so in the context of crypto, order flow has been used to mean any state-changing transaction, including individual transactions, bundles of transactions or full blocks. It's important to make the distinction that in the context of DFlow, order flow is defined as unfulfilled buy and sell orders that originate from crypto-native brokerages.
DFlow is inspired and built from the following observations:
- Decentralization of order flow is necessary to ensure the most optimal execution environment for retail. Private order, meaning order flow sent exclusively to a market maker, leads to centralization and less competition.
- Blockchain technology redistributes power from institutions back to individuals by reducing trust assumptions in the entire finance supply chain. Algorithmically enforcing order execution on-chain guarantees best execution and lets the public easily verify the legitimacy of any transaction.
- There is an intense market need for monetization of order flow safely, freely, and with maximum competition. Enabling the proper monetization of order flow allows the crypto application layer to develop novel features for the end users.
Built For Consumers
Individual traders who trade on venues that are routing orders to DFlow can expect the following:
- Zero Fee Swapping. No hidden fees for all trades. Neither DFlow nor participating market makers take a trading or "convenience" fee.
- Zero Slippage. DFlow's RFQ system prevents negative price slippage.
- Guaranteed Best Execution. The DFlow PFOF model uses a decentralized market price to algorithmically guarantee market makers fill at minimum the best available price.
- MEV Protection. All consumer trades are protected from frontrunning.