Order flow monetization refers to the market mechanism in which trading platforms route orders directly to market makers in return for monetary compensation and best-execution guarantees. When orders are routed directly to market makers, orders are said to be internalized. Order internalization (sometimes called payment-for-order-flow) allow trading platforms to provide best-execution to retail traders, which means orders are executed at the best market prices and as quickly as possible.
A form of order flow monetization exists in traditional US equities and options markets. By many estimates, anywhere from $5-10 trillion of equities order flow is internalized annually (or $20-40 billion per day).
DFlow is introducing significant improvements to the traditional model, both in concept and practice. Most importantly, orders are batched and sold in on-chain auctions to market makers who compete openly for order execution rights.
The intuitive reason for enabling order flow monetization is creating 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).
Part of a good order flow market design is enforcing market makers are subject to strict best-execution standards. This means orders are always filled at the best market prices with lower transaction costs (e.g. no slippage, no liquidity fees, tighter spreads). There is a lot of savings to be uncovered in today's DeFi trading markets.
The benefits do not stop at retail traders. Wallets who route orders to market makers receive financial compensation and many will be able to generate significant, recurring revenue via order flow monetization.
A summary of benefits market participants encounter when participating in a market supporting order flow monetization.
|Wallets||The source of order flow. Non-custodial wallets that have in-wallet trading features.||Generate significant and recurring revenue. Wallets are paid in USDC for every order they deliver. Order flow are auctioned in a decentralized process through competitive on-chain auctions.|
|Retail traders||Users of wallets who submit trades (e.g. swap 10,000 USDC to ETH).||Receive guaranteed best prices. Orders are executed at lower effective spreads, which accounts for slippage, fees, and average rebates by MEV-rebate programs). Currently, retail traders are paying 5-30 bps in effective spread for liquid tokens and 100-150 bps in effective spread for more illiquid tokens.|
|Market makers||Institutional entities who provide liquidity to retail traders.||Permissionless access to decentralized retail markets.|
Traditionally, brokers sell order flow to market makers in bilateral agreements or private auctions. DFlow hosts a public and permissionless marketplace for order flow, meaning order flow routing is determined by a market-driven process (i.e. fairer prices). Market makers price order flow based on a set of standardized auction parameters and submit bids into auctions to win execution rights. Standardization enables clear terms between buyers and sellers (e.g. notional size, delivery period etc.).
The market maker takes delivery and fills orders against a set of best-execution standards instituted by DFlow (orders are settled on-chain). There is far more transparency given all monetization transactions (happen on DFlow Chain) and order settlements are on-chain. DFlow puts a heavy emphasis on improving execution quality for retail trades and will provide accessible reports as a part of its service to wallets and the public.
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Updated about 1 month ago