On March 31st, DFlow, a decentralized order flow marketplace, closed a $2 million seed funding round co-led by Multicoin Capital and Framework Ventures, with participation from Cumberland (DRW), Parataxis Capital and PetRock Capital. The funding round will be used to recruit institutional market makers, build partnerships and more.

Order flow is the liquidity generated by market participants, i.e. the outstanding bid and ask prices. They are a useful asset that can be sold based on its intrinsic value. Buyers of order flow are usually institutional market makers who purchase it to use the liquidity to supplement their market making activities.

Order flow markets enable their participants to buy and sell order flow, and DFlow is the protocol that supports the first decentralized order flow market, allowing order flow to be traded at a free market price. Order flow value-add is driven by many factors, but is primarily based on the non-toxicity of order flow. This property of non-toxicity is influenced by the constituent entities that generate the order flow and their motivation to trade.

We can classify the main participants in the market into three types: institutional market makers, institutional takers, and retail traders. Although they all engage in trading activities, they have very different methods and motivations for trading.

Institutional market makers are large balance sheet entities that provide liquidity through passive buying and selling. They trade when their passive liquidity is hit by receivers. Unlike the average retail trader, they trade without being charged a commission by the trading institution or even earning a kickback on the exchange.

Institutional Recipients are large balance sheet entities that generally execute a passive strategy of buying and selling tokens. They are one of the counterparties to institutional market makers and are required to pay transaction fees to trade.

Retail traders participate in the market based on their relative utility preferences among the assets they trade. For example, they trade token X for token Y because it has greater utility for them, although greater utility is only one of the reasons they are motivated to trade. Perhaps they need Token Y to participate in a different DeFi ecosystem, or they believe that Token Y will appreciate in value over time, or they trust the team behind Token Y.

These transactional reasons make retail trading activity benign, so retail order flow is considered "non-toxic". In contrast, institutional recipients often deliberately submit orders to extract arbitrage profits from market makers, making their order flow "toxic". Order flow toxicity can negatively impact market makers due to the risk of adverse selection. Market makers may not be aware that they are providing liquidity at a loss, so they seek a non-toxic order flow.

Therefore, institutional makers prefer to trade with retail traders compared to institutional recipients because retail traders' incentives to trade reduce the adverse selection risk for institutional makers. Even if there are capital inefficiencies involved, they are willing to pay a premium for orders to satisfy retail traders' orders. But due to the lack of order flow segmentation, they have no practical way to do this.

Order flow segmentation, the separation of non-toxic and toxic order flows, is an important tool to promote healthy markets because it improves market efficiency; institutional market makers are willing to pay a premium for non-toxic order flows to help reduce costs (sources of non-toxic order flows such as wallets, browser-based exchanges or brokers). They may choose to pass this premium on to traders, thereby incentivizing acquisition and retention. However, without a valid order flow segmentation, the order flow premium cannot be extracted and the source of the non-toxic order flow cannot monetize the asset despite the availability of the non-toxic order flow.

So DFlow solves this problem, and the DFlow protocol has two important roles：

**1.**Incentivizing non-toxic order flow to enter the system and be routed to market makers, while excluding toxic order flow, through a combination of Token economics and broad system design.

**2.**Requiring market makers to provide fair and transparent trading prices for non-toxic order flows.

Traditional markets have various methods of centralizing order flow segmentation, such as exclusive legal contracts between brokers and trading firms (i.e., order flow payments), but crypto offers a better design space through trust-free guarantees and programmed economic incentives that can align stakeholder interests.

In contrast, in the current decentralized market, there is a distinct lack of order flow segmentation methods. Decentralized RFQ systems and MEV approximate order flow markets, but MEV does not address the issue of order flow privacy, and neither RFQ nor MEV address the issue of order flow segmentation or the toxicity of order flows through their systems.

The most well-known RFQ system is the 0x ecosystem, an open source, decentralized exchange infrastructure that allows users to exchange tokenized assets on multiple blockchains.

The specific workflow is：

**1.**The market maker creates a 0x order, which is a json object that follows the standard order message format. It indicates the type of asset that the market maker is committed to trading. Assets may include fungible tokens (ERC20), non-fungible tokens (ERC721), or asset packages (ERC1155).

**2.**Orders go through Hash processing and market makers sign orders to submit the orders they create in an encrypted manner.

**3.**Orders are shared with counterparties

If the market maker of a 0x order already knows the counterparty they want to trade with, they can send the order directly (via email, chat or OTC trading platform)

If the market maker does not know the counterparty they want to trade with, they can submit the order to the order book.

4. 0x API aggregates liquidity from all sources to show the best price for an order to the recipient. 0x helps traders create, find and fill 0x orders through an off-chain relay and on-chain settlement paradigm. This means that 0x does not store orders on the blockchain; instead orders are stored off-chain and trade settlement occurs only on-chain. This unique feature makes 0x a flexible and fuel-efficient DEX protocol for developers to build.

**5.**The recipient fills the 0x order by submitting the order to the blockchain and filling the amount of the order.

**6.**The settlement logic of the 0x protocol verifies the digital signature of the market maker and that all conditions of the transaction are met. If so, the assets involved will be automatically exchanged between the market maker and the recipient. If not, the transaction will be revoked.

The DFlow protocol uses a hard-coded programmatic and immutable incentive structure to reliably split decentralized order flow in a way that is only possible in this rich design space. The protocol's built-in token incentive encourages retail traders to route their (non-toxic) order flow through the system, while strongly discouraging institutional recipients from sending their toxic order flow at all.

In addition, the protocol explicitly works with known sources of non-toxic order flow, such as wallets, DEX aggregators and browser-based exchanges, to capture non-toxic order flow and reward users with best execution prices and attractive trader rebates. This disintermediated exchange not only helps retail traders avoid costly exchange fees, but also credits rebates where fees were previously deducted; in this way, the DFlow protocol helps retail traders profit from the non-toxicity of their order streams.

One of the main innovations of the agreement is the introduction of a new financial term: the order flow contract.

An order flow contract is a programmatic agreement, can be purchased but not resold and grants the holder the right to immediate physical delivery of a non-toxic order flow. These contracts are non-substitutable due to differences in notional size, order flow lot size, order type and timing factors.

Order flow contracts are sold repeatedly over time through competitive decentralized auctions in which institutional market makers bid on contracts for delivery of order flow at specific points in time. The purchase price of these contracts is allocated back to the order flow source as a rebate, aligning the interests of the maker and the recipient.

The fairness of execution prices is enforced programmatically in the protocol. When Market Makers execute an order flow, their execution price must be within a manageable threshold of the best available absolute price as currently determined by the Pyth network, where the threshold is a function of market volatility and liquidity.

Traditional marketplace governing bodies require best execution, but retail traders have little transparency into the quality of their order process execution. In a decentralized marketplace, the DFlow protocol can be proven to provide best execution and be executed on the chain via code.

Protocol composability will be one of the key drivers of DFlow flow growth: the protocol will allow other protocols to use DFlow as a market maker-driven liquidity black box by routing orders to DFlow and receiving execution and premium rebates in return. In this way, DFlow can be thought of as a programmatic, on-demand, best execution liquidity provider. This native composability can lead to an explosive growth in the portfolio from structured product order flow to clearing management use cases.

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On March 31st, DFlow, a decentralized order flow marketplace, closed a $2 million seed funding round co-led by Multicoin Capital and Framework Ventures, with participation from Cumberland (DRW), Parataxis Capital and PetRock Capital. The funding round will be used to recruit institutional market makers, build partnerships and more.

Order flow is the liquidity generated by market participants, i.e. the outstanding bid and ask prices. They are a useful asset that can be sold based on its intrinsic value. Buyers of order flow are usually institutional market makers who purchase it to use the liquidity to supplement their market making activities.

Order flow markets enable their participants to buy and sell order flow, and DFlow is the protocol that supports the first decentralized order flow market, allowing order flow to be traded at a free market price. Order flow value-add is driven by many factors, but is primarily based on the non-toxicity of order flow. This property of non-toxicity is influenced by the constituent entities that generate the order flow and their motivation to trade.

We can classify the main participants in the market into three types: institutional market makers, institutional takers, and retail traders. Although they all engage in trading activities, they have very different methods and motivations for trading.

Institutional market makers are large balance sheet entities that provide liquidity through passive buying and selling. They trade when their passive liquidity is hit by receivers. Unlike the average retail trader, they trade without being charged a commission by the trading institution or even earning a kickback on the exchange.

Institutional Recipients are large balance sheet entities that generally execute a passive strategy of buying and selling tokens. They are one of the counterparties to institutional market makers and are required to pay transaction fees to trade.

Retail traders participate in the market based on their relative utility preferences among the assets they trade. For example, they trade token X for token Y because it has greater utility for them, although greater utility is only one of the reasons they are motivated to trade. Perhaps they need Token Y to participate in a different DeFi ecosystem, or they believe that Token Y will appreciate in value over time, or they trust the team behind Token Y.

These transactional reasons make retail trading activity benign, so retail order flow is considered "non-toxic". In contrast, institutional recipients often deliberately submit orders to extract arbitrage profits from market makers, making their order flow "toxic". Order flow toxicity can negatively impact market makers due to the risk of adverse selection. Market makers may not be aware that they are providing liquidity at a loss, so they seek a non-toxic order flow.

Therefore, institutional makers prefer to trade with retail traders compared to institutional recipients because retail traders' incentives to trade reduce the adverse selection risk for institutional makers. Even if there are capital inefficiencies involved, they are willing to pay a premium for orders to satisfy retail traders' orders. But due to the lack of order flow segmentation, they have no practical way to do this.

Order flow segmentation, the separation of non-toxic and toxic order flows, is an important tool to promote healthy markets because it improves market efficiency; institutional market makers are willing to pay a premium for non-toxic order flows to help reduce costs (sources of non-toxic order flows such as wallets, browser-based exchanges or brokers). They may choose to pass this premium on to traders, thereby incentivizing acquisition and retention. However, without a valid order flow segmentation, the order flow premium cannot be extracted and the source of the non-toxic order flow cannot monetize the asset despite the availability of the non-toxic order flow.

So DFlow solves this problem, and the DFlow protocol has two important roles：

**1.**Incentivizing non-toxic order flow to enter the system and be routed to market makers, while excluding toxic order flow, through a combination of Token economics and broad system design.

**2.**Requiring market makers to provide fair and transparent trading prices for non-toxic order flows.

Traditional markets have various methods of centralizing order flow segmentation, such as exclusive legal contracts between brokers and trading firms (i.e., order flow payments), but crypto offers a better design space through trust-free guarantees and programmed economic incentives that can align stakeholder interests.

In contrast, in the current decentralized market, there is a distinct lack of order flow segmentation methods. Decentralized RFQ systems and MEV approximate order flow markets, but MEV does not address the issue of order flow privacy, and neither RFQ nor MEV address the issue of order flow segmentation or the toxicity of order flows through their systems.

The most well-known RFQ system is the 0x ecosystem, an open source, decentralized exchange infrastructure that allows users to exchange tokenized assets on multiple blockchains.

The specific workflow is：

**1.**The market maker creates a 0x order, which is a json object that follows the standard order message format. It indicates the type of asset that the market maker is committed to trading. Assets may include fungible tokens (ERC20), non-fungible tokens (ERC721), or asset packages (ERC1155).

**2.**Orders go through Hash processing and market makers sign orders to submit the orders they create in an encrypted manner.

**3.**Orders are shared with counterparties

If the market maker of a 0x order already knows the counterparty they want to trade with, they can send the order directly (via email, chat or OTC trading platform)

If the market maker does not know the counterparty they want to trade with, they can submit the order to the order book.

4. 0x API aggregates liquidity from all sources to show the best price for an order to the recipient. 0x helps traders create, find and fill 0x orders through an off-chain relay and on-chain settlement paradigm. This means that 0x does not store orders on the blockchain; instead orders are stored off-chain and trade settlement occurs only on-chain. This unique feature makes 0x a flexible and fuel-efficient DEX protocol for developers to build.

**5.**The recipient fills the 0x order by submitting the order to the blockchain and filling the amount of the order.

**6.**The settlement logic of the 0x protocol verifies the digital signature of the market maker and that all conditions of the transaction are met. If so, the assets involved will be automatically exchanged between the market maker and the recipient. If not, the transaction will be revoked.

The DFlow protocol uses a hard-coded programmatic and immutable incentive structure to reliably split decentralized order flow in a way that is only possible in this rich design space. The protocol's built-in token incentive encourages retail traders to route their (non-toxic) order flow through the system, while strongly discouraging institutional recipients from sending their toxic order flow at all.

In addition, the protocol explicitly works with known sources of non-toxic order flow, such as wallets, DEX aggregators and browser-based exchanges, to capture non-toxic order flow and reward users with best execution prices and attractive trader rebates. This disintermediated exchange not only helps retail traders avoid costly exchange fees, but also credits rebates where fees were previously deducted; in this way, the DFlow protocol helps retail traders profit from the non-toxicity of their order streams.

One of the main innovations of the agreement is the introduction of a new financial term: the order flow contract.

An order flow contract is a programmatic agreement, can be purchased but not resold and grants the holder the right to immediate physical delivery of a non-toxic order flow. These contracts are non-substitutable due to differences in notional size, order flow lot size, order type and timing factors.

Order flow contracts are sold repeatedly over time through competitive decentralized auctions in which institutional market makers bid on contracts for delivery of order flow at specific points in time. The purchase price of these contracts is allocated back to the order flow source as a rebate, aligning the interests of the maker and the recipient.

The fairness of execution prices is enforced programmatically in the protocol. When Market Makers execute an order flow, their execution price must be within a manageable threshold of the best available absolute price as currently determined by the Pyth network, where the threshold is a function of market volatility and liquidity.

Traditional marketplace governing bodies require best execution, but retail traders have little transparency into the quality of their order process execution. In a decentralized marketplace, the DFlow protocol can be proven to provide best execution and be executed on the chain via code.

Protocol composability will be one of the key drivers of DFlow flow growth: the protocol will allow other protocols to use DFlow as a market maker-driven liquidity black box by routing orders to DFlow and receiving execution and premium rebates in return. In this way, DFlow can be thought of as a programmatic, on-demand, best execution liquidity provider. This native composability can lead to an explosive growth in the portfolio from structured product order flow to clearing management use cases.

Welcome to join #NowhereDAO, a free information and token information sharing platform:

https://discord.gg/JHXpb8KDzk