DFlow Proposes Conditional Liquidity to Combat Sandwich Attacks on Solana
This is a segment from the Lightspeed newsletter.
Solana Network and Sandwich Attacks
Earlier this year, Solana’s network congestion raised concerns about transaction execution. Currently, traders face fewer issues with executing trades, but concerns have shifted to the prices they receive.
Widespread sandwich attacks, where advanced traders exploit price discrepancies at the expense of less experienced traders, remain problematic. The firm DFlow introduced a solution involving conditional liquidity, which aims to separate toxic from non-toxic order flow through new market intermediaries.
Understanding Sandwich Attacks
In decentralized exchanges (DEXs), when a trader swaps cryptocurrencies, they receive a quoted price and set slippage, which indicates how much the price can change post-submission. Sandwich attackers manipulate slippage by front-running transactions to increase the price slightly before selling the asset, resulting in worse prices for users. Collectively, sandwich attackers can yield millions daily.
DFlow's Proposal
DFlow suggests introducing a new participant category called segmenters to manage order flow and mitigate sandwich attacks. Segmenters will be selected by DFlow and will categorize transactions as toxic or non-toxic before they reach DEXs. This allows DEXs to implement different fee structures, charging higher fees to sandwichers and lower fees to other participants.
DFlow founder Nitesh Nath stated that while conditional liquidity does not entirely eliminate sandwiching, it can significantly reduce it based on the fee difference between toxic and non-toxic flows. DFlow has already launched a segmenter named DFlow Aggregator and a conditional liquidity DEX called Clearpool.
Market Dynamics and Future Trends
Segmenters aim to create a competitive marketplace for order flow, where better prices lead to increased order flow directed towards them. They earn revenue by capturing a portion of the price improvements they provide.
JR Reed from Multicoin Capital noted that conditional liquidity aligns the interests of retail traders, DEXs, and the network, predicting it will be a significant trend by 2025. However, Chris Chung, CEO of the Solana swap app Titan, expressed skepticism about DEXs adopting the new structure without sufficient demand, highlighting a potential “chicken and egg” scenario.
Nath mentioned that several large wallets and applications have shown interest in integrating conditional liquidity, though he did not disclose specific names.