This is a segment from the Lightspeed newsletter. To read full editions, subscribe.
Earlier this year, Solana’s network congestion created a lot of concern over traders’ ability to land transactions onchain.
Today, traders have a much easier time landing trades, but the concern has refocused on the prices they get while doing so.
Widespread sandwich attacks, whereby sophisticated traders exploit price spreads at the expense of unsophisticated traders, have proven to be a long-running and tricky-to-solve issue. The Solana swap app and market infrastructure firm DFlow put an interesting new solution on the table when it proposed conditional liquidity, which tasks new market intermediaries with separating toxic from non-toxic order flow.
When a DEX trader tries to swap one cryptocurrency for another, they are quoted a price and allowed to set slippage, which is the percentage that the quoted price can change after the order is submitted. Solana sandwich attackers exploit slippage by front-running transactions to artificially raise the price a few basis points before selling the asset right after at a profit — leaving the user with a worse price. In the aggregate, sandwich attackers can make millions per day.
DFlow proposes adding a new class of market participants called segmenters to divide toxic from non-toxic order flow and limit sandwich attacking.
Segmenters, which will initially be chosen by DFlow, sit between users who submit the transactions and the DEXs that receive them, and basically sort good from bad transactions. When DEXs receive these labeled transactions, they can then charge higher fees to sandwichers and lower fees to everyone else.
Conditional liquidity “doesn’t completely solve sandwiching” but can reduce it by charging different rates, DFlow founder Nitesh Nath said. “The magnitude of sandwich reduction is proportional to the difference in the higher rate for toxic flow and the lower rate for non-toxic flow.”
DFlow already launched a segmenter called DFlow Aggregator and a conditional liquidity DEX called Clearpool.
Segmenters are meant to create a marketplace for order flow, where the better the prices segmenters achieve for users, the more order flow DEXs and wallets send them. Segmenters make money by collecting some of the price improvement they provide.
“Conditional liquidity aligns the interests of retail traders, DEXs and the network — a win-win-win for all parties involved. We expect conditional liquidity to be one of the big breakout trends of 2025,” JR Reed, partner at DFlow investor Multicoin Capital, said.
Chris Chung, CEO of the Solana swap app Titan, said he believes conditional liquidity could give honest traders better prices, but it could be hard to get DEXs to start accepting the new market structure. DEXs would only start altering their fees if there was sufficient demand for conditional liquidity from the venues where traders are placing orders, but those venues will also want to see DEXs integrate the feature first.
“It becomes a chicken and [egg] problem,” Chung said in a text, adding that the demand question may be partly why DFlow launched its own segmenter and DEX.
Nath told me a “handful” of large wallets and apps have inquired about integrating conditional liquidity, though he declined to say which ones.
