In addition to aggregating third-party liquidity, CowSwap also introduced a demand-matched CoW model to avoid MEV and reduce transaction friction.
Written by: Leo Young
In addition to Ethereum’s high transaction fees due to performance issues, MEV (Miner Extraction of Value) also discourages many users.
Earlier this month, the Gnosis agreement announced the launch of the second version GPv2 , which integrates the liquidity of decentralized exchanges and can provide MEV protection. CowSwap is a decentralized trading application based on GPv2, which deserves attention.
It is important to point out that CowSwap was developed by the development team of the Gnosis protocol. Gnosis is a decentralized application infrastructure. Its products include decentralized prediction market, multi-signature wallet Gnosis Safe, Gnosis DAO, auction market and other types of applications. The native token in the protocol is GNO.
What are the characteristics of CowSwap?
The name of CowSwap seems to be related to “cow”. In fact, “Cow” here refers to a unique way of matching transactions for the product. The product documentation states that CowSwap uses the “Coincidence of Wants (CoW)” method to match transactions.
Specifically, “needs matching” is an economic phenomenon , “two people hold things that each other needs at the same time, and the two parties can directly trade without currency as a medium.”
In traditional trading markets, market makers provide liquidity, while current decentralized exchanges (DEX) mostly provide liquidity for the market by liquidity providers. CowSwap uses batch auctions to match CoW orders for traders as the core trading mechanism.
In other words, on CowSwap, two people holding the assets they want at the same time can directly match the transaction without the need for market makers or liquidity providers to match transactions. In this way, the best price can be brought to individual traders, and the commissions incurred by market makers or liquidity providers can be exempted.
CowSwap allows users to directly trade using CoW. Orders that cannot be settled through CoW are directly matched to transactions through automatic market makers (AMM).
If there is a CoW order in the batch auction order. After the small orders are fully matched, the remaining orders that have not been matched by CoW will be handed over to the liquidity market integrated by CowSwap for matching. The entire order settlement price is based on the remaining order price obtained through external liquidity.
Currently, CowSwap integrates Uniswap, and will integrate more DEX liquidity such as Balancer in the future.
What are the advantages of CoW?
According to the project team, CoW matching transactions has two advantages: avoiding MEV and reducing transaction friction.
Since CoW does not require external liquidity on the chain, it adopts a uniform price settlement within batch orders, and all orders have the same price, and there is no issue of transaction sequencing, which fundamentally eliminates the MEV situation.
For transactions matched by external liquidity on the chain, GPv2 introduces the concept of “slover”. “Searcher” is a third-party tool introduced into the agreement to find the best transaction on the chain through competition. After the off-chain match, the transaction is matched and released in batches.
Since the agreement strictly limits the slippage of “searchers” in executing transactions, there is little room for profit for MEV arbitrage. Moreover, batch order settlement can only be submitted by certified searchers, which greatly reduces the operating space of miners and MEV arbitrageurs.
Since CoW does not require third-party liquidity, there are no transaction costs for CoW transactions. The transaction on CowSwap will charge a certain fee. The handling fee consists of the basic fee for executing the order and the agreement fee. Part of this is paid to the searcher to provide an incentive to provide the best deal within the agreement. At present, users only need to pay the Gas fee (basic transaction fee), and the agreement fee is temporarily not charged.
CowSwap currently only supports buy and sell orders at current prices. Only one off-chain signature is required for a CowSwap transaction. The user only needs to sign and submit the transaction, and the searcher will match the transaction. Only when the order is executed do you need to pay a fee, and there is no fee to pay for a failed transaction.
to sum up
The current Dex transaction aggregator completely relies on third-party liquidity, which can reduce slippage and improve transaction efficiency, but still incur transaction fees. CowSwap uses a combination of CoW orders and third-party flows. In addition to retaining the above advantages, it will also reduce transaction costs.
It is expected that CowSwap will stimulate the depth of CoW transactions and introduce CoW market making in the future. The market maker monitors the limit orders in the agreement, provides counterparty transactions, and reduces dependence on third-party liquidity. Fundamentally eliminate MEV and reduce handling fees to bring users the best experience.
In addition, it should be noted that CowSwap has not issued any tokens, and the Cowswap tokens on the market are not tokens in this agreement.
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