Key points
CoW DAO is a DeFi project aimed at improving usability and security through the CoW protocol, MEV blocker, and CoW AMM.
The CoW protocol is a trading instrument that provides efficient pricing mechanisms and protection against unfavorable trading strategies.
MEV Blocker is a tool for protecting transactions from frontrunning and sandwich attacks.
CoW AMM is an automated market maker that uses a new model to protect liquidity providers from price exploitation.
What is CoW DAO
The CoW DAO is a decentralized autonomous organization that builds products on Ethereum that improve security and ease of trading for Web3 users. CoW DAO uses three main tools: the CoW protocol, the MEV blocker, and the CoW AMM. CoW DAO also supports development, grants, and other resources for these projects.
CoW Protocol: A trading tool that uses group trades to find better prices and increase liquidity.
MEV Blocker: A transaction security tool that prevents attacks and offers users rebates.
CoW AMM: An automated market maker (AMM) that protects liquidity providers from price exploitation.
CoW DAO uses a decentralized governance model that allows community participants to control the development of the protocol.
CoW Protocol
Intention to trade
When trading with the CoW protocol, instead of placing a trade directly, the user signs an "intent to trade." This intent describes what and how much the trader wants to trade in order to choose the best execution method.
Financial benefits
The solution algorithm tries to get the best prices by matching peer-to-peer trades (called wish matching) or by finding off-chain trades. This method reduces fees, avoids price manipulation, and provides protection against MEV (maximum extractable value abuse) attacks.
Technical advantages
The protocol supports batch auctions, allowing users to make multiple trades and even pay gas fees in more than just ETH. It also eliminates fees for failed transactions.
Solution algorithms and batch auctions
The solution's algorithms compete to process bidding intent in batches and seek to obtain the best offer for the user. Batch auctions provide protection against manipulation and uniform pricing across all trades. This system prevents bots from exploiting the order of transactions, and also supports peer-to-peer trades, reduces costs and improves trading efficiency.
Order processing
The CoW protocol processes orders in four main stages:
Submitting Intents: Instead of placing an order directly, users submit a signed “intent to trade” with detailed information about the assets and amounts.
Grouping: The CoW protocol groups multiple trading intents into a batch.
Competition of solution algorithms: in a short time, the algorithms must offer solutions with the most favorable prices for the user. The solution algorithm with the best offer wins.
Execution: The winning solution algorithm executes the trades and users receive their tokens.
This method is designed to reduce fees, improve prices and protect against MEV.
Order Types
As of November 2024, CoW offers six order types: Market Orders, Limit Orders, TWAP Orders, Program Orders, Milkman Orders, and CoW Hooks.
1. Market orders
Instant purchase or sale at the current market price.
Decision algorithms must execute the entire order or wait for liquidity.
Users set the allowed slippage to account for price changes during execution.
2. Limit orders
Buying or selling at a specified price before expiration.
If the price reaches the target, the order is executed, otherwise it expires.
The CoW protocol processes orders without gas fees and optimizes them to get the best possible prices.
3. TWAP order
Breaks down large orders into smaller trades over time to reduce price impact.
Users select assets, price limits, number of splits and duration to control order execution.
4. Program orders
Automatic trades based on certain conditions (eg price triggers).
Suitable for complex strategies, DAOs and protocol-level transactions.
5. Milkman orders
Milkman orders, created by Yearn Finance along with the CoW protocol, are based on a real-time price feed rather than fixed prices.
Milkman orders can be executed at fair market prices even if orders are significantly delayed.
Suitable for DAO and governance dependent transactions.
6. CoW Hooks
CoW Hooks allow users to perform customized actions before or after trades, such as transferring funds, staking, and claiming rewards.
CoW Hooks execute a combination of actions as a single transaction, allowing users to connect any Ethereum-related action to their CoW orders.
Developers and traders can express their intentions.
MEV Blocker
The MEV Blocker, developed by CoW DAO, Beaver Builder, and Gnosis DAO, is a tool that protects users from sandwich attacks. It sends transactions to a secure network and avoids public pools that attract bots.
Frontrunning occurs when bots detect a large transaction in the queue and place their order ahead of it, taking advantage of the expected price change. This often results in the original trader getting a worse price.
Backscreening occurs when bots place trades immediately after a large transaction to profit from price movements. It is not as damaging as it does not affect the original trader's price.
Sandwich attacks are a combination of both, where a bot places a trade before and after a transaction, inflating the price and profiting at the user's expense.
These tactics exploit the transparency of blockchain networks, but can be countered with tools like CoW's MEV blocker.
With the MEV Blocker, users can also receive a rebate of up to 90% on the backscreen generated by their own transactions. This tool is faster than standard transaction processes and provides real-time control and transparency. Many Web3 wallets, such as Uniswap and Trust Wallet, have integrated the MEV Blocker for safer and more efficient trading.
CoW AMM
The Problem of Losses and Rebalancing
Liquidity providers (LPs) often suffer losses because most AMMs cannot quickly adapt to the latest prices on major exchanges and leave behind stale prices that arbitrage traders exploit. This is the Loss and Rebalancing (LVR) problem, which reduces the profits of liquidity providers.
To solve this problem, CoW AMM uses a new mechanism called Function Maximizing AMM (FM-AMM). It groups trades and sets a single clearing price for each batch, ensuring a fair and up-to-date price.
COW token
The COW token plays an important role in the CoW protocol. It acts as a governance token that allows stakeholders to participate in decisions about the development and change of the protocol. This governance system is community-oriented and helps align the interests of users, developers, and supporters.
In conclusion
CoW DAO offers innovative solutions to protect Ethereum users from manipulation, as well as provide convenient trading, liquidity security, and decentralized governance. The CoW protocol, MEV blocker, and CoW AMM allow users to pay lower fees, reduce risk, and increase control over transactions.
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