Key Points
CoW DAO is a DeFi project focused on enhancing user experience and security, featuring three core tools: CoW Protocol, MEV Blocker, and CoW AMM.
CoW Protocol: A trading tool that provides an efficient pricing mechanism and helps users avoid adverse trading impacts.
MEV Blocker: A trading protection tool that helps users avoid front-running and sandwich attacks.
CoW AMM: An automated market maker that uses an innovative model to protect liquidity providers from price exploitation.
What is CoW DAO?
CoW DAO focuses on launching products on Ethereum, committed to enhancing the security and trading experience of Web3 users. The project includes three core tools: CoW Protocol, MEV Blocker, and CoW AMM, while providing development support, funding assistance, and other resources for these tools.
CoW Protocol: A trading tool that determines optimal prices through a batching trading mechanism while enhancing liquidity.
MEV Blocker: A trading protection tool that can prevent trading attacks and provide cashback for users.
CoW AMM: An automated market maker (AMM) that protects liquidity providers from price exploitation.
CoW DAO adopts a decentralized governance model, giving community members a voice in the development of the protocol.
CoW Protocol
Trading Intent
When trading through CoW Protocol, you do not place an order directly but sign a 'trading intent'. This intent specifies the assets and amounts you wish to trade, which will then be matched by the solver to determine the best way to complete the trade.
Economic Advantages
Solvers will seek the best price for you by matching peer-to-peer trades (known as 'demand consistency') or through off-chain trading. This not only reduces fees but also avoids price manipulation while effectively defending against MEV (Maximum Extractable Value) attacks.
Technical Advantages
The protocol supports batch auctions, allowing users to submit multiple trades and even pay gas fees with non-ETH assets. If a trade fails, no fees will be charged.
Solvers and Batch Auctions
Solvers compete to batch process your trading intents, aiming to secure the best price for you. Batch auctions can avoid manipulation, ensuring that all trades are priced uniformly. This system also prevents bots from profiting through transaction order loopholes and supports point-to-point trade matching, thereby reducing costs and improving efficiency.
Order Processing
CoW Protocol primarily processes orders through the following 4 steps:
Submit Intent: Users do not place an order directly; instead, they sign and submit a 'trading intent' that specifies the trading assets and amounts.
Batch Processing: CoW Protocol combines multiple trading intents into one batch.
Solver Competition: Solvers propose solutions in a short time frame to provide the best price for users, and the solver offering the best quote will win.
Execution: The winning solver executes the trade, and the user receives the corresponding tokens.
This process aims to reduce trading costs, optimize prices, and prevent MEV attacks.
Order Types
As of November 2024, CoW offers 6 types of order types: market orders, limit orders, time-weighted average price (TWAP) orders, programmable orders, Milkman orders, and CoW Hook.
1. Market Order
Designed to execute buy and sell trades immediately at the current market price.
The solver must complete the entire order; otherwise, they must wait for market liquidity.
Users can set slippage tolerance to cope with potential price fluctuations during execution.
2. Limit Order
Executes buy and sell trades at a specified price within the validity period.
The order will execute when the price reaches the set target; otherwise, it will automatically expire.
CoW Protocol does not charge gas fees when processing trades and optimizes transactions for the best price.
3. TWAP Order
Breaks large orders into smaller trades and executes them gradually to minimize price impact.
Users can set asset, price limits, split amounts, and duration to control the execution of orders.
4. Programmable Order
Automatically executes trades based on specific conditions (e.g., price trigger conditions).
Suitable for complex strategies, DAOs, and protocol-level trading.
5. Milkman Order
Milkman orders were launched in collaboration between Yearn Finance and CoW Protocol, based on real-time price feedback rather than fixed prices.
Even if there is a significant delay in order execution, Milkman orders can still trade at a fair market price.
Applicable for DAOs and governance-related trading.
6. CoW Hook
CoW Hook allows users to perform custom operations before and after trades, such as cross-chain fund transfers, staking, or claiming rewards.
CoW Hook combines multiple operations into a single transaction, enabling users to execute any Ethereum-related operation alongside their CoW orders.
Both developers and traders can express their trading intentions through CoW Hook.
MEV Blocker
MEV Blocker, developed jointly by CoW DAO, Beaver Builder, and Gnosis DAO, is a tool that protects users from front-running and sandwich attacks. It sends trades to a secure network, avoiding public trading pools that may be exploited by bots.
When a bot discovers a large transaction in the queue and places an order ahead of that transaction, it is called front-running. This action takes advantage of anticipated price fluctuations, often adversely affecting the original trader's execution price.
When a bot places an order immediately after a large transaction, profiting from the price fluctuations caused by the original trade, it is known as back-running. Since this does not affect the original trader's execution price, the harm is relatively minor.
A sandwich attack is a technique that combines front-running and back-running, where a bot places orders before and after a user's trade to profit by raising the price, resulting in a loss for the user.
These attacks exploit the transparency of blockchain networks but can be prevented using tools like CoW MEV Blocker.
Through MEV Blocker, users can also receive up to 90% cashback from back-running transactions triggered by their trades. This tool is more efficient than traditional trading processes and provides real-time tracking and transaction transparency. Currently, many Web3 wallets (like Uniswap and Trust Wallet) have integrated MEV Blocker to offer a safer and more efficient trading experience.
CoW AMM
LVR Issue
Liquidity providers (LPs) often face losses because most AMMs are unable to quickly adjust to match the latest prices of major trading platforms, thus providing arbitrage traders an opportunity to exploit outdated prices. This issue is known as 'relative loss rebalancing' (LVR), which directly reduces LP earnings.
To address the LVR issue, CoW AMM introduces an innovative mechanism called 'Function Maximizing AMM' (FM-AMM). This mechanism allows batch processing of trades and sets a clearing price for each batch, ensuring that all trades are executed at a fair and up-to-date price.
COW Token
COW token is the core governance token of CoW Protocol, allowing stakeholders to participate in the decision-making process regarding the development and changes of the protocol. This governance system aims to balance the interests of users, developers, and supporters, promoting a community-driven development model.
Conclusion
CoW DAO provides innovative solutions to deliver a better trading experience for Ethereum users, avoiding manipulation while further optimizing liquidity protection and decentralized governance. With CoW Protocol, MEV Blocker, and CoW AMM, users can enjoy lower fees, reduce risks, and enhance control over the trading process.
Further Reading
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