Key points to remember
CoW DAO is a DeFi project that aims to improve user experience and security. To do this, the project has three main tools: CoW Protocol, VME Blocker, and CoW AMM.
The CoW protocol is a trading tool that provides efficient pricing mechanisms and protection against unfavorable trading setups.
VME Blockers are a transaction protection tool that helps users avoid frontrunning and sandwich attacks.
AMM CoW is an automated market maker that adopts a new model to protect liquidity providers from price exploitation.
What is CoW DAO?
CoW DAO focuses on building products on Ethereum that can improve the security and trading experience of Web3 users. The project relies on three main tools: the CoW protocol, the VME blocker, and the CoW AMM. These three tools also provide development support, grants, and other resources for these projects.
CoW Protocol: A trading tool that uses grouped trades to find the best prices and improve liquidity.
VME Blocker: A trade protection tool that prevents attacks on trades while providing discounts to users.
AMM CoW: An automated market maker (AMM) that protects liquidity providers from price exploitation.
CoW DAO adopts a decentralized governance model that allows community members to control the development of the protocol.
Protocole CoW
A trading intention
When you trade using the CoW protocol, instead of placing a trade directly, you sign a “trading intent.” This intent describes the assets and quantity you wish to trade. Solvers then find the best way to execute your trade.
Financial benefits
Solvers try to get you the best prices by matching peer-to-peer transactions (called Coincidence of Wants) or finding offers off the blockchain. This method reduces fees and prevents price manipulation while providing protection against VME (Maximum Extractable Value) attacks.
Technical advantages
The protocol supports batch auctions, which allows users to submit multiple trades and even pay gas fees with tokens other than ETH. It also allows for fees to be waived for failed transactions.
Batch Solvers and Auctions
Solvers compete to process your trading intentions in batches, with the goal of getting you the best deal. Batch auctions provide protection against manipulation and allow for uniform pricing across trades. This system prevents bots from exploiting the order of trades and supports peer-to-peer trade matching, reducing costs and improving trade efficiency.
Order processing
The CoW protocol consists of four main steps for processing an order:
Submitting an Intent: Instead of directly placing an order, users submit a signed “Intent to Trade” with details about the assets and quantities they wish to trade.
Bundling: The CoW protocol bundles multiple trading intentions into a batch.
Solver Competition: Solvers have a limited time to propose solutions, in order to obtain the best prices for users. The solver with the best offer wins the prize.
Execution: The solver who won the batch executes the trades and users receive their tokens.
This method is designed to reduce costs, improve pricing and provide protection against VME.
Order Types
As of November 2024, CoW offers six order types: Market orders, Limit orders, TWAP orders, Programmatic orders, Milkman orders, and CoW hooks.
1. Market Orders
If you want to buy or sell immediately at the current price.
Solvers must execute the entire order or wait for liquidity.
Users set a slippage tolerance to account for price changes during execution.
2. Limit Orders
If you want to buy or sell at a specific price before an expiration date.
If prices reach the target, the order executes; otherwise, it expires.
The CoW protocol handles these orders without gas costs and optimizes them to obtain the best possible prices.
3. TWAP Orders
If you want to split large orders into smaller trades over time to minimize price impacts.
Users define assets, price limits, number of divisions and duration to control order execution.
4. Programmatic orders
If you want automated trades based on specific conditions (e.g. price triggers).
These orders are useful for complex strategies, DAOs, and protocol-level transactions.
5. Milkman Orders
Created by Yearn Finance in collaboration with the CoW protocol, Milkman orders rely on real-time price feeds instead of fixed prices.
Milkman orders can be executed at a fair market price, even if the orders are significantly delayed.
They are useful for DAOs and governance dependent trades.
6. Les liens CoW (Hooks CoW)
CoW Hooks allow users to perform custom actions before or after trades, such as transferring funds, staking, or claiming rewards.
CoW Links execute a combination of actions in a single transaction, allowing users to associate any Ethereum-related action with their CoW orders.
Developers and traders are able to express their intention.
The VME blocker
Developed by CoW DAO, Beaver Builder, and Gnosis DAO, the VME Blocker is a tool that protects users from frontrunning and sandwich attacks. It sends transactions to a secure network, avoiding public pools that attract bots.
Frontrunning occurs when bots spot a large trade in the queue and place their order ahead of it, taking advantage of the expected price change. The original trader often ends up with a lower price.
Backrunning occurs when bots place trades right after a large trade in order to take advantage of price changes caused by the original trade. This phenomenon is less damaging because it does not impact the original trader’s price.
Sandwich attacks are a combination of the two methods described above, where a bot places a trade before and after a user's trade, inflating the price and profiting at their expense.
These tactics exploit the transparent nature of blockchain networks, but they can be countered with tools like CoW's VME Blocker.
With the VME Blocker, users can also benefit from a discount of up to 90% on reverse trades created by their own transactions. This tool is faster than standard transaction processes and allows users to transparently track their orders in real-time. Many Web3 wallets, such as Uniswap and Trust Wallet, have integrated the VME Blocker for safer and more efficient trading.
AMM de CoW
The PRR problem
Liquidity providers (LPs) often lose out because most AMMs don’t adjust quickly enough to match the latest prices on major exchanges, resulting in stale prices that arbitrage traders exploit. This phenomenon is known as the “loss to rebalance” (LTR) problem, which reduces liquidity providers’ profits.
To address the PRR issue, CoW’s AMM uses an innovative mechanism called Function-Maximizing AMM (FM-AMM). This mechanism groups trades into lots and sets a single clearing price for each lot, ensuring that trades occur at a fair and up-to-date price.
Le token COW
The COW token is at the heart of the CoW protocol, acting as a governance token that allows stakeholders to participate in decision-making regarding the growth and changes of the protocol. This governance system is designed to align the interests of users, developers, and investors, fostering a community-driven approach.
Conclusion
CoW DAO offers innovative solutions to protect Ethereum users from manipulation, ensuring better trades, liquidity protection, and decentralized governance. With the CoW protocol, VME blocker, and CoW AMM, users can benefit from reduced fees and risks, as well as increased control over their transactions.
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