Key Points
CoW DAO is a DeFi project aimed at improving user experience and security. It has three main tools: CoW Protocol, MEV Blocker, and CoW AMM.
CoW Protocol is a trading tool that provides efficient pricing mechanisms and protection against unfavorable trading setups.
MEV Blockers is a transaction protection tool that helps users avoid frontrunning and sandwich attacks.
CoW AMM 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 creating products on Ethereum that can improve the security and trading experience of Web3 users. The project has three main tools: CoW Protocol, MEV Blocker, and CoW AMM. It also provides support for development, grants, and other resources for these projects.
CoW Protocol: a trading tool that uses batch trades to find the best prices and improve liquidity.
MEV Blocker: a transaction protection tool that prevents attacks on trades while offering discounts to users.
CoW AMM: 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.
CoW Protocol
Intent to Trade
When you trade with CoW Protocol, instead of making a trade directly, you sign an "intent to trade." This intent describes what and how much you want to trade, and the solvers find the best way to fulfill it.
Financial Benefits
Solvers try to get you the best prices by matching trades between pairs (what is known as "wish matching") or finding off-chain deals. This method reduces fees and prevents price manipulation while providing protection against MEV attacks (Maximum Extractable Value).
Technical Advantages
The protocol supports batch auctions, allowing users to submit multiple trades and even pay gas fees in tokens other than ETH. It also eliminates fees for failed transactions.
Solvers and Batch Auctions
Solvers compete to process your batch trade intents, aiming to secure the best deal. Batch auctions offer protection against manipulation and allow for uniform pricing across trades. This system prevents bots from exploiting transaction order and supports trade pair matching, reducing costs and improving trade efficiency.
Order Processing
CoW Protocol processes orders in four main steps:
Intent Submission: instead of executing an order directly, users submit an "intent to trade" with details about the assets and amounts.
Batching: CoW Protocol batches multiple trade intents together.
Solver Competition: solvers have limited time to propose solutions, aiming to ensure users get the best prices. The solver with the best offer wins.
Execution: the winning solver executes the operations and users receive their tokens.
This method is designed to reduce fees, improve prices, and offer MEV protection.
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
Attempts to buy or sell immediately at the current price.
Solvers must complete the entire order or wait for liquidity to become available.
Users set a slippage tolerance to account for price changes during execution.
2. Limit Orders
Buy or sell at a specific price before a deadline.
If the prices reach the target, the order is executed. Otherwise, it expires.
CoW Protocol manages them without gas fees and optimizes for the best possible prices.
3. TWAP Orders
Divides large orders into smaller trades over time to minimize price impact.
Users set the assets, price limits, split count, and duration to control the execution of orders.
4. Programmatic Orders
Automated trades based on specific conditions (e.g., price triggers).
Useful for complex strategies, DAOs, and protocol-level transactions.
5. Milkman Orders
Created by Yearn Finance in collaboration with CoW Protocol, Milkman orders are based on real-time price feeds rather than fixed prices.
Milkman orders can be executed at a fair market price even if the orders are significantly delayed.
Useful for DAOs and trades that depend on governance.
6. CoW Hooks
CoW Hooks allow users to execute custom actions before or after trades, such as moving funds, staking, or claiming rewards.
CoW Hooks execute a combination of actions as a single transaction, enabling users to pair any Ethereum-related action with their CoW orders.
Developers and traders can express their intentions.
MEV Blocker
Developed by CoW DAO, Beaver Builder, and Gnosis DAO, MEV 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 detect a large transaction in the queue and place their order beforehand, taking advantage of the expected price change. This often leaves the original trader with an unfavorable price.
Backrunning occurs when bots execute trades just after a large transaction to profit from the price changes left by the original trade. This is less harmful, as it does not affect the original trader's price.
Sandwich attacks are a combination of both, where a bot executes a trade before and after a user's transaction, inflating the price and profiting at the user's expense.
These tactics exploit the transparent nature of blockchain networks, but can be countered with tools like CoW's MEV Blocker.
With MEV Blocker, users can also earn a refund of up to 90% on backrunning trades created by their own transactions. This tool is faster than standard transaction processes and provides users with real-time tracking and transparency. Many Web3 Wallets like Uniswap and Trust Wallet have integrated MEV Blocker to offer safer and more efficient trading.
CoW AMM
The LVR Problem
Liquidity providers (LPs) often lose out because most AMMs do not adjust quickly enough to match the latest prices on major exchanges, leaving outdated prices that arbitrage traders exploit. This is known as the "loss versus rebalancing" (LVR) problem, which reduces the profits of liquidity providers.
To solve the LVR problem, CoW AMM uses a novel mechanism called Function-Maximizing AMM (FM-AMM). This mechanism batches trades and sets a unique settlement price for each batch, ensuring that trades are executed at a fair and updated price.
COW Token
The COW token is fundamental to CoW Protocol, as it acts as a governance token that allows stakeholders to participate in decision-making for the growth and changes of the protocol. This governance system is designed to align the interests of users, developers, and supporters, fostering a community-driven approach.
Conclusions
CoW DAO offers innovative solutions to keep Ethereum users safe from manipulation, ensuring better trading, liquidity protection, and decentralized governance. Through CoW Protocol, MEV Blocker, and CoW AMM, users can enjoy lower fees, reduced risk, and greater control over transactions.
Further Reading
Legal Disclaimer: This content is provided "as is" for informational and educational purposes only, without representation or warranty of any kind. It should not be interpreted as financial, legal, or professional advice of any kind, nor is it intended to recommend the purchase of any specific product or service. You should seek your own advice from appropriate professional advisors. If the article is provided by a third party, please note that the opinions expressed belong to the third party and do not necessarily reflect those of Binance Academy. Read our full legal disclaimer here for more information. The prices of digital assets can be volatile. The value of your investment may go up or down, and you may not recover the amount invested. You are solely responsible for your investment decisions, and Binance Academy is not responsible for any losses you may incur. This material should not be interpreted as financial, legal, or professional advice of any kind. For more information, please refer to the Terms of Use and the Risk Warning.
