Original title: (COW Doubled in One Day Leading the DeFi Race, What Skills Does Vitalik's Favorite Swap Have?)
Original author: Luke
This article was originally published on November 8
With Trump's victory, cryptocurrency assets surged across the board, but the most notable project is COW, which just went live on Binance, with a maximum increase of 204%.
Some say that COW's choice to go live on Binance led to such a high increase, while others argue that COW is Vitalik's favorite swap; every time he memes a crash, he uses cowswap, so the cow itself is also a meme. But is that really the case?
In comparison, the newly listed SUI ecosystem DeFi project CETUS on the same day had a maximum increase of only 100%, despite benefiting from SUI's recent surge. So, why could COW, which had previously received little discussion, lead DeFi so strongly? What advantages does the project itself have? Marsbit provides a quick overview of CoW Swap.
What is CoW Swap?
CoW Protocol is a DEX aggregation protocol deployed on Ethereum and Gnosis, featuring exchange protocols, batch auctions, trade intents, and MEV protection. CoW Swap is the front end of CoW Protocol; this article refers to both as CoW Swap to avoid confusion.
CoW Swap's predecessor, Gnosis Protocol V1, was launched in 2020. It was the first DEX to offer circular trading through batch auctions. These are order settlements that share liquidity among all orders. This was followed by V2, launched in April 2021. The innovations in V2 led to the renaming of Gnosis Protocol to CoW Swap.
Current DEX pain points: MEV
To understand the advantages of CoW Swap, we first need to grasp the pain points of current DEXs. The current trading sequence is:
1. Users create trades.
2. Trades are sent to the memory pool through RPC endpoints.
3. Validators receive and execute the trade.
However, there is a significant issue in this process: it makes end users vulnerable to MEV (Maximum Extractable Value) impacts. This can lead to severe declines in user experience, such as encountering front-running, sandwich attacks, and may also result in poor order execution.
Specifically, MEV bots continuously scan the Ethereum network for users who are ready to buy tokens. Once a target is identified, these bots quickly insert themselves, placing large orders ahead of the user, artificially raising the price. After the victim's trade is completed, the price rises further, allowing the bots to sell the tokens at a higher price for profit.
The harm of such behavior should not be underestimated. According to a report released by investment firm Galaxy Digital last June, MEV bots extracted profits of up to 300 million to 900 million USD from Ethereum traders using these strategies.
Faced with this daunting challenge, the CoW protocol stands out, with one of its main advantages being comprehensive MEV protection for each order, a type of attack that is difficult to avoid in most major DEXs. The CoW protocol builds a solid defense system for users primarily through its unique trading model in the following three aspects:
· Unified clearing price batch: Innovatively introduced the 'unified clearing price' mechanism. When the same token pair (such as ETH-USDC) is traded multiple times within the same batch, the assets of each trade will be settled at the same market price. This mechanism cleverly makes the order of trades irrelevant, effectively preventing MEV bots from profiting by reordering trades. More importantly, it provides a method for establishing consistent prices for the same token pair within the same block for the Ethereum DeFi ecosystem, addressing the price inconsistency issues caused by the constant product market maker (CPMM) designs of traditional Uniswap liquidity pools.
· Delegated trade execution: The CoW protocol introduces a third party called Solvers, who act as guarantors and execute trades on behalf of users. This means users are no longer directly exposed to on-chain MEV risks (although Solvers may be). The winning Solvers must ensure that users receive execution results no lower than the signed price, effectively transferring all potential price risks from MEV attacks to the Solvers. As professionals, Solvers will accurately calculate the optimal slippage for each trade and match liquidity off-chain through CoW or private market makers, significantly reducing MEV risks.
· Coincidence of Wants: The CoW protocol cleverly utilizes the principle of 'Coincidence of Wants.' Traditional MEV attacks mainly rely on the price dynamics of automated market makers (AMM). However, when orders are matched peer-to-peer through CoW, they completely bypass on-chain liquidity, fundamentally eliminating the potential for MEV attacks. This innovative trading method not only improves efficiency but also provides users with a secure and fair trading environment.
Core explanation: CoW Coincidence of Wants
The 'Cow' in CoW Swap's name is not a mere imitation of Uniswap or 1inch trying to create an animal mascot as the protocol's logo; rather, 'Cow' is an abbreviation for Coincidence of Wants, which refers to a phenomenon in economics where two parties exchange assets directly in a peer-to-peer manner. In CoW Swap, a coincidence of wants occurs when two (or more) traders swap cryptocurrencies without the need for on-chain liquidity.
To better understand this concept, let's take Alice and Bob as an example:
Alice wants to exchange 0.5 ETH for 1,000 USD of DAI. Meanwhile, Bob hopes to exchange 0.75 ETH for 1,500 USD of DAI. In traditional exchanges like Uniswap, both Alice and Bob would utilize the ETH / DAI liquidity pool for trading.
However, on CoW Swap, there is another possibility. CoW Swap orders begin as signed 'trade intent' messages, which are processed in batches before being sent to on-chain liquidity sources like Uniswap. This allows CoW Swap to match orders peer-to-peer.
This also means that Alice and Bob have what the other wants. Alice can directly give her ETH to Bob, and Bob can directly send his DAI to Alice; this trading action does not require going through a liquidity pool, but is a spontaneous peer-to-peer trade. This saves the liquidity providers' fees and gas costs, avoids slippage, and prevents MEV attacks.
At its core, what CoW Coincidence of Wants does is order matching.
Additionally, Bob needs 0.75 ETH, while Alice only has 0.5 ETH, which cannot meet Bob's demand. In this case, if there are no others to engage in a second CoW trade with him during the current trading period, Bob's trade would have to be routed to on-chain liquidity pools like Uniswap or Balancer to fill his remaining trade.
The second design of CoW is to bundle orders that have to trade in liquidity pools together and send them on-chain, allowing everyone to share this gas fee, a design that closely resembles Layer 2 solutions on public chains; indeed, this model can be described as a rollup in DEX, which is very clever.
The third design of CoW is off-chain batch trading, which not only finds 'coincidence of wants' but also creates ring trades. Ring trades share liquidity among all orders instead of a single token pair. This allows the protocol to break trades into multiple parts, thereby reducing user costs.
Now let's take an example with 4 traders trying to swap different token pairs. Alice is trying to sell DAI for OWL, Daniel is trying to sell OWL for USDC, and Bob & Carry are trying to sell USDC for DAI. The Cowswap protocol does not route all trades through AMM, but instead forms a circular exchange that directly matches three different currency pairs.
In contrast, traditional AMMs require jumping between different pools and routes, with more jumps resulting in higher fees, while ring trades effectively solve this problem.
Innovative trading mechanism: Intent trading
CoW Protocol introduces a revolutionary trading method—intent trading. Users do not need to send trades directly but instead submit a signed order, known as a trade intent. This order precisely defines the assets users wish to trade within a specific timeframe. Notably, users do not need to worry about the specific execution details of the trade, such as slippage or liquidity pool selection. These signed orders are then passed off-chain to specialized participants known as Solvers. These Solvers compete fiercely during the order's validity period to find the optimal execution path, and the winning Solver will win the right to execute the trade.
This innovative mechanism has brought significant improvements to user experience: The gas fees required for trading are borne by the Solver, meaning that even if a trade fails to execute successfully (for example, if no path that meets the promised price is found before the deadline), users do not have to pay any gas fees, effectively reducing their trading risk.
In the CoW Swap trading interface, users can clearly see the minimum guaranteed price they will receive when executing a trade. More excitingly, thanks to its unique batch trading and CoW (Coincidence of Wants) mechanism, traders often achieve returns beyond expectations. This delightful phenomenon is vividly referred to as "Price Improvement," further highlighting CoW Swap's outstanding performance in enhancing user trading experience.
Economic model and market cap
COW is the governance token of the Cow Protocol, with a total supply of 1 billion tokens, of which 90.25 million are in circulation, accounting for 9.02% of the total supply, with a market cap of 142 million USD; the token distribution is as follows:
· 44.4% belongs to the national treasury
· 15% belongs to the team
· 10% belongs to GnosisDAO
· 10% for ecosystem investment
· 0.6% for rewarding guiding proposals
· 10% for airdrops
· 10% for protocol development
Governance: COW token holders can participate in the governance of CoW DAO, voting on key parameters and development directions of the protocol to ensure the common interests of the community.
Incentive mechanism: COW tokens are used to reward Solvers who provide the best trading paths in the protocol, encouraging them to continuously optimize trade execution and enhance user experience.
Fee allocation: CoW Protocol plans to introduce a protocol fee mechanism, with part of the revenue used to buy back and burn COW tokens, reducing market supply and potentially increasing token value.
Market analysis and price prediction
Cow Swap stands out with its exceptional innovative performance, providing practical solutions for on-chain trading users in key areas such as MEV resistance, gas-free trading, and advanced orders. With its exquisite design concept and outstanding user experience, Cow Swap performs excellently in the highly competitive DEX aggregator market. Recent data shows that the protocol's trading volume surpassed 3 billion USD last month, achieving a considerable revenue of 870,000 USD, fully demonstrating its strong market appeal and growth potential.
Notably, Cow Swap's market share in the aggregation trading field shows a robust upward trend. It jumped from 17% at the beginning of the year to 30%, narrowing the gap with industry leader 1inch to just 9 percentage points. However, despite Cow Swap showcasing such strong growth momentum, its current market cap of 140 million USD is still less than half of 1inch's. This significant valuation difference has sparked discussions in the market about Cow Swap's potential value being underestimated. Analysts generally believe that as Cow Swap continues to expand its market influence and further improve its ecosystem, its valuation is expected to see significant increases.
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