CowSwap, in addition to aggregating third-party flows, introduces a demand-matching CoW model to avoid MEV and reduce transaction friction.
In addition to high user transaction fees due to performance issues, MEV (Miner Extracted Value) is also a deterrent for many users of ethereum.
Earlier this month, Gnosis protocol announced the launch of its second version, GPv2, which integrates the liquidity of decentralized exchanges and can provide MEV protection. cowSwap is a decentralized trading application based on GPv2, which is worth watching.
In particular, CowSwap was developed by the development team of the Gnosis protocol, a decentralized application infrastructure that includes decentralized prediction marketplaces, multi-signature wallets Gnosis Safe, Gnosis DAO, auction marketplaces, and other types of applications, with the protocol’s native token GNO.
What are the features of CowSwap?
CowSwap’s name seems to be related to “cow”, but in fact the “Cow” refers to the product’s unique way of transaction aggregation. According to the product’s documentation, CowSwap uses “Coincidence of Wants (CoW)” to broker deals.
Specifically, “Coincidence of Wants” is an economic phenomenon in which “two people who have something they need at the same time can trade directly without the use of currency as a medium.
While in traditional trading markets, liquidity is provided by market makers, today’s decentralized exchanges (DEX) mostly have liquidity providers providing liquidity to the market. CowSwap is a core trading mechanism that matches traders with CoW orders through a batch auction.
This means that two people on CowSwap with assets they both want can be matched directly without the need for a market maker or liquidity provider to broker the trade. This allows for the best price for individual traders and eliminates the fees incurred through market makers or liquidity providers.
Users are allowed to trade directly on CowSwap using the CoW method. Orders that cannot be cleared through CoW are traded directly through Automated Market Maker (AMM) matching.
If there is a CoW order in a volume auction order. Once small orders are fully matched, the remaining orders that are not matched through CoW are then matched by CowSwap’s integrated liquidity market. The entire order settlement price is based on the price of the remaining orders obtained through external liquidity.
CowSwap currently integrates with Uniswap, and will integrate with more DEX liquidity such as Balancer in the future.
What are the advantages of CoW?
According to the project team, CoW aggregates transactions with two advantages: avoiding MEV and reducing transaction friction.
Since CoW does not require external liquidity on the chain and uses a uniform price for settlement within a bulk order, all orders are priced the same and there is no transaction sequencing problem, essentially eliminating MEV situations.
GPv2 introduces the concept of “slover” for transactions matched by on-chain external liquidity. The “slover” is a third-party tool introduced into the protocol that competes to find the best deal on-chain, and then matches the deal off-chain and aggregates it for bulk release.
The profit margin for MEV arbitrage is minimal because the protocol strictly limits the slippage of the “finder” to execute trades. Moreover, bulk order settlement can only be submitted by certified searchers, which greatly reduces the room for miners and MEV arbitrageurs to operate.
Since CoW does not require third-party liquidity, there are no transaction costs for CoW trading. Transactions on CowSwap, on the other hand, are subject to a fee. The processing fee consists of a base fee for executing the order and an agreement fee. A portion of this is paid to the searcher to provide an incentive to offer the best deal within the agreement. Currently, users only pay the Gas fee (base transaction fee) and no agreement fee is charged at this time.
CowSwap currently only supports buy and sell orders at current prices. Trading with CowSwap requires only one off-chain signature. The user only needs to sign and submit the transaction, and a searcher will be available to match the transaction. Fees are paid only when the order is executed, and nothing is paid for failed transactions.
The current Dex trade aggregator relies entirely on third-party liquidity, which reduces slippage and improves trading efficiency, but still incurs transaction fees; CowSwap uses a combination of CoW orders and third-party liquidity, which retains these benefits while reducing transaction fees.
It is expected that CowSwap will incentivize CoW trading depth and introduce CoW market making in the future. Market makers will monitor limit orders within the agreement, provide counterparty trading, and reduce reliance on third-party liquidity. This will fundamentally eliminate MEV and reduce fees to provide the best user experience.
It is also important to note that CowSwap is not a coin offering and the Cowswap tokens on the market are not tokens within this protocol.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/read-about-cowswap-in-three-minutes-how-mev-free-low-fee-trading-is-possible/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.