With a single-day increase of over 40%, what is special about CoW Swap?

Original title: "COW doubled in one day to lead the DeFi track, what is the ability of V God's favorite swap?"

Original author: Luke, MarsBit

This article was originally published on November 8

With Trump's victory, crypto assets rose across the board, but the most eye-catching project was COW, which was just launched on Binance, with the highest increase of 204%.

Some people say that COW chose to be launched on Binance on a good day to reap such a high increase, and others say that COW is V God's favorite swap, and every time the meme is smashed, cowswap is used, so the cow itself is also a meme, but is this really the case?

In contrast, the SUI ecosystem DeFi project CETUS, which was newly listed on Binance on the same day, had a maximum increase of only 100%, which also benefited from the recent surge in SUI. So, why can COW, which was not discussed much before, lead DeFi so strongly? What advantages does the project itself have? Marsbit takes you to a quick look at CoW Swap in this article.

What is CoW Swap?

CoW Protocol is a DEX aggregation protocol deployed on Ethereum and Gnosis, integrating exchange protocols, batch transactions (Batch Auctions), intentions (Trade Intents) and MEV protection. CoW Swap is the front end of CoW Protocol. In order to avoid confusion, both are referred to as CoW Swap in this article.

CoW Swap's predecessor, Gnosis Protocol V1, was launched in 2020. It was the first DEX to offer ring trades through batch auctions. These are order settlements that share liquidity between all orders. V2, which was launched in April 2021, was followed by V2. The innovation of V2 led to Gnosis Protocol being renamed CoW Swap.

Pain points of current DEX: MEV

To understand the advantages of CoW Swap, you must first understand the pain points of current DEX. The current transaction order is:

1. The user creates a transaction.

2. The transaction is sent to the memory pool via an RPC endpoint.

3. The validator gets the transaction and executes it.

However, there is a significant problem with this process: it makes the end user vulnerable to MEV (maximum extractable value). This can not only lead to a serious degradation of the user experience, such as front-running, sandwich attacks, etc., but can also cause poor order execution.

Specifically, MEV bots constantly scan the Ethereum network for users who are ready to buy tokens. Once they find their target, these bots quickly jump in line and place large orders before the user, artificially raising the price. After the victim's transaction is completed, the price rises further, and the bots then sell the tokens at a higher price to make a profit.

The harm of this behavior should not be underestimated. According to a report released by investment firm Galaxy Digital in June last year, MEV robots used these strategies to extract up to $300 million to $900 million in benefits from Ethereum traders.

Faced with this severe challenge, the CoW protocol stands out. One of its main advantages is that it provides comprehensive MEV protection for each order, and this attack is difficult to avoid in most major DEXs. Through its unique trading model, the CoW protocol has built a solid defense system for users mainly from the following three aspects:

· Unified clearing price batches:Innovatively introduce the "unified clearing price" mechanism. When the same token pair (such as ETH-USDC) is traded multiple times in the same batch, the assets of each transaction will be cleared at the same market price. This mechanism cleverly makes the order of transactions irrelevant, effectively preventing MEV robots from profiting by reordering transactions. More importantly, it provides the Ethereum DeFi ecosystem with a way to establish consistent prices for the same token pairs within the same block, solving the price inconsistency problem caused by the design of constant function market makers (CFMMs) such as traditional Uniswap liquidity pools.

· Delegated Transaction Execution:The CoW protocol introduces a secured third party called Solvers who execute trades on behalf of users. This means that users are no longer directly exposed to MEV risk on the chain (although Solvers may be exposed). The winning Solvers must ensure that the user is provided with an execution result that is no less than the price they signed, which actually transfers the price risk of all potential MEV attacks to Solvers. As a professional party, Solvers will accurately calculate the optimal slippage for each transaction and match liquidity off-chain through CoW or private market makers whenever possible, thereby significantly reducing MEV risk.

· Coincidence of Demand:The CoW protocol cleverly exploits the principle of "coincidence of demand". Traditional MEV attacks mainly rely on the price dynamics of automated market makers (AMMs). However, when orders are matched peer-to-peer through CoW, they completely bypass on-chain liquidity, fundamentally eliminating the possibility of MEV attacks. This innovative trading method not only improves efficiency, but also provides users with a safe and fair trading environment.

Core Detailed Explanation: CoW Coincidence of Demand

The Cow in the name of CoW Swap is not a groundless imitation of Uniswap or 1inch to make an animal head as the logo of the protocol. In fact, Cow is the abbreviation of Coincidence of Wants, which means coincidence of demand. Coincidence of demand is an economic phenomenon in which two parties exchange assets peer-to-peer. On CoW Swap, coincidence of demand occurs when two (or more) traders exchange cryptocurrencies with each other without having to use 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 DAI. At the same time, Bob wants to exchange 0.75 ETH for $1,500 DAI. On a traditional exchange like Uniswap, both Alice and Bob would trade using the ETH/DAI liquidity pool.

However, on CoW Swap, there is another possibility. CoW Swap orders start as signed "intention to trade" messages, which are batched together before being sent to on-chain liquidity sources such as Uniswap. In this way, CoW Swap can match orders peer-to-peer.

This also means that Alice and Bob both have something the other wants. Alice can give her ETH directly to Bob, and Bob can send his DAI directly to Alice. This transaction does not need to go through the liquidity pool, but is a spontaneous peer-to-peer transaction. This saves liquidity providers fees and gas costs, avoids slippage, and prevents MEV attacks.

At its core, what CoW demand coincidence does is order matching.

In addition, Bob needs 0.75 ETH, but Alice only has 0.5 ETH, which cannot meet Bob's needs. In this case, if no one else can make a second CoW transaction with him during the current trading session, then Bob's transaction will have to be routed to the on-chain liquidity pool through services such as Uniswap or Balancer to fill his remaining transactions.

The second design of CoW is to bundle these orders that have to go to the liquidity pool for trading together and send them to the chain, so that everyone can share the gas fee. A similar design is very similar to Layer2 in the public chain. Yes, this model can be said to be rollup in DEX, which is very clever.

The third design of CoW is off-chain batch trading, which can not only find "demand coincidences", but also create ring trades. Ring trades share liquidity among all orders, rather than a single token pair. This enables the protocol to break down transactions into multiple parts, thereby reducing user costs.

Now let's take the example of 4 traders trying to exchange different token pairs. Alice tries to sell DAI to OWL, Daniel tries to sell OWL to USDC, and Bob & Carry tries to sell USDC to DAI. Instead of routing all transactions through AMM, the Cowswap protocol forms a ring that directly matches three different currency pairs with each other.

The corresponding is that traditional AMM needs to jump between different pools and routes. The more steps of jumping, the more expensive the handling fee is, and the ring transaction solves this problem well.

Innovative trading mechanism: intention trading

CoW Protocol introduces a revolutionary trading method-intention trading. Instead of sending transactions directly, users submit a signed order, which is the so-called trading intention. This order precisely defines the assets that users want to trade within a specific time frame. It is worth noting that users do not need to care about the specific execution details of the transaction, such as slippage or the choice of liquidity pool. These signed orders are then passed off-chain to professional participants called Solvers. These solvers will compete fiercely during the order period, striving to find the best execution path, and the winning solver will win the right to execute the transaction.

This innovative mechanism brings significant improvements to the user experience: the Gas fee required for the transaction is borne by the Solver, which means that even if the transaction fails to be successfully executed (for example, a path that meets the promised price cannot be found before the deadline), the user does not need to pay any Gas fee, which effectively reduces the user's transaction risk.

In the CoW Swap trading interface, users can clearly see the minimum guaranteed price they will get when executing a transaction. What's more exciting is that thanks to its unique batch trading and CoW (Coincidence of Wants) mechanism, traders can often get returns beyond their expectations. This pleasant phenomenon is officially called "Price Improvement", which further demonstrates CoW Swap's outstanding performance in improving user trading experience.

Economic model and market value

COW is the governance token of Cow Protocol, with a total of 1 billion tokens, 90.25 million tokens in circulation, accounting for 9.02% of the total tokens, and a market value of 142 million US dollars; the token distribution is as follows

· 44.4% belongs to the treasury

· 15% belongs to the team

· 10% belongs to GnosisDAO

· 10% for ecological investment

· 0.6% for rewarding guiding proposals

· 10% for airdrops

· 10% for protocol development

Governance:COW token holders can participate in CoW DAO

Incentive Mechanism: COW tokens are used to reward Solvers who provide the best transaction paths in the protocol, encouraging them to continuously optimize transaction execution and improve user experience.

Fee Allocation: CoW Protocol plans to introduce a protocol fee mechanism, and part of the revenue will be used to repurchase and destroy COW tokens, reduce market supply, and potentially increase token value.

Market Analysis and Price Prediction

Cow Swap stands out for its outstanding innovative performance, providing practical solutions for on-chain trading users in key areas such as MEV resistance, gas-free transactions, and advanced orders. With its superb design concept and excellent user experience, Cow Swap has performed well in the highly competitive DEX aggregator market. The latest data shows that the protocol's transaction volume exceeded the $3 billion mark last month, achieving a considerable revenue of $870,000, fully demonstrating its strong market appeal and growth potential.

What is even more striking is that Cow Swap's market share in the field of aggregated trading has shown a steady upward trend. It has jumped from 17% at the beginning of the year to 30%, and the gap with the industry leader 1inch has narrowed to only 9 percentage points. However, despite Cow Swap's strong growth momentum, its current market value of US$140 million is still less than half of 1inch. This significant valuation difference has triggered market discussions about the underestimation of Cow Swap's potential value. Analysts generally believe that as Cow Swap continues to expand its market influence and further improve its ecosystem, its valuation is expected to increase significantly.

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