The First Project Report: What is the CoW Protocol for Anti-MEV Trading?

In 2023, when Uniswap launched UniswapX, the market greeted it not with admiration, but with controversy. UniswapX was accused of copying CoWSwap and 1inch. Curve officials stated that 1inch and CoWSwap had already changed the game, and UniswapX was not original. CoWSwap emphasized its pioneering position in Intent Based Trading.

1. What is CoW Protocol?

CoW Protocol is a DEX aggregator that features MEV protection for transactions. The CoW Protocol matches trades from various on-chain liquidity sources through batch auctions. It can provide users with better prices and save a significant amount of money on gas fee optimization and liquidity provider fees.
The Cowswap module in the CoW Protocol demonstrates significant innovation and advantages compared to traditional automated market maker (AMM) models. It does not pursue immediate execution of trades but adopts a strategy of off-chain order aggregation and batch processing to determine a fair and unified settlement price. This mechanism not only optimizes the trading process but also provides users with an outstanding trading experience.
CoW Protocol deeply understands the potential threat that miner extractable value (MEV) poses to trading fairness. To fundamentally address this issue, Cowswap chose to develop based on the second version of the Gnosis protocol, which was crafted by the Gnosis team. By aggregating off-chain orders and unifying on-chain settlement, Cowswap effectively avoids front-running trades and sandwich attacks caused by MEV, creating a fairer and more transparent trading environment for users.

Its core mechanism cleverly integrates the essence of batch auctions and peer-to-peer trading, ensuring that every participant can lock in the most competitive trading prices. This mechanism is reinforced by a fully permissionless architecture, achieving seamless integration and broad inclusivity. As the core driving force of price discovery, it is deeply rooted in the concept of "Coincidence of Wants" (CoWs). By accurately capturing overlapping moments of trading demand, it maximizes liquidity potential and ensures efficient and precise trade execution. This mechanism not only optimizes pricing strategies but also effectively reduces gas costs and lowers execution risks, as all trades are executed in batches rather than individually.
In the operational landscape of the CoW Protocol, solvers play a crucial role. They act as the key force in optimizing trading rates, competing fiercely for the right to execute trades as a reward for obtaining the best rates. This competitive landscape forces solvers to fully utilize all on-chain liquidity resources, including decentralized exchanges (DEXs) and DEX aggregators, to ensure the successful completion of trading orders.
In short, Cowswap not only provides users with a superior trading experience through its unique trading processing mechanism but also addresses the issue of unfairness in trading through technological means, creating a safer and more reliable trading space for users.

2. CoW Protocol Operating Mechanism

In traditional trading markets, market makers play a key role in providing liquidity, while in the current decentralized exchange (DEX) space, this responsibility is largely undertaken by liquidity providers. However, CowSwap, with its unique batch order auction mechanism, matches CoW orders for traders, opening up a new trading path.
On the CowSwap platform, when two traders hold the assets required by each other, the system can directly match trades for them without relying on market makers or liquidity providers for facilitation. This innovative mechanism not only brings optimal prices to individual traders but also eliminates fees generated through intermediaries, maximizing trading efficiency.

Additionally, CowSwap supports users to trade directly using the CoW method. For orders that cannot be settled through CoW, the system will automatically transfer to an automated market maker (AMM) for matching. If the batch auction order includes CoW orders, small orders will be prioritized for complete matching, while the remaining unmatched orders will be secondarily matched by the liquidity market integrated by CowSwap. Ultimately, the settlement price of the entire order will be based on the prices of the remaining orders obtained through external liquidity, ensuring fairness and transparency in trading.
For trades relying on external on-chain liquidity matching, CowSwap introduces the concept of "seekers." As a third-party tool within the protocol, seekers compete to find the best on-chain trades, matching off-chain before batch publishing the trades. The protocol strictly limits the slippage for seekers executing trades, minimizing the space for MEV arbitrage. Additionally, batch order settlements are limited to certified seekers, further compressing the operational space for miners and MEV arbitrageurs.
CoW trading does not require third-party liquidity, resulting in zero trading costs. However, trades on CowSwap incur fees, consisting of base execution fees and protocol fees, part of which is used to incentivize seekers to provide the best trades. Currently, users only need to pay gas fees (base trading fees), while protocol fees are temporarily waived.
CowSwap now supports market orders for buying and selling, requiring only one off-chain signature during the trading process. After users submit trades, seekers will be responsible for matching, and fees are only incurred upon order execution, with no costs for failed trades.
Currently, CowSwap has integrated Uniswap's liquidity resources and will continue to expand, planning to integrate liquidity from more DEXs such as Balancer to provide richer trading options and a better service experience.

3. CoW Protocol Technical Core

As an innovative decentralized trading mechanism, CoW Protocol aims to optimize trading security and integrity to address the challenges of DeFi and cryptocurrency trading.
It employs batch auctions, peer-to-peer trading, and off-chain order matching, allowing users to sign exchange intentions, after which solvers compete to provide the best rates and execute trades, reducing front-running and slippage risks.
Solvers create Coincidence of Wants (CoWs) through batch processing of trades, improving trading efficiency and cost-effectiveness. When direct matching is not feasible, solvers compare quotes from different sources to ensure competitive pricing. CoW Protocol also implements measures to protect users from miner extractable value (MEV) attacks, reducing malicious behavior through solver algorithm networks.

Governance and infrastructure are overseen by CowDAO, where COW token holders participate in decision-making and enjoy benefits such as discounts on CowSwap fees, aligning with the long-term success and security of the protocol. CoW Protocol promotes direct peer-to-peer trading among users, reducing slippage and trading costs, ensuring the best execution rates through extensive scanning of decentralized exchanges and aggregators.

4. CoW Protocol Team and Financing Information

CoW Protocol is led by Anna George (co-founder and CEO) and Olga Fetisova (data head). The team has a strong technical background and industry experience, dedicated to building a secure and fair decentralized trading platform.
In March 2022, CoW Protocol completed a $23 million private fundraising round, with investors including 0x, 1kx, Blockchain Capital, Ethereal Ventures, Robot Ventures, SevenX Ventures, Delphi Digital, Hack VC, mgnr, Dialectic, Collider Ventures, imToken Ventures, LongHash Ventures, P2P Capital, and Kronos Research, raising $15 million, with the remaining funds raised from 5,000 community members.

5. CoW Token Economics

The native token of CoW Protocol is COW, and its token economics is designed to promote governance, incentives, and value capture for the protocol. Total supply: 1 billion COW tokens. In terms of governance, COW token holders can participate in the governance of CoW DAO, voting to determine key parameters and development directions of the protocol, safeguarding the common interests of the community. COW tokens are used to reward solvers who provide optimal trading paths within the protocol, incentivizing them to continuously optimize trade execution and enhance user experience.
The main distribution methods are as follows:
Cow DAO Treasury: 44.4% (444,000,000 COW)
Development Team: 15% (150,000,000 COW)
Community Investors: 10% (100,000,000 COW)
Gnosis DAO: 10% (100,000,000 COW)
Airdrop: 10% (100,000,000 COW)
Partners: 10% (100,000,000 COW)
Advisors: 0.6% (6,000,000 COW)

CoW Protocol plans to implement a protocol fee mechanism, with part of the revenue used to buy back and burn COW tokens, aiming to reduce market supply and potentially enhance token value.

6. Future Value Analysis of CoW

Overseas analysts predict that if Cowswap successfully implements the "fee switch" strategy, which involves paying solver rewards in ETH or stablecoins, the issuance of COW is expected to significantly decrease by over 40%. The realization of this proposal means that CoW Protocol will have the ability to autonomously collect fees. As trading demand continues to grow, protocol fees will be continuously injected into the DAO treasury in the form of COW tokens, effectively reducing the circulation of COW in the market.
From a theoretical perspective, the increase in Cowswap's real income, the reduction in circulation, and the provision of MEV protection and intent narrative, among other factors, all positively influence its token price. Under the combined effect of these factors, the market value of COW is expected to rise.
However, we must also recognize that Cowswap still has a significant gap in market capitalization and scale compared to leading enterprises in the DEX space. Therefore, whether Cowswap can continue to attract users and expand its market share will be a key factor in determining its future development.