CoW DAO Introduces the First MEV-Capturing AMM
Overview
Before delving into CoW DAO’s latest product release, let's take a quick overview of the protocol.
CoW DAO focuses on creating secure and innovative solutions within the Ethereum ecosystem.
The organisation currently supports two main products: the CoW Protocol and the MEV Blocker. These are supported through development and marketing efforts, including initiatives like the CoW Grants Program, the CoW Protocol Explorer and the CoW Swap interface.
The CoW Protocol is an open trading protocol that uses batch auctions for price discovery. It aims to improve liquidity by finding Coincidences of Wants (CoWs) and accessing all available on-chain liquidity when necessary.
The MEV Blocker is an RPC endpoint designed to protect users' transactions from MEV (Maximal Extractable Value) risks, such as frontrunning and sandwich attacks. It also incorporates an auction mechanism for order flows between searchers and builders, offering users rebates for their trades through backrunning.
Regarding governance, CoW DAO employs a decentralised governance model, allowing the community to have full control over the protocol's direction.
Since inception, the protocol has seen $34.9 billion in cumulative trading volume as depicted below;
Furthermore the platform has impressive user retention which can be seen by analysing return traders (blue) and new traders (red) in the chart below;
The release of the first MEV-Capturing AMM
Yesterday, CoW DAO announced that they have built the first MEV-Capturing Automated Market Maker. This was inspired due to the fact that liquidity providers forfeit between 5-7% of their annual profits to MEV, rendering the majority of liquidity pools unprofitable.
Annually, arbitrageurs syphon off hundreds of millions of dollars from liquidity provider funds, a phenomenon identified as loss-versus-rebalancing (LVR). LVR represents a more significant source of MEV than both frontrunning and sandwich attacks combined.
CoW AMM effectively eradicates LVR by employing batch auctions to redistribute surplus to liquidity providers.
The process looks like the following;
- Liquidity providers contribute tokens to secure CoW AMM pools, making liquidity available for traders.
- Solvers compete by offering bids to adjust CoW AMM pools in response to arbitrage opportunities.
- The solver proposing the highest surplus to the pool secures the opportunity to rebalance it.
- CoW AMM mitigates LVR by retaining arbitrage profits for liquidity providers and protecting them from MEV bots.
Depth Overview;
Disclaimer: This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.