No MEV, free failed transactions, no front-running! How does CowSwap achieve this?

(This article is authorized to be reprinted from ChainNews, titled "Understanding CowSwap in Three Minutes: How Does Transaction with No MEV and Low Fees Work?" Original article here)

Author: Leo Young

In addition to high user transaction fees due to performance issues, Ethereum has also made many users hesitant due to MEV (Miner Extractable Value).

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Earlier this month, the Gnosis protocol announced the launch of the second version GPv2, integrating decentralized exchange liquidity, which can provide MEV protection. CowSwap is a decentralized trading application based on GPv2, worth paying attention to.

It is important to note that CowSwap is developed by the development team of the Gnosis protocol. Gnosis is a decentralized application infrastructure, with products including decentralized prediction markets, multi-signature wallet Gnosis Safe, Gnosis DAO, auction markets, and various other types of applications, with the native token of the protocol being GNO.

What are the features of CowSwap?

The name CowSwap may seem related to "cows," but in reality, the "Cow" here refers to a unique trading matching method of the product. The documentation of the product states that CowSwap uses the "Coincidence of Wants (CoW)" method to match trades.

Specifically, "Coincidence of Wants" is an economic phenomenon where "two people simultaneously hold things that each other needs, allowing them to trade directly without the need for money as a medium."

In traditional trading markets, liquidity is provided by market makers, while current decentralized exchanges (DEX) rely on liquidity providers to offer liquidity to the market. CowSwap, on the other hand, matches trades by batch auctioning orders, matching CoW orders for traders as the core trading mechanism.

In other words, on CowSwap, two individuals holding assets that the other desires can directly match trades without the need for market makers or liquidity providers. This can provide the best prices for individual traders and eliminate fees incurred through market makers or liquidity providers.

Users on CowSwap can trade directly using the CoW method. Orders that cannot be settled through CoW are matched through automatic market maker (AMM) trading.

If there are CoW orders in the batch auction, once small orders are completely matched, the remaining orders that are not matched through CoW will be matched through CowSwap's integrated liquidity market. The settlement price of the entire order will be based on the remaining order price obtained through external liquidity.

Currently, CowSwap integrates Uniswap and will integrate more DEX liquidity providers like Balancer in the future.

What are the advantages of CoW?

According to the project team, CoW matching trades have two advantages: avoiding MEV and reducing transaction friction.

Since CoW does not require on-chain external liquidity and settles orders uniformly at a single price within batch orders, all order prices are consistent, eliminating the issue of transaction sequencing and fundamentally avoiding MEV situations.

For trades matched through on-chain external liquidity, GPv2 introduces the concept of "searcher solver." The "searcher" is a third-party tool introduced within the protocol to competitively find the best on-chain trades, match them off-chain, and batch them for execution.

Due to strict limitations within the protocol on the slippage of "searchers" executing trades, the profit potential for MEV arbitrage is minimal. Additionally, batch order settlements can only be submitted by certified searchers, greatly reducing the maneuvering space for miners and MEV arbitrageurs.

As CoW does not require third-party liquidity, CoW trades have no transaction costs. However, transactions on CowSwap will incur certain fees. The fees consist of basic order execution costs and protocol fees. Part of the fees are paid to searchers to incentivize providing the best trades within the protocol. Currently, users only need to pay gas fees (basic transaction fees), and protocol fees are not yet collected.

CowSwap currently only supports spot buy and sell orders. Trading on CowSwap only requires a single off-chain signature. Users only need to sign and submit the trade, and a searcher will match the trade. Fees are only incurred when the order is executed, and failed trades do not require any fees.

Summary

Current Dex trading aggregators rely entirely on third-party liquidity to reduce slippage, improve trading efficiency, but still incur transaction costs. CowSwap combines CoW orders with third-party liquidity, retaining the aforementioned advantages while reducing transaction costs.

In the future, CowSwap is expected to incentivize CoW trading depth, introduce CoW market-making, have market makers monitor limit orders within the protocol, provide counterparty trading, and reduce reliance on third-party liquidity. This fundamentally eliminates MEV and reduces fees, providing users with the best trading experience.

It is important to note that CowSwap has not issued its own token, and the Cowswap tokens in the market are not tokens within the protocol.