CoW DAO (COW): Community-Driven DeFi Protection
The decentralized finance (DeFi) industry provides a variety of crypto income opportunities for traders, including liquidity provision, token trading, lending, automated yield optimization and more. While traders' potential profits on DeFi protocols might be higher than what’s achievable in traditional finance (or TradFi), there are many sources of losses, both hidden and explicit, on these platforms.
Despite potentially high-profit opportunities, DeFi traders have to deal with unique threats, such as maximal extractable value (MEV), sandwich attacks, loss-versus-rebalancing (LVR) and more. Few traders, even among seasoned DeFi veterans, can totally avoid losses and revenue leaks caused by these threats. For newbie traders, these unique DeFi exploits can be ruinous early in their trading careers.
CoW DAO is a decentralized platform that shields traders from a variety of DeFi exploits and inefficiencies by offering protection against MEV, LVR, transaction ordering–based manipulations and other potential sources of losses caused by parties such as arbitrageurs and malicious validators.
The platform features a decentralized solution that finds the best prices for your crypto trades based on intent-based transactions and batch auctions — CoW Protocol — which is an MEV blocker and an automated market maker (AMM)–based crypto exchange that protects liquidity providers (LPs) from LVR.
Key Takeaways:
CoW DAO is a DeFi protocol that provides value optimization to traders through its unique network of solvers and batched auctions for order execution.
The protocol also features an MEV blocker and an AMM that protects LPs from LVR.
The platform's native token, COW, is used primarily for governance, and can be bought on Bybit as a USDT Perpetual contract.
What Is CoW DAO?
CoW DAO (CoW) is a decentralized platform that aims to provide trading efficiency and security tools via a completely decentralized and permissionless decentralized autonomous organization (DAO)–driven model. CoW Dao consists of three key components:
CoW Protocol, which sources the best crypto trading deals for users' intent-based transactions
an MEV blocker
an AMM exchange that protects LPs from LVR revenue leaks caused by arbitrageurs
The platform's origins date back to April 2021, when the CoW Swap decentralized exchange (DEX) was launched on the Ethereum (ETH) blockchain. Founded by Anna George and Felix Leupold, CoW Swap specialized in offering crypto swaps protected from MEV, a form of exploit in which blockchain validators or bots choose specific ordering of transactions in order to extract maximal value for themselves, typically at the expense of crypto traders. Originally, CoW Swap (and CoW Protocol, which it was based on) was part of GnosisDAO, a decentralized ecosystem devoted to the development of the Gnosis (GNO) Layer 2 blockchain.
In March 2022, CoW Protocol raised $23 million in funding and spun off from the GnosisDAO to form an independent entity — CoW DAO. Over the following couple of years, the project introduced more tools and solutions designed to protect DeFi traders from security risks like MEV, LVR and sandwich attacks, which are common forms of exploits on DeFi platforms that we'll cover in further sections of this article.
CoW DAO's major product, CoW Protocol, is a solution that finds optimal deals for token traders by utilizing a network of solvers, which are decentralized entities responsible for scanning the broader Ethereum ecosystem and offering the best possible rates on the user's intended transaction. The protocol batches user trade intents and auctions them off to solvers, who place bids to win the auction and have the right to process the batch on offer.
The platform also offers an MEV blocker designed to protect users from frontrunning, backrunning and sandwich attacks, as well as common exploits used by MEV bots and validators to manipulate asset prices via transaction ordering and profit at traders’ expense.
CoW DAO's third major product, CoW AMM, is a DEX in which liquidity pools are constantly rebalanced to avoid losses to LPs arising from arbitrageurs' activity. CoW AMM prevents arbitrage bots from exploiting token price inconsistencies between different pools, an activity known as LVR that leads to losses for LPs.
Benefits of CoW DAO
CoW DAO's suite of products offers numerous benefits to DeFi users that include the following.
Better Price Discovery
The protocol's network of solvers scans the web3 environment accessible to them, which includes Ethereum and Ethereum virtual machine (EVM)–compatible chains, to find the optimal price for the user's intended transaction. Some solvers may even be able to access off-chain private markets or on-chain sources not covered by major exchanges.
Moreover, the auction system encourages solvers to compete to offer the best prices possible. As a result, users can access much more competitive rates than they would by manually scanning the Ethereum ecosystem for suitable deals.
Sophisticated Intent-Based Transactions
Many market participants view intent-based transactions as superior to the standard order execution system. Instead of placing an order immediately, traders state their intents — often in meticulous detail — then wait for solvers to execute their transactions via the most optimal path.
Additionally, CoW DAO supports some of the most versatile and sophisticated order types available in the intent-based trading niche. These include market orders, limit orders, programmatic orders (which involve automated trading) and order types unique to CoW DAO.
Protection Against Various DeFi Exploits
As mentioned, CoW DAO's products are designed to shield token traders and LPs from some of the most common and devastating MEV security exploits — LVR, sandwich attacks and other types of transaction ordering-based manipulations. It's been estimated that countless MEV exploits have resulted in well over $1 billion in losses on Ethereum, a figure that highlights the dangers of these attacks for the DeFi user community.
CoW Protocol
Users of CoW Protocol submit their order preferences as intent-to-trade messages. The messages typically specify the asset(s) involved, as well as additional conditions to be met, e.g., a certain threshold swap rate above which the user won't want to proceed with the order. The underlying protocol bundles multiple intents into a batch, which is then auctioned off to the solver network.
Solvers bid on each auctioned batch, proposing the best rates at which they can deliver the requested transactions. An auction's winner is determined based on the total surplus value proposed by solvers, which means the solver that can deliver the highest surplus wins the auction and gets the right to process the batch. The winner executes the batched transactions on-chain via the most optimal routes, platforms and pools.
The use of solvers saves users time and delivers the best possible deals. Additionally, solvers are much more adept at avoiding MEV traps and other vulnerabilities, compared to an average DeFi user. Moreover, the batched processing mode also creates opportunities for so-called Coincidence of Wants, or CoW.
Coincidence of Wants (CoW)
Coincidence of Wants (CoW) is an economic phenomenon whereby two parties — each one having something that the other party might want — enter into a mutually beneficial, direct transaction, exchanging the goods they’d like to acquire without incurring liquidity provider fees (and also reducing gas costs).
There are four types of CoWs:
Simple: Direct swapping of assets between two traders, bypassing AMM liquidity pools.
Batching: Users' trading intents are aggregated into a single trade on-chain, which reduces gas costs.
Intermediate: Trades that involve an intermediary asset to improve the transaction’s efficiency. For example, CRV-to-USDT and USDT-to-COW trades may use ETH as an intermediary to match their liquidity.
Multidimensional: Optimized trades for three or more users and multiple assets, sharing liquidity between their trades for efficiency.
The project’s team considered CoW so fitting to the platform's modus operandi that it was this economic phenomenon — not the world's most popular large livestock animal — that inspired the platform's brand name, CoW.
Order Types
CoW Protocol's intent-based system is capable of supporting several order types, some of them quite sophisticated. Order types currently available via CoW Protocol include the following:
Market orders. These orders instruct the protocol to buy or sell an asset as soon as possible at the current market rate — naturally, at the best price that solvers can source within the wider CoW Protocol ecosystem.
Limit orders. Limit orders request the protocol to buy or sell an asset at a specific price before a designated expiration date.
Time-weighted average price (TWAP) orders. These orders split one large order into multiple parts, traded at fixed time intervals. Users can specify the number of parts for the order and the total time interval over which the order must be fully executed.
Programmatic orders. Programmatic orders, as their name suggests, are based on executing a series of predefined instructions. These orders may have advanced logic and conditions built into them. Programmatic orders' execution is supported by smart contracts maintained by the protocol.
Milkman orders. These orders allow users to trade based on rates sourced from a selected price feed, rather than by specifying a fixed price. Milkman orders have been developed in cooperation between CoW DAO and Yearn Finance (YFI).
CoW Hooks. CoW Hooks allow users to pair an Ethereum auction with an order on CoW Protocol to execute a series of transactions in sequence. Examples include unstaking an asset and then executing a swap operation, or swapping an asset and then immediately bridging it to a Layer 2 chain.
CoW Swap
CoW Swap, the platform's interface for users to conduct token swaps and place limit and TWAP orders, covers assets across three mainnet platforms — Ethereum, Gnosis and Arbitrum (ARB).
MEV Blocker
An MEV Blocker is a security tool for your wallet that protects you from MEV attacks. MEV exploits are among the most common sources of losses for DeFi users. They come in different varieties, but are all based on some form of transaction order manipulation by MEV bots or blockchain validators. Three common MEV attacks the blocker tool protects you from are sandwich attacks, frontrunning and backrunning.
In a typical sandwich attack, a validator might target a genuine trader's transaction as it enters the mempool — a temporary area where blockchain transactions are held before being fully processed by validators, and included in the chain's immutable ledger of records. The validator then places two orders: one queued before the targeted transaction and one immediately after.
The frontrunning order buys the asset that the trader would like to acquire while its price is still low, and the validator's buy order then increases the asset's price in the pool — since any increase in demand for an asset leads to its price appreciation.
Following the frontrunning transaction, the trader's order is executed, with the trader acquiring the asset at the newly increased price. The validator's backrunning order, placed immediately after the trader's transaction, is designed to sell the targeted asset, as the sell order leads to the decline of the asset's price in the pool.
The malicious validator then buys the targeted asset at a lower price and sells at an inflated price, pocketing the differential. In turn, the trader buys the asset at a higher price and then ends up owning the asset following its price drop. While the culprit (the validator) profits, the victim (the trader) suffers losses.
Thus, the culprit essentially sandwiches the victim's transaction between two exploitative orders, hence the name — the sandwich attack. Frontrunning and backrunning MEV attacks are partial sandwich attacks whereby culprits try to extract profit by placing only one exploitative order either before or after the victim's transaction, respectively.
In the current example, the culprit is capable of carrying out the exploit, as validators can influence the order of transactions included in a block.
Other entities that may not have direct influence on the order of transactions, such as specifically designed MEV bots, can also execute sandwich attacks by trying to prioritize their malicious orders, either by paying high gas fees or by directly conspiring with corrupt validators.
CoW DAO's MEV blocker protects users from sandwich, frontrunning and backrunning attacks, thereby neutralizing their devastating effects.
CoW AMM
CoW AMM provides unique protection to LPs against LVR, a loss incurred by LPs due to arbitrageurs' activity. In a typical constant function automated market maker (CF-AMM), arbitrageurs can exploit the price difference for an asset between pools on different exchanges. If an asset's price becomes "stale" in the AMM's pool — that is, if it differs from the asset's rate on other exchanges — arbitrage bots rush to exploit the difference, causing losses to LPs.
CoW AMM protects you from LVR by introducing a different form of AMM, theFunction-Maximizing AMM (FM-AMM). CoW DAO's AMM processes transactions in batches, executing all trades in a batch at the same uniform price. This price ensures that the AMM "moves up the curve" with each trade, regardless of arbitrageurs' activities.
What Is the COW Token?
CoW DAO's native cryptocurrency, the COW token, is designed to support the platform's governance processes, and uses a multistage process for governance. Initial discussions related to any changes to the protocol are discussed online via the CoW DAO forum, where community members, CoW DAO's core team and other parties can provide their input.
The forum is designed for various discussions and announcements, such as details on the platform's CoW Grants Program (CGP), governance issues and CoW DAO periodic gatherings. Following the forum discussions, change and improvement proposals may be put up for final voting. Holders of CoW tokens have the right to participate in the votes, serving as the ultimate decision-makers on any modifications to the protocol and its products.
COW is a supply-capped asset, with a total and maximum supply specified at one billion. The token's supply distribution shares are per the chart below.
Where to Buy COW
The COW token is available on Bybit as a USDT-based Perpetual contract. You can trade COW with up to 50x leverage, using products like Futures Grid, Futures Martingale and Futures Combo.
COW Crypto Price Prediction
As of Dec 13, 2024, the COW token is trading at $0.649, which is 70.7% lower than its ATH of $2.22 on Mar 28, 2022, and over 1,500% higher than its ATL of $0.03987 on Nov 9, 2022.
Long-term price forecasts for COW are generally bullish. DigitalCoinPrice expects the token to hit a high of $1.66 in 2025 and $4.83 in 2030, while CoinCodex predicts COW will surge to a high of $2.81 in 2025, falling slightly to a high of $2.35 in 2030.
Closing Thoughts
Coin swaps and liquidity provision in DeFi are now moving beyond their basic functionalities, with advanced security and value maximization high on the list of users' demands. CoW DAO is among the champions of the move toward more sophisticated options for traders and LPs. Its protocol provides unique value optimization benefits, thanks to its use of a solver network and batched auctions.
CoW DAO's MEV blocker and CoW AMM are also great innovations that provide much-needed protection against MEV bots and LVR. Any trader or LP aware of the devastating effects of MEV and arbitrage bots will undoubtedly appreciate these products.
Regardless of your experience level when it comes to DeFi, CoW DAO can deliver value during your trading and liquidity provision activities. At the end of the day, avoiding losses from MEV and LVR might just be that boost to your DeFi performance you've been looking for.
#LearnWithBybit