What Is CoW Protocol? (COW) Complete Guide & Review About CoW Protocol?

What Is CoW Protocol? (COW)

CoW Protocol matches trades via batch auctions for a variety of on-chain liquidity sources.Trades can be settled via underlying on-chain AMMs directly or via DEX Aggregators, depending on which pool/path offers the best price. It is thus essentially acting as a Dex Aggregator of the DexAggregators. In addition to that, before finding the best price for a trade from available on-chain liquidity, Cow Protocol first seeks a coincidence of wants within the existing batch to offer an even better price than any pool can.

CoW Protocol Coin is a fully permissionless trading protocol that leverages Batch Auctions as its price finding mechanism. CoW protocol enables batch auctions to maximize liquidity via Coincidence of Wants (CoWs) in addition to tapping all available on-chain liquidity whenever needed. Batch Auctions are continuously run by the protocol because the solvers, the parties in charge of finding the most optimal settlement for the batch, are in competition to settle it. The winning solver will be the one that can maximize traders surplus by either having the most optimal CoW, finding the best liquidity sources, or combining both in a single settlement.

The Settlement Layer for Decentralized Trading

CoW Protocol lets people swap assets MEV protected at the best exchange rate by leveraging its batch settlement layer built on top of DeFi’s favorite AMMs and DEX Aggregators. Instead of directly executing trades on-chain, users only sign their swap intention and delegate the execution to so-called solvers (aka relayers in other protocols). Solvers bid on the best possible exchange rate in order to win the right to settle trades.

By batching multiple trades together in order to create CoWs (Coincidence of Wants), solvers can save on gas costs, AMM fees and execution risk. Therefore CoWs lead to structurally better prices than on any existing DEX aggregator. In the absence of CoWs solvers fall back to using the best possible on-chain route, by comparing quotes from leading aggregators.

More than a Meta DEX Aggregator

1. Best On-Chain Prices – By leveraging any on-chain liquidity sources we are able to provide the best on-chain prices.
2. Professional Transaction Execution – Meta-transactions ensure that traders do not pay for failed transactions. They also facilitate automatic resubmission of failed orders.
3. Coincidence of Wants (CoWs) – CoWs, simply put as peer-to-peer trades, improve the prices by reducing the need for liquidity pools. This saves the traders money spent on protocol fees, slippage, and gas fees.
4. MEV Mitigation – Trades are protected against MEV in multiple layers: via Coincidence of Wants (CoWs) and leveraging both Flashbots Protect RPC and the Eden Network.
5. Same Block, Same Price – All trades within the same block are guaranteed to receive the same price regardless of their execution order.
6. ETH-less Trading Experience – Traders pay fees in their sell tokens. No need to spend your precious ETH.

Coincidence of Wants

CoW Protocol, because of its use of Batch Auctions, is optimized for finding Coincidence of Wants (CoWs) amongst the trades within a batch, as well as ring trades. But what exactly are Coincidence of Wants and ring trades? Coincidence of wants can be explained as “economic phenomenon where two parties each hold an item the other wants, and therefore exchange these items directly.

This means that on CoW Protocol, when two trades or more, each hold an asset that the other wants, their orders can be settled directly between all of them without the need for an external market maker or liquidity provider. Cow Protocol can create CoWs in a two dimensional orderbook, but can also create them on a multi-dimensional orderbook.

Signed Orders

CoW Protocol does not need to work with executed transactions in order for users to be able to trade. The smart contract architecture is composed of an allowance manager and a settlement smart contract. The combination of these two contracts allow the protocol to offer users gas-free trades because it works with off-chain orders submitted via signed messages.

CoW Protocol is able to work with signed messages because it bases its mechanism in batch auctions. After the users have submitted their signed order, the solvers check the order submission and include them in the batch auction that the trade fits best. Once a trade order, aka signed message, has been included in a batch, the solvers send the transaction to the settlement contract, which checks with the allowance manager if such signed order has been given the approval to be spent.

The combination of these two smart contracts allow CoW Protocol to work with off-chain order submission, as ultimately, the user has the guarantee that the settlement contract will not be able to spend any funds that have not previously been approved in the allowance manager contract. To sum up, the CoW Protocol smart contracts guarantee the users that

Plug-n-play trading protocol with just a few lines of code

Directly interact with the CoW protocol to place, manage and settle your orders through a documented API interface.

1. Fetch Quotes.
2. Create and cancel limit orders.
3. Manage orders across Ethereum, Rinkeby and Gnosis Chain.