CoW Swap: What It Is & How It Works
CoW Swap is a novel decentralized exchange (DEX) that offers users an alternative to traditional DEXs like Uniswap and Sushiswap. Utilizing the Coincidence of Wants concept, CoW provides traders with unique advantages over more conventional platforms.
How CoW Swap works
CowSwap combines traditional methods with cutting-edge technology to offer a unique way of executing orders. By leveraging both on-chain and off-chain transactions, CoW Swap utilizes batch auctions for complete order execution services.
- To use CoW swap's trading services, users must first permit the platform to facilitate their token trades.
- Rather than initiating an on-chain transaction like other decentralized exchanges, send a signed message requesting the trade - saving valuable resources.
- The protocol enables efficient trading by offering a unique system of batch auctions. Cryptocurrency solvers can interact with the platform to complete orders and reap the rewards in digital tokens.
Through batch auctions, DeFi protocols can order large trades efficiently. When the auction cannot complete an order, AMMs act as a traditional DEX to facilitate it instead.
This resolves liquidity fragmentation worries by cutting orders into smaller chunks and prevents MEV or front-running malicious activities due to their size.
The Miner Extracted Value: MEV
Ethereum faces a significant and concerning issue: Miner Extractable Value (MEV). MEV occurs when miners or specially-crafted bots execute front-running attacks, earning profits at the expense of unsuspecting users. The urgency of this matter should be noticed.
MEV (Miner Extractable Value) is a common problem for users of DeFi protocols, as miners or bots can exploit the decentralized nature of these networks to detect and front-run buy orders. In doing so, costs increase for all who use it - but CoW Swap has found an intriguing solution: Coincidences Of Wants & batch auctions.
This innovative approach protects user funds from malicious actors by ensuring transactions are executed at their expected price point in one single atomic transaction.
What's a Coincidence of Wants
The coincidence of Wants is a concept that facilitates robust exchanges between two or more parties. CoW Swap seeks to turn this protocol into a broad bartering market where users can gain the assets they want through mutual agreement and trading.
As demonstrated by their gitbook example, the possibilities for trading on the platform currently seem immense!
CoW Swap presents an innovative solution to the costly and often inefficient trading process: Batch Auctions.
This system allows parties with something of interest to each other's benefit, such as crypto assets or tokens, to resolve trades efficiently without incurring additional costs due to MEV bots or slippage on Automated Market Makers (AMMs).
Signed messages
CoW Swap enables trading through signed messages, thanks to its batch auction system. Once a user has affixed their signature for an intended trade, Solvers review and off-chain find compatible trades to complete it from other users.
These specialists are rewarded when processing orders successfully; however, should they be unsuccessful or act maliciously, penalties can apply - much like miners would on PoS chains similarly incentivized.
CoW Swap has already made incredible progress in simplifying token swaps and lowering associated costs - a notable accomplishment. As the protocol continues its trajectory, it will be fascinating to see what new developments are on the horizon.