1 of 35

1

MEV Reduction�via Batch Auctions

2 of 35

MEV vs HFT

2

MEV and HFT similarity:

They represent a race to exploit market opportunities

	MEV	HFT
Venue	Blockchain	Traditional exchanges
How to win the race	Tip/bribe miners	Be the fastest / buying speed tech. from exchanges
Who suffers from negative externalities?	Front-run traders, worse prices-> retail & institutional investors	Higher spread in markets -> retail & institutional investors

What is CoW Protocol?

It is a Meta DEX Aggregator with MEV protection, that's right, aggregates liquidity from different sources including other aggregators and provides protection against frontruning and other forms of extraction of value

CowSwap is a swap interface built on top of it. Looks very similar to Uniswap, but it has some differences.

Let's see them by examining the workflow.

An user place an order.

The order is a limit order, so it has a limit price and a deadline. The user will trade at that price or better
The tx costs for placing the order is free, this is because the order is signed with the wallet and placed in a off-chain API
Although the order placement is free, the execution is not. The order includes a fee in sell tokens that are only take if the trade is executed. In order word, you don't pay for reverted or expired transactions

3 of 35

Batch Auctions as response to HFT

in traditional finance

3

Paper 2015:

“The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response”

Eric Budish, Peter Cramton, John Shim

What is CoW Protocol?

It is a Meta DEX Aggregator with MEV protection, that's right, aggregates liquidity from different sources including other aggregators and provides protection against frontruning and other forms of extraction of value

CowSwap is a swap interface built on top of it. Looks very similar to Uniswap, but it has some differences.

Let's see them by examining the workflow.

An user place an order.

The order is a limit order, so it has a limit price and a deadline. The user will trade at that price or better
The tx costs for placing the order is free, this is because the order is signed with the wallet and placed in a off-chain API
Although the order placement is free, the execution is not. The order includes a fee in sell tokens that are only take if the trade is executed. In order word, you don't pay for reverted or expired transactions

4 of 35

Thesis

4

Frequent Batch Auctions (FBA) are able to reduce the MEV on the application layer

What is CoW Protocol?

It is a Meta DEX Aggregator with MEV protection, that's right, aggregates liquidity from different sources including other aggregators and provides protection against frontruning and other forms of extraction of value

CowSwap is a swap interface built on top of it. Looks very similar to Uniswap, but it has some differences.

Let's see them by examining the workflow.

An user place an order.

The order is a limit order, so it has a limit price and a deadline. The user will trade at that price or better
The tx costs for placing the order is free, this is because the order is signed with the wallet and placed in a off-chain API
Although the order placement is free, the execution is not. The order includes a fee in sell tokens that are only take if the trade is executed. In order word, you don't pay for reverted or expired transactions

5 of 35

Agenda

5

Definition Frequent Batch Auctions (FBA)
Comparison: Sequential vs batch execution
MEV protections
Challenges with FBA
Conclusions

What is CoW Protocol?

It is a Meta DEX Aggregator with MEV protection, that's right, aggregates liquidity from different sources including other aggregators and provides protection against frontruning and other forms of extraction of value

CowSwap is a swap interface built on top of it. Looks very similar to Uniswap, but it has some differences.

Let's see them by examining the workflow.

An user place an order.

The order is a limit order, so it has a limit price and a deadline. The user will trade at that price or better
The tx costs for placing the order is free, this is because the order is signed with the wallet and placed in a off-chain API
Although the order placement is free, the execution is not. The order includes a fee in sell tokens that are only take if the trade is executed. In order word, you don't pay for reverted or expired transactions

6 of 35

Agenda

6

Definition Frequent Batch Auctions (FBA)
Comparison: Sequential vs batch execution
MEV protections
Challenges with FBA
Conclusions

What is CoW Protocol?

It is a Meta DEX Aggregator with MEV protection, that's right, aggregates liquidity from different sources including other aggregators and provides protection against frontruning and other forms of extraction of value

CowSwap is a swap interface built on top of it. Looks very similar to Uniswap, but it has some differences.

Let's see them by examining the workflow.

An user place an order.

The order is a limit order, so it has a limit price and a deadline. The user will trade at that price or better
The tx costs for placing the order is free, this is because the order is signed with the wallet and placed in a off-chain API
Although the order placement is free, the execution is not. The order includes a fee in sell tokens that are only take if the trade is executed. In order word, you don't pay for reverted or expired transactions

7 of 35

Frequent Batch Auctions (FBA)

7

Discretize trading in time

Collect orders into batches

Calculate 1 uniform clearing price

per batch

clearing

price

amount

price

What is CoW Protocol?

It is a Meta DEX Aggregator with MEV protection, that's right, aggregates liquidity from different sources including other aggregators and provides protection against frontruning and other forms of extraction of value

CowSwap is a swap interface built on top of it. Looks very similar to Uniswap, but it has some differences.

Let's see them by examining the workflow.

An user place an order.

The order is a limit order, so it has a limit price and a deadline. The user will trade at that price or better
The tx costs for placing the order is free, this is because the order is signed with the wallet and placed in a off-chain API
Although the order placement is free, the execution is not. The order includes a fee in sell tokens that are only take if the trade is executed. In order word, you don't pay for reverted or expired transactions

8 of 35

Frequent Batch Auctions (FBA)

8

Discretize trading in time

Collect orders into batches

Calculate 1 uniform clearing price

per batch

clearing

price

amount

price

given in web3

What is CoW Protocol?

It is a Meta DEX Aggregator with MEV protection, that's right, aggregates liquidity from different sources including other aggregators and provides protection against frontruning and other forms of extraction of value

CowSwap is a swap interface built on top of it. Looks very similar to Uniswap, but it has some differences.

Let's see them by examining the workflow.

An user place an order.

The order is a limit order, so it has a limit price and a deadline. The user will trade at that price or better
The tx costs for placing the order is free, this is because the order is signed with the wallet and placed in a off-chain API
Although the order placement is free, the execution is not. The order includes a fee in sell tokens that are only take if the trade is executed. In order word, you don't pay for reverted or expired transactions

9 of 35

Agenda

9

Definition Frequent Batch Auctions (FBA)
Comparison: Sequential vs batch execution
MEV protections
Challenges with FBA
Conclusions

What is CoW Protocol?

It is a Meta DEX Aggregator with MEV protection, that's right, aggregates liquidity from different sources including other aggregators and provides protection against frontruning and other forms of extraction of value

CowSwap is a swap interface built on top of it. Looks very similar to Uniswap, but it has some differences.

Let's see them by examining the workflow.

An user place an order.

The order is a limit order, so it has a limit price and a deadline. The user will trade at that price or better
The tx costs for placing the order is free, this is because the order is signed with the wallet and placed in a off-chain API
Although the order placement is free, the execution is not. The order includes a fee in sell tokens that are only take if the trade is executed. In order word, you don't pay for reverted or expired transactions

10 of 35

The inefficiency of sequential trading

in web3

10

Buy-Order
Buy-Order
Buy-Order
Sell-Order

Sequential Execution in 1 block

AMM

What is CoW Protocol?

It is a Meta DEX Aggregator with MEV protection, that's right, aggregates liquidity from different sources including other aggregators and provides protection against frontruning and other forms of extraction of value

CowSwap is a swap interface built on top of it. Looks very similar to Uniswap, but it has some differences.

Let's see them by examining the workflow.

An user place an order.

The order is a limit order, so it has a limit price and a deadline. The user will trade at that price or better
The tx costs for placing the order is free, this is because the order is signed with the wallet and placed in a off-chain API
Although the order placement is free, the execution is not. The order includes a fee in sell tokens that are only take if the trade is executed. In order word, you don't pay for reverted or expired transactions

11 of 35

Efficiency of FBA trading in web3

11

AMM

Buy-Order
Buy-Order
Buy-Order
Sell-Order

Leftover Order

Batch Execution

=> Less AMM fees, less slippage

clearing price

12 of 35

Price spreads �example block: 1417421

12

https://dune.xyz/queries/582549

ETH-USDT price occurrences

price spread of 1.4%

What is CoW Protocol?

It is a Meta DEX Aggregator with MEV protection, that's right, aggregates liquidity from different sources including other aggregators and provides protection against frontruning and other forms of extraction of value

CowSwap is a swap interface built on top of it. Looks very similar to Uniswap, but it has some differences.

Let's see them by examining the workflow.

An user place an order.

The order is a limit order, so it has a limit price and a deadline. The user will trade at that price or better
The tx costs for placing the order is free, this is because the order is signed with the wallet and placed in a off-chain API
Although the order placement is free, the execution is not. The order includes a fee in sell tokens that are only take if the trade is executed. In order word, you don't pay for reverted or expired transactions

13 of 35

Price spreads �example block: 1417421

13

ETH-USDT price occurrences

Auction execution: Additional price improvement 2.5K$

What is CoW Protocol?

It is a Meta DEX Aggregator with MEV protection, that's right, aggregates liquidity from different sources including other aggregators and provides protection against frontruning and other forms of extraction of value

CowSwap is a swap interface built on top of it. Looks very similar to Uniswap, but it has some differences.

Let's see them by examining the workflow.

An user place an order.

The order is a limit order, so it has a limit price and a deadline. The user will trade at that price or better
The tx costs for placing the order is free, this is because the order is signed with the wallet and placed in a off-chain API
Although the order placement is free, the execution is not. The order includes a fee in sell tokens that are only take if the trade is executed. In order word, you don't pay for reverted or expired transactions

14 of 35

CoW study: Quantitative impact of FBA

in web3 today

14

Surplus yearly:

~27M$ on ETH-USDT

~28M$ on ETH-USDC

…

if FBA would be used per 1 block

CoW + AMM fee analysis and Surplus analysis

What is CoW Protocol?

It is a Meta DEX Aggregator with MEV protection, that's right, aggregates liquidity from different sources including other aggregators and provides protection against frontruning and other forms of extraction of value

CowSwap is a swap interface built on top of it. Looks very similar to Uniswap, but it has some differences.

Let's see them by examining the workflow.

An user place an order.

The order is a limit order, so it has a limit price and a deadline. The user will trade at that price or better
The tx costs for placing the order is free, this is because the order is signed with the wallet and placed in a off-chain API
Although the order placement is free, the execution is not. The order includes a fee in sell tokens that are only take if the trade is executed. In order word, you don't pay for reverted or expired transactions

15 of 35

Agenda

15

Definition Frequent Batch Auctions (FBA)
Comparison: Sequential vs batch execution
MEV protections
Challenges with FBA
Conclusions

What is CoW Protocol?

It is a Meta DEX Aggregator with MEV protection, that's right, aggregates liquidity from different sources including other aggregators and provides protection against frontruning and other forms of extraction of value

CowSwap is a swap interface built on top of it. Looks very similar to Uniswap, but it has some differences.

Let's see them by examining the workflow.

An user place an order.

The order is a limit order, so it has a limit price and a deadline. The user will trade at that price or better
The tx costs for placing the order is free, this is because the order is signed with the wallet and placed in a off-chain API
Although the order placement is free, the execution is not. The order includes a fee in sell tokens that are only take if the trade is executed. In order word, you don't pay for reverted or expired transactions

16 of 35

MEV surface

16

AMM

All orders are

prone to MEV-bots

Buy-Order 1

Buy-Order 2

Buy-Order 3

Sell-Order 4

Leftover Order

Only 1 order

is prone to MEV

Sequential Execution

Batch Execution

What is CoW Protocol?

It is a Meta DEX Aggregator with MEV protection, that's right, aggregates liquidity from different sources including other aggregators and provides protection against frontruning and other forms of extraction of value

CowSwap is a swap interface built on top of it. Looks very similar to Uniswap, but it has some differences.

Let's see them by examining the workflow.

An user place an order.

The order is a limit order, so it has a limit price and a deadline. The user will trade at that price or better
The tx costs for placing the order is free, this is because the order is signed with the wallet and placed in a off-chain API
Although the order placement is free, the execution is not. The order includes a fee in sell tokens that are only take if the trade is executed. In order word, you don't pay for reverted or expired transactions

17 of 35

Additional MEV protection

17

Less Back-Running:

Optimal trade path is chosen

in the first place

Protocols like CoW Protocol offer also

RFQ trading

RFQ-trading has no MEV surface

Private Submission

Prevent front-running

What is CoW Protocol?

It is a Meta DEX Aggregator with MEV protection, that's right, aggregates liquidity from different sources including other aggregators and provides protection against frontruning and other forms of extraction of value

CowSwap is a swap interface built on top of it. Looks very similar to Uniswap, but it has some differences.

Let's see them by examining the workflow.

An user place an order.

The order is a limit order, so it has a limit price and a deadline. The user will trade at that price or better
The tx costs for placing the order is free, this is because the order is signed with the wallet and placed in a off-chain API
Although the order placement is free, the execution is not. The order includes a fee in sell tokens that are only take if the trade is executed. In order word, you don't pay for reverted or expired transactions

18 of 35

CoW study: Quantitative impact of FBA

in web3 today

18

~13% CoW volume

13% of the ETH-USDC volume could be fully settled internal in a batch auction without AMM liquidity

Cow Analysis

Waiting for CoW

&

Market makers integration

will boost the percentage a lot

What is CoW Protocol?

It is a Meta DEX Aggregator with MEV protection, that's right, aggregates liquidity from different sources including other aggregators and provides protection against frontruning and other forms of extraction of value

CowSwap is a swap interface built on top of it. Looks very similar to Uniswap, but it has some differences.

Let's see them by examining the workflow.

An user place an order.

The order is a limit order, so it has a limit price and a deadline. The user will trade at that price or better
The tx costs for placing the order is free, this is because the order is signed with the wallet and placed in a off-chain API
Although the order placement is free, the execution is not. The order includes a fee in sell tokens that are only take if the trade is executed. In order word, you don't pay for reverted or expired transactions

19 of 35

Agenda

19

Definition Frequent Batch Auctions (FBA)
Comparison: Sequential vs batch execution
MEV protections
Challenges with FBA
Conclusions

What is CoW Protocol?

It is a Meta DEX Aggregator with MEV protection, that's right, aggregates liquidity from different sources including other aggregators and provides protection against frontruning and other forms of extraction of value

CowSwap is a swap interface built on top of it. Looks very similar to Uniswap, but it has some differences.

Let's see them by examining the workflow.

An user place an order.

The order is a limit order, so it has a limit price and a deadline. The user will trade at that price or better
The tx costs for placing the order is free, this is because the order is signed with the wallet and placed in a off-chain API
Although the order placement is free, the execution is not. The order includes a fee in sell tokens that are only take if the trade is executed. In order word, you don't pay for reverted or expired transactions

20 of 35

Latency

20

Traditionally main critique point
Solving time is not instant
Reduced trade execution speed
Increased inventory risk for market makers

Block n-1

Block n

Price

calculation

Order collection

Not accepting new trades

Submission

13 secs

21 of 35

Challenges with auctions

21

Information leakage:

Information leakage could enable front-run the trade on other market platforms or AMMs.
Private mempool/sealed orders might solve it

Incentive compatibility

Small trades are incentive compatible
Price impact orders are need to be split up, exactly as in the case of continuous trading

22 of 35

Auction liquidity & AMM price shifts

22

Block n-1

Auction price calculation won’t know AMM price shifts within block n

AMM

AMM price shifts cause deficits or surpluses of the auction

Block n (1. tx)

Block n (2. tx auction)

What is CoW Protocol?

It is a Meta DEX Aggregator with MEV protection, that's right, aggregates liquidity from different sources including other aggregators and provides protection against frontruning and other forms of extraction of value

CowSwap is a swap interface built on top of it. Looks very similar to Uniswap, but it has some differences.

Let's see them by examining the workflow.

An user place an order.

The order is a limit order, so it has a limit price and a deadline. The user will trade at that price or better
The tx costs for placing the order is free, this is because the order is signed with the wallet and placed in a off-chain API
Although the order placement is free, the execution is not. The order includes a fee in sell tokens that are only take if the trade is executed. In order word, you don't pay for reverted or expired transactions

23 of 35

Agenda

23

Definition Frequent Batch Auctions (FBA)
Comparison: Sequential vs batch execution
MEV protections
Challenges with FBA
Conclusions

What is CoW Protocol?

It is a Meta DEX Aggregator with MEV protection, that's right, aggregates liquidity from different sources including other aggregators and provides protection against frontruning and other forms of extraction of value

CowSwap is a swap interface built on top of it. Looks very similar to Uniswap, but it has some differences.

Let's see them by examining the workflow.

An user place an order.

The order is a limit order, so it has a limit price and a deadline. The user will trade at that price or better
The tx costs for placing the order is free, this is because the order is signed with the wallet and placed in a off-chain API
Although the order placement is free, the execution is not. The order includes a fee in sell tokens that are only take if the trade is executed. In order word, you don't pay for reverted or expired transactions

24 of 35

Winners of FBA model

24

	Should favor batch auctions	Reason/Examples
Retail investor	✓	Better MEV protection, better price (if not time critical)
Arbitrageurs	x	They need the speed/bribe to extract value
Market makers (with inventory risk)	x/✓	AMMs would earn less fee Less risk from order snipping
Liquidations	✓	Example: MakerDAO / English Auction
DAO investments	✓	Example: Yearn is using CowSwap

What is CoW Protocol?

It is a Meta DEX Aggregator with MEV protection, that's right, aggregates liquidity from different sources including other aggregators and provides protection against frontruning and other forms of extraction of value

CowSwap is a swap interface built on top of it. Looks very similar to Uniswap, but it has some differences.

Let's see them by examining the workflow.

An user place an order.

The order is a limit order, so it has a limit price and a deadline. The user will trade at that price or better
The tx costs for placing the order is free, this is because the order is signed with the wallet and placed in a off-chain API
Although the order placement is free, the execution is not. The order includes a fee in sell tokens that are only take if the trade is executed. In order word, you don't pay for reverted or expired transactions

25 of 35

Dapp layer MEV contribution

25

If we get adoption in green area, => big MEV reduction on Dapp layer

	Should favor batch auctions	Example/Comment
Retail investor:	✓	Better MEV protection, better price
Arbitrageurs	x	They need the speed/bribe to extract value
Market makers	x/✓	AMMs would earn less fee Less risk from speed snipping
Liquidations	✓	MakerDAO / English Auction
DAO investments	✓	Yearn is using CowSwap

What is CoW Protocol?

It is a Meta DEX Aggregator with MEV protection, that's right, aggregates liquidity from different sources including other aggregators and provides protection against frontruning and other forms of extraction of value

CowSwap is a swap interface built on top of it. Looks very similar to Uniswap, but it has some differences.

Let's see them by examining the workflow.

An user place an order.

The order is a limit order, so it has a limit price and a deadline. The user will trade at that price or better
The tx costs for placing the order is free, this is because the order is signed with the wallet and placed in a off-chain API
Although the order placement is free, the execution is not. The order includes a fee in sell tokens that are only take if the trade is executed. In order word, you don't pay for reverted or expired transactions

26 of 35

Thank you for listening

26

This was a lot of theory,� feel free to give it a practical try at

�

https://cowswap.exchange

27 of 35

27

Appendix

28 of 35

Abstract:

28

MEV reduction on the application layer is important. Batch auctions are a promising venue to reduce the MEV of trading activity. This talk will investigate the benefits, but also all the challenges and shortcomings of auctions usage.

29 of 35

Main criticism for FBT

In traditional

29

Markets are faster than batch time

Informations are coming quicker than the th

Incentive compatibility

Small trades are incentive compatible
Price impact orders are need to be split up, exactly as in the case of continuous trading

30 of 35

Challenges with auctions

30

Information leakage:

Information leakage could enable front-run the trade on other market platforms or AMMs.
Sealed order auctions are a solution

Incentive compatibility

Small trades are incentive compatible
Price impact orders are need to be split up, exactly as in the case of continuous trading

31 of 35

Batch Auctions as response to HFT

in traditional finance

31

Paper 2015:

“The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response”

Eric Budish, Peter Cramton, John Shim

300M$ Cable for 3 milli sec

https://en.wikipedia.org/wiki/Spread_Networks

What is CoW Protocol?

It is a Meta DEX Aggregator with MEV protection, that's right, aggregates liquidity from different sources including other aggregators and provides protection against frontruning and other forms of extraction of value

CowSwap is a swap interface built on top of it. Looks very similar to Uniswap, but it has some differences.

Let's see them by examining the workflow.

An user place an order.

The order is a limit order, so it has a limit price and a deadline. The user will trade at that price or better
The tx costs for placing the order is free, this is because the order is signed with the wallet and placed in a off-chain API
Although the order placement is free, the execution is not. The order includes a fee in sell tokens that are only take if the trade is executed. In order word, you don't pay for reverted or expired transactions

32 of 35

Incentive compatible

32

1. Batch

2. Batch

Revealing willingness to buy

In on batch

Not revealing willingness to buy

In one batch

p

p_1

p_2

p> (p_1+p_1)/2

33 of 35

Price spreads

example block: 1417421

33

Yearly savings (estimated): 30M$ on ETH-USDT only

Auction execution:

price

Clearing price

Additional surplus 2.5K$

34 of 35

Sequential vs. auction-trading

in web3

34

Price ETH/USDC

# trades

Prices in a block spread

over a spectrum.

=> MEV opportunities

With auctions: 1 price per block

=> less MEV

Sequential trade execution

FBA trade execution

What is CoW Protocol?

It is a Meta DEX Aggregator with MEV protection, that's right, aggregates liquidity from different sources including other aggregators and provides protection against frontruning and other forms of extraction of value

CowSwap is a swap interface built on top of it. Looks very similar to Uniswap, but it has some differences.

Let's see them by examining the workflow.

An user place an order.

The order is a limit order, so it has a limit price and a deadline. The user will trade at that price or better
The tx costs for placing the order is free, this is because the order is signed with the wallet and placed in a off-chain API
Although the order placement is free, the execution is not. The order includes a fee in sell tokens that are only take if the trade is executed. In order word, you don't pay for reverted or expired transactions

35 of 35

Challenges with auctions

35

Auction liquidity

&

AMM price shifts:

Block n-1

Block n

Auction price calculation won’t know AMM price shifts within block n

AMM

Auctions will suffer deficits or surplus depending on the price changes AMMs

What is CoW Protocol?

It is a Meta DEX Aggregator with MEV protection, that's right, aggregates liquidity from different sources including other aggregators and provides protection against frontruning and other forms of extraction of value

CowSwap is a swap interface built on top of it. Looks very similar to Uniswap, but it has some differences.

Let's see them by examining the workflow.

An user place an order.

The order is a limit order, so it has a limit price and a deadline. The user will trade at that price or better
The tx costs for placing the order is free, this is because the order is signed with the wallet and placed in a off-chain API
Although the order placement is free, the execution is not. The order includes a fee in sell tokens that are only take if the trade is executed. In order word, you don't pay for reverted or expired transactions