Moove Over MEV Milkers, Here Comes CowSwap

In Part 1 of this report series, we discussed what MEV is and why it exists, in addition to analyzing Flashbots, a project focused on minimizing its negative externalities. For Part 2, we’ll dive into the application layer – specifically CowSwap – and how its unique design can potentially offer traders better execution and MEV protection. 

MEV derives from transaction ordering, and thus, applications that fuel this activity inherently create MEV opportunities. With that said, the economics and soundness of applications also, in many cases, rely on MEV. For example, the extractable value for keepers (liquidations) on lending protocols incentivizes actors to keep lending protocols whole. Sandwiching and front-running arb transactions are harmful forms of MEV that are made more accessible through the existence of AMMs. Arbitrage AMM transactions, however, as a whole can be net-positive for LPs (i.e. volatility harvesting). Out of all MEV, DEX arbitrage transactions account for an overwhelming majority, as seen above. In response to this, DEX solutions like MistX, CowSwap, RFQ, and private pools, have emerged to circumvent damaging DEX MEV extraction. MEV and DEXs are tightly coupled. With this context in mind, let’s dive into CowSwap’s approach to mitigating MEV. 

Built on Gnosis Protocol v2, CowSwap is not your typical DEX, but rather a protocol that combines DEX aggregation with batch auctions via “Coincidence-of-Wants” (CoWs). The latter is core to CowSwap’s unique value proposition, and it is this innovation through which the protocol can achieve MEV protection. Put succinctly, a CoW is an economic phenomenon where two parties each hold an item the other desires, so they exchange these items directly without any monetary medium.

Consider a situation where User A would like to sell WETH for USDC and User B would like to buy WETH using USDC. A regular Uniswap transaction means that both traders