Master's Thesis Vigan Lladrovci

Analysis and Evaluation of the CoW Protocol for MEV Mitigation on the Ethereum Blockchain

Abstract

Decentralized Exchange (DEX) protocols enable users to utilize traditional exchange services on blockchain networks like Ethereum. Automated Market Makers, such as constant function market makers, are among the most popular ones, enabling the trading of digital assets without intermediaries. However, although efficient and simple, they expose extractable value, which can harm traders through attacks such as sandwiching. CoW Protocol has emerged as an MEV-aware DEX that operates in a batch auction model. It aims to mitigate Maximal Extractable Value (MEV) through two strategies: Uniform Clearing Price and Coincidence of Wants (CoWs), which essentially is a form of securing liquidity through peer-to-peer trading when possible.

In this thesis, we provide an approach to quantify CoWs, which can be generalized for any protocol that operates in a batch auction model. We find that CoWs occurrence on the CoW Protocol is negligible, thus providing little value in mitigating MEV. In contrast, when we evaluate the strategy of CoWs on Uniswap V3 by performing a counterfactual analysis, the liquidity secured via CoWs could account for typically 20% to 40% of needed liquidity. Furthermore, we observe that the CoW Protocol primarily avoids sandwich attacks using private channels to submit the batches.