CIP: 2 title: Solver Rewards author: Felix Leupold status: Active created: 2022-02-21
Vote passed with 65M votes in favour (134k against) and has been executed at: Ethereum Transaction Hash (Txhash) Details | Etherscan
The purpose of this proposal is to ensure continued solution submission by solvers powering CoW Protocol by refunding them the gas cost for solution submission plus a fixed 100 CoW reward for every winning settlement. This proposal is aiming at solvers operating on mainnet only.
One of the core parties in the CoW Protocol are the so-called solvers: Entities that compete for the best execution of user orders and eventually submit the on-chain transaction settling their trades. Solvers are run by external parties (currently still controlled by Gnosis) and incur significant costs in the form of transaction gas fees from their operation.
With CoW Protocol spinning off from Gnosis, it is imperative to quickly set up an adequate incentive scheme so that solvers continue to participate in the protocol.
At the moment CoW Protocol is charging users a fixed fee per order denominated in the sell token. That fee is taken atomically as part of the settlement transaction if and only if the order is executed. The fee is currently computed by the protocol’s orderbook API by estimating the gas costs the user would incur by trading on a DEX Aggregator and converting that gas fee into the sell token.
The fees are collected in the settlement contract. Solvers have access to those balances and could therefore withdraw the fees. However, due to the fact the the protocol currently subsidizes trades, fees don’t fully cover the expenses solvers incur (cf. Dune):
While the exact amount of the subsidy - and therefore the expected loss - is easily configurable, changing the subsidy strategy is outside the scope of this proposal.
On top of revenue in the form of fees and cost in the form of gas costs, solvers and the protocol have a few other operational factors that affect their profitability (we ignore server costs as they tend to be minor):
- Failed transaction costs: Failed settlements yield no trading fee, but still cost gas.
- Positive/Negative Slippage: Orders are executed at the price the solver reported in the off-chain competition. The actual achieved price on-chain may differ (e.g. when the AMM’s price moved in the meantime, or the solver got sandwiched, etc). Currently the protocol keeps positive slippage and pays negative slippage from the token balances it accrues from fees.
- Inventory Risk: Since the fee is taken in the sell token but gas costs are paid in ETH, revenue is not captured in the same unit as cost. Fluctuations in token prices may therefore affect the value of ETH or USD stored in the contract. Moreover, some solvers currently fill orders from existing balance in the settlement contract to avoid the gas cost involved with interacting with an AMM. Moving funds across buffers also incurs an inventory risk.
We suggest to begin by rewarding solvers with a fixed CoW token promise (100 COW per solved batch) and to refund them their entire successfully executed settlement transaction cost. Reimbursements will be done in ETH and gas costs can be easily tracked via Dune.
In return, all balances that are accrued inside the settlement contract are considered protocol revenues and belong to the CoW DAO (>$11M revenue to date) going forward. However, all fees accrued before the target date for this CIP still belong to Gnosis. Gnosis will withdraw as many balances as it deems reasonable from the settlement contract prior to the target date. As of then, the balances fully belong to CoW Protocol.
In order to minimize the inventory risk of balances held in the contract, we propose to restrict the list of tokens with which solvers are allowed to perform gas cost optimizations by not routing the trades via an AMM (“internal buffers”) to a hardcoded token list of tokens the protocol is willing to hold.
Moreover, solvers are only allowed to replace trades at a “real” exchange rate they found on-chain. Failure to prove the existence of such liquidity on any of the blocks between the start of the auction and the solution submission, results in the deduction of the traded amounts (in ETH) from the gas refund.
Solvers are expected to not incur negative slippage on average over all trades during the reward period. While positive and negative slippage may occur on a per batch basis, when tallied up over the entire reward period, a total negative slippage may be withheld from the reward. A total positive slippage belongs to the protocol. Slippage will be tracked using a Dune dashboard.
COW DAO will fund a Gnosis Safe that is controlled by the Cow Protocol development team with 500 ETH and 7M COW (~10 weeks of runway) and whitelist this Safe as a solver on the protocol. The team will periodically withdraw tokens of which the contract holds significant balance (>$1000) and convert them into ETH. The converted ETH together with the initial funds will be used by the team to - once a month - refund all participating solver addresses the equivalent of their gas amounts spent.
To summarize the rules of the refunds:
- As of March 1st, solvers receive a full refund on all ETH spent on gas for successful Mainnet settlements
- Additionally, solvers receive 100 COW tokens for every successful Mainnet settlement.
- Payments happen in the first week of each month (first payout would happen in April).
- Solvers are allowed to trade internal balances only from a specified token white list (e.g. this list)
- Positive and negative slippage for each solver is tallied up over the whole rewards period. Profits stay in the protocol, losses will be deducted from the gas refund.
With CowSwap spinning off from Gnosis it needs a quick and pragmatic solution for keeping solvers incentivised to pay large amounts of ETH per week in transaction fees. This proposal is very close to the previous modus operandi where a large portion of the operational cost would be covered by swapping internal balances for ETH, and previously Gnosis (now the CoW DAO) would provide ~50 ETH per week in additional funds to cover the loss mainly arising from fee subsidies.
While Gnosis solvers are no longer willing to cover these costs without a reward, they are generally still very much aligned with the success of the protocol and can be trusted to operate in good faith. While we believe a more sophisticated and adversary prone reward system is needed in the future, we would like to focus our short term development on building out new core features and bringing more people to CoW Protocol while at the same time offering a basic but appealing reward system for solvers.
We want to make it as easy as possible for external solvers to join the CoW Protocol. By not having them deal with the complexities from inventory risk and slippage we think new participants are more encouraged to join.
We believe that this proposal is both simple and effective for all parties involved and therefore achieves these goals.