Price estimation is currently a key component of the protocol. This proposal aims to set up a rewards mechanism in order to incentive all solvers participating in the solver competition to become estimators in the price estimation competition.
As outlined in this (Towards a stronger price estimation competition) post, price estimation is integral for the success of the protocol. Establishing a robust, consistent and competitive quoting mechanism will lead to more accurate quotes for the users, much better fee estimation and will eventually minimize the percent of expired orders (i.e., orders that got a quote but solvers were not able to realize it). This will, ultimately, lead to increased traffic in the protocol.
Currently, only a subset of the solvers participating in the solver competition do price estimation. Concretely, only Gnosis solvers and SeaSolver are participating in the price estimation competition. Many Gnosis solvers solely rely on external APIs (such as 1inch, 0x), and from time to time these solvers get rate-limited, thus resulting in suboptimal performance. Due to this, significant dependency on external APIs poses a non-trivial risk to the protocol, and we believe that by encouraging multiple solvers to participate in the price estimation competition would mitigate this and would result in very consistent good quoting. Moreover, the solver competition is already in an advanced stage, where solvers have evolved a lot and are quite sophisticated, and able in many cases to outperform external APIs. For all these reasons, we believe it is crucial to make the price estimation competition stronger by having solvers participate in it.
We propose the following mechanism. We start by noting that the number of orders getting settled onchain per month is between 30k and 35k for the last few months. To simplify the analysis below, we will assume throughout that we have 35k orders being settled onchain, on average, every month.
To incentivize solver participation in the price estimation competition, we propose to reallocate
15% 20% of the COW rewards, currently allocated for the solver competition and intended to be distributed as consistency rewards. As a reminder, there is a total of 20M COW tokens allocated for solver rewards over a year, which corresponds to an average weekly budget of 383307 COW for solver rewards, of which 25%, or 95826 COW, is intended to be used for consistency rewards, as specified by CIP-20.
Here, we propose to reallocate
15% 20% of the COW rewards budget, equal to 4M COW over a year, or ~77,000 COW per week, to the price estimation competition. The rationale behind this is that:
- as explained above, we believe that price estimation is crucial for the success of the protocol. A very competitive and reliable quoting system is the first step towards increasing order flow, allowing the protocol to always quote the best possible prices to users, along with competitive fees.
- Based on the fact that for many weeks, significantly more than 25% of the COW rewards given are consistency rewards, we expect that the reduction of the total budget for solver rewards will not eliminate consistency rewards, which are very important as they ensure robustness of our batch auction mechanism. On top of that, the protocol has made significant steps in the last few months to minimize solvers’ costs, especially with the introduction of MEV Blocker, and the hope is that this budget reduction will not negatively affect the development and well-being of the solvers participating in the solver competition.
Given the weekly budget of 77,00 COW for price estimation, we propose the following distribution mechanism:
- Every market order being placed in the orderbook is associated with a quote, that is the winning quote of the corresponding price estimation competition that took place. We link each order with the solver that gave this winning quote. We stress here that for a quote to be eligible for participating in the price estimation competition, full calldata must be provided which should be able to successfully simulate.
- For every market order that a solver provided a winning quote for, we track whether it got successfully executed onchain or whether it expired and in the case where the order got successfully executed onchain, the solver that provided the winning quote gets a reward of 9 COW.
If the order expired without getting executed, the solver gets a (negative) reward of -Y COW.
On the first day of each month, the rewards for each solver are aggregated and the protocol transfers out the COW rewards in the rewards address already specified by the solver where the COW rewards are currently being sent.
Note: We stress that the majority of quotes do not lead to order creation. We view this as something positive, as price estimators would have to be consistent and provide quotes for most of the requests in order to get rewarded, as one cannot know in advance if a certain request will lead to an order being placed in the orderbook.
Since we have assumed a total of 35k orders being executed onchain per month, it is clear that on average the protocol would spend 35k * 9 * (7/30) = 73,500 COW per week. Thus, the rewards proposed above fall within this budget and can also accommodate an increase in the number of orders being executed.
Regarding how much a solver will actually be gaining, a solver that ends up getting 10% of the rewards would earn 7,350 COW per week, or 31,500 COW per month. With the current COW price, this would be around 2200 USDC per month. We believe this should be enough to cover infrastructure costs. More importantly, we believe that solvers that will engage in price estimation will, as a byproduct, become much faster, reliable and competitive for the solver competition as well, thus gaining significant edge, which should also result in more rewards in the solver competition.