Long Term CoW Value Capture

Tldr, the goal of this post is two-fold:

  1. Raise awareness of what I believe is the best long term value proposition for COW: make more in fees than we spend in cost and distribute that profit to token holders
  2. Bootstrap a discussion around how we as a community see the trade-off of being profitable now vs issuing tokens as means to bootstrap network effects

Given some of the recent discussion around the increased sell pressure and long term value proposition of the $COW token, I wanted to take a moment to post my thoughts on the matter.

I personally don’t share the belief (which I recently saw repeatedly on Twitter and from speaking to people) that the long term value of the token will come from fee subsidies for traders nor deferred locking mechanisms to reduce immediate sell pressure (I’m also not strongly against either as a short term incentive, but I feel they will have little impact on the fundamental value of the protocol).

While the decision on how to run the protocol is ultimately up to the DAO, I think COW Protocol can run a very simple business model. It generates revenue by charging users a fee on each trade (for users’ convenience in the sell token). Up until today the protocol has earned more than $15M in fees. Last week alone it earned >$330k in fees.

At the same time, the protocol has costs. It refunds its solvers the gas they spend for settling orders and also pays a 100 COW reward for each settlement. Today, the cost of the protocol mostly exceeds the revenue it makes (it is operating at a loss). However I think that in the long term the revenues can be much larger than the operating costs. At this point, it should be straightforward to capture value for COW token holders by implementing a simple buy-back or dividend payout scheme.

How can we get there? In theory, the DAO could turn the protocol profitable today. Since revenue and costs are quite detached in our architecture (compared to other DEXs where users pay their own transaction cost) we could increase the amount of trading fees we take on each order beyond our expected execution costs (users may be willing to pay for other factors like trust in the platform, paying their fee in sell token, MEV protection, not failing for failed transactions, chance of price improvement via a COW).

Currently, we deliberately charge less than the expected gas costs. The idea behind the discount was to reduce some of the fixed gas overhead that comes from the added batching layer and in order to bootstrap adoption. This decision was made, because another key aspect of CoW Protocol is its extremely strong network effects both for gas costs as well as price improvements: Matching a single user order via Cow Protocol is on average more expensive than going to Uniswap directly (due to the intermediate settlement layer that performs a signature check + extra transfers). However, executing multiple trades in a single transaction can be much cheaper than executing them individually. Dune shows plenty of batches in the last month where the average gas cost per trade was below 100k - a significant improvement compared to current DEXs. If most batches looked like that, the protocol would be more gas efficient than its competition.

This trend can also be seen if we look at the average gas cost per trade vs gas cost per batch, we can see that as the “gas per batch” increases (batches getting more crowded) “average gas per trade” stays constant and even trends down.

I therefore believe that given enough users we could even sustain the current fee subsidy while eventually being profitable. However, this would require liquidating more tokens in the short term.

Maybe there are other ways to bootstrap the network effect? Maybe, instead of giving users a subsidy on the fee we should use CoW tokens directly for a trading incentive program? Should we strive to make a small profit already today and demonstrate a buyback program with the return? Or would this stifle growth and usage too much?

I’m looking forward to input and thoughts from the CoW-munity.

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I agree that the COW project should not be operating at a loss. Increasing fees sounds reasonable to me. This is still one of the few spots that will protect its users from MEV.

Not sure how feasible this is, but additions to increasing the fee, the surplus from a trade could be divided up between the user, solver, treasury, and holders.

Solvers and even many COW holders are not really incentivized to hold onto their COW tokens. If the cowswap discount also applied to a Balancer v2 80/20 COW/ETH LBP, anyone who holds COW could receive the trading discount, build deep liquidity, and receive swap fees. Some percentage of the platform fee increase could go towards incentivizing veBAL holds on voting for the 80/20, further benefiting holders.

how it will be eventually profitable in the future ? I guess it wont by its own.

we need a system to make progress and become profitable .

I did not check this forum everyday . But whenever someone says we are not profitable now he finishes the sentence with but we will be in future .

can you explain me how it will become profitable if we keep the current state

then we can discuss to find a quicker way to reach stable profit making state

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I don’t think that increasing the base fee, which is supposed to cover the execution cost, is a good idea.

What makes more sense to me is take a small cut on the surplus on each trade.

For inspiration: Rook as a pretty much direct competitor of CowSwap does basically this:

-cut on surplus
-allows users to stake
-stakers earn from the surplus

So maybe as long as you don’t get a better price than you requested you could pay the same fees as until now. That way by holding $cow, you are actually betting on a long term success.

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Through network effects of user growth. If a user trades alone in a batch (which is currently still the case in the majority of batches at the moment), we won’t be profitable.

But, if batches become more crowded, that is if 3-4 people trade on average per batch, a single batch settlement of those trades is more cost efficient than four individual transactions.

E.g. take this transaction: Ethereum Transaction Hash (Txhash) Details | Etherscan

It cost the protocol $130 to execute the four trades, but it collected $350 in fees (the estimated cost of what the four trades would have been on another aggregator).

So even without a volume/surplus based protocol fee, CoW can be profitable just by virtue of having more cost effective settlements.
On top of that, benefits such as structurally better prices from CoWs, MEV protection and other UX advantages may be valuable enough for users to justify a protocol fee on top.

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I think there is a fine line here to walk. Right now I almost exclusively use cowswap for my trades because of the discount vs other dexs That discount can be adjusted certainly but if it no longer seems substantial than it doesn’t attract as many users and therefore fees as before. I think it can be adjusted it just needs to be as little as possible. Obviously there are other ways of increasing the long term viability of the token. Reducing solver rewards seems logical as more solvers are onboarded. This I think would equate immediately to relieving sell pressure. If the reward went from 100 a batch to 90 your talking about probably a 10% sell pressure (as I assume most solvers earn than sell). And it doesn’t seem a substantial amount to force solvers to quit solving. You must maintain reimbursement of gas or you would risk taking all the profit out. However this would also relieve cost so you have multiple benefits. The other idea you touched on that I think could certainly work would be a portion of fees being used to buy back cow tokens and burn them. Buy and burn. This puts a deflationary pressure on the token and would be directly placing that value in token holders. Obviously this would be if cowswap was profitable which is the primary concern. So I think a three pronged approach would be a great idea. A small increase in fees while maintaining cowswaps competitive advantage. A reduction in solver rewards, possibly to 95 cow would be sufficient. Finally a buyback of COW using a percentage of fees earned and then burned(what percentage is up for debate) . I think if cowswaps competitive advantage is protected (lower swap costs and Mev protection) adoption is going to continue to increase and will absolutely become profitable, but both competitive advantages need to be protected. This approach would put the initial stress of adjustment at all parties involved.

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I think the real issue is to stabilise the price. I think investors are quite aware of the efficiency of the protocol and that their investment today will satisfy them tomorrow.
We are not very far from the seed investment price. I think that’s a limit that should not be exceeded. This threshold must be reassuring and offer stability and even a period of accumulation.
I think that we should not give in to short-term perception by adding costs that will not be necessary in the future to be profitable. We must keep in mind that this financial decentralisation must be cheap and I am not in favour of adding fees everywhere.

PS: I would agree to make the “moooow” a charge. If you want to hear it you need to own COW tokens at least one

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It does not make sense to charge a user based on their “consumer surplus”.
If two users submit an order, user A for buying 1 ETH for at most 2010 USDC, user B for buying 1 ETH for at most 2100 USDC, and they are both executed at 2000 USDC price, arguably their real benefits are fairly close, in other words user B should not be charged 10 times higher fee. In my post below, I propose some other factors to consider, although the question “which users benefit” is not very straightforward to answer (e.g. unsuccessful Flashbots’ bundles that would have otherwise attacked a user order at the time are not observable).

It’s great that this has been brought up! Hard agree on need of revenue in the long-term, and protocol revenue remains the strongest value accrual a token can have. (The only other viable being work token, which does not seem ideal in CoW DAO case). Discounts and others seem like a short-term icing on the cake only.

Nonetheless, I think CoW DAO should tread carefully. I started crafting a more elaborate proposal, but here are a few thoughts to begin with:

  1. CoW Protocol has massive economies of scale. Thus far it has often worked just as well as say 1inch, Matcha but not that much better. This is because of many batch sizes are size 1. With more CoW (2p2) trades, CoW Protocol can offer much more value than competitors. When that happens, users will be much more willing to pay a protocol fee and still benefit.

Therefore, while I am in favour of CoW DAO committing to a standard protocol fee in several years, but phase-in over several years starting with 0% today, say 25% next year, 50% the year after, 100% the year after.

  1. Protocol fee should be reflecting the value user order is getting from MEV protection, and CoW DAO taking on the execution risk (i.e. user pays gas fees only for successful trades). Therefore, it should be dependent on token pair. As an example, a user swapping $1m of USDC to USDT may be able to use Uniswap v3 directly and execute a trade easily setting slippage tolerance to say 0.02%, not minding a failed gas fee on such a large order. Arguably, the full protocol fee should be probably around 0.01% or so.

However, a user wanting to swap $1m worth of HACHIKOINU to UNISOCKS should pay a very high protocol fee, because a) this swap is hard to execute given high volatility of these tokens, might get reverted, which is effectively paid for by CoW DAO b) if user submits this trade on Uniswap v3 , they are getting frontrun with 100% likelihood for a very high amount.
Estimating fair protocol fee is nontrivial, but should be done prior to introducing it and losing customers that realize the protocol fee is not worth paying for their type of swap.

  1. Further, and this may go a bit beyond what is needed to introduce the fee in the beginning, some user orders are actually beneficial. to other user orders. For instance, orders where the selltoken is say USDC, ETH, DAI, USDT may be frequently used by another user order that needs these tokens to perform AMM operations. On the other hand, a trade in tokens that are not commonly traded and does not go through any common tokens either is unlikely to be part of CoWs. So, the protocol fee may want to consider that where the order generated a direct CoW benefit for other users, this could offset the protocol fee charged normally.
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looks like the real optimisation to be made here is increasing the number of cows. it is one of the features that sets the protocol apart from the rest, and is also what can increase the profitability nfold.

  • give users that have the patience the option for their swap to wait for a cow for an hour or a day. maybe at a x% fee discount? this should increase the pool of wants considerably, eventually decreasing costs.
  • reward solvers that are able to find cows, or somehow have solvers focus on cow hunting more.
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Could a long-term model be a no-fee model because running a solver itself would be so profitable?

Similar to how Robinhood doesn’t pay for trades but gets paid for order flow.

Getting more trades through CoW protocol and attracting more (and more sophisticated) solvers seems like the top priorities imo

Good thoughts! I agree with you. We also need to create more use cases for $COW so that holders have a reason to keep the token, not just dumping.
I am still holding.

My main concerns regarding CoW Protocol are addressed by this thread and I am open to many ideas possible here. I am very happy to see some openness regarding the tokenomcis take place.I typically see the vote escrowed model working in terms of directing revenue for an AMM (CRV) as a comprehensive model but in our case as an aggregator we must make our profit off of our unique ability to increase trade efficiency. Some key points:

Short time solutions which will not benefit us:

  1. Locking tokens for a period of time. Yes sell pressure decreases but long time holders end up holding the bag while farmers can continue to push the price point down. Votes are important here, however at this time the model of a revenue distribution (upon us making one) seems to be beneficial on block by block basis, with the caveat of us needing to scan to make sure users are not manipulating CoW revenue sharing to buy and sell the token frequently and receive any profits which may come from the protocol.

  2. Burning, bonding, buy backs. These ultimately will drive the price up short term at the expense of those who are willing to long term hold. If any of these events happen, it is in the best interest of bad actors to sell their tokens immediately as price theoretically will spike and decay after the event, unlocking, release, etc.

Long term solutions which can benefit this protocol:

  1. A pay to play model. Yes we aggregate and MEV protect as a service, but as opposed to receiving such discounts & benefits as all users do now you must hold CoW to receive said discount. In theory moving the brackets we currently have up 1-2 rungs. If you hold no CoW tokens you are treated as happy to pay the premium for the potential to receive a CoW and trade protection. Positive slippage on your trade is taxed to be split 75/25, 75 for the protocol, 25 for the user. Given you hold X number of CoW tokens over the week’s snapshot(s) you can decay that fee to 50/50, 25/75, as low as we may agree upon(0/100 as it is now is possible but a % of total supply should determine this level of benefit).

  2. Using COW token as a protocol payment for when a CoW is executed as opposed to an AMM. Limit orders would thrive in this environment because users would essentially pay the lowest possible gas fee and hit a desired strike price. In this case COW acts as a trading coupon where a user can toggle between standard aggregation or “coincidence of wants mode” if you want to only be eligible for a coordinate non-AMM trade. While you will still pay your gas in the sell token, because it is less than a typical AMM swap, 25-50% of your savings will be taken by the protocol in COW tokens (this number is flexible). If this is not gas efficient up front a staking contract of your coupon allocated COW may be needed in order to pull into the DAO treasury without a substantial cost to the protocol.

  3. Integration with more AMM trade interfaces. In particular Uniswap and Sushiswap gain a large amount of their volume due strictly to popularity. If we were able to put a gasless option on their trade UI to utilize our contracts similar to Balancer’s integration we would have a much larger opportunity for scaling and network effect to make our protocol sustainable. This is much easier said than done, however we would save everyone who trades in Defi gas across the board in a very impactful way.

A selling point for us as @fleupold mentioned is that at scale we ultimately save Ethereum gas for users. In a sense, CoW Protocol is the most “environmentally” friendly trading option the network has at its disposal. The product has an ability to protect and profit for the users who are willing to use it. In my mind fees are the only way forward. Distribution to users and benefits for those who hold make sense. I am open to feedback and edits always. Contact me at any point to strike conversation on this topic. Hopefully this conversation yields us all a fruitful future.

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hahahahahahahhaha, agree!

“moooow” is My favorite feature.

Really good comments already, please keep it going :slight_smile:

Just for comparison, the vesting schedule makes about 10% of CoW tokens tradable per year, CoW solver rewards ~3% (about the rate that could be enabled with inflation). I’m not sure reducing the CoW reward slightly would have a big impact on sell pressure. I think working towards making solvers economically long-term aligned with the protocol (e.g. by requiring to hold larger amount of CoW and build a bonding pool) might be a better approach.

That’s an interesting one. After talking to our first external solver it actual turns out that focussing on CoWs with the current batch sizes is not super interesting for them (even if we awarded an extra reward for them). I also wonder how we would prevent solvers from gaming this (by placing orders with sibling accounts).

I’m happy to see and agree with the sentiment that we need to primarily think about how to grow our order flow and CoW potential, for instance by giving people more optionality to wait for CoWs. Any more ideas on how we can advance on that front would be awesome :pray:

Regarding, using the CoW token as a “cashback” token for surplus (similar to how Rook pays back surplus in their token), I wonder if that is a desirable user experience. One key advantage in my opinion of CoW Protocol is that it gives traders the most bang for the buck in the token they care about (ie. the token they are buying) and not awarding them some claim on a governance token they might not care too much about.

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My belief is that limit orders will boost CoWs, CowSwap can potentially become the best limit order service out there.

Meanwhile we could allow users to create “extended orders” (or whatever we would call it) meaning they will signal that they don’t mind to wait for CoWs or more trades to be included in the same batch (this kind of orders should never be set in batches with less than 2/3 or 4 trades for instance). This feature should allow users to make their order valid for some hours (24h max wouldn’t be bad to start). With this in place, we could increase “regular orders” fees enough to make the protocol profitable. If people don’t want to pay that “premium fee” then they can use extended orders or hold enough tokens for discount (meaning discounts would be boosted).

Another solution would be to create “priority orders” signaling that people don’t want to wait for CoWs and they want to get their trade settled asap but paying a premium fee. All regular trades would then be executed only if there’s more than 2 or 3 trades per batch.

Exactly. I wouldn’t care much about the protocol profitability if we hadn’t a Bear Market evolving and if people wouldn’t be so short term focused but it seems that the majority keeps selling because they don’t see any value in COW tokens (not even for voting). Sellers don’t believe in the future of the protocol or they believe in CowSwap utility but they don’t get anything in return. With a trading fee premium we may lose some traders but not if we give alternatives to avoid this premium (boosted discounts and eventually “extended orders” or whatever). I would like to avoid this but under current market conditions doing nothing isn’t exactly the smarter move.

Like @Zen_Dragon also said I don’t think buybacks are good, if the market doesn’t want to buy the token, this buybacks will transfer value from the Treasury to COW token sellers. That’s the reality, recently we saw how useless this buybacks can be.

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After reading @fleupold first post I also immediately thought we should increase efficiency which is more trades per batch using a two options (or dynamic) feed model. Like others also proposed already here.

a) Fast trade → higher fee which makes single trade per batch bring revenue to the protocol
b) normal trade → lower fee and wait till at least 4 traders per batch can be included or timeout after x hours (Possible to set timeout by user, maybe advanced settings and use default value)

Do we have any data how many trades per batch on average we had during the UST/LUNA collapse? This is kind of a best case (for us) scenario from market point of view. I assume a lot of trades happpend and I would like to know if we had enough traders per batch there to break even.

I also thought about making the solver rewards dynamic like EIP-1559 when we have enough solvers. But it seems the COW rewards for solvers a just a very little part of the expenses. @fleupold Do you have the cost breakdown between gas costs and the COW rewards by hand?

Also what is the goal: Make COW more valuable by price or more valuable as a utility (Holding gives benefits e.g. cheaper trading fees).

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We have all trade data available in Dune Analytics. A specific analysis of fee vs cost per batch can e.g. be found here.

During the Luna/UST collapse we also had settlement throughput issues stemming from high gas costs and volatility making it difficult for the system to settle batches successfully. The congestion increased batch size and made the protocol overall profitable that day (modulo failed gas costs which are currently covered by the solvers).

Regarding solver payouts, we have been using this dashboard to compute payouts: Dune

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Maybe its an idea to incentivize users to get some COW tokens when their trade is settled through a CoW while also setting a protocol fee that is relatively higher when a CoW is settled than when a trade is settled through AMMs. In this way gaming this system would also give holders of COW token a higher income when revenue is shared between holders (or perhaps stakers). Even solvers would be incentivized to stake their rewarded COW tokens when winning a batch because they can also earn income on the fees with it.

Furthermore I agree with Voyta to set fee ratios higher for ‘complex’ orders rather than for ‘easy’ orders so that the difference in cost between CoW protocol and AMMs like Uniswap or Curve is low and people still are better off by going to CoW Protocol because they are protected from MEV etc

When sorting this dashboard by trades (which is traders per batch I assume) we have max. 5 trades and still a negative profit for all of these.