Use of $COW in protocol economics

General
6

Hello @m0xt , @tanglin , @Curia , @Hasu and @valloderbabo ,
Thank you for bringing this discussion to the forum and following up from the Discord chat, I think it is very beneficial to have this conversation here.

Summary:

  1. Are rewards correlated to $COW → No. From the moment COW exceeds a few cents, rewards are capped to a native token amount, hence, the amount of COW rewards does not increase with the price of COW - see below for more details.

  2. It is wasteful to pay solvers in $COW → No, because:
    a) This mechanism fosters stronger alignment between the Protocol and Solvers, ensuring that those who contribute to the Protocol’s efficiency and success are also able to share in its long-term growth, while directly influencing its future through active participation in governance. This commitment is evident in the behavior of leading solvers, many of whom continue to hold a substantial share of their COW rewards as a signal of long-term alignment.
    b) The current buyback strategy has had a positive PnL from the Treasury perspective

I will go in more detail on responses below:

However, this protocol fee doesn’t go directly to the protocol itself. Instead, it’s first collected by solvers. At the end of each accounting period, these collected fees are converted into $COW tokens and then transferred to the protocol.

Without getting too technical, the flow of funds is mostly:

  1. In each settled batch, solvers “leave in the settlement contract” the slippage (including all fees charged) in surplus token.
    Note: Applicable for non-colocated solvers, as for those they might decide to transfer funds back to the protocol instead of #1 - currrently all solvers behaving the same way on this front*).*
  2. On a certain cadence (currently daily, but will be increased in L2s), these tokens are swapped to native token to a Payout Safe.
  3. Each week on or around Tuesday, the Solver team runs an accounting script that leads to the payment of solvers (both buffer changes in native token and COW rewards, both quoting and solving), partners (in native token) and the treasury (in native token).
  4. The Treasury then initiates a token buyback (TWAP) to cover the amount of tokens emitted / paid to solvers, and sends the remaining native token to CoW DAO Treasury for treasury management.

So, to clarify, all fees are accrued at protocol level (settlement contracts), are withdrawn to one of the entities managed by CoW Foundation and used to pay external parties, with the remainder being used for treasury management.

This means that currently, on an ongoing basis CoW’s balance sheet slightly increases in COW terms (per buyback analysis post here) and in native token.

Currently, solvers receive fixed rewards in $COW—for actions like submitting bids, winning auctions, etc.

This is not the case - documentation.

Solvers are rewarded in two parts:

  1. Quote reward:

    1. Valid rewards (as per CIP-72) are paid on a per trade (not batch) basis a capped amount of min [6 COW, X amount of Native token].
      1. Example 1 - Gnosis chain - the payment would be min [0.15 USD or 6 COW], where the cap of 0.15 USD applies.
      2. Example 2 - Base - the rule is min [0.00024 ETH = 1.02 USD , 6 COW = 2.1 USD]. so the native token cap applies
    2. This means that as $COW price rises, there is not a guaranteed higher amount being paid in USD.

  2. Solving / competition reward:

    1. Payment to solvers is the additional total surplus provided by a solver compared to the competition, measured in the native token.
    2. This calculated Payment (in native token) is then converted to COW using a Dune price feed for the day prior to the Payouts.
    3. This means that solving rewards are dependent on overall surplus generated, normalised in native token price. Actually, an increase in $COW versus the native token would lead to lower COW rewards being distributed.

Overall, the drivers for the solver rewards are not $COW price, but actually underlying are Native token prices (either because of the caps on quoting, or on the surplus generated on the solving). As these are then just converted to $COW for payment , there is not a direct link between solver performance and rewards to be paid and $COW price increase.

The above explains why in moments of added volume / volatility, there are more Protocol Fees generated (higher price improvements or surplus), but there is also more activity (more quotes and batches being executed), hence more rewards to pay (calculated in native token, converted to COW).

Most will likely sell the $COW tokens shortly after receiving them to cover operational costs and lock in profits.

This is the basis for the CoW Buybacks in the market, to absorb any / potentially all the sell pressure. Also, the solvers bonded under CoW DAO bond are mandated to keep 25% of tokens “soft-locked” to participate in the mechanism (see here).

Even some non-CoW DAO bonded solvers are holding significant amounts of COW.

However, in Month A, the price of $COW was $0.30, while in Month B, it was $0.90. Even though everything else stayed flat—including revenues—the protocol’s expenses tripled, purely because the price of $COW went up.

Assuming that $COW and Native prices are kept constant, any variation on the USD amount paid to solvers corresponds to them generating more value (more quotes, or more surplus). What I mean here is that CoW Rewards cannot be evaluated from a USD perspective, but from a COW amount perspective relating to volume / Fees to benchmark performance.

Right now, we can track protocol revenue by chain, but we have no visibility into how solver rewards are distributed across chains, since all rewards are currently settled on mainnet.

This is a fair request, and we’ll see to add this to the Analytics roadmap.

Regarding @Hasu ‘s comment, there is no “perpetually ICOing” as rewards paid to solvers are not 100% sold in the market, there is a buyback motion to keep supply from increasing.

solvers incentives should be independent of $COW price.

As per the notes above, from the moment $COW is above a few cents, the native token price caps are reached. Hence, rewards are mostly independent from $COW price

paying solvers in $COW token, irrespective ov the amount, is wasteful.

Several considerations here:

  1. Some colocated solvers are holding the token, hence it’s a good strategic alignment having the rewards paid in COW.
  2. Colocated solvers are part of CoW DAO bond and required to hold 25% of all rewards paid.
  3. The current buyback strategy has actually been PnL positive, where considering that there was an overpurchase of 2.6M COW, at current price level, there is a ~570k USD gain on the treasury operation.

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4. We also think that if Solvers were paid in native tokens, they would not buy the same degree in the open market, given friction and, potentially, inertia.

Let’s continue the discussion, thank you for all the comments.

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