Decentralized Finance (DeFi) focuses on correcting the mistakes found in traditional finance. CowSwap, also known as Gnosis Protocol v2, is one of those reliable cutting-edge DeFi players, offering a comprehensive approach to Finance 2.0.
In this deep dive into DeFi, we’ll dive into the details to explain CowSwap and how it is contributing to this new financial landscape.
What is Gnosis?
For those who do not have a classical training in Hellenistic languages and philosophy, “gnosis” translates from Greek to “knowledge.”
Gnosis company was launched in April 2017 to develop decentralized blockchain-based solutions to redefine decentralized financial markets.
Martin Köppelmann (CEO) and Stefan George (CTO) founded Gnosis in 2015, two years before receiving their significant ICO funding.
Gnosis originates from ConsenSys, Ethereum’s global manufacturing platform. Being at the forefront of the blockchain space, the Gnosis team was the first to launch live Ethereum applications in 2016.
CowSwap (aka Gnosis Protocol v2)
Much like the Komodo blockchain covered in a previous DeFi deep dive, the CowSwap (Gnosis Protocol) team is focused on a future DeFi connecting different blockchains and digital assets.
CowSwap is a completely permissionless decentralized trading mechanism (protocol) that runs on Ethereum and xDAI.
Gnosis Protocol V1, the predecessor to CowSwap, was launched in 2020. It was the first DEX to offer ring trading via batch auctions. se are order settlements that share liquidity among all orders.
This was followed by V2, released in April 2021. This version takes advantage of the economic phenomena that can only occur within lot auctions called Matching of Wishes (CoW). Lot auctions allow CowSwap to provide Mineral Removable Value (MEV) protection and offer better prices by tapping into all sources of liquidity in a chain and settling trades in lots.
Cowswap.exchange is the first commercial interface built on the basis of the Gnosis v2 protocol. It was released as a proof of concept for V2, but after 3 months the final stable version was released.
After going live in April, the DEX novel caught up. $ 1 billion in trading volume within the first five months.
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Historical CowSwap Activity in Trading Volume, Transactions, and User Count – DappRadar.com
A dive into the Meta-DEX aggregator
If you have followed the DeFi space, you should bear in mind that the effectiveness of a DEX depends on its popularity and the liquidity it is capable of attracting. After all, the underlying DEX principle is that liquidity providers target or lock their assets in all kinds of liquidity pools.
n, those looking to trade tokens take advantage of liquidity pools that value assets based on the number of tokens in the pool, while also giving liquidity providers a haircut in the process.
However, CowSwap goes one step further. Offer better prices, if possible, by matching overlapping user orders directly in a batch auction, rather than passing them through liquidity pools, or directly linking them to the best chain price when trading via DEX aggregators or interactions Direct DEX.
CowSwap addresses liquidity issues by running batch auctions as the key trading mechanism for all orders. This allows the protocol to offer its MEV protection and uniform compensation prices for all trades of the same token pairs within each batch.
Batch auctions as a trading mechanism allow users to directly match trades when there are opposing wishes or to be bundled and routed to the best on-chain liquidity spot at the time of trading.
While Uniswap and other DEXs use the Automated Market Maker (AMM) or Central Limit Order Book (CLOB), CowSwap uses decentralized batch auction competition, where solvers compete to regulate trades within each batch.
In essence, solvers act as meta aggregators for users, connecting them directly with overlapping users or with DEX and DEX aggregators.
Solvers are professional third parties who compete with each other for the most optimal batch settlement solution.
Within these batch auctions, they can search for CoW (match of wishes) within trades, as well as being able to take advantage of the best chain liquidity available for all batch trades that cannot be settled on a cow.
If the user’s trade is in a CoW, their trade is fully MEV protected since the liquidity is completely off-chain, whereas if the user’s trade is not in a CoW, then the trade is MEV protected because the solvers y make sure to set such strict slippage for all trades in a lot so that those trades are executed at those prices.
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MEV is a serious problem, right now, as of January 1, 2020, Ethereum DeFi users have already mined a total of $ 737.1 million.
Cowswap enables traders to get MEV protection and better prices and not have to face liquidity provider fees as they are directly matched, as well as get gas savings by not having to invoke a smart contract call to get group liquidity or from the fact that solvers can group multiple transactions into one.
V2 and ETH 2.0
CowSwap’s batch auction caral, capable of matching peer-to-peer orders, has made MEV less of a problem. Speaking of upgrades and Ethereum, the CowSwap team responded to BIC that ETH 2.0 should not have a negative effect on the CowSwap value proposition, quite the contrary.
“CowSwap’s value proposition, which minimizes the MEV for user operations, is still valid at ETH 2.0. Furthermore, we hope that due to the scalability brought about by the upgrade, more value will be exchanged on Ethereum: there will be more opportunities for attackers to extract value from users and thus the need for a protocol that minimizes the MEV for the users «. explains the team.
What is the future of CowSwap?
In April, Balancer (BAL) and CowSwap collaborated to launch the Balancer-Gnosis (CoW) (BGP) protocol. Balancer regularly visits the top 10 DEXs using the Automated Market Maker (AMM). At press time, its market cap is $ 191.2 million, with the BAL token at $ 27.53.
price of the Balancer (BAL) moves over a period of 3 months: CoinMarketCap
partnership was established to implement the new BGP platform in three stages. So, ending with integration of Balancer V2 with Gnosis Protocol V2 in BGP dApp.
refore, this partnership will provide mutual benefits. Balancer receives better MEV protection, while CowSwap gets closer integration with Balancer v2 liquidity pools.
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Ethereum will continue to be the home of CowSwap for the foreseeable future, with some major updates on the way. However, “we are also investigating how we can use the liquidity of L1 to settle ongoing operations in L2, which is sure to be a game changer,” says the team.
Meanwhile, CowSwap offers discounts on gas rates during integration. Thus, incentivizing users of the Ethereum ecosystem to find refuge from its exorbitant fees.
While CowSwap’s market footprint is a far cry from Uniswap’s, joining forces with Balancer could be just what it takes to gain ground in the ever-growing DeFi ecosystem.
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