CoW DAO launches the first MEV-capturing AMM
CoW DAO, which builds user-protective products like CoW Swap and MEV Blocker, is launching the first MEV-capturing AMM — CoW AMM.
While CoW DAO’s other products protect traders from MEV, CoW AMM is the first product from CoW DAO built to protect liquidity providers. CoW AMM is the first product on any blockchain to tackle the LVR problem head on.
The LVR Problem
First described by Jason Milionis, Ciamac C. Moallemi, Tim Roughgarden, and Anthony Lee Zhang in the paper Automated Market Making and Loss-Versus-Rebalancing, LVR is defined as the losses LPs incur due to arbitrage bots constantly rebalancing liquidity pools.
Research suggests that:
- Liquidity providers for major token pairs lose 5–7% of their liquidity due to LVR¹
- In aggregate, arbitrageurs are responsible for well over $500M in LP losses every year²
- LVR accounts for more MEV than frontrunning and sandwich attacks combined
LVR disincentivizes liquidity provision in DeFi, restricting its potential utility and growth. And LVR is a contributing factor to block-builder centralization, which many people consider undesirable for Ethereum as a whole.
How CoW AMM Works
The CoW AMM is a special kind of automated market maker designed to help liquidity providers capture MEV from arbitrageurs. According to research by Andrea Canidio and Robin Fritsch in the paper “Arbitrageurs’ profits, LVR, and sandwich attacks: batch trading as an AMM design response,” the most promising way to capture LVR is by using batch auctions to rebalance liquidity pools based on surplus.
CoW AMM, therefore, works as follows:
- Liquidity providers deposit tokens into protected CoW AMM liquidity pools
- This liquidity becomes available to CoW Swap traders, who can access it similarly to other sources of liquidity
- Solvers bid to rebalance CoW AMM pools whenever there is an arbitrage opportunity
- The solver that offers the most surplus to the pool wins the right to rebalance the pool
This design eliminates LVR by capturing arbitrage value for LPs and shielding it from MEV bots.
Said another way: while most AMMs allow arbitrageurs to make money at the expense of their LPs, CoW AMM protects this money for the LPs instead.
Expected Outcomes
Research suggests that CoW AMM LPs will fare as well if not better than CFAMM LPs. Backtesting over 6 months in 2023 shows that LP returns on CoW AMM would have been equal to or greater than returns on Uniswap in 10 of the 11 most liquid, non-stablecoin pairs.
Why is CoW DAO launching CoW AMM?
Launching CoW AMM is a natural extension of CoW DAO’s mission to protect Ethereum users from MEV. With two successful products (MEV Blocker and CoW Protocol) aimed at traders, the time is right to extend MEV protection to liquidity providers.
LVR is a large problem, estimated to be responsible for over $500M in value lost to MEV bots every year — more than all trading-related forms of MEV combined.
CoW DAO is uniquely capable of bringing an FM-AMM design to market, as it relies on a surplus-capturing solver network to balance liquidity pools. CoW Protocol currently runs the largest solver competition on Ethereum, with 19 active solvers.
Find out more about CoW AMM here: cow.fi/cow-amm
