Why TWAP? The Perks of Time-Weighted Average Price

CoW Swap has recently become one of the first DeFi projects to launch native support for Time-Weighted Average Price (TWAP) orders. TWAP orders spread out large trades into multiple smaller orders. This reduces slippage & price impact and helps traders enter or exit a market position at an average price.

TWAP has been around for a while on centralized exchanges, but CoW TWAP — CoW Swap’s version of TWAP — comes with several important benefits that traders won’t find on CEX alternatives.

What is Time-Weighted Average Price (TWAP)?

Time-Weighted Average Price (TWAP) is a trading strategy used to execute large orders over a set period of time. This approach splits a larger order into multiple smaller trades. This strategy helps minimize market impact, avoid sudden price movements, and reduce slippage.

Example: using a TWAP for Ethereum

Let’s say that a trader wants to buy 1,000 ETH. They choose to use a TWAP order over a 5-hour time window. The order is split into five equal parts of 200 ETH and the trade is executed at 200 ETH every hour over the 5-hour time window.

Benefits of TWAP orders

Dollar-Cost Averaging (DCA)

TWAP orders help automate the dollar-cost averaging (DCA) investment strategy. DCA involves investing a fixed amount of money in an asset at regular intervals, regardless of the asset’s price, in order to reduce the impact of market volatility.

In highly volatile markets like crypto, the risk of making a large investment just before a sudden price shift is significant. TWAP minimizes this risk by breaking down your investment into smaller, evenly distributed purchases over time. This finds an average market price and helps smooth out market volatility. Want to buy an asset but you’re not sure exactly when to click the “Swap” button? TWAP-enabled DCA means you can forget about timing the market and get the average price instead.

Investors can also use TWAP to sell their positions through dollar-cost averaging. Simply switch the assets you’re swapping and TWAP will help you exit the market for an average price.

Riding the crypto waves has never been so s-moooo-th! 🐮

Reduce your price impact

Large orders move markets and traders often get worse prices as a result. By splitting up large trades into multiple smaller orders, TWAP helps mitigate the negative effects of price impact. A bunch of smaller orders affect prices much less than one big order, meaning you end up getting a better deal for your trades.

Reduce your slippage

Finding the right slippage can be tricky. Set it too low and your order might not go through, too high and you could fall prey to MEV. Using TWAP to split up a large order into smaller parts allows you to use a smaller slippage tolerance for each part. The MEV bots can stay hungry…

TWAP vs. VWAP: What's the Difference?

While TWAP (Time-Weighted Average Price) and VWAP (Volume-Weighted Average Price) are both trading strategies designed to help execute trades at optimal times and prices, they operate quite differently.

TWAP splits an order into equal parts executed over a set period defined by the order. This makes it an ideal strategy for discreet execution and for trading in low-liquidity environments where large trades could move the market significantly.

VWAP, on the other hand, calculates the average price of an asset weighted by its trading volume at a moment in time. Based on this, the VWAP trading strategy adjusts your trades sizes based on the market volume to execute your trade as close to the market's volume-weighted average price.

The downside of TWAP Orders

TWAP has its drawbacks, too. Trade execution can be slow and predictable. The results can be disappointing to traders and very exciting to predators.

TWAP doesn't adapt to real-time price changes or volume. Additionally, once a TAWP strategy is started, traders have limited control over its execution. Because of this, the TWAP strategy may not be ideal for extremely illiquid assets or trades that require urgent execution.

The trade execution patterns can often be predictable. Since the strategy follows a fixed schedule of equal-sized trades, bots can detect this behavior and attempt to front-run or exploit it. This can erode some of the cost-saving benefits of TWAP and potentially leave traders worse off.

Why TWAP with CoW Swap?

Those familiar with CoW Swap know there’s always something extra in our barn 😉. Below are some exclusive benefits you’ll only find on CoW TWAP.

Always receive 100% of your order surplus

CoW Swap searches for surplus opportunities on every order and TWAP orders are no exception. In fact, since TWAP orders are split up into different parts, each part is another opportunity to find surplus for your trade.

In our tests, selling 1,000 ETH in four parts of 250 ETH each allowed us to get a price for the order that was 3.5% better than selling the 1,000 ETH all at once! This was in large part thanks to CoW Swap’s batch auctions that include finding Coincidence of Wants and other price improvements.

Get price protection

After you select the assets you want to trade through CoW Swap’s TWAP interface, you’ll need to indicate the number of order parts you want to use, as well as the total duration over which you’d like your TWAP order to execute. From these selections, the interface automatically calculates each part duration and the amounts you will be buying and selling per part.

Unique to TWAPs on CoW Swap is the “price protection” feature. Price protection ensures that your order will stop executing if the market price of the assets moves by more than your specified percentage.

Get started with CoW TWAP

To get started with TWAP orders on CoW Swap, you’ll first need to ensure that you have a Safe wallet. Currently, TWAP is only available through Safe but support for more wallets will be coming soon.

Don’t have a Safe? No problem! Create one here. After you make a Safe, you’ll also need to upgrade your fallback handler. Learn what this means and how to do it here.

Once your Safe is fully set up, you can access TWAP directly through the CoW Swap order interface.

TWAP orders on Ethereum Mainnet have a $5,000 minimum per order part. This ensures that gas costs are relatively low compared to the entire order size, even with multiple parts involved. Smaller traders can also enjoy CoW TWAP on Gnosis Chain where part minimums are only $5 (and the gas is much cheaper!)

You can find the full how-to guide on CoW TWAP orders here.

As always, on CoW Swap:

• All prices are aggregated from the best available on-chain and off-chain liquidity
• Traders are fully protected from MEV
• Orders are free to place and free to cancel
• Traders never pay for failed transactions
• Transactions are gasless as fees are paid in the sell token

Happy TWAPping!

FAQs about TWAP

How is a Time-Weighted Average Price (TWAP) order calculated?

A Time-Weighted Average Price (TWAP) order breaks a large order into smaller, consistent trades across a set duration, aiming to achieve an average price over time. This approach reduces market impact by executing evenly regardless of short-term price fluctuations.

What market conditions are ideal for employing a TWAP trading strategy?

TWAP trading strategies are particularly effective in highly volatile markets, such as cryptocurrency. They help traders mitigate the risk of sudden price shifts by averaging out the entry or exit price over time.

Additionally, TWAP is well-suited for markets with moderate liquidity, where a single large order could significantly impact the price, as it reduces overall market impact.

What are the primary disadvantages or limitations of using TWAP orders?

TWAP strategies offer limited real-time control once initiated, and their effectiveness can be reduced in unpredictable market conditions. If not carefully designed, TWAP orders might not always achieve the optimal execution price in fast-changing environments.

Additionally, they can become predictable to other market participants, potentially exposing the order to adverse trading behavior.

How does CoW Swap's TWAP feature offer unique advantages compared to traditional TWAP?

CoW Swap's TWAP implementation provides unique benefits such as guaranteed 100% order surplus, where the platform actively searches for price improvements for each smaller trade through batch auctions and Coincidence of Wants.

It also includes a "price protection" feature, which stops the order execution if the market price moves beyond a user-defined percentage, offering an added layer of security against adverse market shifts.