Sorella and CoW Protocol have something in common: Making on-chain exchanges work better

CoW Protocol adds programmatic orders to DEX traders’ toolkit, Sorella is battling toxic flow

article-image

CMP_NZ/Shutterstock modified by Blockworks

share

CoW Swap is spelled with funny capitalization deliberately. Aiming for a Coincidence of Wants (CoW) underpins its unique approach compared to other decentralized exchange (DEX) venues. Unlike typical decentralized exchanges, CoW Swap facilitates direct order matching among traders before considering traditional liquidity pools.

By avoiding on-chain liquidity pools, traders save on LP fees and gas costs, leading to better trade prices. This method also safeguards against MEV attacks by facilitating peer-to-peer swaps, thus eliminating opportunities for transaction hijacking. CoWs are particularly effective in large trades or for assets with lower liquidity.

They can also result in lower slippage, and are part and parcel of the protocol’s primary goals: to ensure fair trading conditions by developing features that directly benefit users.

On the Bell Curve podcast (Spotify/Apple), Anna George, CEO and co-founder of CoW Protocol, discussed how the project’s latest feature — programmatic orders — is expanding the ways that traders can automate their strategies.

By making use of ERC-1271, CoW allows users “to add any type of on-chain interaction before and after a normal swap,” George told Blockworks’ Michael Ippolito and co-host Dan Robinson.

For instance, how about setting up to execute 100 different TWAP orders, then updating the frequency for all of them with a single signature?

Or put in place stop-loss orders and automatic dollar-cost averaging (DCA) schemes, fully on-chain?

The feature empowers users to automate complex trading strategies, portfolio management, and even DAO treasury operations.

Sharing the guest mic on Bell Curve, Ludwig Thouvenin, founder of Sorella Labs, elucidated the mechanisms behind the “plague” of Maximal Extractable Value (MEV) — also known as Loss versus Rebalancing (LVR) — which makes passive liquidity providing unprofitable.

He noted that 80% of volume on Uniswap is arbitrage. Due to Ethereum’s 12-second block times, DEX LPs are constantly living in the past when it comes to price, while centralized exchanges with an order book operate in “continuous time.”

“MEV arises because you have this sequential execution of transactions,” Thouvenin explained. “You have different prices for one asset and one block, and then they are arbitrarily ordered or someone else is purposefully ordering them in a specific way to maximally extract slippage.”

This notion of “stale” price quotes is exploited by vertically integrated block builders, who take advantage of asymmetric information — knowledge of centralized exchanges’ prices — and bid to win Ethereum’s block auction so as to be the first to extract value from the passive LPs.

“Sorella” means “sibling” and the company’s Angstrom project, built on Uniswap V4 hooks, aims to group all transactions of a given asset into one big happy family sharing the same price.

The technique, called batch auctions, removes the arbitrageur’s edge — its opportunity for nearly riskless profits which, Thouvenin says, are “not supposed to exist in a well functioning market.”

“That’s a philosophical question [and] I think it’s more so an existential question for blockchain in the sense that this value, from MEV, is most of the time extractive — someone is losing — and we see this with LPs today.”

George agreed, saying, “[Automated Market Makers] that we know today may be at risk of disappearing because it’s not profitable or efficient.”

Ludwig expects that passive LPs overtime will strictly employ third-party services through which to provide their liquidity and have it managed for them — an efficient solution, “so long as you remove that inherent loss that occurs every time there’s some toxic [order] flow.”

Thus, Angstrom’s goal is to redirect the value to the LP.

“You have to design the application whereby you are cognizant of the fact that some MEV opportunity is going to be created, but when it is, the application itself has to effectively give the right to someone,” he said.

“You have to be in control of who actually gets to extract that value.”


Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.

Tags

Upcoming Events

Salt Lake City, UT

WED - FRI, OCTOBER 9 - 11, 2024

Pack your bags, anon — we’re heading west! Join us in the beautiful Salt Lake City for the third installment of Permissionless. Come for the alpha, stay for the fresh air. Permissionless III promises unforgettable panels, killer networking opportunities, and mountains […]

recent research

Screenshot 2024-05-23 091855.png

Research

Bitcoin L2s aim to boost scalability while preserving decentralization and security, unlocking a better user experience, and new avenues for Bitcoin-powered innovations. However, no existing Bitcoin L2 leverages the full security of Bitcoin.

article-image

Sponsored

The convergence of AI and blockchain on Polkadot represents a groundbreaking opportunity for investors and developers alike

article-image

The company is making public a previously private offer rejected by Bitfarms’ board of directors last month

article-image

Semler Scientific, a publicly traded medical tech company, joined MicroStrategy by buying up millions of bitcoin

article-image

As someone who’s been knee-deep in the trenches of blockchain development, I can’t help but wonder if these behemoths are really cutting it anymore

article-image

UNI and MKR are suffering from the successes of their respective protocols

article-image

Maybe there’s no silver bullet to avoiding most tokens dumping after launch…