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


CMP_NZ/Shutterstock modified by Blockworks


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.”

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