Simple Summary

CoW Protocol’s current second-price auction uses a fixed reward cap, which suppresses solver rewards on high-value batches and lets rewards exceed protocol fees on low-fee batches (especially on L2s). This CIP replaces the fixed cap with a dynamic cap tied to protocol fees generated by the winning solution, and introduces a very small unconditional volume fee of 2 bps (0.02%).

The goal of this CIP is to change the reward mechanism in a way that aligns incentives of solvers and the protocol to ensure economic viability even under adversarial or long tail order flow conditions.

Motivation

CoW Protocol currently uses a second-price auction mechanism for solver rewards, with a fixed reward cap. The winning solver’s reward is determined by the difference between their solution’s score and the next-best solution’s score (the “second-price”), and this reward is capped at an upper bound (for example, ~0.012 ETH on mainnet).

Since surplus and protocol fees tend to follow a fat-tailed distribution (few trades contribute most of the value) we observe cases in which the protocol profits significantly from fees (price improvement or surplus fees) while the upside of solvers that provided a very good solution are capped at a fairly low amount. On the other hand, we also observe a lot of batches (especially on L2s) in which the protocol doesn’t earn sufficient protocol fee to cover the solver rewards.

The goal of this CIP is to align incentives between the protocol and solvers to make sure that in auctions in which the protocol benefits a lot, solvers can also benefit a lot and conversely limit protocol exposure when fees are low.

To achieve this we propose to change the fixed (upper) reward cap with a dynamic one that is computed based on the total protocol fees a solver solution contributes. Assuming our current fee policies however, this change by itself would lead to a tremendous increase in auctions in which no reward is paid. We therefore also suggest adding an unconditional volume based protocol fee of 2bps.

Backtesting & Simulation

An interactive simulation based on past data (not taking into account possible change in user behavior) can be found here: https://dune.com/cowprotocol/reward-mechanism-experiments?volume_fee_bps_n0500b=2&start_time_d7df20=2025-09-01+00%3A00%3A00&end_time_d70df8=2025-10-01+00%3A00%3A00

Trade-offs & Market Impact

Under the new fee model both solvers as well as the protocol will be significantly more profitable. We expect an increase in the number of auctions in which the cap on rewards is binding, which however remains reasonable. We also expect a decrease in the volume settled in auctions in which the cap on rewards is binding. Overall, we believe that solvers can continue to participate in the competition by bidding truthfully, thus reducing complexity and reducing barriers to entry of new solvers..

While quantifying the exact execution quality across competing venues remains hard, recent independent research (https://arxiv.org/abs/2503.00738) suggests that CoW Protocol’s unique execution quality advantage will not be impaired by such a small volume based fee.

A markout comparison between 1Inch Fusion and CoW Protocol for September also shows a larger than 2bps execution advantage for CoW (​​https://dune.com/queries/6017103).

Moreover, a small unconditional fee will make some toxic flow (i.e. arbitrage bots) unprofitable, which allows market makers to further tighten their spreads and therefore likely lead to a smaller than 2bps impact on execution.

We acknowledge that this fee may cause a decline in total trading volume, but also highlight that this type of fee-sensitive volume is notoriously elastic and therefore not as valuable for the DAO nor solvers as compared to the increase in profitability.

Lastly the new model simplifies new network deployments, since the protocol no longer has to predict reasonable reward caps in advance.

Specification

https://github.com/cowprotocol/docs/pull/550/commits/a60c867b6950c588d3ed1f32251d0ebf44eabd64

Additionally, the Core Team is delegated authority to adjust the baseline volume-based protocol fee per token pair in the inclusive range of [0.00%, 0.05%]. The maximum total protocol fee per order (including all protocol fee policies, but excluding partner fees) shall be capped at 1%. To ensure accountability, the Core Team will maintain a registry of all fee exceptions with their justifications, report these changes regularly to the DAO, and remain subject to the DAO’s ultimate oversight and authority.