Thread by @CoWSwap

CoW Protocol's team has been made aware of an instance of surplus shifting that negatively impacted a trader on CoW Swap while positively (though unfairly) impacting LPs on CoW AMM.

The team has investigated what happened. Read below for more info and next steps.

A 🧵

The specific transaction in question is a CoW Protocol batch where a solver included liquidity from a CoW AMM pool as part of their solution.

You can see the transaction here: explorer.cow.fi/tx/0x924533688…

In this instance, the right to execute the batch was won by a solver that provided a worse-than-expected price to the CoW Swap trader, while giving more surplus than expected to the CoW AMM pool, and winning the right to execute the batch within the solver competition.

This is an example of what we call "surplus shifting" – an issue that we've come across in other contexts in the past.

Generally, CoW Protocol takes an unfavorable view of surplus shifting as we don't think that it maximizes fairness for users.

CIP-11 explicitly states that intentional surplus shifting is not allowed, and introduced a test in order to detect such cases.



It also gives CoW DAO the capability to reimburse users if a violation of this test takes place.snapshot.box/#/s:cow.eth/pr…

CoW Protocol's EBBO rule ("Ethereum Best Bid and Offer”) also states that traders must get at least as much as they could get on a major public AMM (e.g., Uniswap, Balancer, Sushiswap), when routing via (multiple) 2-hop paths that touch some so-called base tokens.

The team also introduced CIP-52 to allow CoW DAO the ability to reimburse users affected by EBBO violations.

You can read it here: snapshot.box/#/s:cow.eth/pr…

The core team has been working on upgrading the batch mechanism and will soon post a CIP that proposes switching to a fair combinatorial auction mechanism.

This upgrade should address a number of known issues, including surplus shifting, more systematically.

In summary: surplus shifting is a known, though rare, issue, and we are actively penalizing solvers and reimbursing users when it happens.

Once an investigation has been completed, CoW DAO will take appropriate steps to resolve this instant.

While the core team has built a robust set of tools to monitor and prevent surplus shifting, refinements are in progress to eliminate this from happening in future.

A detailed forum post that explores this issue further can be found here:

Thank moo!forum.cow.fi/t/recent-surpl…