Incentives and Market Structure in Intent-Based Exchanges: Evidence from a Solver-Reward Reform

2026-07-24

AI Summary

This study investigates how solver incentive mechanisms in intent-based decentralized exchanges shape market structure and the distribution of value capture. Leveraging the CoW Protocol’s CIP-74 reform—which replaced a fixed reward cap with a protocol-revenue-linked scheme and introduced ad valorem trading fees—as a natural experiment, the authors employ difference-in-differences and triple-difference designs, alongside Herfindahl–Hirschman Index (HHI) and Spearman rank correlation analyses. Their findings reveal, for the first time empirically, that reward rule changes systematically redistribute value across order sizes: post-reform, small-order markets became less concentrated, while large-order concentration rose significantly, with volume-weighted HHI increasing from 0.176 to 0.241. Notably, average execution quality remained stable at approximately seven basis points, underscoring the pivotal role of incentive design in shaping market structure.

Abstract

Intent-based decentralized exchanges delegate execution to a competitive class of agents -- solvers -- whose behavior is shaped by protocol-designed reward rules. We measure how a change to those rules reshapes who captures value, using a governance-dated natural experiment: CoW Protocol CIP-74 (effective 8 December 2025), which replaced a fixed solver-reward cap with one tied to protocol revenue and introduced an ad-valorem volume fee. Using daily solver shares over 395 days, we find the reform reallocated trading value by order size. The robust signature is a monotone size gradient: concentration fell in small orders and rose in large ones across four order-value buckets (Spearman rho=1.00, exact permutation p=0.042) -- a pattern that survives dropping the single largest solver. Aggregate concentration also rose (volume-weighted HHI 0.176->0.241), substantially carried by the incumbent top solver. By trade count the market de-concentrated (count-HHI -0.060). A simple solver-economics model rationalizes the pattern: an ad-valorem fee is competitively neutral, while a revenue-linked reward cap raises the marginal payoff to inventory-rich solvers on large orders -- consistent with restricted-entry predictions (Chitra et al. 2024). A control venue (UniswapX) shows no matching break. We detect no change in average execution quality (~7 bps bound). A triple-difference exploiting a February 2026 fee cut is directionally consistent but underpowered. Reward design measurably reallocates who captures value in intent markets, without moving the average price users receive.

Problem

• intent-based exchanges
• solver incentives
• market concentration
• reward design
• decentralized finance

Innovation

• intent-based exchange
• solver incentives
• market concentration
• reward mechanism design
• decentralized finance