by Franklin Bi and Kristie Huang, December 2020
As the total billion-dollar value locked in DeFi reaches the double digits, more decentralized finance solutions and platforms have arisen to meet this demand. The allure of decentralized finance for users is simple: instead of relying on intermediaries to coordinate transactions, DeFi users trust in the integrity of peer-to-peer, decentralized exchanges.
The current state of DEXes
Decentralized exchanges (DEXes) forgo intermediaries to facilitate peer-to-peer transactions directly on-chain. Automated market makers (AMMs) are similarly decentralized protocols that enable users to transact without intermediaries — but instead of trading peer-to-peer, users are trading peer-to-pool. AMMs collect reserves of token pairs in liquidity pools and algorithmically adjust swap prices based on supply and demand.
But this presents a problem: with hundreds of DEXes and AMMs in the market, liquidity has fragmented across the digital asset ecosystem. For traders, this means that selecting the right DEX or AMM could have considerable impact on the prices of the selected token pair. On top of that, each DEX or AMM only covers a specific set of crypto pairs, and individual DEXes tend not to be interoperable with each other.
Ultimately, traders are left craving a better solution.
How 1inch works
1inch’s core protocol is a DEX aggregator, designed to be the one-stop platform for traders to access liquidity from various DEXes and liquidity protocols. The aggregator’s Pathfinder algorithm discovers the best swapping route and splits the trade across different exchanges. The result: 1inch is able to consistently execute the most optimal trade for the user while minimizing price slippage.
1inch’s approach has found significant traction. At time of writing, just 17 months after founding, 1inch’s cumulative trading volume is nearly US$6.6 billion. Daily trading volume is currently upwards of US$80m, after surpassing US$100m in DTV at its peak in mid-September.
As part of their vision to become the single point of entry for DeFi, the 1inch team has expanded their product suite to include a next-generation AMM protocol and native token. Yield farming and lending protocols are on the way.
On Mooniswap & the 1INCH token
AMMs, typically disconnected from external markets, rely on arbitrageurs to adjust token prices. However, arbitrageurs’ price slippage profits result in impermanent losses for the protocol’s liquidity providers. By using virtual balances, an approach first proposed by Vitalik Buterin, 1inch’s Mooniswap AMM is tackling this industry-wide problem.
Mooniswap updates exchange rates for token pairs gradually after trades are conducted, as opposed to making immediate updates. Liquidity providers can now catch a portion of the trade’s slippage revenue that would otherwise be captured by arbitrageurs.
1inch is also releasing a network token, 1INCH, to incentivize safe, permissionless network operations. The token will be distributed over time to community members, team members, investors, liquidity providers, and other protocol participants.
Why we’re excited about 1inch
Despite their current successes, the beginnings of 1inch were relatively unassuming. Sergej Kunz (CEO) and Anton Bukov (CTO) began competing together at blockchain hackathons around the world in late 2018. By mid-2019, the duo had attended more than a dozen hackathons, winning various awards for their projects along the way. 1inch was one of these projects, born in May 2019 at ETHNewYork.
Together, Kunz and Bukov are dynamic and execution-oriented; Mooniswap, for example, was built in eighteen hours and launched two weeks later. The two co-founders collectively have over three decades of engineering experience, and CTO Bukov was previously a developer at NEAR Protocol. Over the past year and a half, they’ve scaled the 1inch team to 16 people and counting.
We’re excited to back the 1inch team on their journey to raise the bar for decentralized finance. 1inch recently unveiled V2 of their platform, featuring a ground-up interface redesign and the release of the Pathfinder API.