Inching Closer To Perfect DeFi Aggregator: What is 1inch?
6th May 2021
In turbulent ‘DeFi summer’ of 2020, crypto segment witnessed a number of eye-watering rallies of decentralized financial protocols (DeFis) including Aave Protocol (AAVE, previously LEND), Balancer (BAL), Curve Finance (CRV) etc.
Meanwhile, decentralized cryptocurrency exchanges (DEXs) actually pioneered the concept of DeFis in 2017, well before the invention of the term itself. What are DEXs and why do we need the aggregators of DEXs?
One-stop-shops for DEXs
Decentralized (on-chain) exchanges should be referred to as smart contract-based platforms for cross-asset conversion. They allow exchanging one asset to another without custodying users’ coins or keys.
All operations are executed on-chain through a sophisticated hierarchy of smart contracts. So, no server, key storage, cold wallet is required. This scenario eliminates the possibility for exchange teams or watchdogs to interfere into the process of exchange. So, DEXs are considered a safe and reliable way to exchange digital assets without KYC checks.
With DEXs teams have no control over order books: so, the prices in the same pairs may vary from DEX to DEX significantly. That’s why finding an exchange with the most attractive pricing is a sine qua non for profitable trading.
And here aggregators come: they browse through plenty of platforms to find the most suitable pricing and display top offers. Besides simple exchanging it’s crucial for arbitrage trading. So, the users don’t need to scan multiple DEXs manually.
1inch: Basics and concept
1inch service was founded by seasoned Ethereum (ETH) developers and researchers Anton Bukov and Sergei Kunz during ETHNewYork hackathon in 2019. Its first iteration, V1, used to index dozens of first-gen DEXs such as Uniswap, 0x, Kyber Protocol and so on. Thus, it helped to work out the best prices across all pre-DeFi-boom Ethereum-based platforms.
1inch V1 indexes 13 exchanges seeking for the best price in ETH/USDT pair
Due to its usefulness, paramount importance for traders and elaborated UX/UI, 1inch managed to raise generous seed funding from Binance Labs, Pantera Capital, Galaxy Digital. VC giants invested $15 million in 1inch to support V2 progress.
At the same time, 1inch implemented a revolutionary gas reducing mechanism dubbed Chi. It reconsiders the transactional logics and allows 1inch traders to save up to 40% on gas fees.
1inch in 2020: Mooniswap, V2, Christmas airdrop
In August, 2020, 1inch introduced its own liquidity protocol with automated market making instrument (AMM), Mooniswap. It’s ‘killer feature’ is its resistance to ‘price slippage’, an unpleasant effect when the price of an asset changes during the procedure of swap. This disadvantage of AMMs is widely used by arbitrageurs. With 1inch, the price changes only in a 5-minute interval, so both parties can take pre-determined profits.
Like many AMMs, it rewards its users with native assets, 1inch tokens. 1inch tokens can be staked in order to earn a high annualized yield. Right now staking 1inch tokens can bring its holders more than 11,4% APY.
1inch staking is available for everyone who connected his/her wallet to exchange
Besides that, in its V2 iteration, 1inch added the function of re-routing liquidity between ‘yield farming’ modules of liquidity aggregators such as Aave or Compound. Thus, 1inch is integrated into the hottest segment of the DeFi scene.
On December 25, 2020, 1inch dropped a bombshell by the airdrop of its native 1inch tokens. Every crypto enthusiast who used Mooniswap at least once prior to this date was eligible for the distribution. 1inch price rocketed more than 40 per cent in two hours after the distribution.
With very high airdrop price ($1,9 per 1inch), this distribution should be considered one of the biggest in DeFi history surpassed only by monstruos UNI airdrop by Uniswap.
What’s new in 1inch V3?
In March, 2021, 1inch team unveiled V3 of its protocol with lower fees, reconsidered marketmaking module and (surprisingly!) support of Binance Smart Chain (BSC).
1inch indexes the best strategies of ‘yield farming’ across two blockchains
‘Ethereum Killer’ by Binance was added to 1inch due to its increased popularity amidst Ethereum (ETH) fees spike and network congestion. As a result, more new traders decided to migrate to BSC’s dApps.
In a nutshell, 1inch proved itself as a game-changing instrument for AMM-driven trading on Ethereum, liquidity providing and multi-platform staking.