1inch: All Major DEXs in one Aggregator
July 10, 2021
1inch is an aggregator that scans decentralised exchanges (DEX) to find the lowest cryptocurrency prices for traders.
Origin Story and Governance
1inch came about in a very “DeFi” way. In fact, the prototype was developed during the ETHGlobal Hackathon in New York in 2019, i.e. a development “competition” on Ethereum.
In order to support the network and the development of the 1inch project, a Foundation and a DAO were then created, allowing the community to partially manage the governance of the network. A key contributor to the 1inch network is also 1inch Labs, a decentralised group of software developers developing a set of open-source protocols governed by users through the 1inch DAO.
The 1inch Foundation is a non-profit organisation that issued the 1INCH token and is dedicated to promoting the network and community initiatives, as well as providing funding to encourage new talent to contribute to the project.
In the second phase of the decentralised governance implementation, planned for early 2022, the 1inch Foundation will introduce the extended DAO functionality in an effort to fully decentralise the 1inch network that will eventually be entirely owned by the community.
Co-founder Sergej Kunz explained that implementing the full DAO first would have meant entrusting it to a small group of individuals. While waiting for the project to grow further, will allow the DAO to be integrated on a much more decentralised network.
In the section on the 1inch token, we will elaborate on the method of governance already in place on the network.
The Difference between CEX and DEX
To understand the scope of 1inch, let’s look at how a decentralised exchange works.
Centralised cryptocurrency exchanges (CEX) use order books to match buyers and sellers in the market.
In contrast, decentralised exchanges employ self-executing smart contracts (AMM) to match and execute transactions between buyers and sellers using a non-custodial infrastructure.
However, exchanges must be able to provide liquidity even at times when no user wants to buy what they are trying to sell or vice versa.
CEXs remedy these situations through market makers, trading partners who are always willing to buy or sell. In addition, these exchanges maintain liquidity reserves in case of need.
DEXs from Uniswap onwards use a system that incentivises users to provide liquidity and that bases the execution of orders directly on smart contracts, through the so-called Automated Market Maker. There are different variants of these market makers in each DeFi DEX, based on different algorithms, each with its own strengths and weaknesses.
As these transactions take place on the blockchain, they are subject to variable fees. At times of high network congestion, fees rise rapidly, disincentivising trading activity and placing negative pressure on liquidity.
All of this also relies on users being willing to provide the liquidity, and therefore being sufficiently incentivised to do so.
Otherwise, a lack of liquidity can occur and can lead to what is known as slippage, an inefficiency in asset pricing that results in a difference between the expected price of a transaction and the actual price of the transaction when executed.
Why DeFi Needs an Aggregator
Many blockchain networks fail to support the trading volume needed to reach the level of liquidity on centralised exchanges. While platforms such as Binance Smart Chain (BSC) and Solana cost less than Ethereum, they do not support ERC-20 tokens, which is problematic given that the vast majority of cryptocurrencies in circulation today adhere to this standard.
1inch, by supporting 3 major blockchains – Ethereum, Polygon and BSC – acts as a mediator to find the lowest price in the decentralised market, optimises transaction costs and makes trades more convenient. Moreover, by having the aggregated liquidity of all DEXs available, the chances of a lack of liquidity and slippage are almost zero.
The name of the project, 1inch, was inspired by Bruce Lee’s legendary “1inch punch”, an epitome of efficiency in martial arts. To execute a 1inch punch, you need power, which in Asian martial arts is called Chi / Qi, whose equivalent on 1inch is the Chi Gastoken, that allows to save on transaction gas.
In November 2020, 1inch launched version 2 of its protocol, enabling trades across 21 DEXs. In addition to counteracting slippage on single trades, the protocol also indirectly cushions price volatility in the broader DEX ecosystem, increasing liquidity in the wider DeFi market.
To support the DEX liquidity, 1inch also provides a Yield farming feature through liquidity supply.
Users can deposit in liquidity pools 50% of 1inch tokens and 50% of other supported tokens (as of July 2021 only ERC20).
For some liquidity pools, it is possible to obtain periodic rewards from the supply of liquidity by staking it in the farms from the 1inch “Farming” feature.
1INCH: the Governance Token
In addition to powering the liquidity protocol, the 1INCH token is central to network governance. The 1INCH token was distributed on Christmas Day 2020 as a governance token issued retroactively to users who had already used the 1inch exchange. The token is currently available both on Ethereum as ERC20, and on the Binance Smart Chain as BEP20.
1inch is managed through what is called instant governance, and allows the community to vote for specific protocol settings under the decentralised autonomous organisation (DAO) model, in a transparent and automated manner.
Instant governance is a new type of governance in which the community can participate, benefit and vote for specific protocol settings without any barrier to entry, in a user-friendly and efficient way.
Any holder of 1INCH tokens can stake them to vote on protocol decisions. The weight of each user’s vote is proportional to the number of tokens they have staked, and liquidity providers who do not participate automatically delegate their votes to 1INCH token stakers. There is also an incentive to participate in governance.
1inch is one of those projects that the DeFi industry has been waiting for and needs. It is the first decentralised exchange aggregator on the market and offers state-of-the-art functionalities. Moreover, its governance design is very promising for the development of DAOs across the industry.