【Selected ChainNews】Crypto Briefing: Understanding DeFi Trading Route 1inch.exchange in One Article

The fragmentation issue in the DEX industry is likely to persist for quite some time, a trend that presents an opportunity for 1inch.exchange.

Authors: Liam Kelly, Ashwath Balakrishnan
Translator: Jiangfei Lu
Crypto Briefing authorized Chain News to translate and publish the Chinese version

One of the main reasons why 1inch.exchange has been thriving in the DeFi space is that they have "aggregated" decentralized liquidity in one place. Especially with the rise of Yield Farming, the 1inch.exchange platform has seen significant development.

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Key Content Overview

• 1inch.exchange focuses on serving retail (individual) users who are eager to explore decentralized exchanges.
• By integrating numerous decentralized exchanges (DEXs) and tokens, users can swap nearly all types of ERC-20 tokens.
• However, as most DEXs are built on Ethereum, this could lead to high gas fees.

1inch.exchange has become an integral part of the thriving decentralized finance (DeFi) industry, evolving from a liquidity aggregator to a versatile tool crucial in the rapidly changing DeFi landscape.

Indeed, many users have recognized the powerful capabilities of 1inch.exchange.

Recently, DeFi supporter and crypto entrepreneur Qiao Wang conducted an informal survey on Twitter, seeking insights from his 17,000 followers on the utility of various DeFi platforms, listing prominent projects including Balancer, Uniswap, and Compound. Ultimately, Qiao Wang concluded that in terms of product/market fit, the top three DeFi projects are Uniswap, Curve, and 1inch.exchange.

As the saying goes, knowledge is power. Qiao Wang's survey results provoke thoughtful considerations. By better identifying product/market fit, understanding liquidity across different DeFi platforms, and determining if there are any "business overlaps" between platforms, one can more accurately assess the distinctions among these DeFi platforms.

This article delves into the essence of 1inch.exchange, explains platform functionalities, explores its operational principles, and elucidates why this DeFi tool is indispensable for any user.

What is 1inch.exchange?

1inch.exchange is a DEX aggregator that helps route nearly all DeFi trades. By integrating with various DEX service providers, 1inch users can access the most cost-effective trades, lowest trade delays, and can trade with various ERC-20 tokens.

The platforms include Uniswap, Kyber Protocol, Aave, Curve.fi, Airswap, mStable, Balancer, dForce Swap, 0x API, 0x Relayers Bamboo, Radar Relay, Bancor, and Oasis, along with many other liquidity sources (including private market makers).

Typically, 1inch.exchange routes trades through at least 1 platform, a process known as split trade, for example, aDAI (Aave's interest-bearing DAI token) and DAI use this simple exchange model.

Most of these trades occur on Uniswap, with only a small portion on Balancer, and the specific trade ratio fluctuates based on the constantly changing rates on the two platforms.

Before executing such specific trades, Uniswap also offers users two "unlock" processes, one being "infinite unlock," and the other being "single unlock" each time.

Most DApps require users to allow interaction with their digital wallets, but 1inch is a non-custodial decentralized application, meaning it never holds user funds but can continuously interact with various crypto wallets.

Once unlocked, trade activities occur, and each application call and verification of the unlock can save gas fees. For users who frequently interact with DeFi protocols, this feature can save them a significant amount of money. 1inch refers to this type of unlock as "infinity unlock" because it differs from the higher-cost "single unlock trades" – as users incur gas fees each time they call for an unlock, making the cost higher. However, "single unlock trades" offer higher security, as users are not always linked to the protocol in case of threats.

Among the listed DeFi platforms, users can also hide certain DEXs they prefer not to interact with on 1inch, making it simple to switch by clicking a toggle button, ensuring that trades do not pass through those platforms.

Essentially, 1inch functions more like an efficient DeFi routing platform, not searching for the best trade prices across exchanges but organizing all this data for users and ensuring they get the best price no matter how they "swap." While the platform's operation might initially seem intimidating, even beginners can achieve an intuitive user experience with just a few minutes of interaction.

Next, they delve into how 1inch has evolved during the Yield Farming craze, exploring the specifics behind these "swaps."

The Role of 1inch.exchange in Yield Farming

Yield Farming essentially involves users transferring idle cryptocurrencies to various lending platforms to earn interest on these assets. While Yield Farming may have more complex definitions in different forms, the above explanation suffices for this article. If you want to learn more about Yield Farming, we recommend the following two articles:

1. How to Yield Farm on Uniswap and Not Get Rekt
2. Yield Farming on DeFi: Beginner’s Guide to Earning Interest on Your Crypto

Let's take a look at how a so-called "Yield Farmer" user can use 1inch.exchange to maximize their earnings—also known as "Yield." By opening a tab on 1inch.exchange, users can connect to sites like LoanScan, DeFi Rate, DeFi Prime, etc., to monitor lending rates on different platforms.

Currently, the DAI stablecoin exchange rate on Aave is quite favorable. For users holding DAI, Yield Farming is relatively straightforward: they can directly access Aave, swap their DAI for aDAI, the interest-bearing version of DAI on Aave.

As the process is quite simple, users may not require the services of a trade routing provider like 1inch for such operations. However, if users hold other assets like Chainlink's LINK token, manually converting to aDAI can be cumbersome:

Users need to find a decentralized exchange or liquidity pool that offers competitive pricing for the LINK-DAI exchange. Then, users need to leverage this pool to swap DAI obtained from the decentralized exchange or liquidity pool to Aave and convert it to aDAI.

This process can be cumbersome as users might not always lock in the best prices at each step—this is where 1inch comes in. On 1inch, users can complete the entire process with a single click, ensuring that the trader's orders do not suffer from slippage issues (the difference between the price point at which a market order is placed and the final price at which it is executed).

However, as DeFi gains popularity, Ethereum gas fees continue to rise, meaning simple transactions may be relatively cheaper. If users start interacting with multiple smart contracts, gas fees can quickly escalate. This may be a significant issue encountered when using 1inch, but from another perspective, this problem is essentially rooted in the underlying blockchain (Ethereum) rather than 1inch itself.

Exploring Ethereum Gas Fee Issues on 1inch

Now, let's consider another example to potentially understand another problem 1inch solves: if a user holds aDAI tokens but discovers that the interest rate for Synthetix stablecoin SUSD's aSUSD is better on Aave, and the user wishes to switch to aSUSD, what should they do?

On 1inch, users can route their aDAI tokens through any number of liquidity pools and DEXes, converting their aDAI tokens to DAI, then DAI to SUSD, and finally converting SUSD to aSUSD tokens—all with just a click.

Unfortunately, while the operation is convenient, it incurs high gas costs for users.

Image from 1inch.exchange: To convert approximately 50 aDAI to around 50 aSUSD, users need to pay over $30 to execute this transaction. Thus, most users may not find this operation feasible.

One of the main reasons for such high costs for specific trades on 1inch is the excessively high gas costs on the Ethereum network. As most DEXs are built on the Ethereum blockchain, gas fees are an unavoidable issue. However, to address this challenge, 1inch integrates a unique feature: the CHI GasToken.

Before explaining the CHI GasToken, let's first discuss GasToken. GasToken allows users to speculate on gas prices, enabling users to purchase and store gas when prices are low for future use. The developers behind 1inch took this concept a step further and created the CHI GasToken. For active DeFi users, using this token or an equivalent GasToken is indeed a good practice.

The Team Behind 1inch

In June 2019, Sergej Kunz and Anton Bukov announced the founding of 1inch.exchange at the ETH New York Hackathon. Both are highly experienced software engineers with nearly 30 years of industry experience. Sergej Kunz has been a software engineer at several German companies, most notably Porsche. Anton Bukov has worked as an iOS and macOS developer and entered the crypto industry in August 2017, collaborating with the NEAR protocol to establish interoperability between NEAR and Ethereum until June 2020.

1inch is renowned for releasing DeFi vulnerability reports and has issued several such reports to date, involving DeFi platforms such as Balancer and Bancor.

In terms of hackathons, the 1inch team often seeks assistance at hackathons, such as for product building, enhancing user interfaces, and more. Before creating 1inch, Sergej Kunz and Anton Bukov also participated in hackathons, developing arbitrage bots for DeFi projects.

1inch Platform Metrics

1inch's liquidity aggregation feature provides significant utility for DeFi users, helping them obtain the best prices across various aspects. This aggregation service greatly enhances the user experience on DEXs. However, for users who prefer to keep it simple, avoid complicating with CHI tokens, and maintain lower transaction costs, Uniswap might be a better choice, as Uniswap offers a cheaper way to acquire liquidity.

The majority of 1inch users are frequent users of the product. At the time of writing, 1inch has approximately 300 daily unique users, with a peak of 730 users on June 24, 2020.

The 1inch user base primarily consists of individual traders, with trading volumes ranging from $500 to $8,000, indicating many small trades. To date, the platform has seen fewer than 100 transactions exceeding $1 million.

The prevalence of numerous small trades on the 1inch platform may also result from whale split trades, as DeFi liquidity struggles to facilitate large trades without significant slippage.

Conclusion

Currently, DeFi liquidity primarily remains "centralized" in a few pools, such as Uniswap, Kyber, Balancer, Bancor, 0x, and Curve, serving as the main participants in most DEX liquidity. Each DEX's token liquidity pool has different depths, for example:

• Uniswap may have a deeper LINK-ETH pool, allowing traders to obtain better prices;
• Kyber may offer better terms for SNX-ETH trades.

However, faithfully adhering to liquidity pools may not align with traders' best interests, and continuously checking for the best prices across different DEXs for each trade can be tedious—but 1inch successfully addresses this issue.

In the future, as DEX aggregation services gain popularity, liquidity pools may shift to the backend of user experience, indicating that liquidity may be distributed across several DEXs, meaning whoever provides a cleaner, more user-friendly interface and experience at the frontend can attract more users.

However, if a DEX eventually becomes a "liquidity black hole" and its growth significantly surpasses other competitors, the "market power" of DEX aggregation services like 1inch could be substantially weakened. Nevertheless, this issue is not as crucial, as each DEX has its own strengths and attracts different assets and types of traders.

From this perspective, you'll find that the current DEX industry still faces a certain level of fragmentation, which is likely to persist for some time, presenting opportunities for DEX aggregation services—1inch undoubtedly leads in this niche market.

This article is authorized and reposted from ChainNews. Original article here