One key promise of DeFi (decentralized finance) is facilitating trade and transactions effectively without the need for intermediaries and centralized authorities–the true utopia of privacy. Private entities can carry out their transactions in a decentralized and trustless manner. Decentralized exchanges (DEX) are instances of how the fulfilment of this promise looks like.
A decentralized exchange is a marketplace where transactions are carried out without a traditional arbiter. Smart contracts and blockchain technology ensure that the parties involved in the transactions are treated as the terms of the agreement dictated. This basic premise of a DEX can be built on and expanded to more than just this…1inch exemplifies this.
The platform allows users to trade cryptocurrencies across multiple decentralized exchanges in a single transaction, ensuring the best possible prices for their trades.
Essentially, 1inch functions as a liquidity aggregator, drawing liquidity from exchanges such as Kyber, Uniswap, and Balancer. The ramifications of platforms like 1inch are immense.
This article provides a detailed review of 1inch, its features, functionality, and benefits. Whether you are a seasoned cryptocurrency trader or a newcomer to DeFi, this article is an essential guide to everything you need to know about 1inch.
What Is 1inch All About?
1inch is an Ethereum-based liquidity aggregator founded in May 2019 by Russian developers Sergej Kunz and Anton Bukov. The platform automatically combines offers from various decentralized exchanges (DEXs), including Uniswap, Kyber, Aave, and more, to provide users with optimal transaction routes. The founders initially developed an automated market maker (AMM) during the ETHNewYork Hackathon, leading to the creation of the protocol.
In August 2020, 1inch secured $2.8 million in seed funding and later received an additional $12 million from investors. The platform introduced Mooniswap, an AMM with a five-minute price delay, enhancing competitiveness for arbitrage and reducing risks for liquidity providers.
In November 2020, 1inch launched an upgraded protocol, 1inch V2, featuring the advanced “Pathfinder” routing and matchmaking algorithm for faster and more efficient exchanges.
In December 2020, 1inch introduced the 1INCH token as the governance token for its decentralized autonomous organization (DAO), allowing the community to actively participate in project development. The platform has since become a notable player in the DeFi space.
How Does 1inch Work?
1inch serves two main purposes for its users.
Firstly, it offers a Liquidity Protocol, formerly known as Mooniswap, allowing users to earn passive income by depositing crypto assets into liquidity pools.
Secondly, 1inch’s Pathfinder Protocol scans various decentralized exchanges (DEXs) to find the most cost-effective platform for buying crypto, considering gas fees and the asset’s price.
For instance, if your goal is to generate passive income with Ether (ETH), the initial step involves converting it into Wrapped Ethereum (WETH), a form that facilitates easy exchange for a variety of digital assets on Ethereum-compatible platforms. However, WETH prices may differ on various DEXs, typically requiring traders to manually check multiple exchanges.
1inch simplifies this process by automatically identifying the most cost-effective trade, functioning as a valuable tool for traders. This capability stems from its Smart Routing Algorithm.
The Smart Routing Algorithm is powered by a combination of limit order books (LOBs) and automated market makers (AMMs). Smaller trades are executed using AMMs, which are faster and more effective, while LOBs are used for larger deals since they provide better price discovery and liquidity.
When a user places a trade on 1inch’s aggregation protocol, the algorithm considers factors such as trading volume, liquidity, and fees across various platforms. Based on these considerations, the algorithm directs trades to platforms with the best prices and lowest fees. This enables traders to execute trades across the entire DEX landscape, using a single platform and comparing prices.
Beyond its smart routing system, 1inch provides various features and tools to enhance users’ trading experience. These include trading history, price charts, and customizable gas and slippage settings. The platform also supports several chains, including Ethereum, Binance Smart Chain, and Polygon.
The Issues 1inch Aims to Solve
1inch was developed to address several issues with the DEX space. It takes a unique approach, streamlining trading processes with a range of tools and features to enhance users’ experience on decentralized exchanges. Here are some of the key problems that 1inch aims to solve:
Liquidity Fragmentation
In traditional DEXs, liquidity is fragmented across independent platforms, making it challenging for traders to find the best prices for their trades. 1inch tackles this problem by aggregating liquidity from multiple DEXs, allowing users to access optimal prices for their transactions.
High Gas Fees
Due to high gas fees on DEXs caused by Ethereum’s congestion issues, many users find trading on these platforms excessively expensive. 1inch uses the Pathfinder proprietary algorithm to determine the most practical and cost-effective trading routes. This reduces gas fees and helps users to trade at lower costs..
Front-Running
Traders can sometimes gain an unfair advantage by using their knowledge of open positions to place their orders ahead of the original transaction. This practice is known as front-running. 1inch prevents this by using different Automated Market Makers (AMMs) and an off-chain order book, making it difficult for anyone to predict the outcome of a trade before it takes place. The platform’s liquidity protocol also employs virtual rates, discouraging malicious actors from attempting front-running.
Complexity
Many DEXs are challenging for novice users to understand and use. 1inch simplifies the trading procedure thanks to its user-friendly design that helps new users to get around the platform. Also, the platform provides different features (such as limit orders and stop losses) that make trading more appealing to a wider audience.
Solving these problems means that 1inch becomes a faster exchange that helps users maximize their profits by reducing “slippage”—the price movement between confirming a transaction and its actual execution—and executing trades at the best prices possible.
What the Future Looks Like For 1inch
1inch currently provides a diverse range of tokens for trading, albeit with a more limited selection compared to centralized exchanges. While this may meet the needs of many users, those seeking a broader choice of cryptocurrencies might find centralized exchanges more accommodating.
To become a leader in the DEX liquidity space—which it seems 1inch is committed to—it needs to expand its ecosystem and offer users more trading options. The platform’s collaborations with projects like Polygon, Binance Smart Chain, and Solana are definitive steps in this direction.
The integration of Layer 2 scaling solutions, such as the partnership with Coinbase’s Base, demonstrates 1inch’s commitment to addressing challenges like high gas fees and slow transactions on Ethereum. This integration enhances the DeFi space by providing liquidity, reducing costs, and speeding up transactions.
2/ 🫡 The #1inch Network is glad to announce that the 1inch Aggregation Protocol and the 1inch Limit Order Protocol are now live on #Base, a Layer-2 #Ethereum scaling solution incubated by major #crypto exchange @coinbase.
Read more ⤵️https://t.co/9PAJozIlHd
— 1inch Network (@1inch) August 24, 2023
Despite these positive developments, there are notable challenges ahead. Security risks, including hack attacks and smart contract vulnerabilities, remain a concern for 1inch, as is the potential for increased regulatory scrutiny in the evolving DeFi market.
Liquidity concerns may also impact 1inch’s ability to provide the best prices and minimize slippage if liquidity on the DEXs it utilizes diminishes. Additionally, as DeFi is still a relatively niche sector, it may take time for 1inch to achieve widespread adoption and realize its full potential.
Despite the potential challenges, 1inch appears well-positioned for continued growth and success in the crypto industry, driven by its ambitious plans and dedicated team.
Disclaimer: This article is intended solely for informational purposes only and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence.
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