1inch - Transaction Aggregation Protocol#
At the 2019 Ethereum Hackathon, 1inch's founders, Sergej Kunz and Anton Bukov, introduced the concept of a transaction aggregator. After securing $3 million in funding, the 1inch exchange officially launched in August 2020.
The concept of a transaction aggregator is clear: if liquidity is spread across multiple exchanges, splitting orders into multiple exchanges for conversion will be more cost-effective than using a single exchange. For example, if the Ethereum market price is 3000 DAI and you trade 10 ETH on a single exchange with weak liquidity, there may be a 1% premium, resulting in each ETH being priced at 3030 DAI. However, if you split the order into 10 orders across 10 exchanges, the impact on liquidity for each exchange will be smaller, and each ETH may only cost 3003 DAI. On 1inch, after selecting the trading pair and amount, the platform will calculate the trading route, including the percentage allocated to each exchange, the final price, and the savings compared to trading on a single exchange.
This market requires a transaction aggregator, especially for low-market-cap tokens, as their liquidity may be spread across multiple DEXs. Even if ultimately only one exchange is needed for the trade, most traders will use 1inch's routing to test the liquidity of various exchanges before trading.
In addition to being a transaction aggregator, 1inch has also made an interesting innovation. The 1inch team developed a new token called Chi Gastoken, which is used to reduce transaction fees. As a side note, both "1inch" and "chi" are derived from Chinese martial arts. The former comes from the "1-inch punch," while the latter's name comes from the "qi/chi" required to perform the punch. Chi utilizes Ethereum's "storage refund" feature, which incentivizes smart contracts to delete unnecessary storage. When a transaction deletes storage, it reduces the miner's fee for that transaction, and the most efficient way to do this is by creating and deleting sub-contracts. Therefore, when Ethereum network fees are low, one can spend Ethereum to create sub-contracts and obtain Chi, and then use Chi to destroy the sub-contracts during transactions to reduce transaction fees.
Furthermore, 1inch has also developed Mooniswap, a variation of Uniswap, to mitigate front-running attacks. For more information on this mechanism, please refer to the video in the footnote.
Similar to other leading DeFi protocols, the products released by 1inch are research-oriented, demonstrating the team's strong geek culture.
Conclusion#
If borrowing in DeFi is the decentralized implementation of traditional lending, then trading takes it a step further by changing the operational paradigm of exchanges. Traditional exchanges provide a matching platform for buyers and sellers, charging fees in the process. DEX exchanges offer a different service, with two additional roles - LPs (liquidity providers) and traders. LPs provide liquidity and earn fees but bear the risk of impermanent loss, while traders exchange assets and pay fees. The boundaries between traders and market makers have also become blurred, allowing users to switch between the two roles. Imagine in a stock exchange, you no longer have to pay fees for each trade but can provide liquidity for fiat currency and stocks to earn fees. If you hold multiple stocks, you can provide liquidity for stock exchanges and earn stocks!