Robert has reported for a variety of international publications including the Associated Press, The Guardian, Vice, and Decrypt. Current areas of interest include the political economy of technology, cryptocurrencies, and privacy. Robert has a Bachelor of Science from UCL, and a Master's degree from the University of Oxford's Internet Institute.
1inch is a decentralized finance tool that aims to cut down the cost of trading on decentralized exchanges by rerouting your trades across a variety of complicated decentralized finance protocols. The result, it claims, is “the most efficient DeFi aggregator,” that promises “the most liquidity, lowest slippage and best exchange rates across Ethereum and Binance Smart Chain.”
1inch was first conceptualized at the ETHGlobal New York hackathon in May 2019. Since then, 1inch has grown into a group of decentralized protocols known as the 1inch Network.
The 1inch Aggregation Protocol is the most important part of the 1inch Network. This protocol is the part that facilitates cheap and secure token swaps by sifting your trade across the entire DeFi ecosystem.
Decentralized exchanges, also known as automatic market makers, roughly work like this: People with money to spare lock up pairs of tokens, like ETH and AAVE, in liquidity pools—big pots of money that only decentralized exchanges can access.Buy and Sell Bitcoin, Ethereum, and dozens more cryptocurrencies with Wealthsimple. Sign up and Trade here.
Whenever someone wants to swap a token, the decentralized exchange takes money out of these liquidity pools, and prices the trade according to the supply of tokens in the pool. So, if there’s not a lot of ETH in a pool on one decentralized exchange, the cost of ETH will increase.
What’s more, decentralized exchanges, or DEXes, will often reroute your trade several times before you arrive at your final trade. If you want to trade ETH for AAVE, the DEX might trade your ETH for COMP, then trade that COMP for AAVE.
On the one hand, this is efficient as it allows you to dip in and out of different pools to trade AAVE at any moment. On the other hand, if these trades take place on the Ethereum blockchain, this is very expensive—each trade costs about $10 in gas fees, and the average cost of trading a single token on Uniswap at the time of writing is $53. Note that this $53 fee applies to all trades, making small and medium-sized trades prohibitively expensive.
Therefore, if you’re trying to trade coins with low liquidity, you might have to pay a premium for that coin due to the scarcity of supply in the liquidity pool, and you also might have to pay lots of gas fees.
There are many decentralized exchanges and thus lots of liquidity pools. If you performed the entire trade manually, you might find that there’s a cheaper way to process your trade. That would be time-consuming, however, and by the time you’ve completed the complex mathematical calculations, that trade would be out of date and the prices would have changed.
1inch uses algorithms to reroute your trade for you. It makes the most of all these different liquidity pools to reduce price slippage, then reroutes trades across gas-efficient blockchains to cut down on transaction fees.
1inch does this through an aggregation service called Pathfinder, which splits trades across multiple decentralized exchanges and protocols that have healthy liquidity pools. Pathfinder operates on Ethereum and the Binance Smart Chain, and taps more than 70 protocols on both chains as sources of liquidity for token swaps.
1inch used to help customers save up to 40% on gas fees with its own gas token, Chi. Chi was an ERC-20 token (a generic token standard for Ethereum) that you use to pay transaction costs.
The price of Chi was pegged to the price of the Ethereum network’s gas price. So, when the gas price is low, Chi’s cheap. Chi helped users save on gas fees because it was minted when gas prices were low.
However, these tokens fell out of use when Ethereum implemented EIP-1559 in the London Hard Fork in August 2021. This stopped paying fees to miners and rendered the gas tokens obsolete. To replace this system, 1inch now refunds gas to users who stake 1INCH tokens through 1inch’s application.
Gas gets refunded at the start of every subsequent month. Staking 100 1INCH tokens nets you a 25% refund on the gas you spent, 1,000 1INCH tokens gets you a 50% refund on gas, 10,000 tokens gets you a 75% refund and staking 100,000 1INCH tokens entitles you to a full gas refund. The refunds come out of the 1inch Foundation’s treasury.
1Inch’s Agggreation Protocol also works on other exchanges than just Ethereum, including Polygon, a scaling solution that processes some Ethereum transactions on a cheaper, faster blockchain and confirms transactions through a more environmentally friendly validation system.
The Aggregation Protocol also works on the Binance Smart Chain, a blockchain operated and maintained by Binance, the world’s largest cryptocurrency exchange. The Protocol is also deployed on Optimistic Ethereum, or OΞ, another Layer 2 Ethereum protocol.
1inch’s wider network
1inch’s DEX aggregation protocol is just one part of the 1Inch network. There are four other parts.
There’s the 1inch Liquidity protocol, which functions as a proprietary automatic market maker. 1inch claims that the protocol projects users from front-running bots, making it more secure than other protocols, and offers better capital efficiency to liquidity providers while reducing slippage for traders.
There’s the 1inch Foundation, a non-profit that oversees the development of the 1inch network. It also issues the 1INCH ERC-20 token, which trades on regular cryptocurrency exchanges. As of September 2021, 1INCH token has a market cap of $555 million, and each token is worth $3.
The 1inch Foundation bulks out the community, incentivizes developers and teams to build on the network through grants. It also runs yield-farming programs to make money.
Crypto projects often have non-profit foundations because a) they want to decentralize the project and let the community run things b) securities regulators don’t like it when for-profit companies issue tokens.
1inch has its own DAO, or decentralized autonomous organization. This lets people use 1INCH tokens to vote on the parameters of the network. The decision to use 1inch Foundation funds to refund gas costs, for instance, was proposed by the community.
Then there’s 1Inch Labs, which 1inch’s blog describes as “a decentralized group of software builders that develop a range of open-source protocols governed by users through the 1inch DAO.”
How to use 1Inch
1inch’s aggregation protocol lets you swap tokens cheaply, by letting 1inch’s algorithm reroute your trade across lots of different decentralized finance protocols.
To use it, head here and choose the token you’d like to swap. You can select a token from a list or enter the contract address of an unlisted token.
Let’s say you’d ike to swap your Ethereum tokens for DAI, an algorithmic stablecoin pegged to the US dollar. To do so, the first thing you have to do is connect your browser-based Ethereum wallet—say, the popular MetaMask wallet—and load it up with ETH.
You can buy ETH from a cryptocurrency exchange such as Binance or Coinbase for fiat currency (like dollars and pounds). Note that you have to buy from an exchange that lets you withdraw cryptocurrency; some brokerages don’t support this feature.
Once you can see your ETH in your MetaMask wallet, and you’ve connected it to 1inch’s site, select ETH under “from” and DAI under “to” and enter the amount of ETH you’d like to swap. 1inch will automatically estimate the dollar amount of that ETH, as well as how much DAI you’d receive.
1inch will then estimate the price. Despite all the rerouting, it’s still very expensive to swap the $3.5 worth of ETH for DAI, and 1inch has quoted us a price of $88.69 to swap our $3.5 worth of ETH.
How to buy 1INCH tokens
You can also buy 1INCH tokens. These are governance tokens based on the Ethereum blockchain. Hold enough and you could influence the parameters under which 1inch operates.
You can buy 1INCH tokens on most major cryptocurrency exchanges. Investing in 1INCH’s token is a little like an investment in the success of 1INCH. These tokens represent voting rights, and voting rights are only valuable if the protocol is important and makes people a lot of money.
You can also earn 1INCH through 1inch’s liquidity protocol. By providing liquidity to its AMM, you can earn rewards whenever people place transitions. For instance, if you deposit 1INCH-OPIUM liquidity tokens, you can earn rewards of both 1INCH and OPIUM, and expect to earn a (highly variable!) reward of 73% a year. As of this writing $2.4 million has been staked in this pool, known as a “farm.”
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