Plotting the Growth of 1inch

  • Commentary
  • September 6, 2020

As the use of DeFi and decentralized exchanges (DEXs) in particular have grown, a new sector has emerged that seeks to improve on the user experience and overall service offered by DeFi protocols. Liquidity aggregators pull liquidity from multiple trading venues, with the intent of providing end-users optimal prices and low slippage. Aggregation can provide substantial value in illiquid markets, such as the long-tail of ERC20 tokens or DEXs that have struggled to bootstrap the liquidity of venues like Uniswap.

Although several aggregators exist, the 1inch service has far outpaced its rivals and currently dominates the still-nascent aggregation sector in terms of volumes, having risen from relative obscurity since the beginning of the year. Following this rapid growth, the project raised $2.8 million in a seed round in August and launched its automated market maker (AMM) DEX named Mooniswap that, as its name implies, leverages much of Uniswap’s design, including its core architecture and front-end interface, albeit with supposed improvements to liquidity providers’ compensation. Much like Uniswap, 1inch’s success can be in part explained by a product-minded focus on user experience, as well as consistent innovation, such as its use of a novel type of gas token, which takes advantage of Ethereum’s gas refund feature to lessen the high gas costs that aggregation services typically incur.

1inch USD Volume Per Week1inch weekly volumes

Source: Dune Analytics

With the number of DeFi protocols and services continuing to balloon, services such as 1inch are likely to be in continued demand, as they can return the best rates or offers to users, saving them time and effort while partly offsetting aggregation’s higher gas cost. Indeed, the 1inch exchange somewhat resembles Yearn Finance, a highly-popular DeFi protocol that aggregates the ‘optimal’ APR across DeFi protocols for users. Protocols such as these that can function as search engines to the DeFi ecosystem may indeed prove to be the ultimate category winners, in terms of value flow, as users congregate downstream from core protocols, opting for simplicity and time-saving, much like how Amazon or other online marketplaces have supplanted individual vendors.

Despite there being a variety of other aggregation services, 1inch accounts for the vast majority of volumes and is by far and away the category leader. In a recent dispatch, Smith + Crown noted similar trends concerning Uniswap in the DEX space. It is worthwhile asking whether such trends are not simply coincidences and consequences of uniquely valuable services, but rather are products of more systematic dynamics at work. Much like how network effects exist in cryptonetworks, whereby usage begets more usage in a cycle that becomes increasingly difficult for other networks to overcome, similar effects may well exist concerning liquidity among exchanges, whether they be DEXs or aggregators. By removing geographical constraints imposed by regulatory and operational burdens that centralized exchanges face, such network effects may be greatly enhanced.

Aggregator Weekly Volumes (USD)aggregator volumes

Source: Greenfield One

Originally, the relationship between DEXs and aggregators benefited competitive DEXs, whereby, aggregators could provide DEXs with users and volumes without taking a cut of fees. However, with the release on Mooniswap, there are now clear potential conflicts of interest, especially between 1inch and Uniswap. While 1inch’s pathfinder algorithm, for now, appears to choose DEXs based on clear, fair, and well-reasoned parameters, there is now a clear incentive for the project to begin to give preference to Mooniswap, much like how Google notoriously skewed its search algorithm towards its products. As volumes, and revenues increase, tension between the two types of service providers becomes more likely.