From Hackathon Project to DeFi Powerhouse: AMA with 1inch Network

Cointelegraph’s latest AMA covered the origins and development of the 1inch Network, a popular DeFi platform that aggregates DEXs and protocols to offer users the best rates. Co-founders Sergej Kunz and Anton Bukov started 1inch during a hackathon in 2019, and have since grown it to over $400 billion in total volume.

The 1inch Network introduced a game-changing feature called gasless swaps, which eliminates transaction fees for users. The platform’s other features include high liquidity, unique algorithms minimizing MEV attacks, multiple order types and real-time market data. During AMA, the 1inch Network’s founders discussed these and other recent innovations in detail and shared their views on the industry.

Key AMA outtakes:

1inch Pathfinder algorithm helps find the best rates for users. How does it work?
Another 1inch upgrade, Fusion Mode, expands Pathfinder’s capabilities by protecting users from unfair exploitation and by making trading easier. How does it operate, and how much security does it offer?
Who are resolvers, and what role do they play in the 1inch Network?
Why did 1inch decide to create a self-custody wallet, and how can one use it?
What is the 1inch Developer Portal, and what can developers find there?

Join our AMA with @1inch now! https://t.co/QJgoKCL6TK

— Cointelegraph (@Cointelegraph) December 6, 2023

On Pathfinder

Bukov: The first version of 1inch, which we introduced at a hackathon, aggregated just three DEXs – Bancor, Kyber and Uniswap. The algorithm we used was pretty simple, it was about finding the optimal distribution of user volume across multiple sources. We found that the more you swap on hDEX, the worse the exchange rate (hDEX or hybrid decentralized exchange combines the best features of CEX and DEX. Offers deeper liquidity, reduced transaction fees and reduced slippage). But if you spread the user liquidity across multiple DEXs, you could improve the exchange rate because you swap less on hDEX.

Then we came up with a better solution called Pathfinder: it helps to find a kind of multipath to exchange liquidity between multiple tokens. If you are swapping Ether to USDC, you can tap into the Ether USDC liquidity. For larger amounts, sometimes it makes sense to swap some of that USDC to USDT and tap into the USDT Ether liquidity. So Pathfinder is looking for the right amounts and rates, which is actually a non-trivial problem.

Kunz: Yes, Pathfinder uses multiple liquidity sources, multiple markets in between to find paths, not just split on one market.

The problem with CEXs is that they’re not composable; no one can build something that’s so simple and atomic that the user has protection that it will do what they expect. Some projects try to aggregate CEXs, but it’s a painful process because each exchange has its own APIs, implementations, and settlement engines.

But DeFi is all about composability and we are trying to get as much out of it as possible. We use our private market maker liquidity to bridge liquidity from CEXs and other networks. Since we have most liquidity and highly optimized smart contracts, swapping through 1inch is cheaper than through Uniswap, DEXs and other liquidity sources.

You can use Pathfinder through our DApp. We also offer integration for professional traders, arbitrage traders, B2B partners.

On 1inch Fusion

Kunz: We created Fusion to address MEV attacks that stole bmillions from users in 2022. By using a Dutch auction approach with fully transparent smart contracts for settlement, we eliminated sandwich attacks.

I think of 1inch Fusion as a decentralized NASDAQ for non-custodial swaps of utility tokens. You just create an intent to exchange one asset for another in a certain price range. Based on that, the protocol tries to achieve the best execution through the auction approach. The settlement is done on a blockchain, so we see no centralized settlement with CEXs. But at the same time, the user experience is similar to CEX.

Behind our NASDAQ are professional market makers that are selected by the 1inch Network community. These professional market makers compete using only liquidity and hedging positions on CEXs and other networks. For example, if you want to sell MATIC on Ethereum, one of these traders might buy your MATIC, sell it on another network where MATIC is traded more often, and then buy it back from you. They then balance their positions across different networks. So by using 1inch, you get access to all the liquidity on and off the chain that comes through the market makers.

Bukov: I’d like to point out that users have atomic access to liquidity while the professional market makers (PMMs) bridge it. It’s a benefit to users because swaps can happen or be reversed.

With Fusion, you can’t revert transactions because users don’t make them. The smart contract compares the final amount to the user’s minimum requirement. If insufficient, the entire transaction is reversed, ensuring no user funds are lost. Users only provide digital signatures for their order or intent. This means that when you trade on the Ethereum mainnet, you have indirect access to liquidity on other chains like BNB, Polygon and CEXs through these PMMs.

We don’t care about the security of individual DEXes because we protect users from their risks. When we added new DEXes, some started with huge initial liquidity, which allowed us to integrate them immediately, which was amazing.

And users usually don’t care where their liquidity is executed or what’s under the hood, just that it’s efficient. It depends on the amount and the fees. For chains with lower fees, like BNB or Polygon, aggregation is more likely for smaller swaps. For larger swaps, the gas cost outweighs the benefit of aggregation.

On liquidity

Kunz: So if you do a market swap or use our Pathfinder in the classic way, you’re only accessing the liquidity that’s available on that particular chain. This leads to price impact. To improve this, we created Fusion, which uses the user’s intent and signature permission. This allows the protocol to execute the order at the best price, starting from the spot price and gradually reaching the market price.

You may face a small price impact, perhaps 2-3%, depending on the swap size. This is because the price may change during the execution, which takes about 10 minutes for large trades. We use dedicated grids for this process to ensure access to the full liquidity of the market.

Market makers have enough time to arbitrage and hedge, making it very safe for them. This technology provides users with best execution and secure access to market makers and orders. It improves the swap experience and provides access to the entire liquidity market.

Bukov: 1inch has improved user prices, but those gains don’t come from anywhere. They come from the profits of arbitrage traders who saw your trade on a single DEX. Traders used to manually find price differences between different DEXs, buy low and sell high, and slowly balance the market. Now, 1inch does all this automatically and on a much larger scale, using PMMs and working across all accessible markets – even CEXs and other chains. This means that price movements happen simultaneously on all platforms, instantly giving users the best prices and taking away the profits that once belonged to those arbitrage traders.

On the role of Resolvers

Kunz: In 1inch Network, Resolvers are like professional traders who execute users’ swap intentions. Similar to the NASDAQ model, we have market makers that fill orders. Our community selects these Resolvers through a staking system that uses the “Unicorn Power” earned by staking 1INCH tokens. We currently have five resolvers actively participating across all supported chains, ensuring efficient execution. In the future, we see potential for resolvers to expand their role beyond trade execution to potentially handle additional “intents” within the 1inch Network.

Bukov: Resolvers compete for two things: user orders and delegations. Users place orders in Fusion mode, which act as Dutch auctions where prices improve for Resolvers over time. The first Resolver to find the optimal price and execute the order with the best gas optimization and leverage across multiple chains and exchanges wins the order. This competition drives down prices for users.

Additionally, Resolvers compete for user delegations that allow them to participate in the system. They incentivize delegations by sharing a portion of their profits with delegators, proportional to the amount delegated. Users often rebalance their delegations based on the profits shared by the resolvers.

On the 1inch Hardware Wallet

Kunz: We built the 1inch self-custody wallet to address the issue of users not understanding what they’re signing. This wallet clearly explains permissions and prevents users from accidentally signing away their funds. It’s a high risk for the whole DeFi space if people don’t understand what they’re signing, so we’re trying to improve that.

Bukov: You can enable it with NFC for offline signing and choose from different versions like Bluetooth-enabled or fully air-gapped. You can also connect it to any DApp or Metamask. We’re committed to open-source hardware and software, and we’ve built it with secure chips to prevent hacking.

On the 1inch Developer Portal

Kunz: We started with a simple frontend in 2019, but quickly realized the need for backend services. We built APIs for various features, such as balance retrieval and Pathfinder, which require significant processing power. Today, we offer over 12 APIs for free, allowing developers to build new Web3 applications with minimal effort. These APIs cover a wide range of functionality, from balance and portfolio to current gas prices and access to 1inch features such as Fusion and Pathfinder. With these tools, we aim to attract new developers and encourage innovation in the Web3 space.

Bukov: Starting a new project is all about the 80-20 rule: achieving 80% of the result with 20% of the effort. 1inch started this way, creating a working prototype at a hackathon. We later spent much more time polishing the remaining 20%, including features like asset prices, balances, and the portal. That’s why we decided to share our APIs with other developers, so they can use the 80-20 rule to build their minimum viable product and quickly validate their ideas.

Learn more about 1inch Network

#Cryptocurrencies
#DeFi
#Trading
#DEX

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