The ability to swap among various tokens in the decentralized finance (DeFi) space requires liquidity. Essentially, the “deeper” the liquidity—or the more assets that are accessible to traders—the easier swapping becomes, and at the most optimal prices. Put another way, deep liquidity is necessary for highly efficient markets. This benefits market participants who wish to trade assets without significantly moving their prices.
However, DeFi is fragmented into multiple smaller markets. If a DeFi user wants to swap one token for another, they may go to Uniswap, SushiSwap, Curve, or any number of other decentralized exchanges (DEXes). To ensure they are swapping their tokens at the best possible price, users must compare prices at each of these DEXes before choosing where to execute the trade.
To solve this problem, 1inch aims to aggregate liquidity by providing users visibility and access to multiple DEXes on multiple blockchains simultaneously. The goal is to make the process of token swapping smoother while also improving the efficiency of the overall market. 1inch has also built additional functionality for placing limit orders, reducing the cost of network gas fees, and reducing exposure to various DeFi risks.
Although 1inch was not the first DEX aggregator, it has become one of the most popular options for DeFi users. Other similar projects include Slingshot, ParaSwap, and SushiSwap (which announced it was adding aggregator functionality in 2023).
The 1INCH token is a tool for participating in 1inch’s decentralized autonomous organization (DAO) and providing utility to the ecosystem like aiding with gas-preserving swap execution.
How was 1inch developed?
Sergej Kunz and Anton Bukov introduced 1inch at the ETHGlobal New York hackathon in May 2019 and have since led the project’s development. Kunz is software engineer based in Stuttgart, Germany who previously worked in cybersecurity for Porche and hosted the CryptoManiacs YouTube channel. Bukov was a smart contract developer for NEAR Protocol before co-founding 1inch.
1inch raised $2.8 million in a 2020 funding round led by Binance Labs, closely followed by a second funding round raising $12 million led by venture capital firm Pantera Capital. In 2021, it raised another $175 million through multiple institutional investors.
1inch’s funding clearly demonstrated an interest in development of its DEX aggregator. This was echoed in its enthusiastic adoption by the crypto community; within its first year, 1inch passed over $1 billion in total volume. As its popularity has grown, it has expanded into multiple blockchain networks including the Binance Smart Chain (later the BNB Chain) and Polygon in 2021, Fantom in 2022, and zkSync Era in 2023, among many others.
The 1INCH token is issued by the non-profit 1inch Foundation, which directs its capital through grants and other funding mechanisms. Meanwhile, 1inch Labs is a collective of developers who contribute the most to the development of 1inch’s back-end software. The project is governed by a DAO comprising holders of the 1INCH token.
How does 1inch work?
1inch is primarily a DEX aggregator and built out other functions both to support its aggregation efforts and to aid in other interactions with the DeFi space for its users.
Decentralized exchange aggregator
The aggregation protocol uses the Pathfinder algorithm to determine the best exchange rates for token swaps and route user trades appropriately. Pathfinder tests many possible swaps through one or multiple DEXes to achieve the best price. This might mean splitting a swap into smaller trades in different protocols or even testing “market depths” in the same protocol to further optimize swaps.
Pathfinder then determines the parameters for the swap by specifying the environment (i.e., the chain), checking token allowances (so tokens can be withdrawn from users’ wallets), and making the swap according to certain details like sending/receiving addresses and slippage allowance.
The underlying software supports multiple chains including Ethereum and its scaling solutions (e.g., Optimism, Arbitrum, Polygon), Avalanche, BNB Chain, and zkSync Era, and more.
Fusion
In 2022, 1inch announced the release of Fusion, a way to further improve swaps for users of its platform.
The purpose of Fusion is to eliminate gas fees and reduce the risk of front-running. The former of these is especially important for users of Ethereum’s mainnet, as network congestion has historically caused unaffordable run-ups in the cost of transactions. Front-running occurs when trading bots leverage knowledge of future transactions, such as proposed transactions which haven’t yet been included in a block on the blockchain, to gain an edge and make a profit—to the detriment of users of DEXes.
Although Fusion swaps might look like regular swaps to end-users, they are processed differently behind the scenes. Fusion swaps are limit orders, rather than market orders like conventional swaps, that go through a Dutch auction process using third party traders called resolvers, who act as market makers. In a Dutch auction, the price of the swap is set high and slowly decreases over time until a resolver bids on it. Resolvers pay the gas fees while profiting from arbitrage trading and platform incentives for their work.
Other products
Besides the DEX aggregator and Fusion’s contributions to its use, 1inch has other offerings that bolster its ecosystem. These include:
- Limit order protocol – allows 1inch users to set an acceptable price for their swap, rather than using the spot market price.
- RabbitHole – a feature that reduces the risk of front-running by routing swaps through third party validators rather than directly to the blockchain.
How is the 1INCH token used?
The 1INCH token is available on multiple smart contract chains. It was released in December 2020, at which time 6% of tokens were unlocked.
1INCH is used as both a utility token and a governance token. In Fusion mode, 1INCH is staked by resolvers and deposited into a “feebank” contract to become eligible for processing swap transactions. Holders of 1INCH also have voting rights in 1inch’s DAO, allowing them to choose future directions for the platform.
Token distribution
Of the maximum supply of 1.5 billion 1INCH tokens, 33% were allocated to backers/investors, 30% have been dedicated to community incentives, 22.5% to core contributors, and 14.5% to the network growth fund. All tokens were scheduled to have been distributed by the end of 2024.
1inch essentials
- 1inch is a decentralized exchange aggregator that offers deep liquidity and optimal swapping rates for its users.
- Through Pathfinder and Fusion, 1inch chooses the best prices by comparing multiple DEXes and liquidity pools and splitting swaps into smaller transactions when necessary, while also reducing gas fees and minimizing the risk of front-running.
- The 1INCH token is used by parties called “resolvers” to power the back-end of Fusion mode, and it also is used to govern the platform through 1inch’s decentralized autonomous organization.