DeepDive–001: 1INCH

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Today I’m excited to introduce a new initiative for Our Network — the Deep Dive series. As you all know, our regular Friday newsletter aims for brevity with its network updates, but I’ve long wanted to give our data-driven contributors a platform to write more long-form pieces on network health and related topics they care about. So we created Deep Dive, and I’m excited to share the first installment today with you all.

Today’s Deep Dive examines the 1inch token launch and its effectiveness in catalyzing an early community. This is an area of focus for us at Variant since nailing mechanism design (which includes token distribution) is shaping up to be a critical component for project success in the ownership economy. The post also shares some helpful background on the 1inch protocol and token economics.

One more thing. If you’re a data-driven analyst, researcher, or project team, and you’d like to be featured on a future installment of Deep Dive, please reach out!

— Spencer 🕛

Since the 1INCH token launch on Christmas Eve, which distributed 6% of the total supply of 1INCH tokens to users, the 1inch project has seen robust growth in users and volume. As of January 12th, 1inch liquidity pools hold over 473 million dollars, where LPs and farmers are earning high APYs. Current farmers are on track to receive additional compensation—1% of the total 1inch token supply. The DAO is also fully implemented, enabling token holders to make key decisions regarding revenue generation and allocation.

1inch is an ecosystem of protocols governed by the 1INCH token and its holders. The first product, the 1inch.exchange DEX Aggregator, launched in May 2019 as an ETH Global hack submission at ETHNewYork by Sergej Kunz and Anton Bukov.

The name of the project, 1inch, is an homage to the late Bruce Lee. His 1inch punch technique demonstrates that a relatively small force, directed strategically to the exact, correct location, can have a devastating impact. Analogously, the 1inch DEX aggregator has surged into 3rd place (in trade volume and dollar amounts in LP’s) behind Uniswap and Sushiswap and projects to continue growing its market share.

The DEX Aggregator connects to industry-leading decentralized exchanges and liquidity sources (41 sources in total). 1inch exchanges utilize an algorithm called Pathfinder to route a users’ trade between one or multiple venues to get traders the best price at the fastest response time.

The 1inch Liquidity Protocol (frmly. Mooniswap), which launched in August 2020, is a decentralized exchange based on the automated market maker (AMM) model. It is unique in its design through its addition of a decay period and price impact fee. These features aim to increase profits for liquidity providers (LPs) and lower profits for arbitrageurs while maintaining the ease of use traders expect from an AMM.

The 1INCH token’s primary purpose is as a governance token. Similar to other Defi protocols, users can influence the development of the protocol by voting on governance proposals and the distribution of rewards. The more tokens you own, the greater the weight of your vote.

1INCH governance is unique. In addition to voting on general governance proposals, 1INCH holders can exercise Instant Governance by voting directly and continuously on key protocol parameters. For example, 1INCH holders can vote on the distribution of Spread Surplus (i.e. positive slippage) collected by the 1inch Aggregator and Liquidity Protocol. The voting periods are permanently open, meaning a user can stake their token and vote on a parameter to x value one day, and change their vote to y value if their changes based on new information.

At first, expert users and community members have helped guide and set these parameters, but it is expected that voting participation will expand as the broader community begins discussions around some of the more technical parameters. Through democratic governance, user and token holder feedback will help guide future protocol development.

Because the 1inch ecosystem relies on token holders to govern the protocol and set key protocol parameters, a large and diverse community was an explicit design goal and paramount to its ongoing success. A retroactive airdrop of tokens to users was used to achieve widespread distribution of tokens to early 1inch users and community members. At 12am UTC Christmas Day, the 1INCH token was released:

• Traders who placed a trade through the 1inch Aggregator with a base rate of 670 1INCH/account
• Liquidity providers who deposited assets into the 1inch Liquidity Protocol. LPs earned tokens based on the $ value of liquidity provided and the duration of their deposits
• 90,000,000 tokens were distributed to traders and LPs (6% of total token supply)
• 58,000 unique wallets received tokens, with a median of 627 tokens being distributed per wallet

Since the Christmas Eve token launch, the 1inch DEX Aggregator protocol has surpassed 10 billion dollars in total volume. The increase in volume was rapid as on December 3rd the total transaction volume of the DEX aggregator product was around 7 billion. The average volume per day since the token launch is $133,612,709, which represents a 22.28% increase in transaction volume since the inception of the 1inch DEX aggregator product.

Between September 1st and December 24th, the average number of daily users swapping on 1inch was 953. On December 23rd (day prior to token launch), the total number of unique 1inch.exchange users all-time was ~57,000. But in just 2.5 weeks since the token launch, the protocol has seen an additional ~30,000 new users, an increase of nearly 30%.

The increase in users and volume post token launch may result from:

1. Increased publicity and exposure from the launch attracted new users
2. Launch increased loyalty among existing users
3. High APY for Liquidity Pools and Staking encourages users to hold and use 1INCH token in protocol.
4. DAO governance of Slippage Surplus distribution and other parameters encourages overall protocol use.

1inch liquidity pools and staking are widely used thus far. 35M 1INCH tokens are currently locked in the 1inch Protocol. High APY incentivizes the community to provide liquidity and stake their 1INCH tokens.

The APY on pools is currently quite high relative to other opportunities in Defi. For example, on Jan 11th the APY on ETH-DAI pair is 33.33%, 1INCH-USDC is 37.76%, 1INCH-DAI is 39.8%.

The current APY on farming is high. For example, farming 1NCH-ETH pool tokens delivers 108% APY; ETH-USDT pool token farming delivers 62 % APY.

The 1inch DAO determines rewards for active network participants. There are two types of rewards:

• Referral Rewards— a total of ~67k 1INCH tokens rewarded Referrers (e.g. dapps and wallets that source users/trading volume) in the form of Referral Rewards. The referral reward derives from a dedicated portion on swap fees and price impact fees (on swaps that originate from referrers).
• Governance Rewards— a total of ~ 830k 1INCH tokens have been awarded to “governors” of the system in form of Governance Reward. The governance reward compensates stakers for governing the 1inch Liquidity Protocol parameters. The governance reward is also sourced from swap fees and price impact fees.

Overall, the 1inch Token launch has catalyzed an early community. The DEX aggregator and upgraded liquidity protocol have grown significantly in volume and users post-launch. The DAO is also live but low voting participation is an issue. To account for this, more information and education around voting and its implications are on the way.

The 1inch token distribution spiked many Christmas punch bowls this season. The Christmas distribution is the first of many ways 1inch expects the community to use the token to build an engaged and aligned community. Stay tuned for more education and resources around the opportunities that exist today and to come in the future.