What is 1inch exchange, and how does the 1inch DEX work?
Created in 2019 by Sergej Kunz and Anton Bukov, the 1inch exchange solves a real-world problem and has quickly become one of Ethereum’s most popular protocols. 1inch is currently the 4th most popular Ethereum exchange as measured by trading volume.
DeFi traders and investors use 1inch to figure out which Ethereum DEX (Decentralized Exchange) has the lowest trading fee for a trading pair. Here’s how the exchange works.
- Go to the 1inch website
- Connect your crypto wallet to 1inch. The exchange is compatible with all sorts of wallets, everything from Metamask to Coinbase wallet to the Ledger hardware wallet
- Select a trading pair. For example, ETH/DAI is one of the most liquid and popular trading pairs in DeFI
- Choose whether to optimize for the lowest gas cost or best return. As a general rule it makes sense to optimize for low gas costs for small trades, while optimizing for a higher return makes sense for larger trades
- Submit the order and let 1inch do its magic
At this point 1inch doesn’t actually execute the trade, instead it gets a quote from all of the major decentralized exchanges on Ethereum. Once the search is complete 1inch tells you which DEX is offering the best deal on the trade. At that point the trader can choose to approve or reject the trade.
One of the easiest ways to understand 1inch is to compare it to a travel website like Kayak. A vacationer submits the dates for their flight and then Kayak checks multiple airlines and travel websites to figure out where the best deal is. That’s exactly what 1inch does, except it’s looking for the cheapest trading fees instead of the cheapest flights.
Although many people refer to 1inch as a crypto exchange, it’s more accurate to refer to it as a “DEX-aggregator.” 1inch aggregates prices so that traders can be sure that they’re not overpaying for a trade.
The Current State of the 1inch Exchange
About six months ago the 1inch exchange launched a second version of the protocol which introduced a better UI and new trading methods which reduced gas usage. This update shows that there’s an active developer community constantly improving the 1inch exchange.
Unlike an ICO, the 1inch exchange is not primarily funded by token sales. Rather, 1inch has received funding from VC firms like Pantera Capital, Binance Labs and Galaxy Digital.
Currently, the 1inch exchange is doing about $250 million in daily volume, representing about 5% of all trading volume from all of the decentralized exchanges on Ethereum. Up-to-date statistics about trading volume are available here. In terms of transaction fees, 1inch is currently the third-largest user of gas on Ethereum.
Even more advanced data about the exchange is available from Dune Analytics, one of the best on-chain data aggregators for Ethereum.
How Does the 1Inch Exchange Work?
1inch supports more than twenty different liquidity providers (decentralized exchanges). For example:
- The Kyber network
In terms of cost, 1inch doesn’t charge any trading fees. Nor are there deposit or withdrawal fees. The exchange aggregator is completely free to use. The 1inch protocol makes money in referral fees. Every time that 1inch refers a trader to a protocol like Uniswap or Sushiswp, they receive a small referral bonus.
1inch supports hundreds of ERC20 tokens, including all of the major tokens and many others that you’ve probably never heard of. A full list of all of the tokens currently trading via 1inch is available on their website.
How Does the 1inch Token Work?
As is the case with many Ethereum protocols, the 1inch exchange has its own token. The 1inch token is used for governance so that users can vote on decisions about how the exchange should be managed. For example, users can vote on the exchange fee or the price impact fee.
1inch investors can also stake their tokens in the protocol to earn a liquidity provider reward.
Exodus wallet users can now safely store the 1inch token on Exodus, the non-custodial wallet that allows you to keep hold of your own private keys.
How to buy the 1Inch Token
The easiest way to get 1inch tokens is to stake your crypto on the 1inch exchange. Liquidity provider rewards are distributed via the 1inch token. Investors can also purchase 1inch tokens on a variety of popular exchanges, including Binance and Bittrex. A full list of all the exchanges that have a 1inch token trading pair is available here.
Five Advantages of Using a Decentralized Exchange
Although they’re not perfect, DEXes have some great benefits compared to their centralized counterparts. Here are five reasons to use a decentralized exchange:.
1. They cannot be shut down
As a general rule, a decentralized exchange cannot be shut down. It’s based on code running on a public blockchain, not a private server like a centralized blockchain.
Even if a DEX is somehow shut down, a developer can always fork it and launch a new version overnight. Decentralized exchanges are much more censorship-resistant than centralized exchanges.
2. Anyone can use them
Most centralized exchanges require users to sign up and complete a KYC verification process. That’s not the case for a decentralized exchange, which anyone can use without having to verify their identity.
3. Full token support
Anyone can list a token on Uniswap. That doesn’t mean it will have a lot of trading volume or liquidity, but it can be listed. That’s different from a centralized exchange like Binance, which is in control of every token that’s listed (or delisted) on the platform.
4. Non-custodial transactions
The problem with a centralized crypto exchange is that it’s custodial, it holds customer deposits in its wallet. If the exchange is compromised, hackers can steal all of the crypto that belongs to people who’ve deposited it.
Decentralized exchanges are typically non-custodial, which means that they don’t hold customer deposits. Exchange users control their funds at all times, which is much safer.
5. Better rates
Although transaction fees on Ethereum are currently quite high, once the gas fee problem is solved decentralized exchanges could have even cheaper trading fees than centralized exchanges.
The Future of the 1inch Exchange
1inch serves a valuable function in the DeFi ecosystem since it lets users compare prices across multiple exchanges from one dashboard. With a good development team and continued updates to the protocol we expect the 1inch exchange to continue growing, especially as more users recognize how 1inch can help them to get the best price on their trades.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.