State of 1inch Q4 2023

Key Insights

• 1inch dramatically increased volumes and market share in Q4’23, executing over $30 billion in volume and claiming 64% of the Ethereum DEX aggregator market share.
• Volume from external sources nearly doubled the fourth quarter’s from last year, likely showing the adoption of 1inch as a backend solution as well as the growth of aggregators.
• New products are driving transaction growth. Transactions on the Limit Order Protocol (LOP) and 1inch Fusion increased in the quarter, while transactions in the Aggregation Protocol fell.
• Fusion transactions rose by 66% in the fourth quarter, a strong rebound after falling 29% in the previous quarter.
• The amount of 1INCH staked increased, as the DAO worked to configure the resolver competition to improve token accrual through a fair and competitive market.

Primer

The 1inch Network (1INCH) is an all-in-one decentralized finance (DeFi) service provider operating on Ethereum, Arbitrum, Optimism, Polygon, zkSync Era, Avalanche, BNB Chain, Gnosis, Fantom, Klaytn, and Aurora. Launched in 2019, 1inch Aggregation Protocol (AP) allows users to route trades across various markets and realize the best available rate compared to any individual decentralized exchange (DEX). In late 2020, the 1inch Liquidity Protocol introduced a native automated market maker (AMM) to the network, which enabled users to provide liquidity and earn passive liquidity mining rewards.

The network’s third product, the 1inch Limit Order Protocol (LOP), was introduced in June 2021 to support conditional limit and stop-loss orders with no fees. In late December 2022, the 1inch Swap Engine enabled Fusion mode, which is partially based on the existing tech, including the 1inch Limit Order Protocol and the 1inch Aggregation Protocol. This new feature empowers DeFi users to place orders with a specified price and time range without paying network fees. All three protocols, and Fusion mode, are governed by the 1inch DAO using the network’s native 1INCH token.

Note: This report includes data from Ethereum, BNB Chain, Polygon, Optimism, Arbitrum, Avalanche, Gnosis Chain, Fantom, and Base. Data from zkSync, Klaytn, and Aurora are currently not included. We are working to improve access to this data.

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Key Metrics

Performance Analysis

Protocol Usage

As the leading DEX aggregator, 1inch has benefited from increased trading activity in the space. Beneath the surface, the newer protocols and products from 1inch led the volume growth. While volumes on the Aggregation Protocol increased 59% from the previous quarter, volume on the limit order protocol (LOP) increased over 90% in Q4. 1inch LOP executed over $6.4 billion of trades for the first time since Q1’23. Volume through 1inch Fusion also increased by 88% in the quarter, surpassing $5 billion and showing a growing user preference for the new execution venues.

Aggregation Protocol volume growth was broad, with four 1inch EVM deployments doubling their volume or more from Q3 to Q4. Aggregation Protocol volumes on mainnet increased by 45% to roughly $173 million per day. Not including Gnosis and Base, which launched at the end of Q3, Avalanche and Arbitrum volume increased the most, by 176% and 129%, respectively. Arbitrum ended the quarter accounting for 16% of 1inch Aggregation Protocol volume, responsible for $3.8 billion in Q4. In its first full quarter, 1inch’s Base deployment grew volumes to over $220 million in Q4. Fantom was the only chain that saw a fall in volume in the quarter.

The average size of a transaction in USD terms grew substantially in Q4, especially for the Aggregation Protocol, as volumes rose while transactions fell nearly 3% QoQ. For the Aggregation Protocol, the fall was largely driven by Polygon, which made up 32% of 1inch transactions in Q3 but only 22% in Q4. While volumes on Fantom fell in the quarter, the number of transactions increased by 31%. The increase surpassed every other 1inch deployment besides BNB Chain and Base, which was only live for part of the third quarter. BNB Chain accounted for the most transactions in the quarter, representing 28% of 1inch transactions or over 22,000 per day. Ethereum transactions increased by 15.5% from 14,000 per day to over 16,000 per day in Q4.

The Limit Order Protocol saw transactions fall on Gnosis, Optimism, and Fantom, even though transactions rose overall by 44% in the quarter. Ethereum, Arbitrum, and Polygon activity increased dramatically, with daily transactions rising 95%, 82%, and 81%, respectively. Those three EVM deployments made up 70% of 1inch LOP transactions in the fourth quarter, or nearly 8,000 per day.

Fusion transactions rose by 68% in the fourth quarter, a strong rebound after falling 29% in the previous quarter. Average trade size rose on all three protocols, increasing by 60% in the Aggregation Protocol, by 35% in the LOP, and by 23% on 1inch Fusion.

Fusion volumes grew 88% in the fourth quarter, and 1inch Labs resolver increased its share to 44% of volume. A new competitor, Rizzolver, began competing at the end of September and grew its market share to 26% in Q4, executing over $1.2 billion of Fusion orders. Rizzolver achieved its growth by offering the most 1INCH rewards to delegates. The top 3 resolvers executed 88% of volume in Q3, but only made up 83% of volume in Q4. However, there were fewer total successfully participating resolvers, with only 7 completing transactions in Q4 versus 12 in Q3.

As discussed in depth in the Qualitative Analysis section, the DAO is focused on increasing competition for resolvers. This quarter, DAO members voted to set a cap for gas consumption for resolvers, which should enable resolvers to earn more and thus be able to pay more in rewards to stakers.

Market Share Analysis

In the fourth quarter, the share of 1inch trades executed on Uniswap V3 and V2 increased by 8 and 3 percentage points to 40% of trades and 8% of trade volume, respectively. Volume from 1inch on the two Uniswap versions increased from $5.6 billion in Q3 to $10 billion in Q4. The share gains largely came from Curve and Dodo, the second and now sixth most common execution venues. PancakeSwap received over $1 billion of trade volume from 1inch for the second consecutive quarter, or 7% of 1inch volume in Q4.

1inch’s fourth-quarter growth in volume was significantly higher than peers, helping it increase its market share from 59% of trades in Q3’23 to 63% in Q4’23. The only large competitor to increase share in Q4 was CoW Swap, which commanded 11% of aggregator volume on Ethereum in the quarter. ParaSwap and 0x respectively commanded 11% and 10% of aggregator volume in Q4.

Treasury and Staking

The 1inch DAO continued to invest its treasury and diversify its stablecoin holding, swapping 1 million USDC into DAI and depositing to earn interest as sDAI. This is the first allocation following the 1 million USDC deposited in Aave to earn interest in Q2. On the expense side, the DAO spent just over $1 million split between three different transactions. On December 30, the DAO sent $890,000 USDC to fund support services for 1inch Network users (discussed in depth in the Qualitative Analysis section).

The amount of 1INCH staked increased by 7% in the fourth quarter. Staking 1INCH gives Unicorn Power (UP), which can be used to vote in governance and delegate to resolvers. Staking and delegating to resolvers create an important value accrual pathway for the token, as resolvers give 1INCH rewards to attract delegates so the resolver can compete in completing Fusion transactions. The top resolvers are currently offering over 45,000 1INCH to delegates.

Qualitative Analysis

Improving Resolver Competition

On October 7, 1inch DAO voted to create new rules governing resolvers interacting with 1inch Fusion. In the past, only five resolvers competed to fill orders, which was insensitive to gas costs to win the transaction. As a result, the resolver business turned into a gas war, significantly increasing expenses and thus hurting resolvers’ profitability. If resolvers were more profitable, they would be able to better compensate 1INCH stakers.

The core of the proposal revolves around the introduction of a smart contract-enforced gas fee limit, aimed at regulating the priority gas fees in the 1inch Fusion mode. This cap is designed to fluctuate based on the block's baseFee:

• BaseFee < 10.6 gwei: PriorityFee capped at 70% of the baseFee.
• BaseFee 10.6 - 104.1 gwei: PriorityFee capped at 50% of the baseFee.
• BaseFee > 104.1 gwei: PriorityFee capped at 65% of the baseFee.
• Attempts to circumvent this limit (including direct payments to block builders) will be considered violations.

The proposal also introduces a stringent penalty system for violators. Using a tiered approach, it ranges from an official warning to a substantial 365-day block from filling orders for repeat offenders.

The proposal intends to lower the Unicorn Power (UP) requirement for Resolvers from 10% to 5%, in order to democratize access to the Fusion Mode ecosystem. The more lenient entry threshold has already led to more diversity and robustness within the system. From a market perspective, the changes could mean a more competitive environment with more options for stakers and hopefully increased resiliency for traders.

The rationale behind these proposed changes is grounded in a pragmatic approach to tackling the high operational expenses currently faced by resolvers, primarily due to the inflated gas fees during auctions. Given that this situation often escalated into “resolver gas wars,” it has been a pain point for participants in the 1inch Network, affecting both profitability and trade rates. The proposed solution seems to be a well-considered strategy to address these challenges head-on.

However, there are concerns that need to be addressed. For one, this new system might inadvertently penalize resolvers who are more gas-efficient, especially since builders tend to prioritize transactions based on total ETH paid on gas. While the proposal argues that this shouldn't be an issue as builders are incentivized to maximize fee collection, it still requires careful monitoring post-implementation.

In conclusion, the proposal comprehensively addresses current challenges faced by resolvers in the 1inch network. Its success hinges on competition between resolvers and continuous monitoring to ensure its changes do not lead to unintended consequences. Higher earning resolvers should attract new resolvers, which will need to attract UP by giving rewards to 1INCH stakers.

Support for an Improved User Experience

The 1inch DAO has approved a proposal to fund comprehensive support services aimed at enhancing the 1inch Network ecosystem's growth and user experience. These support services encompass various aspects, including issue management and reporting across multiple communication channels, documentation management, monitoring reviews, special investigation for complex refund cases, and support for the token listing and delisting process. The 12-month subscription fee for these services amounts to $890,000. The primary motivation behind this proposal is to ensure that 1inch Network users receive efficient and responsive technical support, which is crucial for brand credibility, user retention, and network expansion.

As crypto matures and the initial products grow beyond just finding product-market fit, winning the consumer becomes more important. The support services will enhance the overall experience for 1inch Network users, potentially leading to higher user satisfaction and retention. Effective customer support can establish brand credibility and reputation, contributing to the long-term success and growth of the 1inch Network ecosystem. The proposal covers various aspects of support, including bug-bounty program management and participation in conferences, which can contribute to the continuous improvement of the network.

The proposal is not without risks, namely an annual subscription fee of $890,000 paid upfront. In addition, the DAO relies on the service provider to meet the specified KPIs, and there is a risk of service quality not meeting expectations, which could harm the network's reputation.

In sum, the approved proposal seeks to provide valuable support services to the 1inch Network ecosystem, aiming to enhance user satisfaction and brand reputation. 1inch DAO and Network continue to focus on winning the consumer as part of its growth strategy.

Closing Summary

The return of the bull market in Q4’23 helped the category leader grow, as volumes soared to over $35 billion in the quarter. The work in the bear is helping, as 1inch’s limit order protocol and Fusion product drove transaction usage, while L2 deployments led volume growth. Resolver competition and market design remain in flux, as the DAO tries a new approach by setting a gas limit. The amount of 1INCH staked in the quarter increased, and $1 million from the treasury was newly invested. 1inch grew its dominant market share as the leading DEX aggregator on Ethereum in the quarter.

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This report was commissioned by 1inch DAO. All content was produced independently by the author(s) and does not necessarily reflect the opinions of Messari, Inc. or the organization that requested the report. The commissioning organization does not influence editorial decision or content. Author(s) may hold cryptocurrencies named in this report. This report is meant for informational purposes only. It is not meant to serve as investment advice. You should conduct your own research, and consult an independent financial, tax, or legal advisor before making any investment decisions. Past performance of any asset is not indicative of future results. Please see our Terms of Service for more information.

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