State of 1inch Q3 2022
Key Insights
- 1inch implementations on Layer-2 scaling solutions Arbitrum and Optimism grew in every key metric while outperforming every other chain.
- User behavior shifted as the Limit Order Protocol took market share from the Aggregation Protocol, negatively impacting the treasury.
- The 1inch Foundation removed the staking requirement from the Gas Refund Program allowing all users to be eligible for at least a 5% reimbursement.
- Changes to the 1inch DAO Treasury materialized in Q3: the Treasury diversified its assets and began accumulating the 1INCH governance token.
Primer on 1inch
The 1inch Network is an all-in-one decentralized finance (DeFi) service provider operating on Ethereum, Arbitrum, Optimism, Polygon, Avalanche, BNB Chain, Gnosis, Fantom, Klaytn, and Aurora. Launched in 2019, 1inch’s 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 enables 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. All three protocols 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, and Gnosis Chain. Data from Fantom, Klaytn, and Aurora are currently not included. We will be working in the coming months to improve access to this data.
Introduction
The 1inch Network was not insulated from the bearish sentiment that plagued both the crypto and the global economy. Along with the broader crypto market, the DEX aggregator continued to experience the aftermath of the fallout in H1 2022. In Q3, the network saw a substantial decline in total trade volume similar to DEXs like Uniswap and Curve.
Total trade counts were nearly identical QoQ as the network benefited from modest user growth in Q3. Layer-2 solutions were the heroes this quarter, with increased volume, transactions, and users. The catalyst for L2s was directly tied to 1inch’s OP airdrop announcement and speculation of an Arbitrum airdrop. As these expectations come to fruition, the growth in these metrics is expected to stabilize.
Trading volumes and token swaps were driven mainly by stablecoins like USDC, USDT, and BUSD and wrapped volatile assets like WETH and WBTC. The new 1inch proposal implementations materialized, adding new tokens to the Treasury. However, the substantial network volume decline slowed 1inch’s balance sheet growth in Q3 2022.
Performance Analysis
Network Overview
In Q3 2022, the total trading volume fell 45.5% from $49.5 billion to $27 billion. In the prior quarter, 24% of total trading volumes occurred over seven days after the panic caused by the UST collapse and stETH depeg.
1inch processed 4.6 million trades in Q3 2022. Although overall trading volume fell by almost half, total trades were flat QoQ. As volatility settled, the daily average trade size by volume fell to its lowest over the last three quarters at $5,900. Considering these factors, it’s evident volatility drives volume to 1inch.
Over the last three quarters, the Aggregation Protocol (AP) consistently accounted for over 94% of the total trading volume. The AP is used to swap tokens at market prices which are susceptible to higher slippage as volume per trade increases.
Despite Limit Order Protocol (LOP) trading volumes declining in Q3, its market share of total trading volume grew by 38% compared to Q2. This growth permeated across other chains, signaling a change in user behavior. The LOP can give insight into user behavior because it enables users to customize trades by setting desired price limits and expirations for trade execution.
With over 84% dominance in total trading volume over the last three quarters, it’s no surprise Ethereum drove the majority of trading volume to 1inch during Q3.
Polygon and BNB Chain are the second and third largest chains where 1inch is deployed. Polygon flipped BNB Chain in total volume QoQ for the first time since Q4 2021. In Q3, both had quarterly trading volumes of $1.4 billion (-37%) and $1.1 billion (-59%), respectively.
Network Users
Total users in Q3 rebounded from the prior period growing a modest 2.4% to 2.2 million users. There were approximately 23,500 daily average users in Q3, in line with the preceding period. Most users were on Polygon, followed by Ethereum and Binance.
The LOP drove the most user growth, with an impressive QoQ growth of 25%, adding over 24,000 users. The shift demonstrates the importance of flexible trade execution and how it can attract users. Users appear more sensitive to price fluctuations during a bear market, seeking to benefit from strategic trade execution using the LOP. Users also joined 1inch due to existing and potential airdrop announcements.
Layer-2s Optimism and Arbitrum outperformed every chain by the number of trades, trading volumes, and user growth QoQ. Optimism and Arbitrum grew users by 37% (14,000) and 41% (28,000), respectively, while Polygon had 7.6% (69,000) fewer users than last quarter. Quarterly trading volume declined for every chain besides Optimism and Arbitrum, where it grew 9% and 5%, respectively. The outperformance was primarily a result of airdrops and cheaper transaction fees.
In early September, 1inch announced a 300,000 OP token airdrop rewarding 3,782 1inch wallets selected for being regularly active. This incentive was a catalyst for Optimism’s user growth QoQ. In addition, rumors of a possible Arbitrum airdrop coincided with a large percentage increase in users in Q3. Because airdrop eligibility factors typically include wallet usage and overall trading activity, the growth in users and activity could prove to be inorganic preceding the airdrop. The combination of these events resulted in Polygon losing market share in the quarter.
Micro Analysis
Breaking down users and unique wallets by their total trade volume in the quarter allows users to be profiled by their activity. Since Ethereum accounts for most of the total trading volume, groupings will differ slightly from those on BNB Chain, Polygon, and Optimism which collectively account for just over 10% of total volume. Trading volumes on 1inch show a clear power law distribution, with a small percentage of wallets responsible for an overwhelming majority of volume.
In Q3, there were 493,000 wallets with 2.9 million trades resulting in over $2.5 billion in trading volume on Polygon, Binance, and Optimism. Despite small retail accounting for over 53% of overall trading activity and 97% of wallets on 1inch, it represents less than 2% of the total trading volume.
The overall user base is evidently quite large and increased QoQ. Still, considering less than 1% of total wallets were responsible for over 60% of trading volume, it’s abundantly clear that whales primarily drive 1inch trading volumes across the four chains.
Token swaps paired with stablecoins and blue chips continued to drive the most volume to 1inch. USDC token swaps facilitated over $13 billion in volume, down from $22 billion the prior quarter. While overall network volumes were down QoQ, USDC token swaps grew over 4%, as a percentage of total volume. The top trading pairs on Ethereum, BNB Chain, Polygon, and Optimism were USDC-DAI, WBNB-BUSD, WETH-USDC, and sUSD-USDC, respectively.
The primary goal of the 1inch Network is to facilitate the most efficient trade routing through various protocols using its Pathfinder algorithm. As expected, export volumes were down in the quarter to $22 billion from $46 billion in Q2. Uniswap and Curve remained the primary protocols through which trading volumes are routed. Besides DODO V1, there were no significant changes in the volume share by venue. While total export volumes fell by over 50%, DODO V1 saw a 38% increase in export volume.
1inch DAO Treasury
Swap Surplus, i.e., revenue for the 1inch DAO Treasury, is a result of positive slippage from token swaps on the Aggregation Protocol (AP). The probability of positive slippage occurring increases with heightened volatility and volume, as witnessed during the UST and stETH events earlier this year. The shift in trading volume from the AP to the Limit Order Protocol will continue to impact Swap Surplus generation significantly, ultimately siphoning revenue away from the 1inch DAO Treasury.
Currently, 100% of the Swap Surplus is split between the 1inch Network DAO Treasury (~80%) and Referrers (~20%). However, the vast majority of trading volume is not through referrals; therefore, most of the Swap Surplus goes directly to the Treasury.
Despite Q3 having nearly half the trading volume of Q2, the 1inch DAO Treasury grew its balance by 7% to $15.7 million in Q3. The implementation of 1IP-08, a diversification mechanism for the Treasury, authorized the conversion of Swap Surplus into DAI, USDT, WETH, and WBTC. A total of 84 WETH was added to the treasury, valued at approximately $112,000 at quarter end.
After the execution of 1IP-09, the Treasury switched from buying USDC with Swap Surplus revenue to buying the 1INCH token when prices fall below $1.30. When the cost of 1INCH is greater than or equal to $1.70, the Treasury reverts to using Swap Surplus to buy USDC. The 1inch DAO Treasury has since accumulated $204,000 in 1INCH or 350,000 tokens in native terms.
The proposals are meant to diversify using risk-on assets to outpace inflation and to allow the Treasury’s value to grow with its token. The Treasury balance will fluctuate in USD terms as more risk-on assets are added.
Qualitative Analysis
The 1inch Network has continued its commitment to being a leading DEX aggregator by offering optimal trade execution. It has taken strategic steps by deploying on new blockchains, integrating with new wallets, and improving the user experience through the gas refund program.
Mainnet Deployments
The onboarding of new Layer-1 and Layer-2 blockchains enables 1inch to deepen liquidity further, facilitate more efficient markets, increase transaction speeds, and improve the user experience. In Q3, 1inch announced its deployment on Klaytn’s and Aurora’s mainnets for the Aggregation and Limit Order Protocols.
Klaytn is an enterprise-grade EVM-compatible blockchain focusing on gaming and the metaverse. Aurora is also an EVM-compatible blockchain providing an Ethereum Layer-2 experience built on the NEAR Protocol. These integrations enable 1inch users to access liquidity on various AMM and DEX protocols.
Wallet Integrations
On August 11, the 1inch Network announced the KuCoin Wallet integration using the 1inch API.
The Pathfinder algorithm drives KuCoin Wallet’s API. The algorithm efficiently routes transactions through non-custodial markets and identifies the best prices for optimal execution. The integration is a big win for the team, considering KuCoin is a top 10 crypto exchange and could drive substantial volume to the network.
There were many wallet integrations in Q3, improving accessibility and adoption. 1inch now supports Zerion, Wirex, iME, D’Cent, and Orange.
Gas Refund Program
The 1inch Foundation launched a Gas Refund Program in Q4 2021, reimbursing Ethereum users through tier-based staking of the 1INCH token. The program offsets costly ETH transactions for users by offering refunds based on the total of 1INCH staked. For example, a user who staked 1,000 1INCH would be eligible for a 50% gas refund compared to a user staking 100,000 1INCH, which would merit a 95% gas refund.
Initially, these variable refunds were only available to users staking 1INCH. However, in Q3, the foundation lifted the staking requirements for a gas refund. The tier-based refund still exists, but all users are now eligible for a 5% gas refund, incentivizing more users to use the 1inch Network.
1inch Foundation Grant Program
The 1inch Foundation launched a $3 million grant program to fund the future development of the network, community, and research and analytics. The foundation released approximately $781,000 in 1INCH in 2021 to grant recipients. A new batch of grants equivalent to $308,000 in 1INCH was announced in Q3. Their purpose is to grow the 1inch ecosystem and improve the user experience.
The new grantees will focus on building products and services ranging from protocol development and network infrastructure to Web3 education and supporting the Web3 developer community.
Key Events
[1IP-09] Collect 1inch DAO Treasury revenue in 1INCH in addition to USDC
July 18, 2022 – Voting for 1IP-09 passed and has been implemented. 1IP-09 modifies the Treasury’s revenue collection strategy by switching from buying USDC with Swap Surplus revenue to buying 1INCH when prices are below $1.30. When 1INCH prices are greater than or equal to $1.70, the Swap Surplus reverts to buying USDC.
[1IP-08] Simple diversification mechanism for 1inch DAO Treasury
July 18, 2022 – Voting for 1P-08 passed and has been implemented. 1IP-08 enables the diversification of the Treasury’s composition. Authorized tokens include ETH, WETH, WBTC, DAI, and USDT.
Aave 1INCH Listing
July 30, 2022 – The 1INCH governance token was listed on Aave as a collateral asset with borrowing enabled. The executed proposal initialized the 1INCH reserve, enabled variable borrowing, set a reserve factor, and configured the reserve as collateral. Motivations include the highly liquid 1INCH markets and first-mover advantage, as 1INCH is not listed on any decentralized lending platforms. This allows existing token holders the flexibility to extract value out of their tokens through borrowing without selling their assets.
Closing Summary
1inch continues to be a key player in the market. It maintained its position as a leading DEX aggregator after onboarding more users during the bear market. The Limit Order Protocol grew the user base rapidly in the quarter. It could continue to take market share from the Aggregation Protocol as users are more sensitive to price fluctuations in the current environment. Ultimately, this shift in protocol usage can harm the growth potential of the 1inch DAO Treasury due to its revenue model. The 1inch Network remains in a strong position as it continues to onboard new chains and increases accessibility to users.
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