Key Insights
- Arbitrum and the BNB Chain only experienced growth in every key metric during Q4.
- The new Fusion upgrade enables fee-less transactions, improved security against MEV, and updated staking contracts.
- 1IP-11 Staking Pods passed an important proposal that incentivizes DAO engagement and community adoption through new reward mechanisms that route a percentage of protocol revenue to 1INCH stakers.
- Although the 1inch Foundation didn’t award any grants in Q4, approximately $946,000 in 1INCH tokens have been distributed through grants in 2022.
- Approximately 250 million 1INCH tokens, or ~17% of the total supply, were unlocked on December 1.
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, Gnosis Chain, and Fantom. Data from Klaytn and Aurora are currently not included. We will be working in the coming months to improve access to this data.
Key Metrics
Performance Analysis
Network Overview
Overall volumes declined 42% YoY, while total trading volume decreased by 3.2% to $26.1 billion in Q4. The FTX collapse contributed to the increase in November’s trading volumes as users scrambled to reallocate assets on exchanges. On November 8, Binance announced a non-binding agreement to buy out the non-U.S. entity of FTX, which corresponded with the spike in volume over the coming days. Approximately 17% of total trading volume in Q4 occurred from November 8 to November 10, immediately following the contagion.
For the third consecutive quarter, Layer-2 (L2) solution Arbitrum grew in trading volume, with an increase of 44% QoQ. Additionally, the BNB Chain experienced growth in volume for the first time in 2022, increasing from $1.1 billion to $1.29 billion in Q3. These were the only two chains to see any growth in trading volume during Q4.
Daily transactions were flat (0.1%) in Q4 but ended with 4.8 million, above the 2022 4.6 million average. Relative to trading volume, transactions were only down 13% YoY. Additionally, L2s Optimism and Arbitrum grew quarterly transactions by 153% and 97%, respectively. These two chains experienced growth in transactions every quarter in 2022.
In Q4, FTX contagion shifted user behavior toward the Aggregation Protocol (AP). AP volumes remained relatively stable QoQ (-0.61%), but volumes on the Limit Order Protocol (LOP) decreased by 33% as more users sought to urgently execute market orders. However, LOP dominance grew substantially toward the end of December as markets fell to Q1 2021 lows. The increase in LOP volumes is likely due to users setting favorable limit orders with the anticipation of a nearing bottom.
On average, Ethereum owned approximately 86% of the total trading volume market share in 2022. This trend should continue in 2023; however, 1inch usage on Arbitrum has been growing aggressively since its launch. Arbitrum volume dominance has grown double digits since the beginning of the year and could very well threaten Polygon’s and BNB Chain’s standing in 2023. The growth is attributed to the increased usage on the network, DeFi in general, and could also be a result of the ongoing speculation of an Arbitrum airdrop. Time will tell if this growth sustains.
Network Users
Despite widespread erosion of user confidence following the collapse of centralized exchange FTX, it appears the 1inch Network benefited as unique users grew by 13% to over 2.4 million in Q4.
While users of the BNB Chain soared by approximately 52% QoQ to 778 million users, the growth in user base on L2s Optimism and Arbitrum continued to outpace other chains in Q4 with 174% and 64%, respectively. Polygon continued to trend downward for a second quarter as its market share of users rapidly declined (-23%) QoQ.
Micro Analysis
Overall trading volumes on Ethereum declined QoQ. However, in Q4, Small and Mid Retail wallet profiles grew by 13% and 8%, respectively. In addition to the retail wallet growth, their corresponding volumes grew by 10% and 3%, respectively. 1inch trading volumes show a clear power law distribution, with a small percentage of wallets responsible for an overwhelming majority of the volume. The growth in Small and Mid Retail users and activity is a strong signal retail users perceive 1inch as a robust platform within the ecosystem.
Q4 ended with 676,000 unique wallets, trading over $2.3 billion in volume on the three chains. BNB Chain grew by 170,000 wallets in the quarter, taking a substantial amount of market share from Polygon in Q4. Small Retail and Whale wallets saw the largest growth, with 27% and 136%, respectively. Notably, Small Retail, which accounts for wallets with less than $10,000 in trading volume over the quarter, grew by $25 million. This growth strongly evinces that Small Retail users traded off of centralized exchanges due to a loss of confidence.
As expected, token swap pairs stablecoins and blue chips drive the most volume to the 1inch Network. USDC pairs grew by approximately 10% QoQ to $16 billion, accounting for nearly a third of the overall trading volume. USDT pairs, however, saw trading volumes increase by 70% QoQ to $12.7 billion. In Q4, the top trading pairs on Ethereum, BNB Chain, Polygon, and Optimism were USDT-USDC and USDT-BUSD.
The 1inch Network’s primary goal is to facilitate the most efficient trade routing through various protocols using its Pathfinder algorithm. In Q4, Curve exceeded Uniswap in trading volume for the first time. Export volumes grew 2.6% from $22.5 billion to $23.1 billion in Q4. Uniswap, Curve, Balancer, and CoW routed more volume in the prior period but remained substantially down from Q2, with total export volumes down 51% YoY.
1inch DAO Treasury
Swap Surplus (i.e., revenue for the 1inch DAO Treasury) is a result of positive slippage from token swaps on the AP. Protocol revenue for the 1inch DAO Treasury spiked mid-November, following the volatility caused by the FTX collapse. Trading volumes soared on the AP during this period and, combined with dislocated markets, allowed the AP to capture Swap Surplus, a net benefit for the Treasury. As markets experienced new lows following the FTX collapse, volatility seemingly settled and LOP dominance reached new highs. This increase in dominance benefits users, as they secure strategic price execution. However, Swap Surplus is not captured when trading on the LOP, which prevents the 1inch DAO Treasury from accruing additional protocol revenue.
With the implementation of 1IP-09 in Q3, the Treasury now accumulates 1INCH tokens when its price falls below $1.30. Since 1INCH has been trading below $1.30 for the better half of 2022, 296,000 1INCH tokens were added to the Treasury in Q4, valued at $249,000. Additionally, 226 WETH valued at $260,000 and $298,000 in USDC, DAI, and USDT were added to the Treasury in Q4. The Treasury balance grew by 4% in USD terms QoQ and 268% YoY, bringing its year-end balance to $16.4 million.
Qualitative Analysis
Protocol Upgrades and Integrations
The 1inch Labs released two core protocol updates in Q4; the Aggregation Router v5 was merged with the Limit Order Protocol v3, allowing users to benefit from an increase in gas efficiency. Gas costs are expected to be at least 10% lower than other DEX offerings.
The improvements include new interaction logic, pre- and post-interactions, and a feature informing users about any errors prompting why a specific operation failed. These implementations have been audited by Consensys, OpenZeppelin, Peckshield, and others.
The 1inch Network also released Fusion at the end of December, enabling users to place orders with Maximal Extractable Value (MEV) protection and without paying any network fees. Sending swaps directly to validators bypasses the memory pool (mempool) and prevents bots from identifying opportunistic MEV trades. Fusion mode offers three options: Fast, Fair, and Auction, built on top of the AP and LOP. Fusion mode is only available on Ethereum, Polygon, and BNB Chain but will eventually roll out to other supported chains.
Wallet Integrations
The user experience and interface are critical to onboard customers. The 1inch Pathfinder algorithm continues to establish new wallet relationships with DeBridge, XDeFi, XYFinance, Fizen Wallet, and others. This trend is expected to continue, providing users access to deepened liquidity and efficient trade execution.
1inch RabbitHole
This new feature helps protect MetaMask users from MEV or “sandwich attacks” when they swap on 1inch. These attacks are a common type of front-running attempt facilitated by bots who monitor pending transaction confirmations in the mempool. If the bot identifies an opportunity, it will initiate transactions before and after (sandwich transactions) a targeted (user) trade. This causes an anticipated spike in gas fees paid to the targeted user while the bot profits.
Commonwealth Governance
A custom-built platform for the 1inch ecosystem enables a crypto-native token forum to vote, discuss, fund projects, snapshot integration, and discourse import, all of which improve governance and the user experience. The 1inch Commonwealth forum went live on Dec. 16, 2022.
1inch Resolver Incentive Program
The new incentive program launched on Dec. 24, 2022. This program incentivizes resolvers, who are responsible for filling Fusion orders and using the AP. Resolvers will now be able to receive gas refunds as part of this new program. The monthly compensation for resolvers is capped at 1 million 1INCH, and the program will run until a total of 10 million 1INCH funds have been distributed. This program will replace the existing Gas Refund Program that ended on Dec. 31, 2022.
Partnerships
Unstoppable Domains
Partnering with Unstoppable Domains enables new and existing 1inch Wallet users to enter human-readable domain names (e.g., JohnDoe.Wallet) for buy and send transactions. This removes a layer of friction, as default wallet addresses are a string of alphanumeric characters which are difficult to memorize and could introduce errors when sending transactions.
Unstoppable Domain names are minted NFTs without any renewal or minting fees. The NFT can be used as a wallet address and digital identity across various dapps.
Revolut
By taking advantage of more than 20 million Revolut customers worldwide, the launch of the 1inch’s Learn and Earn education program will increase awareness and provide the necessary tools to navigate the space. Participants are awarded 1INCH tokens by progressing through the new educational series aimed to empower users and help them gain mastery.
Key Events
[1IP-10] 1inch DAO SAFE Airdrop Claim
The 1inch DAO Treasury Gnosis Safe is eligible for an airdrop of 10,128.65 SAFE with approximately half immediately available, while half vests over the next four years. The purpose of the proposal is to facilitate the transaction needed to claim the SAFE airdrop and allocate it to the 1inch DAO Treasury.
[1IP-11] 1inch Staking Pods
The proposal aims to improve the staking system to incentivize various activities on the network. Modular Delegation Rewards and Generic stINCH rewards should bolster engagement within the community while driving adoption. The proposal introduces:
- Incentivized time-locked 1INCH staking
- Permissionless delegation pods
- Reward distribution compatibility
- 50% of all current and future 1inch DAO protocol revenue shall be distributed to stakers
[1IP-X] Governance Community Participation Incentives
Discussions around boosting governance activity on 1inch by incentivizing community members to present proposals and receive rewards. Initial distribution of $12,000 in USDC tokens for six months (2,000 per month).
Closing Summary
The 1inch Network continues to maintain its position as a leading DEX aggregator while emphasizing the improvement of the user experience and increased access to liquidity. 1inch empowers the community by reducing friction to the user experience and incentivizing engagement and adoption through novel staking contract updates by the DAO. To realize these goals, 1inch launched the Fusion upgrade, partnered with Unstoppable Domains, and passed 1IP-11 Staking Pods. 1inch maintains its strong position in the market and will continue to onboard new chains and solutions, with expectations to integrate with zkSync in the future.
