DEX Prime Brokerage
🦃VeradiVerdict - Issue #112 🦃
Happy Thanksgiving everyone! Thankful to be part of this wonderful crypto space and community!
Ethereum 2.0 Launch
Ethereum reached a significant milestone as the ETH2 deposit contract crossed the launch threshold and the Ethereum proof-of-stake chain will launch on December 1st!
If you’re interested in staking some of your ETH or even running a validator yourself to get an implied yield of 22.97%, check out our portfolio company, Staked, to get set up. Some of our team members are enjoying the novelty of running a node for the beacon chain.
DEX Prime Brokerage
This year, decentralized exchanges have allowed for more liquidity for early stage token projects and the inception of liquidity mining, where you can providing liquidity for yield. Now that there are numerous decentralized exchanges, it makes sense for an aggregator (prime brokerage) to help facilitate trading and provide best trade execution across different liquidity pools. Since fragmentation of liquidity doesn’t seem likely to disappear, platforms such as 1inch seem prime to be the user-interface for all of DeFi trading.
Traditional Prime Brokerages
In traditional financial markets, prime brokerage services are offered by investment banks and major financial institutions to facilitate active trading operations for hedge funds or other banks. Acting as middlemen, prime brokers help manage risks, build capital, coordinate secure trades, and serve as an intermediary between hedge funds and institutional investors and commercial bank counterparties. Prime brokerage services enable large-scale trading operations to occur smoothly, connecting institutional traders to global markets and investors.
Prime Brokerages for Digital Assets
Like their institutional counterparts, crypto traders have the same liquidity, security, and regulatory needs. However, technological and financial infrastructure supporting the crypto ecosystem remains disjointed and underdeveloped. Despite thousands of crypto exchanges in existence, there are limited options for interconnectedness, cybersecurity, and cross-platform efficiency. With a cumulative market cap of nearly a quarter of a trillion dollars in 2019, the growing impact and scale of the crypto ecosystem has created a pressing need for crypto prime brokerages. Several crypto brokerage services have recently emerged, offering solutions to support trading activity, arbitrage opportunities, and multi-platform navigation of the exchange ecosystem.
What is a DEX?
A decentralized exchange (DEX) is a cryptocurrency exchange that operates without the involvement of a central authority or third party. Based on the Ethereum blockchain, DEXes provide users with greater security and control of their stored or traded funds. In contrast, centralized exchanges do not rest entirely on the blockchain and are run by a third party, which collects trading fees.
Challenges of traditional DEXes:
Inefficiency: users must manually check for the best and most efficient price for a swap across all the DEXes
It is difficult to find the best exchange rates for tokens, and manually checking does not enable complex trading routes and paths
Comparing rates on all DEXes, which are not fixed, is a time-intensive process.
DEX aggregators are a more recent development to offer users the best token swap rates than any single exchange in the shortest possible time. Sophisticated DEX aggregator algorithms help instantly deliver optimal trades at the best prices, along with shielding users from price impact and decreasing the risk of failed transactions.
What is 1inch?
Launched in May 2019, 1inch is a DeFi aggregation platform that gathers liquidity from several other DEXes to provide traders the best possible exchange rates on swaps. 1inch effectively functions as a unified portal to the DEX ecosystem, drawing together different sources of liquidity and providing traders with the ability to efficiently trade across different marketplaces.
As a non-custodial exchange, the 1inch exchange does not hold onto users’ digital assets directly, but facilitates peer-to-peer trades and makes a small fee off of each transaction. 1inch splits the amount users want to exchange into several parts, distributed among multiple ‘market depths’, and then swaps each part at a different DEX. The 1inch exchange sources liquidity from 21 major protocols, including 0x Protocol, Uniswap, Bancor, Balancer, Kyber, Airswap, and more.
Chi Gas Token
1inch launched its own functional gas token, Chi, in May 2020. 1inch burns gas tokens inside transactions to lower costs — in fact, 1inch’s Chi gas token can reduce gas costs by 42%. By using gas tokens on transactions, users can save on miner fees and costs, and bid higher prices without paying correspondingly higher fees. To date, nearly 6 million gas tokens have been burned in total, creating over $2 million in saved gas cost.
To transfer value on the Ethereum network, users must pay gas fees (GWEI), similar to the fees banks charge on money transfers. As a fundamental resource, gas is included in every network transaction, with the fee paid to miners directly proportional to the gas consumed by a transaction. However, the volatile nature of gas fees makes it nearly impossible to predict the ultimate size of transaction costs. Chi gas token was created to hedge against gas fee volatility by allowing users to tokenize gas, storing gas when it’s cheap, and using/deploying gas when it’s expensive.
1inch released version 2 of its protocol in November 2020, enhanced with improvements to ensure the best rates at the fastest speed. The major components of the release are Pathfinder, an API that contains a new discovery and routing algorithm, and a more intuitive, customizable, and user-friendly UI. The new Pathfinder algorithm utilizes numerous ‘market depths’ within the same protocol, in addition to splitting a swap across multiple liquidity protocols. ‘Market depth’ is a measure of supply and demand for crypto, based on the number of open buy and sell orders.
Pathfinder can split part of the swap for a specific protocol between different ‘market depths’, which act as bridges between source and destination tokens. This helps ensure the best rates on trades across 21 different DeFi liquidity sources, and decreases response time. For example, 1inch offers a swap rate for 1 sBTC-sUSD that is nearly 98% better than Uniswap’s offer.
Pathfinder swap routes:
The 1inch platform can perform multipath swaps, and can pack, unpack and migrate collateral tokens from Aave and Compound as part of the swap path.
Why is 1inch compelling?
The 1inch exchange has innovated DeFi trading experiences, enabling users to process large transactions at optimal conversion rates. 1inch’s automated and interoperable platform is a solution to the otherwise difficult and time-intensive manual search across DEXes to find the best exchange rates for tokens and discover the most efficient swapping routes.
Newly launched 1inch v2 brings major improvements for customizable and competitively priced trades, aggregated liquidity, and lower gas fees through CHI tokens, further simplifying vital trading functions at reduced user cost.
1inch’s solution comes at a period of explosive growth of DEX trading volume, which has outperformed volume growth on centralized exchanges (CEXes). According to CoinGecko, in Q3 2020, the monthly average DEX trading volumes (of top 10 DEXes) grew by 197%, outperforming the average volume of the top 10 CEXes, which went up 35%. While CEXes still have the bulk of trading volume, DEXes have seen an impressive surge in market share from $3.8 billion in volume in July to over $30 billion in September. Uniswap continues to lead as the dominant DEX, surpassing Coinbase and expanding from 47% share of total trading volume in July to 63% in September. Combined CEX and DEX trading volume increased 88% during this period, growing by $155 billion.
By the end of 2021, 1inch is estimated to account for up to 70% of the overall DEX market. Having recently surpassed $6 billion in total trading volume, with 350k+ total swaps, 1inch has strong growth prospects as a primary aggregator for traders in the DeFi community.
- Paul V
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LETS MEET UP
Walks at the park or Zoom coffee meetings!
Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. The firm invests in equity, pre-auction ICOs, and cryptocurrencies on the secondary markets. I focus on early-stage investments and share my thoughts on what’s going on in the industry in this weekly newsletter.