Fusion
VeradiVerdict - Issue #278
Bridging the Gap between DeFi and TradFi with 1inch Fusion
In the world of finance, a subtle but consequential transformation is underway. Decentralized Finance (DeFi) has emerged as a disruptive force, reshaping the way we think about financial services and transactions. Still, DeFi is only serving a small fraction of retail users mostly consisting of the degen and speculative traders. Institutions do show an increasing interest in DeFi, but the regulatory uncertainty in DeFi and the lack of compliant options remain a major obstacle for corporate adoption.
1inch, a DeFi pioneer since 2019, is now enhancing the DeFi industry again with Fusion, its new groundbreaking technology unveiled in December 2022, which will be the foundation for the first decentralized and regulatory-compliant DeFi trading platform.
What is 1inch Fusion
1inch Fusion represents a significant enhancement of the key existing technologies - the 1inch Aggregation Protocol and the 1inch Limit Order Protocol, designed to provide crypto investors with cost-effective and secure swap options. The technology was a result of a month-long internal hackathon at 1inch, with the primary objective of improving cost efficiency, security and user experience for traders. This is accomplished by implementing a Dutch auction order matching model, allowing users to customize their order parameters (price range, swap duration etc.) and without having to pay network fees. These orders are fulfilled by professional market makers called Resolvers dedicated to securing the most favorable settlement rates for swaps.
What makes 1inch Fusion special?
Explaining the initial intent behind the Fusion upgrade, 1inch Network co-founder Sergej Kunz stated: “Fusion makes swaps on 1inch dramatically more cost-efficient, as users won’t have to pay network fees, plus, an extra layer of security is added, protecting users from sandwich attacks.”
At the core of 1inch Fusion is its swap engine, featuring a Dutch Auction model for effective order-matching. (see below)
In this model, users will place a gas-less order with a certain price range (users decide the maximum and minimum they are willing to receive) and time range (the time users are willing to wait for order fulfillment). As the auction kicks off, the swap rate gradually decreases to the minimum return specified by users until it becomes profitable for Resolvers to fill the order. Multiple Resolvers compete to fill the orders, increasing the chances of users receiving a favorable rate on their swaps.
The Dutch-auction-esque process means Resolvers only need to bid up to the point where they are willing to accept the trade as well — in other words, the point where they are comfortable with the profit margin. Thus, when transactions occur, both participants’ trade requirements have been met. For this reason, being a Resolver is likely to be a profitable business like any other market making operation where orders are bid upon based on the market maker’s point of profitability.
On 1inch Fusion, users enjoy 3 key advantages:
Cost-Efficient. Users benefit from gas-free transactions since it is paid for by the Resolvers. Additionally, Resolvers can break down the token amounts into smaller batches during the auction reducing the price impact and allowing users to fulfill orders at their desired prices.
MEV-Resistant. When making swaps on decentralized exchanges, users face the risk of falling prey to MEV (Maximum Extractable Value) strategies, resulting in significant financial losses. To date in 2023, DEX users lost the equivalent of over $3.6b to sandwich attacks, the most common form of MEV. In Fusion mode, professional traders who fill users’ orders use the most sophisticated and efficient method to safeguard users’ trades from MEV removing concerns for users.
Deep Liquidity. Given that the 1inch swap engine powering 1inch Fusion is built on top of 1inch’s Aggregation Protocol and Limit Order Protocol, users benefit from deep liquidity at all times.
Resolver role
As explained above, in Fusion mode, the transaction for exchanging one token into another is executed only by a Resolver. Resolvers on 1inch are the market makers who have access to execute orders on 1inch Fusion, where users sign intent-based transactions specifying their preferred terms. Resolvers can see the orders and compete to fill them, within the constraints specified by the user.
A Resolver is a fully automated algorithm that consists of a server app (that determines which orders to fill and when), a set of smart contracts that execute trades and an externally owned account that sets up the contracts.
Towards a regulatory compliant DeFi
DeFi takes the promise of creating an entire on-chain Wall Street – a borderless and inclusive ecosystem where individuals have greater control over their assets and financial operations. For this reason DeFi has not only enjoyed exceptional growth but continues to thrive. Behind this growth, 1inch stands out as a leading force through its revolutionary liquidity aggregator. Over the past four years 1inch has played a central role in the DeFi space, offering its users a platform for almost limitless liquidity and a secure environment for trading digital assets.
For DeFi to become truly mainstream, it must cross the barrier of institutional adoption. The journey to mass adoption depends on institutions embracing DeFi, and this imperative largely revolves around the need for a compliant framework. While the decentralized and permissionless nature of DeFi inherently lacks regulatory oversight, the industry recognizes that compliance measures are necessary. Today, advanced tools and technology make it possible to implement compliance checks in DeFi closely align with those in traditional finance. This transformative shift represents a significant step towards fostering trust and regulatory alignment within the decentralized financial ecosystem.
In response to this evolving landscape, 1inch has proactively embraced change, prominently demonstrated through its Fusion technology. Within the 1inch Fusion ecosystem, to obtain the right to resolve swaps, a Resolver has to go through a verification process, which includes KYC/KYB and wallet/account screening (to make sure the account in question isn’t linked to any illicit activities).
These initiatives not only highlight 1inch's commitment to building a compliant ecosystem but also showcase the potential for the seamless integration of regulatory protocols within the decentralized DeFi space. This technology, pioneered by 1inch yet again, is paving the way for developing a comprehensive compliance protocol where all the participants of the trade go through KYC/KYB procedures and are monitored.
The development of a compliance protocol within the DeFi ecosystem will surely be the catalyst for increased regulatory engagement and institutional participation. The establishment of such a framework will give confidence to regulators, offering them a structured and transparent way to oversee DeFi operations. Simultaneously, it creates a more inviting environment for institutions, as the compliance measures provide a level of assurance and familiarity comparable to traditional finance.
1inch is very aware of it and is already taking aggressive steps to establish the first regulated on-chain Wall Street, collaborating with forward-thinking regulators and jurisdictions around the world. This initiative highlights 1inch's commitment to positive innovation, aiming to create a secure and regulated environment that encourages institutional participation in DeFi.
1inch Fusion by numbers
Launched in December 2022, 1inch Fusion has surpassed $14billion in volume. 1inch Fusion is currently executing more than $1B monthly volume and its user friendly platform and cost effictive swap engine is attracting more and more institutional traders.
Pantera and 1inch
Pantera investment into 1inch was driven by 1inch commitment to innovation and growth positioning them as a driving force for positive change in decentralized finance globally. Pantera recognized the passion demonstrated by 1inch founders and contributors to design and build an ecosystem that maintains the ethos of Decentralization yet striving to uphold the security and transparency for its users. This aligns with Pantera’s values to foster positive transformation in decentralized ecosystems worldwide.
If you want to know more about 1inch, you can find more information on their website at
https://1inch.io/
and follow their twitter account @1inch.
- Paul Veradittakit
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ABOUT ME
Hi, I’m Paul Veradittakit, a Managing Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. I’ve been in the industry since 2014, and the firm invests in equity, early stage token projects, and liquid cryptocurrencies on exchanges. I focus on early-stage investments and share my thoughts on what’s going on in the industry in this weekly newsletter.
I hate this design, it caused me to lose 2 ETH in a transaction (compared to using Curve directly) just because I didn't pay attention and used Fusion with its default settings. It's disgusting. I guess the increase in trading volume is only because it defaults to Fusion and the cryptocurrency market has been recovering in recent months.