LianGuaintera Partner Unraveling 1inch Fusion

Unlocking the Power of LianGuaintera Partners with 1inch Fusion

Author: LianGuaiul Veradittakit, Partner at LianGuaintera Capital; Translation: LianGuaixiaozou

In the financial sector, a subtle but profound revolution is taking place. Decentralized Finance (DeFi) has become a disruptive force, reshaping our perception of financial services and transactions. However, DeFi currently only serves a small portion of retail users, mostly investors and speculators. Institutions have indeed shown increasing interest in DeFi, but regulatory uncertainties and the lack of compliance options remain major obstacles for businesses adopting DeFi.

Since 2019, 1inch has been a pioneering force in the DeFi space, and its groundbreaking new technology, Fusion, launched in December 2022, is driving DeFi forward once again, laying the foundation for the first decentralized and compliant DeFi trading platform.

1. Introduction to 1inch Fusion

1inch Fusion is a significant improvement to existing key technologies (1inch Aggregation Protocol and 1inch Limit Order Protocol), aimed at providing cost-effective and secure swap options for crypto investors. This technology is the result of a one-month internal hackathon by 1inch, with the main goal of improving traders’ cost efficiency, security, and user experience. This is achieved through a Dutch auction order matching model, which supports user-customized order parameters (price range, duration, etc.) without the need for network fees. These orders are fulfilled by professional market makers called “Resolvers,” who are committed to ensuring that transactions are completed at the optimal settlement rate.

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2. Unique features of 1inch Fusion

Let’s take a look at the original intent behind the Fusion upgrade. Sergej Kunz, co-founder of 1inch Network, once said, “Fusion greatly improves the swapping cost of 1inch because users don’t have to pay network fees and adds additional security to protect users from sandwich attacks.”

The core of 1inch Fusion is its trading engine, which utilizes a Dutch auction model for efficient order matching. (See the image below)

In this model, users place orders within a specific price range (determined by the highest and lowest price they are willing to accept) and time range (the duration they are willing to wait for the order to be fulfilled) without gas fees. As the auction begins, the swap rate gradually decreases to the user’s specified minimum return rate until the Resolvers can process the order. Multiple Resolvers compete with each other, giving users a great chance to obtain favorable rates in swap transactions.

This Dutch auction process means that Resolvers only need to bid up to the level they are willing to accept the trade – the level at which they are satisfied with the profit margin. Therefore, when a trade occurs, it means that the transaction demands of both participating parties have been met. For this reason, being a Resolver is likely a profitable business, just like any other market-making operation, with order pricing based on the market maker’s profit potential.

With 1inch Fusion, users will enjoy three main advantages:

• Cost efficiency. Users can benefit from gas-free transactions, as the gas fees are paid by the Resolver. Additionally, the Resolver can break down the token amount into smaller batches during auctions to reduce price impact and allow users to complete orders at the expected price.

• MEV resistance. When swapping tokens on decentralized exchanges, users face the risk of becoming victims of MEV (Maximal Extractable Value) strategies and suffering significant financial losses. So far this year, DEX users have lost over $3.6 billion due to sandwich attacks (the most common form of MEV). In the Fusion mode, professional traders handle user orders using the most complex and efficient methods, protecting users’ trades from MEV and eliminating concerns.

• Deep liquidity. Considering that the 1inch Fusion is built upon the 1inch Aggregation Protocol and Limit Order Protocol, which are supported by the 1inch exchange engine, users will always enjoy the advantage of deep liquidity.

3. Role of the Resolver

As mentioned earlier, in the Fusion mode, the exchange of one token for another is performed solely by the Resolver. The Resolver on 1inch is a market maker authorized to execute orders on 1inch Fusion. On 1inch Fusion, users sign intent-based transactions, specifying their preferred terms. The Resolver can view the orders and compete to process them within the specified constraints.

The Resolver is a fully automated algorithm composed of a server app (determining when to process which orders), a set of smart contracts that execute trades, and an external account that sets the contracts.

4. Towards Compliant DeFi

DeFi promises to create a complete on-chain Wall Street – a borderless and inclusive ecosystem where individuals have greater control over their assets and financial transactions. It is precisely because of this promise that DeFi has not only seen astonishing growth but also has great potential for further development. Behind this growth, 1inch has emerged as a leading force with its disruptive liquidity aggregator. Over the past four years, 1inch has played a pivotal role in the DeFi space, providing users with a platform of almost limitless liquidity and a secure digital asset trading environment.

In order for DeFi to truly go mainstream, it must overcome the barriers adopted by institutions. Mass adoption depends on institutional acceptance of DeFi, and this prerequisite largely concerns compatibility framework requirements. While the decentralization and permissionless nature of DeFi inherently lack regulatory supervision, the industry recognizes the need for compliance measures. Today, advanced tools and technologies make it possible to implement compliance checks in the DeFi space that closely mirror those in traditional finance. This transformative shift is an important step towards fostering trust and aligning regulation in the decentralized financial ecosystem.

In order to cope with this ever-evolving landscape, 1inch actively embraces change, and its Fusion technology is a prominent example. In the 1inch Fusion ecosystem, resolvers must go through a verification process to gain the right to process swap transactions, including KYC/KYB procedures and wallet/account screening (to ensure that questionable accounts are unrelated to illegal activities).

These measures not only highlight 1inch’s commitment to building a compliant ecosystem but also demonstrate the potential for seamless integration of regulatory protocols in the decentralized DeFi field. This technology, once again pioneered by 1inch, paves the way for comprehensive compliance protocols in which all transaction participants must undergo KYC/KYB procedures and be monitored.

Developing compliance protocols within the DeFi ecosystem will undoubtedly serve as a catalyst for strengthening regulation and institutional participation. Establishing such a framework will enhance regulatory authorities’ confidence by providing them with a structured, transparent way to oversee DeFi operations. At the same time, it creates a more attractive environment for institutions as compliance measures offer a level of certainty and familiarity comparable to traditional finance.

1inch is well aware of this and has taken proactive steps to collaborate with forward-thinking regulatory agencies and jurisdictions around the world to establish the first regulated Wall Street on the blockchain. This initiative highlights 1inch’s commitment to proactive innovation as they aim to create a safe, regulated environment that encourages institutional involvement in the world of DeFi.

5. 1inch Fusion Trading Volume

1inch Fusion was launched in December 2022, and the trading volume has exceeded $14 billion. The current monthly trading volume of 1inch Fusion exceeds $1 billion, and its user-friendly platform and low-cost swap engine are attracting more and more institutional traders.

6. Why LianGuaintera Invests in 1inch

LianGuaintera invests in 1inch because of its commitment to innovation and growth, positioning it as a driving force for positive change in the global decentralized finance sector. LianGuaintera highly values the passion of 1inch’s founders and contributors, who have designed and established an ecosystem that maintains the spirit of decentralization while striving to uphold security and transparency for users. This aligns with LianGuaintera’s values of promoting the positive transformation of the global decentralized ecosystem.

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