First Published on @IOSG Medium on Aug 21, 2020

Recently, we have invested in 1inch and we are proud to embark on this journey in supporting this ambitious team.

In this article, we explain our take in the current DeFi ecosystem and our reasoning behind this investment.

The clear and present challenge

The pain points for DEX are the miss of mainstream cryptocurrency and poor liquidity and depth. The current DEX is basically concentrated in the Ethereum ecosystem and mainly trading ERC20 tokens, which leads to currencies such as BTC and ZEC that have their own main chains rarely traded on DEX. Liquidity also remains a key concern. DeFi liquidity is fragmented across several pools. Each DEX’s liquidity pool for a particular token has varying depths. Checking every DEX for the best price is insane, especially for big orders.

However, with the rise of concepts such as liquidity mining and AMM automatic market maker, the depth of DEX has gradually increased.

AMMs such as Bancor and Uniswap allow for the swap of assets with no need of matching orders and ensure constant liquidity when traders deposit their assets into it. The recent rise of “liquidity mining” also boosted the liquidity in DeFi through feeding liquidity providers with protocol’s newly minted native token in addition to regular returns. Currently, the gap with CEX is getting smaller, and it can even surpass CEX in some currencies, such as Curve’s stable currency exchange.

The figure below shows DEX historical market share. AMMs Uniswap and Curve contributed the most to June’s volume figure. Together, they contributed to 53% of the overall volume recorded.

1inch is tackling the problem:

1inch is a DEX aggregator with smart running at back-end. It offers users the best price, lowest slippage and for a wide range of ERC-20 tokens. The integrated platforms include Uniswap, Kyber Protocol, Aave, Balancer, 0x, Oasis etc. As a liquidity aggregator, 1inch helps route trades from all around the DeFi sector. It recently has emerged as an essential part of the booming decentralized finance (DeFi) movement, which is shown below as the digital assets swapped on 1inch.exchange per month.

Many people concerns that splitting a swap to numbers of transaction order among DEXes would lead to higher gas cost. Many believe it would be especially painful/expensive for small amounts around 5$ and less. In order to deal with this problem, 1inch’s latest upgraded algorithm is respecting gas costs for each exchange and lending tokens. More importantly, 1inch team launched Chi, a next-generation Gastoken that allows users to significantly save on gas.

1inch has recently launched Mooniswap, its own liquidity pool. Mooniswap aims to solve current flaws in some AMM models that result in “high slippage on large trades and impermanent losses” for traders and liquidity providers. This led to the launch of new projects like Bancor V2 with enhanced AMM models. Here is the comparison of the 2 designs.

Our bet in DeFi ecosystem: Since its founding in 2017, IOSG Ventures has been researching and exploring open finance & DeFi world. Until now, we have 9 investments in DeFi and they are specifically:

• Stablecoin: MakerDAO
• Dex: Kyber Network
• Synthetic asset platform: Synthetix
• Dex aggregator: 1inch
• Decentralized financial contracts platform: UMA
• Dex: DDEX
• First DeFi lending platform based on Cosmos: Kava
• Asset management protocol based on Synthetix: dHedge
• Decentralized bitcoin backed ERC-20 token: tBTC

We have been focusing DeFi ecosystem and have developed the following map:

We believe that DeFi protocols play as the financial-service middleware which is a bridge that transmits the security value of the base layer native token such as ETH to the interface layer. Based on the stablecoin protocol such as MarkerDAO and the decentralized exchange protocol such as 0x protocol, we can see various financial primitives are invented and the financial protocol’s native token also plays a big role in value-adding for the whole crypto network. More importantly, DeFi protocols improves the decentralized collaboration capability or the efficiency of token value transmission.

From a vertical perspective, the user’s rights and interests are tokenized from the bottom asset to the upper layer, showing the rights and interests in different tokens, and finally flowing to the user aggregation layer on top. A good example is that Ether can be collateralized in the Maker’s Vault and then users can borrow stable currency Dai, and Dai can enter the Compound or Aave’s smart contract for re-collateralize, with cDai or aDai representing equity, and the top-level return maximization tool such as RAY can automatically distribute user equity to different loan agreements to obtain maximum benefits.

From a horizontal perspective, decentralized exchanges, oracles are the basic application modules that run through all projects. Decentralized exchanges provide token exchanges services and oracles provide a price-feed mechanism for each DeFi protocol. They serve as the basis for DeFi.

Building a Cohesive & Collaborative Ecosystem

We believe that, blockchain ventures are ultimately community projects. The team builds the initial infrastructure and it takes a strong and cohesive community to take it to the next level. ***IOSG Ventures is looking forward to working closely with the 1inch team in nurturing partnerships and collaborations with business in China as well as bold and innovative developer community. ***In particular, we feel strongly about open-mindedness and teamwork, especially in this fledgling blockchain sector, and we strive to work together with different blockchain projects, venture builders, and business in making blockchain as an infrastructure a reality.

Please reach out to us anytime if you would like to collaborate!