Decentralized Exchange: 1Inch DEX aggregator

Gepubliceerd op 29 januari 2023 om 09:30

As blockchain becomes more and more known and more applications around crypto emerge, it is also important to make it easy for newcomers. This is especially the case for Decentralized Exchanges (DEX).

1Inch is a protocol that allows the user to bring together different Decentralized Finance (DeFi) applications, compare them, and choose the best strategy to invest.

What is 1Inch blockchain protocol?

It is imaginable that beginners or more experienced investors may not see the best protocol / crypto project to invest in. Especially in the field of DeFi. There are so many protocols and projects that it is impossible to keep up. A DEX aggregator like 1Inch is trying to change this. Through the 1Inch protocol 1Inch wants to offer an overview of the best crypto protocol to invest in.

The Aggregation Protocol
1inch uses the aggregation protocol. This is a ''click and compare'' protocol of different tokens on different DEXs. This makes it possible to view and compare different tokens on different DEXs. This eliminates the need for investors to go to each DEX to see what the price is for a specific crypto. On each DEX, the price of a crypto can differ. In addition to the fact that the price can differ, the transaction costs also differ on each DEX. By using a DEX aggregator you can pick the cheapest DEX. This makes it easier for investors to invest.

Not only should you look at the price of a crypto on a DEX, but also the liquidity of a DEX and what the trading volume is. These are important factors to keep an eye on. If a DEX has little liquidity, then it is difficult to get this crypto.

So you can actually think of 1Inch as a kind of Google or a price comparator. This protocol looks for the best deals by scanning the different DEXs and extracting the information from that DEX. This protocol gathers information like the swap rate and liquidity on a DEX.

1Inch Liquidity Protocol
What exactly is a liquidity protocol? A DEX is a decentralized exchange without a central authority to monitor whether there is enough money in the exchange. At a DEX the crypto owners provide their crypto in the exchange so the exchange has enough money. Suppose you have 5 Bitcoin. You can place these 5 bitcoin in a liquidity protocol of a DEX. This allows others to invest and buy crypto on a DEX. You always give your 5 bitcoin in a trading pair, such as BTC:ETH. As a reward, you get transaction fees and LP tokens.

Some caution with DeFi protocols is very much in order. Make sure you have enough knowledge about the protocols and risks before you start using a DEX.

1Inch has a liquidity pool with multiple liquidity pools. So you can put in several trading pairs. At this moment there are about 260 pools available to deposit your crypto.

In the 1Inch protocol you select a pool by clicking on it and indicating which tokens you want to deposit. This is easy and fast.

Limit Order Protocol
In addition to the aggregator where you can compare different prices, transaction costs, liquidity, etc, 1Inch also offers a Limit Order Protocol.

A limit order is a bid that you make for a certain price. You set this price in advance. If the crypto you want to buy hits that predetermined price, you automatically sell (or buy) that crypto. You can place a limit order above the current price or below the current price. If you want to buy a crypto, you place your limit order below the current price. If you want to sell your crypto, you place your limit order higher than the current price.

The special thing about the 1Inch limit order is that when you fill a limit order, the 1Inch protocol compares the different DEXs where your limit order can be filled the fastest. This is a great advantage because your order can be filled faster than if you were only on 1 DEX. Also, with transaction costs, it can be beneficial to compare different DEXs.

1Inch governance

The governance of 1Inch will be transferred to a DAO, a Decentralized autonomous organization, in 2022. An organization that is governed not by people, but by technology. Token holders who stake the tokens will automatically have a say in the further development of the network.

1Inch is a project with a solid foundation. Stakeholders have part of the tokens because they invested in this project. The stakeholders are investment companies that are often found in large and successful blockchain projects. Pantera Capital is a well-known one.

1Inch token

The crypto/token of 1Inch is both a governance and utility token. Thus, this token has certain functions within the blockchain network. Such as having a say in the governance of the network. The 1Inch token should therefore be viewed separately from, say, a security token or an equity token. The beauty of the 1Inch token is that it is interoperable and can therefore work on other blockchains.

Tax questions

An interesting question is how a utility token should be qualified for tax purposes. Is this a property? Is this a stock? How should utility tokens be taxed? This question does not apply only on utility tokens, but also on equity tokens or security tokens. And what about cross-border payments and double tax treaties (OECD Model tax Convention, UN Model tax convention) and ATAD3? 

According to art. 4(a) of ATAD3, crypto-assets are considered 'relevant income'. Does this also include staking income or income from providing your crypto in a liquidity pool? What about lending? Does this also fall under 'relevant income' of ATAD3?

Please let me know if you have any thoughts on this! 

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