Discovering the Secret to 1inch’s Exceptional Performance in the World of Decentralized Finance

What held people back from executing trades across various liquidity pools within a single transaction? That pivotal question catalyzed Sergej Kunz to build 1inch the rise of one of the most effective DEX aggregators in the decentralized finance space. Initially conceived during a hackathon, it swiftly transformed into a revolutionary tool that expanded the possibilities of decentralized trading.

In this conversation, 1inch's co-founder discusses his journey from analyzing smart contracts on YouTube to spearheading innovation in DeFi. He elaborates on methods for staying ahead in a competitive market, tackling MEV attacks, and the promising future of intent-based swaps, while providing insights into the rapidly changing Web3 ecosystem.

Can you share your journey to Web3?

I launched my YouTube channel primarily to share insights on crypto mining. During one of my weekly live sessions, I ventured into the realm of Ethereum smart contracts. I observed that various Ponzi schemes were promoting specific contracts as guaranteed money-makers. My goal was to inform viewers about the risks of trusting such schemes since a smart contract simply operates like a program that can be scrutinized.

Yet, I quickly discovered that many of these contracts were indecipherable due to their creators failing to provide the source code. Thus, I took it upon myself to decompile them. It was during one of these live streams that my future collaborator, Anton Bukov, reached out to me, offering his extensive expertise in smart contracts. That marked the beginning of my deep dive into the Ethereum ecosystem.

After dedicating six months to YouTube streams on smart contract security, Anton and I decided to immerse ourselves in hackathons. That decision truly kickstarted my journey into Web3 and blockchain technology. Over the span of 14 months, we traveled globally, participating in around 17 hackathons and developing a variety of projects.

I clinched several hackathon victories, including contests in Stuttgart, my hometown, and other competitions organized by Daimler and Porsche. We also secured significant awards from Ethereum Global, the main host for Ethereum-oriented hackathons. The prizes from these events enabled us to continue our travels and competitions, allowing me to fully engage with the Web3 movement.

What is the most overlooked technical hurdle when it comes to building an efficient aggregator in the DeFi sphere?

The greatest hurdle is maintaining a continuous stream of innovation. Our adventure began with a basic proof of concept during the Ethereum Global Hackathon in New York back in 2019. We posed the question: why isn't there a way for individuals to execute trades that draw from multiple liquidity sources in a single transaction?

This method mitigates pricing effects, enabling users to extract greater value compared to trading through a solitary liquidity source. At that time, we had options like the first version of Uniswap, Kyber, and the Bancor Network. We tested our concept, and it proved successful. Some recognized its potential, while others remained skeptical.

What measures have been implemented to address MEV (Maximum Extractable Value) challenges affecting DeFi traders?

In 2022, I personally endured the impact of MEV attacks and suffered a loss of approximately 10 ETH, which was a tough experience. This spurred me into action. I engaged with our team to discuss the issue, and we brainstormed until we created a protocol designed to safeguard users against MEV from the ground up.

We named it Fusion. Essentially, it operates as an intent-based swap protocol. Users only need to specify their goals, freeing them from the complexities of execution details. They can set required conditions, and an executor—generally a market maker or arbitrage trader—will perform the trade based on those predefined terms.

Additionally, we have expanded our intent-based model to facilitate cross-chain swaps. Since last September, users can seamlessly trade assets across different blockchains in a fully automated, custodial-free way. This ensures that in the event of an issue, users maintain complete control over their assets. The industry is undoubtedly progressing positively, with intent-based architectures becoming increasingly standard.

In the face of intensifying competition among DEX aggregators, how do companies set themselves apart aside from just offering competitive pricing?

Numerous projects are attempting to replicate our approach—whether it's with intent-based swaps, traditional swaps, or cross-chain exchanges. This competition can be beneficial for users.

I've encountered pitches where teams proclaim they are developing a 'more efficient version of 1inch,' but more often than not, I haven't observed anything genuinely superior. Nevertheless, it's encouraging to see individuals investing time and resources into enhancing the DeFi ecosystem.

We thrive amidst competition. Our hackathon background fuels our love for challenges that help us stay ahead. Currently, our Dubai team—consisting of about 30 members—is engaged in an internal hackathon to implement Solana support for 1inch. Consider it a little sneak peek for you!

Ultimately, competition drives our innovation, and we welcome the evolution of the ecosystem.

How do decentralized exchanges address the risks associated with malicious liquidity pools?

Our protocols facilitate atomic transaction execution, which safeguards against liquidity pool owners withdrawing funds during an ongoing transaction. This is a key security measure for users who engage with our platform.

As for suspicious funds, we have a compliance team that actively monitors wallet activities. If a hacker attempts to inject stolen funds into a liquidity pool, we possess the ability to block those transactions. Our resolvers—market makers conducting intent-based swaps—are also subject to scrutiny. Should they accept tainted funds, they will be barred from our network.

This self-regulation proves vital in preventing malicious entities, like those affiliated with North Korean hacking operations, from laundering money through decentralized finance.

What implications does institutional adoption of DeFi have for the future of DEX aggregators?

The entry of institutions into the DeFi space brings an influx of liquidity and trading volume. We’re witnessing Swiss banks beginning to offer crypto trading along with custody services. Additionally, several companies in Germany are creating B2B solutions enabling brokerage systems to provide crypto trading.

While institutions predominantly utilize centralized exchanges at present, there is a noticeable uptick in DeFi adoption. To bolster this, we must establish improved compliance protocols, ensuring that institutions engage only with legitimate liquidity.

What macroeconomic forces could critically influence DeFi adoption?

Pinpointing specific factors can be challenging—if anyone had clear insight, we would all be preparing for it. Nonetheless, I genuinely believe that non-custodial wallets will soon become as ubiquitous as the internet. In the past, many underestimated the need for an internet presence, but now it permeates our lives. Likewise, in the future, full asset ownership through non-custodial wallets will be common.

We're already observing trends like tokenized real estate, allowing individuals to invest in fractions of properties for as little as $50. This democratizes investing. Additionally, DeFi opens avenues for new financial models, such as leveraging tokenized stocks as collateral for loans.

Although widespread adoption will take time, education remains paramount. We must focus on enhancing user experiences and developing safer architectures to make DeFi readily accessible.

What are the pivotal trends within Web3 and DeFi today, and how do they diverge from last year's landscape?

Meme coins have surged in popularity, though they come with significant risks. While they draw in new participants, they can also lead to letdowns when people incur losses.

We’re noticing a rise in blockchain projects integrating AI, allowing users to earn cryptocurrency by tagging data for AI training. Furthermore, payment infrastructure is evolving, witnessing the emergence of crypto-based subscription models.

At 1inch, we've developed a Web3 SaaS solution akin to Google Cloud, specifically tailored for blockchain. Users can create accounts and process payments for API services directly using cryptocurrency. The pace of innovation is exhilarating, and we are proud to be at the vanguard of this evolution.