What are the advantages of the rapid DeFi transaction aggregator? How to capture value?
Editor's Note: This article comes fromChain News ChainNews (ID: chainnewscom)Editor's Note: This article comes from
Chain News ChainNews (ID: chainnewscom)
, Author: Pan Zhixiong, Lianwen Research Director, published with authorization.
The decentralized transaction aggregator, which was not valued by venture capital institutions at one time, is gradually becoming another decentralized financial (DeFi) application that is popular in the market after decentralized exchanges, lending platforms and oracles .
The reason is easy to understand. With the increase in the number of Ethereum decentralized exchanges (DEX), liquidity is dispersed to various agreements or fund pools, resulting in an increase in the overall transaction cost of users, and the emergence of aggregators, in addition to significantly optimizing transaction costs, can also Improve user experience.
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Why do you need a deal aggregator?
In the DeFi ecosystem of Ethereum, transaction protocols are the earliest and most core components. Coupled with the emergence of the AMM (automatic market maker) model and the liquidity mining model, the transaction liquidity on the chain has undergone a qualitative leap. Many long-tail or niche tokenized assets can take advantage of this set Rules build liquidity and facilitate price discovery.
The advantage is that with the increase of the overall liquidity, native users of the blockchain do not need to transfer assets to a centralized exchange, and can directly complete the exchange of tokens with less loss in the Ethereum network, and at the same time It also protects the privacy of users without the need for KYC review.
However, with the increase in the number of trading protocols on the chain and the adoption of different AMM rules by various protocols, the capital pool and liquidity are distributed among different protocols, such as Uniswap, Balancer, Bancor, Curve, Kyber, 0x, etc. Compared with trading on a single exchange, users trade on each protocol at the same time, and the transaction cost (slippage) may be lower. For example, if a user wants to buy ETH with 1 million USDT, in the scenario of a centralized exchange, he can consider going to multiple centralized exchanges to find the lowest price pending order for trading; if he switches to the blockchain, he can transfer assets Submit to protocols such as Uniswap, Balancer, 0x, Kyber, etc., and find the best price from them, or deal in multiple agreements in multiple times.
This is the value that transaction aggregation tools can provide: provide users with a convenient and simple service, collect and find the optimal transaction path from various liquidity providers in the market, and reduce the comprehensive transaction cost of users.
This is even more important for transactions with large capital volumes. After all, every one percent or one thousandth of the cost saved may be a huge amount. These tools are similar to the "trade execution" tools in the traditional financial industry. Through various algorithms provided by service providers and combined with the specific needs of users, they save users overall transaction costs.
In contrast, the smart contract logic of the transaction aggregation tool is more complicated, because the transaction path is formed through the combination of multiple DEXs, so the transaction aggregation tool will consume more computing resources on the chain and the cost will be higher. Coupled with the recent and long-lasting high Gas, users cannot ignore this factor.
But this does not mean that the transaction aggregation tool is worthless for small transactions, because its front-end aggregates the amount and price of liquidity everywhere for users, and users can use them to find the agreement with the lowest price, and then directly go to the corresponding agreement directly trade. In this scenario, the transaction aggregation tool can also act as a "price comparison tool".
Taken together, transaction aggregation tools can provide users with additional value under certain conditions. However, for assets such as ETH whose liquidity is mainly on centralized exchanges, if the transaction volume is too large, it is recommended to trade on decentralized exchanges or off-site. However, there are currently many long-tail and DeFi tokens with better liquidity in DEX, so the transactions of these tokens are more suitable for on-chain transactions.
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List of on-chain transaction aggregation tools
Currently, Ethereum-based on-chain transaction aggregation tools include 1inch, Matcha, ParaSwap, Totle Swap, Nuo, DEX.AG, etc.
Judging from the data performance in the last year, among the three aggregation trading tools (1inch, ParaSwap and DEX.AG) that have been connected to DeBank, 1inch is the earliest start and the fastest growing, and the transaction volume of the others is only Fraction of 1inch. Therefore, 1inch is currently the most noteworthy case among transaction aggregation tools, and it is also the main reference object of this article.
For transaction aggregation tools, the most important thing is the transaction path algorithm, which is the core part of building the competitiveness of the entire product. The calculation complexity of this part is generally high, and all transaction pairs involving more than 10 DEXs need to be completed off-chain, and then the transaction path is submitted to the chain for execution.
However, the current algorithm is not a difficult technical barrier. After all, the optimal transaction path can be found after collecting data from multiple DEXs. For example, because 1inch has access to more DEXs, the overall transaction execution algorithm is better than other DEXs. The advantage is greater, but the experience is slightly worse.
Therefore, the comprehensive competitiveness of the product may need to start from other aspects in order to continue to provide users with efficient transaction execution algorithms and maximize transaction efficiency. For example, developers’ rapid iterative optimization of transaction execution algorithms, keeping up with the industry’s “rhythm and hotspots”, better user experience, or gradually establishing proprietary or private liquidity pools may be several directions worth exploring.
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The foundation of transaction aggregation
The popularity of automatic market makers (AMM) and liquidity mining mechanisms has significantly increased the liquidity and transaction volume of DEX, which is also the most important basis for the rise of transaction aggregation tools.
Therefore, the total lock-up volume hosted in the agreement is the most direct reflection of liquidity. After Uniswap went online at the end of 2018, the peak lock-up volume reached nearly 90 million U.S. dollars. Later, the launch of the V2 version caused the lock-up volume to fall, but the overall volume is still maintained increase.
In the middle of this year, the liquidity mining mechanism launched by Compound has allowed Balancer and Curve, which are similar to Uniswap, to seize a wave of trends and reward additional governance tokens for market makers who provide liquidity, leading to overall The lock-up volume has grown by leaps and bounds, with a peak of more than 750 million US dollars.
Therefore, after AMM and liquidity mining stimulate the growth of on-chain liquidity, DEX can finally handle larger-scale transaction needs, and transaction aggregation tools can also exert more practical value.
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But liquidity is still scattered everywhere
For example, both Uniswap and Oasis have ETH/DAI liquidity. For a user who needs to exchange DAI for ETH (such as tens of thousands of dollars), it may be more convenient to choose to trade in two places at the same time than in one DEX. cost-effective.
Another feature is that each DEX has different preferences for assets. For example, Curve is more suitable for the exchange between stablecoins. For example, USDT and DAI can have better exchange prices, while other DEXs cannot. So if the user needs to exchange ETH for USDT, the best path may be to exchange ETH for DAI from Uniswap first, and then exchange DAI for USDT through Curve. The transaction aggregation tool can combine the above two transactions into one transaction at the same time, which may also reduce the gas consumption and potential price fluctuations on the chain.
Therefore, for transaction aggregation tools, the most important value is to find the best liquidity and the best price from everywhere, and then execute the conversion at one time.
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Advantages of Deal Aggregators
When WeChat and Alipay code scanning payment first appeared, many merchants had two code scanning tools. Users who use WeChat need to scan the QR code with a green background to pay for the merchant; users who use Alipay need to scan the QR code with a blue background to pay for the merchant.
Later, a kind of "aggregated QR code" appeared. Users can scan the code with Alipay or WeChat, and they can pay, which reduces the process of user judgment, and they can use whichever they want. This is the most intuitive value that "aggregation" can bring, which improves the user experience and hides complex logic where users cannot see it, and it is judged and processed by machines and algorithms.
Of course, if placed in the context of this article, transaction aggregation tools can also provide some other value, such as:
Provide users with a tool to compare prices;
Further reduce Gas consumption and save costs through additional mechanisms (currently only 1inch provides);
Provide better user experience than other DEX;
Maximize the user's transaction efficiency through the transaction execution algorithm, and exchange more target assets.
Price comparison tool
Therefore, for price-sensitive small-amount exchanges, it is recommended to use 1inch to learn about the DEX options with the best liquidity for two specific tokens, and then directly go to the DEX website to operate.
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Compare Best Prices
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For some exchange needs, the user has to perform multi-step operations to achieve it. For example, the two assets exchanged do not appear in the same fund pool.
For example, there is no BUSD fund pool in Uniswap, and any need to exchange other assets for BUSD needs to be transferred through other assets. If you want to exchange ETH for BUSD, the path you can choose is to exchange ETH for USDC in Uniswap, and then exchange USDC for BUSD in Curve.
For this type of demand, users can not only use the transaction aggregation tool to improve the experience, but also save the overall Gas consumption by aggregating multiple operations into one execution.
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For 1inch, they provide users with a further on-chain fee saving function, and other companies can actually follow up and support it.
This solution comes from a solution called GasToken a few years ago. They innovatively used a special mechanism of the Ethereum network to mint tokens called Gas Token when the Gas price was low, and then when the Gas price was higher When the token is destroyed and the previously saved data is released, then the system will be compensated for the release of space by the user, reducing the total gas expenditure in the second transaction.
1inch has been using GasToken to reduce transaction costs for users before, but recently they have optimized it and launched the token Chi, which has better performance than Gas Token.
For users, they only need to purchase a certain amount of Chi through 1inch when the Gas price is low, and then when the Gas price is high, they only need to turn on the function of using Chi to trade on 1inch, which can save money for the transaction. Gas expenditure. According to 1inch's previous calculation of Gas Token data, it can reduce the transaction cost on the chain by 42%.
user experience
However, this mechanism may change with the adjustment of the Ethereum network, so it is not necessarily a long-term solution.
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Although DEX protocols like Uniswap have been under active development and the user experience has been iteratively upgraded, there is still a lot of room for improvement for end users.
For example, the transaction aggregation tool Matcha launched by 0x pays great attention to product design, interaction, details, and experience. In their own words, “That’s why we set out to rethink the trading experience and lay the groundwork for the next wave of cryptocurrency traders.”
Front-end experience is a place that can widen the product gap. Coupled with basic components such as Torus and WalletConnect, such tools may also have lower and lower thresholds like Internet products. However, the designs of 1inch and DEX.AG are not so refined, but they can still meet the trading needs of current users.
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Core Competitiveness: Improving Transaction Execution Efficiency
The core competitiveness of the transaction aggregation tool is to improve the overall transaction execution efficiency. Simply put, it is to exchange a certain asset for more target assets.
Of course, the overall liquidity of the top centralized exchanges is better, but it is not absolute, for example:
The online speed of new currency may not be as good as DEX;
If the project side adopts liquidity mining incentives, it may cause the liquidity of tokens to be mainly in DEX;
Don't like to submit personal information (KYC) on the exchange.
For the transaction demand of more than one million US dollars, it should still rely on centralized exchanges or over-the-counter transactions, otherwise the transaction loss will be too great.
If you compare the trading liquidity on Uniswap at the same time, you will find that the slippage is as high as 12%. That is to say, in the above case, using 1inch can get nearly 40,000 USDT more than using Uniswap.
Therefore, for transaction aggregation tools, performance indicators are well defined, which is to look at transaction execution results and maximize transaction income for users.
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How do trade aggregators reduce trade slippage?
For the current transaction aggregation tools, a parallel, serial or mixed method is usually used to formulate a transaction execution path for the user, so as to reduce the user's transaction slippage, that is, to exchange more target assets.
Case 1: If the liquidity of ETH/DAI in Uniswap and ETH/DAI in Balancer is very close, then the best trading strategy for users is to divide ETH into two parts and submit them to the two fund pools respectively. Then trade at the same time, which can maximize transaction efficiency.
If it is expanded, it is also possible to submit the transaction to multiple fund pools at the same time, and the specific path calculation needs to be performed by the transaction aggregation tool.
If it is expanded, more transaction paths may be serialized, and the specific path calculation needs to be performed by the transaction aggregation tool.
Case 3: By combining the above two situations, a more complicated transaction path can be combined. This is also currently supported by some transaction aggregation tools, including 1inch, ParaSwap, etc. They call this function "Multi Path" (multi-path).
How to formulate a most cost-effective transaction execution path is the core part of the transaction aggregation tool. However, compared with the transaction execution tools in the traditional financial industry, transaction aggregation tools are still in a relatively early stage, and there are still many parts that can be explored and optimized.
What are the profit models?
While providing value to users, how does the transaction aggregation tool itself capture the value and continue to develop and iterate? Haven't seen a good answer, at least for now.
Except for 1inch, which clearly stated that it will issue the protocol’s native tokens, the other companies have no clear actions, and they have never disclosed their profit models. However, some users discovered the mystery in the process of questioning 1inch.
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earn the difference
This Twitter user found that when 1inch executes a transaction for the user, if the execution price is higher than the quoted price, the 1inch protocol will extract all parts other than the quoted price and transfer it to an address of the tool as income.
Before diving into this matter in detail, some background needs to be explained. The transaction aggregation tool will provide users with an estimated quotation as a reference before executing the transaction. For example, the user can check how much DAI can be exchanged for 100 ETH. 1inch will grab the data on the chain for the user to calculate, and then give It is estimated that about 30,000 DAI can be exchanged.
However, before the user submits the transaction, it is possible that a certain DEX in the transaction path has already been traded by other users, causing the result of the target transaction path to deviate from the original quotation of 30,000 DAI. The probability of this event happening is not low , which will cause the execution price to be higher than 30,000 DAI, and may also be lower than 30,000 DAI.
Therefore, some transaction aggregation tools also provide a setting called "maximum slippage ratio" to avoid additional losses. The default value is 1%. This means that if the executed price loses more than 1% compared to the quoted price (30,000 DAI), the transaction will fail.
However, another possibility is that the transaction execution price may be higher than the quoted 30,000 DAI. And for this case, 1inch didn't fail it, but transferred the extra part to 1inch's own address.
That is, the final transaction execution result may fall within three intervals:
Interval 1: If the transaction execution price causes the user to lose more than the maximum loss ratio, the transaction will fail;
Interval 2: If the transaction execution price is between the quotation and the loss is less than the maximum loss ratio, the transaction is successful, but the amount of target assets obtained by the user will be less than the quotation;
Interval 3: If the execution price of the transaction is higher than the estimated value, the transaction is successful, and the amount of the target asset obtained by the user is the same as the quotation, but the excess part is captured by 1inch.
From the address found by this user to summarize income, we found that this address has just purchased the Ethereum domain name mooniswap.eth, which is the name of the DEX platform incubated by 1inch itself, and it may be used for other purposes in the future. Currently, the address is summarized The amount of funds is about 110,000 US dollars.
1inch has also been criticized by some domestic and foreign communities because of this incident, believing that 1inch is not transparent about this set of rules, and the rules are not equal enough. But some people in the community commented that they understand, because this is the business model of tools like 1inch.
As for 1inch’s token model, there is no more information released yet, but 1inch can obtain stable income from the above models, and perhaps the “repurchase and destruction model” similar to exchange platform tokens is also one of the feasible options.
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In the long run, the establishment of private liquidity can consolidate the advantages
The current core competitiveness of the transaction aggregation tool is the transaction path algorithm. However, due to the current computational complexity and data volume are too large compared to Ethereum, it is not suitable for all execution by Ethereum. Instead, it is calculated off-chain and submitted to Transactions are ultimately executed on the blockchain.
As a user, if PMM can provide better prices and liquidity, it is natural to give priority to the liquidity of PMM. Therefore, 1inch will also consider the liquidity of PMM when calculating the transaction path, and then combine the third-party liquidity to further exceed the transaction execution effect of other single DEX.
Summarize
For the liquidity from PMM, 1inch can justifiably charge a certain percentage of transaction fees, which will also be a very direct way of making profits. However, there is no relevant data available for reference.
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Summarize
The transaction aggregator systematically organizes the decentralized liquidity in the Ethereum network. For most users who have on-chain transaction needs, they can choose 1inch with more comprehensive functions, Matcha with better user experience, or use These tools perform price comparisons.
