1inch Co-Founder: Launching On Solana | Sergej Kunz

1inch Expands to Solana

1inch, a popular decentralized exchange (DEX) aggregator in the Ethereum ecosystem, has recently expanded its operations to the Solana blockchain. This move marks a significant development in the DEX aggregator space on Solana, challenging the dominance of established players like Jupiter. Sergej Kunz, co-founder of 1inch, joined the Lightspeed podcast to discuss the intricacies of this expansion and the unique features 1inch brings to the Solana ecosystem.

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The Challenge of Performance

One of the primary challenges for 1inch in expanding to Solana was adapting to the blockchain's high-performance environment. Ethereum, where 1inch originally gained popularity, has significantly slower block times compared to Solana. Ethereum's layer 1 operates with approximately 12-second block times, while Solana boasts an impressive 400-millisecond block time. This stark difference in performance metrics posed a unique challenge for 1inch, especially considering that DEX aggregation is a time-sensitive and performance-critical operation.

Kunz explained their approach: "We actually launched an aggregate of aggregators on Solana. We call it in 10 best swap protocol. We came back in 2022. This thing allows us to create a market where users can announce orders. These orders are sold by the protocol to market makers, like PGP swap."

Innovative Swap Protocol

The 1inch team developed a novel swap protocol for Solana that leverages the blockchain's fast block times. This protocol employs a Dutch auction mechanism for the liquidity curve, allowing for more efficient price discovery and execution. Kunz elaborated on this mechanism: "Every block, we have little bump of the price down, so the price is getting better for the market maker arbiters' trader, and they compete between each other to be the first to fill."

This approach not only takes advantage of Solana's high performance but also introduces a new level of competition among market makers, potentially leading to better prices for users.

Cross-Chain Functionality

While 1inch has launched its swap functionality on Solana, the team is also working on introducing cross-chain capabilities. This feature will allow users to swap assets between different blockchain networks, including Solana and Ethereum-compatible chains. Kunz emphasized the importance of this feature: "We need cross-chain to offer seamless experience similar to centralized exchanges."

The goal is to provide a user experience comparable to centralized exchanges, where users can trade assets across different networks without worrying about the underlying blockchain infrastructure. However, this comes with its own set of challenges, including maintaining efficiency and managing liquidity across chains.

MEV Protection on Solana

Miner Extractable Value (MEV) protection is a crucial aspect of DEX aggregation, and 1inch is bringing its expertise in this area to Solana. MEV refers to the profit miners (or validators in Proof-of-Stake systems) can extract by reordering, including, or excluding transactions within the blocks they produce.

Kunz highlighted the differences in implementing MEV protection on Solana compared to Ethereum: "What helps on Solana is the fast block time. So the arbitrary opportunity after price moves, the reverse arbitrage opportunity is sold in time. And in Solana, you can really set maybe for two seconds. You can set for three seconds."

This faster block time allows for more rapid responses to potential MEV opportunities, potentially reducing the impact on users' trades.

Open Source Approach

One of the key differentiators for 1inch on Solana is its commitment to open-source development. Kunz emphasized the importance of transparency and verifiability in their smart contracts: "You don't have to trust us. You can verify the smart contracts because it's public. Available, it's under open source, under MIT license, so if you want to build something on top of it, you can do it."

This approach contrasts with some other projects in the Solana ecosystem that operate with closed-source smart contracts. Kunz expressed concerns about the security implications of interacting with unverified smart contracts, citing potential risks of hacks or malicious code injection.

Challenges in Adapting to Solana

The transition from Ethereum Virtual Machine (EVM) compatible chains to Solana's unique architecture presented several challenges for the 1inch team. Kunz described the process: "So it worked very hard for us because we are even native people, so we learned how to develop them. If you're in blockchain, architecture is different, differently."

One significant change was in the handling of user orders. On EVM chains, 1inch used an off-chain approach based on signing messages and sharing them through different servers. However, on Solana, this approach wasn't feasible due to the need for account deposits. This led to a redesign of their architecture, resulting in a more decentralized system where orders are announced on-chain.

Competitive Landscape on Solana

The DEX aggregator space on Solana is becoming increasingly competitive, with several new entrants launching in recent months. When asked about 1inch's ability to compete with established players like Jupiter, Kunz emphasized the importance of onboarding more market makers to achieve full efficiency.

He explained: "For small amounts, it's almost the same execution like Jupiter under the hood. Some of the market makers are using also Jupiter as well because we didn't release our classic swap similar to Jupiter. We didn't release yet."

However, Kunz highlighted that for larger trades, 1inch's protocol can significantly reduce price impact, potentially saving users substantial amounts on high-volume swaps.

Business Model and Profitability

Unlike some competitors that charge interface fees, 1inch currently operates without such fees, which impacts its profitability. Kunz revealed: "So, we are swimming around zero, I would say. We don't have interface fees."

Instead, 1inch focuses on business integrations and API services as a revenue stream. Many wallets and applications in the crypto space use 1inch's APIs under the hood, creating a software-as-a-service platform for developers and businesses.

Future Plans for 1inch

Looking ahead, 1inch has several key developments in the pipeline. Kunz outlined their roadmap: "So we are working very hard on the cross-chain solution. So I hope in next one half months we can deliver. After the cross-chain we will introduce the classic swap, what you see on Jupiter so we can also fulfill the need of our arbiter streamers."

Following these developments, 1inch plans to expand to other blockchain networks and introduce Bitcoin support, allowing users to buy Bitcoin directly using Solana-based assets.

The Importance of Cross-Chain Functionality

While some may question the necessity of cross-chain functionality, especially given Solana's comprehensive ecosystem, Kunz argues for its importance in creating a seamless user experience comparable to centralized exchanges. He envisions a future where users can easily swap assets across different blockchains without worrying about the underlying technology.

This cross-chain functionality could become particularly important if new blockchains emerge as dominant players in the future, allowing users to easily move their assets to the most advantageous networks.

Challenges in Cross-Chain Implementation

Implementing effective cross-chain swaps comes with its own set of challenges. Kunz acknowledged that cross-chain swaps might have wider spreads and be less capital efficient compared to single-chain swaps. However, he emphasized that the goal is to provide a user experience similar to centralized exchanges, where users don't need to concern themselves with the underlying blockchain infrastructure.

Kunz explained their approach: "When you swap at one inch between the different event compatible chains and a layer two, you're most likely under two minutes for the swap. And it's not a bridge, you know? It's not like you move the assets from one blockchain to another. You sell your assets in one chain and you get your assets in the other chain."

The Role of Market Makers in Cross-Chain Swaps

The efficiency of cross-chain swaps relies heavily on the participation of market makers and arbitrageurs. Kunz described how these actors facilitate cross-chain transactions: "So it's like for the market makers, arbitrators, they just take you to Trump, sell it against something stable, maybe use the C or even maybe Ethereum, bridge to Ethereum or since of Ethereum. And then they do the reverse rate on the other chain."

This behind-the-scenes process allows users to experience seamless cross-chain swaps without needing to understand the complex mechanisms that make them possible.

Comparing with Centralized Exchanges

While centralized exchanges currently offer a smoother user experience for cross-chain transactions, Kunz argues that decentralized solutions like 1inch can compete effectively. He points out that when considering the entire process of depositing, trading, and withdrawing on a centralized exchange, which can take up to 24 hours, a two-minute cross-chain swap on 1inch is comparatively efficient.

The Importance of Open Source in DeFi

Throughout the interview, Kunz repeatedly emphasized the importance of open-source development in the decentralized finance (DeFi) space. This commitment to transparency stands in contrast to some other projects in the Solana ecosystem that operate with closed-source smart contracts.

Kunz expressed concerns about the security implications of interacting with unverified smart contracts: "I'm very careful with what I am interact in crypto. So you can be easily drained. We have seen cases where developer got like attacked by North Koreans, for example, what happened with by bit, right?"

This stance on open-source development is not just about security, but also about fostering innovation and collaboration within the DeFi ecosystem.

Adapting to Solana's Unique Architecture

The transition from Ethereum-based development to Solana's unique architecture presented significant challenges for the 1inch team. Solana's account model and the need for on-chain order announcements required a fundamental rethinking of their approach.

Kunz described this process: "We got really to learn to work. Again, on Solana, we had to rethink everything, to change the architecture. And actually, it was really good because we introduced something that is more decentralized than we had before."

This adaptation process led to innovations in their protocol design, potentially benefiting users with a more decentralized and efficient system.

The Future of DEX Aggregation on Solana

As more DEX aggregators enter the Solana ecosystem, the competitive landscape is evolving rapidly. Kunz sees this competition as beneficial for the ecosystem and users, driving innovation and improved services.

He commented on the approach of competitors like Jupiter: "Jupiter is delivering like this, I will say, they have a lot of fun. They earned a lot of money, obviously, on Solana, and it's very interesting. They start to buy teams."

While 1inch has a different approach, focusing more on API services and business integrations, Kunz indicated that they might also consider acquiring teams to expand their capabilities in the future.

Balancing Performance and Security

One of the key challenges in developing DeFi applications on high-performance blockchains like Solana is balancing speed and security. Kunz emphasized the importance of fail-safe designs: "If something can fail, it's real fail. So we try to do something with kind of fail. Yeah, there's no way to fail. And you can only achieve it by using specific centers and our value proposition is non custody and atomic execution also for Christian swaps."

This approach aims to provide users with the benefits of Solana's high performance while maintaining the highest standards of security and reliability.

The Role of MEV in DeFi

Miner Extractable Value (MEV) continues to be a significant concern in the DeFi space, even on high-performance blockchains like Solana. Kunz discussed how 1inch approaches MEV protection on Solana: "What I noticed on Solana is that do make a lot of money. They get bribed for protecting people from math. And when you interact with the decks, they're not protected from math by design."

1inch aims to change this by introducing MEV-resistant protocols that protect users from potential value extraction while maintaining efficiency.

Innovating Liquidity Provision

Kunz also touched on innovations in liquidity provision, referencing their experience with the 1inch Liquidity Protocol on Ethereum. He hinted at plans to bring similar innovations to Solana: "We performed four times better than you used to up in fees. If you're like, have this, if you look into the fees based on the TVL. The F actually brought 2020 already back protected decks. And I think we will deploy it also on Solana and others, some other blockchains as well."

These innovations aim to provide better returns for liquidity providers while offering improved rates for traders.

The Importance of User Experience

Throughout the discussion, Kunz emphasized the importance of user experience in driving adoption of DeFi services. The goal is to create an experience that rivals or surpasses that of centralized exchanges, without compromising on the principles of decentralization and user ownership of assets.

This focus on user experience extends beyond just the interface to include aspects like transaction speed, cost-efficiency, and protection from MEV. As Kunz put it: "I want to have the same user experience but with the value proposition of atomic execution and non-casted approach. So you own the assets, you don't believe anyone and you don't need to trust anyone, but I'm doing that."

Collaboration in the DeFi Ecosystem

Despite the competitive nature of the DEX aggregator space, Kunz emphasized the importance of collaboration within the DeFi ecosystem. He mentioned potential collaborations with other projects, including the possibility of working with Jupiter: "We even work with Jupiter, you know? Under the hood, it can be that Jupiter is used for swapping, yeah?"

This collaborative approach reflects a broader trend in the DeFi space, where projects often build on each other's strengths to create more robust and efficient systems for users.

The Role of Regulation in DeFi

While not explicitly discussed in depth, the topic of regulation in the DeFi space was touched upon. Kunz expressed concerns about centralized approaches in DeFi, suggesting that they might attract more regulatory scrutiny: "These people who are offering like centralized approach, there's also from the regulatory point of view, like highly critical view, I would say, because like if they control everything and it's not like a P2P marketplace or protocol, what allows you to buy yourself to aggregate, then it's more centralized thing."

This perspective underscores the importance of true decentralization in DeFi projects, not just for ideological reasons, but also for potential regulatory considerations.

The Future of Blockchain Interoperability

The discussion about cross-chain functionality opens up broader questions about the future of blockchain interoperability. While Solana currently offers a comprehensive ecosystem for most DeFi activities, Kunz sees value in enabling seamless movement between different blockchain networks.

This vision of interoperability could become particularly important if new blockchain technologies emerge that offer significant advantages over current solutions. As Kunz put it: "Maybe there's another chain that just becomes the chain and so you need kind of to be able to move your assets around eventually."

Conclusion

The entry of 1inch into the Solana ecosystem marks a significant development in the world of decentralized finance. By bringing their expertise in DEX aggregation, MEV protection, and cross-chain functionality to Solana's high-performance environment, 1inch is poised to contribute to the ongoing evolution of DeFi.

As the DeFi landscape continues to evolve, the innovations and approaches discussed by Sergej Kunz provide valuable insights into the challenges and opportunities that lie ahead. The focus on user experience, security, and true decentralization, combined with the technical capabilities of platforms like Solana, suggests an exciting future for decentralized finance.

Facts + Figures

• 1inch has launched an "aggregate of aggregators" on Solana, called the 10 best swap protocol.
• Solana has a block time of 400 milliseconds, compared to Ethereum's 12-second block times.
• 1inch's protocol on Solana uses a Dutch auction mechanism for price discovery.
• Cross-chain swaps on 1inch typically take under two minutes to complete.
• 1inch's liquidity protocol on Ethereum performed four times better in fees compared to Uniswap, based on TVL.
• 1inch currently operates without interface fees, focusing instead on business integrations and API services for revenue.
• The company plans to introduce Bitcoin support, allowing users to buy Bitcoin directly using Solana-based assets.
• 1inch's smart contracts on Solana are open-source and available under the MIT license.
• The company is working on introducing cross-chain functionality within the next 1.5 months.
• 1inch plans to expand to other blockchain networks, including SUI and Aptos.
• The company is considering acquiring smaller teams to expand its capabilities on different blockchains.
• 1inch's cross-chain swaps do not use traditional bridges, but instead facilitate asset exchanges across chains through market makers.
• The company's last funding round was in 2021, and they are considering raising funds again to support growth.

1inch aims to introduce MEV-resistant protocols on Solana to protect users from value extraction.

Questions Answered

What is 1inch?

1inch is a popular decentralized exchange (DEX) aggregator that has recently expanded its operations to the Solana blockchain. Originally gaining popularity in the Ethereum ecosystem, 1inch aims to provide users with the best possible rates for token swaps by aggregating liquidity from various decentralized exchanges and liquidity sources.

How does 1inch's protocol work on Solana?

On Solana, 1inch has launched an "aggregate of aggregators" called the 10 best swap protocol. This protocol creates a market where users can announce orders, which are then sold to market makers through a Dutch auction mechanism. The protocol leverages Solana's fast block times to provide efficient price discovery and execution, with the price improving for market makers with each block to encourage competition.

What challenges did 1inch face in adapting to Solana?

The main challenges 1inch faced in adapting to Solana were related to the fundamental differences between Ethereum's architecture and Solana's. The team had to rethink their entire approach, moving from an off-chain order system to an on-chain order announcement system. This required learning new development practices and adapting to Solana's unique account model and high-performance environment.

How does 1inch plan to implement cross-chain functionality?

1inch is working on introducing cross-chain swaps that will allow users to exchange assets between different blockchain networks, including Solana and Ethereum-compatible chains. These swaps are facilitated by market makers who execute trades on both chains, rather than using traditional bridge mechanisms. The goal is to complete these cross-chain swaps in under two minutes, providing a user experience similar to centralized exchanges.

What is 1inch's approach to MEV protection on Solana?

1inch aims to introduce MEV-resistant protocols on Solana to protect users from potential value extraction. The company leverages Solana's fast block times to implement strategies that make it difficult for attackers to profit from front-running or sandwiching trades. This includes mechanisms like time-based auctions for arbitrage opportunities and restrictions on liquidity withdrawal within the same block as provision.

How does 1inch generate revenue?

Unlike some competitors, 1inch currently operates without charging interface fees to users. Instead, the company focuses on business integrations and API services as its primary revenue stream. Many wallets and applications in the crypto space use 1inch's APIs under the hood, creating a software-as-a-service platform for developers and businesses.

What are 1inch's future plans for expansion?

1inch has several key developments in the pipeline. These include finalizing their cross-chain solution, introducing a classic swap functionality similar to Jupiter, expanding to other blockchain networks like SUI and Aptos, and introducing Bitcoin support. The company is also considering acquiring smaller teams to expand its capabilities on different blockchains and may seek additional funding to support this growth.

Why does 1inch emphasize open-source development?

1inch strongly emphasizes open-source development as a means of ensuring transparency, security, and fostering innovation in the DeFi ecosystem. By making their smart contracts publicly available under the MIT license, 1inch allows users and developers to verify the code, build upon it, and contribute to its improvement. This approach contrasts with some other projects in the Solana ecosystem that operate with closed-source smart contracts, which 1inch views as potentially risky for users.