The decentralized exchange aggregator 1inch.exchange has started its own DEX. As part of your efforts They promised to fix two main problems with this type of exchange: expected loss and temporary loss.
The Mooniswap exchange announced on Tuesday is an automated money market (AMM), similar to Uniswap or Balancer.
It has taken a significantly different approach than Bancor V2, which uses oracles to keep up with market prices.
A temporary loss occurs when the price of an asset on one AMM falls compared to the current market price on other exchanges. With this expected behavior, MMAs update prices. However, due to the comparatively lower liquidity, the decline rarely corresponds to the actual change in market prices.
A higher loss gives arbitrage traders the opportunity to make up for this difference through reverse trading. Essentially, they extract a value that exceeds the desired 50-50 balance and only return the 0.3% conversion fee back to the liquidity pool. If the drop is 10%, then a total of only 0.6% is returned to the pool as fees, while the arbitrageurs pocket the remaining 9.4%.
Sergej Kunz, CEO of 1inch.exchange, explained to Cointelegraph that arbitrage traders are top earners on AMM logs:
“Uniswap’s liquidity providers earn 0.3% in trading fees, such as $ 200,000 for a period of time, while arbitrageurs earn between $ 400,000 and $ 500,000.”
The team set out to fix this problem by trying to return more of the profit to liquidity providers rather than arbitrage traders.. Kunz said the team investigated an oracle-based solution similar to Bancor but found it to be vulnerable to beneficial investments through oracles. “We realized that we had to solve the problem in other ways,” he said.
They were inspired by a contribution by Vitalik Buterin two years ago and dealt with the concept of the virtual scale. When a high-slip trade occurs, the exchange’s internal balance does not immediately reflect this change. Each new trade is initially carried out at the old price.
Within five minutes, the price will gradually update to the actual value based on the group’s balances. This opens up small windows for arbitrage opportunities that are expected to be seized as soon as possible.
The difference is that the conversion fee is now a much higher percentage of the merchant’s profit. Hence, arbitrageurs give a much larger portion of the price decline back to the pool.
In addition, every normal trader who places orders at the old price will effectively return part of this slip difference to the pool as he technically overpays for the trade.
Kunz said the added benefit of this system is drag. Since the price isn’t updated instantly, you can’t make a profit by going faster than someone else.
Simultaneously with the launch, the 1 inch team received a UDS 2.8 million UDS funding round led by Binance Labs and accompanied by Galaxy Digital, Dragonfly Capital, FTX and others.