What updates have been made to the trading model and token economics after 1inch launched the Fusion upgrade?

Original source: Jiang Haibo, PANews

On December 25, the leading on-chain aggregation trading platform 1inch Network announced the launch of the Fusion upgrade, allowing users to place orders within specified price and time ranges without paying network fees, enhancing cost efficiency, security, and user experience. Additionally, 1inch has updated its token economics.

Fusion Mode Integrates Limit Orders and Aggregation Protocols

The new trading mode is named "Fusion," which means integration in Chinese. The Fusion mode is derived from the existing products of the 1inch trading engine: the 1inch Limit Order Protocol and the 1inch Aggregation Protocol.

The 1inch trading engine, combined with the Fusion mode, is a decentralized trading and matching system that introduces both centralized and decentralized liquidity through professional market makers. This approach seems to have similarities with Hashflow.

Under the Fusion mode, there are three options: Fast, Fair, and Auction, with the execution time gradually increasing, and the corresponding exchange rates potentially becoming more favorable.

• If "Fast" is chosen, it indicates that the user is willing to accept less than ideal trading prices to execute trades in the earlier blocks.
• If "Fair" is chosen, it indicates that the user is willing to wait a certain amount of time in exchange for a more favorable trading price. The initial trading price may be relatively poor, but it may gradually become advantageous during the execution process.
• If "Auction" is chosen, it indicates that the user is willing to wait the longest expiration time (10 minutes) to obtain the best trading price. This option is more beneficial for large transactions.

The biggest update of Fusion is the introduction of the Dutch auction model. Users' orders are fulfilled by professional market makers (Resolvers), and the gas fees are also paid by the Resolvers, who profit from arbitrage activities.

To become a Resolver, one must stake a sufficient amount of 1INCH tokens into the "feebank" contract. Resolvers are ranked based on the amount and duration of staked 1INCH tokens, with higher-ranked ones having priority in executing orders. In the future, the 1inch DAO may charge fees to Resolvers.

In this understanding, the advantages of trading through Fusion for users include: no gas fees, MEV protection, no price impact, no fees for failed transactions, and fast execution.

Resolvers can also enjoy: earning staking rewards, receiving Resolver fees, participating in the 1inch Network gas rebate program, and obtaining governance voting rights in the 1inch DAO.

Comparison of Fusion Mode and Legacy Mode

Currently, trades in 1inch have defaulted to the Fusion mode. As shown in the figure below, trades in the Fusion mode under Fast, Fair, and Auction do not require users to pay gas fees.

However, this does not mean that Resolvers will voluntarily pay gas fees for users. Taking the example of exchanging 1 WETH for USDC under both Fusion and Legacy modes, both show the market value of the tokens received is the same, at 1198.24 USDC. The left Fusion mode incurs no gas fees, while the original Legacy mode incurs a gas fee of $2.52. However, if the market price remains unchanged, the value shown in the right Legacy mode is the actual value received; in the left Fusion mode, the actual value received must refer to the Est.received below, which will deduct gas fees and other costs after completing the transaction for the user.

In the example below, a quick transaction exchanging USDC for ETH in Fusion mode shows that the smart contract directly exchanged USDC for 0.11261 ETH on Uniswap V2, paying 0.10793 ETH to the user, with a transaction gas fee of 0.00359 ETH, arbitraging 0.00109 ETH directly from the user, which does not benefit the user.

The Fusion mode also has some limitations, such as not accepting small asset transactions (below $100), as gas fees are paid by Resolvers, which can lead to significant discrepancies between Resolvers' bids and actual prices. Additionally, Fusion does not support trading of native tokens; ETH must first be exchanged for WETH.

Adjustments to Token Economics

This update also adjusts the token economics of 1inch Network. Under the new governance system, users can stake their 1INCH tokens for a period ranging from one month to two years to earn Unicorn Power.

Unicorn Power can be used for network governance, to receive rewards from the Resolvers incentive program, or to delegate Unicorn Power to others. Fees collected from Resolvers can be distributed among stakeholders based on their interests in the network and Unicorn Power.

The 1inch Resolver incentive program started on December 24, allowing Resolvers to receive refunds for gas spent on user transactions in Fusion mode. The 1inch Foundation will allocate 10 million 1INCH tokens for this purpose, with each Resolver able to receive a maximum of 1 million 1INCH tokens per month.

Summary

In summary, the Fusion trading mode of 1inch does not eliminate gas fees for users' transactions out of thin air and may only be suitable for large auction trades. Currently, in the Fusion fast trading mode, Resolvers are merely arbitraging on top of helping users trade on-chain, resulting in users receiving fewer assets than they would after paying gas fees in the Legacy mode. Meanwhile, Resolvers can also earn 1INCH refunds from the 1inch Resolvers incentive program during this process.