By
Godfrey Benjamin
April 26th, 2024
The 1inch Earn employs concentrated liquidity distribution thereby offering an efficient reward system to liquidity providers.
On Thursday, February 3, decentralized exchange (DEX) 1inch announced a new liquidity pool Earn offering liquidity providers some attractive APYs.
The decentralized exchange noted that the launch of 1inch Earn is a big step towards improving network sustainability, community-led governance, and decentralization. 1inch Earn derives its inspiration from Uniswap V3 range orders and comprises a set of liquidity pools optimized for stablecoins. The platform earns by charging some fees on swap trades on the pool.
A liquidity pool basically comprises a set of digital assets such as stablecoins or Ethereum. These assets are then locked in smart contracts operated by protocols dubbed automated market makers (AMMs).
The 1inch Earn uses concentrated liquidity distribution thereby offering significantly better capital efficiency to liquidity providers (LPs). Here, LPs provide liquidity to the pool with finite price intervals instead of distributing it across a broader price range. Concentrated liquidity is especially beneficial to stablecoin swap having tighter spread. The official announcement notes:
“At the time of launch users’ earnings from 1inch Earn are estimated to be in the range of 5–10% APY and, in future, profitability will depend on market conditions. Swaps in the pool will be done by arbitrage traders, algorithmic trade bots and individual 1inch users, as 1inch Earn pools are integrated in the 1inch Pathfinder algorithm as a liquidity source, ensuring deep liquidity at any point”.
Different From Standard Liquidity Pools
As 1inch Earn employs contracted liquidity distribution, it differs major from the standard liquidity pools wherein all liquidity is distributed equally along with the entire price range between zero and infinity.
This also results in no use of most of the available liquidity. This is particularly visible in stablecoin pairs wherein in the relative price of two assets’ remains constant most of the time. Thus, with a liquidity pool having two stablecoins, liquidity outside their typical price range gets hardly used. It solves this problem. 1inch explains:
“1inch Earn enables liquidity providers to concentrate their assets to smaller price intervals than between zero and infinity. For instance, it could be in a range between 0.99 and 1.01. In that case, traders get deeper mid-price liquidity for swaps, and liquidity providers earn more fees”.
Upon confirmation of a trasaction, the user immediately starts earning yield with both tokens deposited to the pool. Users can view all the stats on the 1inch dashboard.
1inch Earn said that they have launched the first pool on the Ethereum blockchain with the USDC/USDT pair. 1inch says that stablecoin liquidity pools are good at times of market volatility. Besides, they also offer better protection from slippages.
