1INCH - Risk Assessment
Smart Contract Risk Counterparty Risk Market Risk Overall Risk
General
The 1inch Network was launched at the ETHGlobal New York hackathon in May 2019 with the release of its aggregation protocol v1. Since then, the 1inch Network has also launched the Liquidity Protocol, Limit Order Protocol, P2P Transactions and 1inch Mobile Wallet. The 1inch Network is composed of three independent entities, the 1inch Foundation, 1inch Core Contributors and 1inch DAO that each operate separately.
- 1inch Foundation is a non profit organisation with the goal of fostering 1inch Network growth and support initiatives that benefit the 1inch community. The foundation issued the 1inch token, however the 1inch DAO has control over the smart contract. The 1inch Foundation holds around 28,188,355.56 1INCH tokens via a 2 of 3 multisig.
- Core Contributors are a decentralised group of 1inch Network technical contributors dedicated to building out the 1inch Network. The largest contributor of the Core Contributors is 1inch labs.
- 1inch DAO governs the 1inch Network through a set of on-chain smart contracts. The 1inch DAO has control, amongst others, over the 1INCH token, DAO Treasury, 1inch Network Protocols and the revenue streams generated by those protocols. Do note the 1inch Treasury only holds USDC at the time of writing.
- 1INCH: The un-staked version of 1INCH does not have the ability to vote on governance proposals.
- st1INCH: A non transferable ERC-20 which represents 1INCH staked within the 1inch protocol’s governance contract. This has a Voting Weight of 100%. There is no time commitment or waiting period upon entering or exiting the contract respectively.
- v1INCH: This is an ERC-20 which represents 1INCH tokens that are currently locked in the vesting contract. These tokens are held by backers, advisors and core contributors but are not yet fully-vested. Each v1INCH has 1/5th (20%) the Voting Weight compared to st1INCH.
The 1inch DAO earns its revenue in the form of USDC via the Swap Surplus collector which deposits the funds in the DAO’s treasury. A Swap Surplus occurs when a User performs a swap and the price terms change between when the swap was quoted and when the transaction was mined on the network. The majority of the Swap Surplus is swapped for USDC and sent directly to the 1inch Network DAO Treasury.
Relevant addresses are linked below:
DAO Treasury: 0x7951c7ef839e26F63DA87a42C9a87986507f1c07
1inch Foundation: 0x5E89f8d81C74E311458277EA1Be3d3247c7cd7D1
1INCH: 0x111111111117dc0aa78b770fa6a738034120c302
st1INCH: 0xA0446D8804611944F1B527eCD37d7dcbE442caba
v1INCH: 0x03d1b1a56708fa298198dd5e23651a29b76a16d2
Chainlink Oracle: 0x72AFAECF99C9d9C8215fF44C77B94B99C28741e8
1INCH Smart Contract Risk:
The 1INCH token was launched on 23rd December 2020. Since then it has done over $250B in trading volume with the number of Users approaching 3M.
The 1INCH token is an ERC-20 token with no governance influence held by around 88,475 wallets and the staked INCH token, st1INCH, used for governance is held by around 5,391 wallets. The staking contract holds 20,218,800.81 INCH tokens at the time of writing.
The 1inch Foundation, although a 2 of 3 multisig has transferred out the vast majority of 1INCH token from the wallet. The current value of the 1inch Foundation wallet is approximately $15M and all 3 signers are on at least one other wallet which is also 2 of 3 which holds a similar value.
On April 6th, 2022 the 1inch Foundation burned the mint function of 1INCH.
There is an extensive list of audits available on Github.
Relevant addresses are linked below:
Audits: GitHub - 1inch/1inch-v2-audits
1inch Genesis: 0x9825b9f083ba43112afd66dbcfbbf770e24bc21ff4128ce24ddbda171d79ae2f
Burn 1INCH Key Transaction: 0x8799998e32cf58f4939a1fb21b3e679f1cc4598b26b73bfea6f265fa5426d511
1INCH Counterparty Risk:
1inch is a permissionless protocol where 1INCH holders do not have a say in how the protocol or DAO is governed.
Holders of the 1inch Network token may stake it in the 1inch DAO governance contract and participate in general proposals, Instant Governance, or benefit from the gas refund program.
The st1INCH token is used for governing the DAO and although there is no revenue sharing like with xSUSHI there are economic rewards/incentives for those who hold the token. st1INCH token holders receive up to 100% of gas expenses refunded, depending on your stake size. Under this program, 1INCH tokens are distributed as a gas refund to Ethereum users who stake 1INCH tokens through the 1INCH dApp. Borrowing 1INCH with the intent to receive a gas refund is a useful utility.
Users who stake 1INCH receive st1INCH which is non transferrable and used for governance. If a malicious actor was to borrow 1INCH, stake to receive st1INCH and then try attack the DAO’s treasury, then the Treasury Multisig 7 of 12 can veto the proposal during the 72 hour timelock period post successful Snapshot vote. This measure provides a level of protection for the DAO’s Treasury funds which are nominated in USDC. Any malicious attack on the DAO Treasury would not lead to the actor selling 1INCH on-market and this scenario would not create bad debt by moving the spot price of 1INCH.
Risk Parameters:
As of 18th June 2022 for 1INCH:
| Parameter | Value |
|---|---|
| 30 Day Average Daily Volume | $58.4M |
| 30 Day Average Daily Volume | $73.1M |
| 90 Day Average Daily Volume | $78.0M |
| 1 week Normalised Volatility | 0.05507 |
| 1 month Normalised Volatility | 0.04442 |
| 3 month Normalised Volatility | 0.05669 |
| 6 month Normalised Volatility | 0.05198 |
| 1 year Normalised Volatility | 0.06044 |
| Parameter | Vaue |
|---|---|
| Collateral | Yes |
| Borrowing | Yes |
| LTV | 60% |
| Liquidation Threshold | 75% |
| Liquidation Penalty | 7.5% |
| Reserve Factor | 20% |
| UOptimal | 45% |
| R_0 | 0% |
| R_s1 | 7% |
| R_s2 | 300 |
Relevant addresses are linked below:
https://docs.1inch.io/docs/governance/dao-treasury
https://docs.1inch.io/docs/governance/proposal-lifecycle
https://docs.1inch.io/docs/governance/instant-governance
https://blog.1inch.io/the-1inch-foundation-will-distribute-10-mln-1inch-to-the-defi-community-as-gas-cost-refunds-2dd35a6a084f
General Comments:
At the time of writing, there are 535,985,403 units of the 1.5B units in circulating supply worth $303,701,283 on the 19th June 2022. 1INCH has a fully diluted market capitalisation of $849.9M. Of the 1.5B 1INCH tokens, 63% are vested in the form of v1INCH. The distribution of v1INCH is fairly concentrated, with the 1inch Foundation holding 23.64% and the next 9 top holders holding around 37.5% of the v1INCH supply. The Top 10 v1INCH holders effectively hold 37% of 1INCH supply. The vesting schedule started during December 2021 and concludes December 2024.
The concentration of the 1INCH tokens distribution creates a risk for lending markets as large illiquid positions can be used as collateral and liquidators may not be able to effectively clear bad debt from the system due to the size of the position relative to on-chain liquidity. Implementation of a Supply Cap would enable the Aave community to mitigate this risk by restricting the quantity of 1INCH in the lending pool which can be maintained via the governance process based upon secondary market liquidity conditions. To implement this mitigation the Aave v3 market needs to be deployed on mainnet. The Aave community can elect to proceed with a Aave v2 listing in line with the risk parameters detailed above with Gauntlet to offer further refinement in time or await Aave v3 on mainnet utilising the supply cap.
Other considerations, the 1INCH token is listed on several Centralised and Decentralised Exchanges with the main liquidity source being on 1inch liquidity pools. The 1INCH token has a Chainlink oracle price feed, good volatility results and there is solid trading volume for 1INCH. This is all very favourable for listing the asset on the Aave markets as collateral.