Why Everyone Will be Trading on DeFi Aggregators
Decentralized finance or DeFi has firmly settled in the blockchain industry and is now undoubtedly the hottest sector in cryptocurrency markets, with no signs of slowing down.
The biggest piece of the DeFi cake still sits comfortably on the Ethereum network but other competing networks, capitalizing on the crowded space on Ethereum causing gas fees to skyrocket, are now making inroads and carving out larger slices for themselves. The total value locked in Ethereum is well over $50 billion (Defipulse) but others like Binance Smart Chain has already crossed over $1 billion just from the PancakeSwap DEX alone (Coingecko).
Tens of thousands of DeFi users are now using decentralized exchanges (DEXs) to trade, swap, stake, mine liquidity, and yield farm, with the majority of this activity taking place on exchanges using automated market maker (AMM) models. Of these individual AMMs, Uniswap and SushiSwap are consistently the primary targets for hunting the best yields, chiefly because of the concentration of liquidity available there which, in turn, drives the most trading volume (since it is trading activity that generates revenue at the end of the day).
Why trade on one when you can trade on many?
However, take a look at DEX trading volume charts and you might notice an emerging trend of other DEX protocols creeping up the leaderboard. 1inch Protocol is the most obvious, now sitting in the Top 5 of DEXs by trading volume.
1inch isn’t, in fact, a DEX on its own, but an “aggregator” protocol.
What’s a DeFi aggregator?
Now, one of the major issues for DEX traders is the high slippage that can happen when swapping — that is, the orders are filled at a price less favorable than the one intended. This is simply because, if swapping at a single liquidity pool from a single DEX, prices or the buy/sell spread can change between the time the order is requested and the time the swap is made.
So, there are two ways to solve this problem via aggregation.
Aggregators like 1inch automatically executes orders from the liquidity sources it connects to, based on what its protocol determines is the best. This can end up being a single order or split up into multiple orders.
1. Swap aggregation
Aggregators like 1inch simply aggregate liquidity from across different DEXs so that whenever a trader swaps from its platform, the protocol works out the best crypto prices from all the DEXs it is connected to, and executes from whichever liquidity pool it determines is the best. This typically means that your order is split up and spread across multiple DEXs. This typically results in lower slippage than if you swap yourself on a single DEX.
It’s probably a good way on average to swap but in this way, traders won’t be able to select for themselves the liquidity source and have to trust the protocol to execute trades as desired. Additionally, traders can’t actually compare sources on this type of aggregator, and the automated calculations on gas price can tend to be overestimated.
It should be noted, however, that token interactions in DeFi can be quite complex. As smart contracts are automatically routed through multiple platforms, the cost of execution can quickly add up. This, in times of high gas fees (when hasn’t it been a time of high gas fees?), it hardly makes sense to split up an order into multiple ones and multiply gas fees — so during congested periods on Ethereum since 2020, 1inch tends to select one source for a single order anyway.
Aggregators like PlasmaFinance display real-time decentralized data from all liquidity sources it connects to, allowing the user to determine which source they want to swap at.
2. Data aggregation
The other way, like what our own aggregator PlasmaFinance does instead, is to aggregate only the data. This method will display all the different DEXs and protocols connected, allowing the user to see for themselves which prices are available in real-time, and to swap at the desired DEX.
You can even set your own slippage tolerance and transaction deadline to your preferred setting, which allows you to control precisely how much slippage you’re willing to risk, and how long you’re willing to wait for your swap conditions.
This way, professional arbitrage traders can very quickly swap from one liquidity source to another from the same aggregator. Once PlasmaFinance integrates with Binance Smart Chain and Polkadot, among others, you can even choose to swap cross-network. In fact, we plan to integrate other aggregators like 1inch, allowing you to even swap on other aggregators from ours if automatic swap aggregation is what you prefer.
Get the best out of all worlds with PlasmaFinance
As you can see, using an aggregator in the right way can really take your DeFi trading to the next level. When you trade on only one DEX, you’re stuck with the one liquidity pool and the prices it offers. When you trade using an aggregator, you either have the option of swapping at the best price sourced from multiple liquidity sources, or you are presented with all the possible prices and can pick your own (as is the case with PlasmaFinance).
For PlasmaFinance, this works not just with trades but with other DeFi interactions. If you want to mine liquidity, you can view all the different pools across all connected protocols to choose the ones with the best APY — measured in real-time using decentralized data sources so you are assured of actual data, not fake or manipulated data.
An aggregator doesn’t force you to choose, it lets you see every opportunity that DeFi has to offer. You can still choose to trade from or provide liquidity to a single liquidity source if you want, but it’s nice to know you have all the options laid out in front of you in an easy and simple manner.
Simply put, if you’re not using an aggregator yet, then you’re really missing out. Try out PlasmaFinance now and see for yourself just how easy and simple it can be to get the best out of DeFi.
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