Liquidity is critical for any financial product. Since the DeFi Summer of 2020, various DeFi products have emerged, which promoted the development of the DeFi ecosystem while dividing the liquidity across different protocols, making trading markets fragmented. Aggregator products that aim to concentrate liquidity have also emerged at this time. According to the functions and methods, aggregators have these categories:
Yield aggregator: aggregate funds into asset pools, distribute them to different DeFi platforms through strategies, and distribute the generated income among asset pools.
Examples: Yearn Finance, Idle Finance, APY.Finance, Harvest Finance
DEX aggregator: aggregate liquidity from multiple protocols, find the optimal trading path through algorithms, and reduce transaction costs.
Examples: 1inch, DODO, Matcha, Paraswap, KyberSwap, CowSwap
Multi-functional aggregator: access multiple DEX liquidity on the same terminal, such as Uniswap, Balancer, but cannot split orders; that is, it does not distribute transactions among multiple DEXs.
Examples: Zapper, Plasma Finance, InstaDapp
This article mainly introduces DEX aggregators. Focusing on the development of the DEX aggregator ecosystem, product comparisons, and aggregation algorithms, it provides a detailed introduction from the past to the present and prospects.
In May 2019, 1inch introduced the first decentralized exchange (DEX) aggregator that collects liquidity from multiple other DEXs. 1inch released V2 in November 2020. V2 iterated from V1 with the Pathfinder component, APIs containing price discovery and routing algorithms that split transactions across many DEXs, and even different markets within the same DEX. In short, Pathfinder ensures that users receive the best trade rates at the fastest response.
DODO has evolved from its initial Proactive Market Making(PMM) algorithm to an aggregator algorithm, making it both a liquidity provider and a traffic distributor. DODO's proprietary routing aggregates liquidity from top exchanges on the chain to calculate the optimal trade path for users, supporting splitting transactions across different protocols and within the same protocol across different market depths. After the path is determined, on-chain smart contracts execute the trade for the user. Security verification ensures the safety of funds and pricing validity.
In essence, DODO provides a DEX-like user experience and leveraged the capabilities of an aggregator.
0x API, on the other hand, provides peer-to-peer liquidity functionality for other Ethereum-based applications. It enables composable asset trading to decompose liquidity in any dAPPs. Once 0x API connects order receivers to DEXs, 0x becomes an aggregator. In addition to connecting orders to exchanges, 0x also provides its own market maker services. Market makers and app developers are 0x's target users, being incentivized through the token economy to optimize the end-user experience. For example, Match is a DEX aggregator built on 0x API.