1inch, a decentralized exchange (DEX) aggregator, has announced the launch of a new investment tool called Earn.
According to an announcement shared with The Block, Earn is a collection of liquidity pools optimized for stablecoin swaps. A liquidity pool is a set of cryptocurrencies like ether (ETH) and stablecoins like tether (USDT) locked in a smart contract operated by protocols known as automated market makers (AMM).
1inch stated that Earn offers significantly better capital efficiency for LPs by utilizing concentrated liquidity distribution. This means that LPs provide liquidity to the pool within tight finite price intervals rather than distributing same across a broader price range.
Concentrated liquidity is especially advantageous for stablecoin swaps since they tend to have tighter spreads (the difference between the bid and ask price of the stablecoin). Stablecoins are by definition supposed to maintain their price peg which means a trading pair like USDT/USDC should maintain almost a 1-to-1 price relationship.
This approach differs significantly from the liquidity distribution mechanism on standard pools where liquidity often exists across a larger price range that can theoretically stretch from zero to infinity.
By opting for a tighter liquidity distribution, 1inch says traders can enjoy deeper liquidity across probable price ranges for stablecoin swaps without compromising on earnings from fees for liquidity providers.
1inch Earn liquidity providers (LPs) — people who contribute crypto trading pairs to the liquidity pool — stand to earn between annual percentage yields (APY) of between 5-10%. These earnings will come from transaction fees levied on swaps in the pool.
The 1inch Earn product will launch with the USDC/USDT trading pair on the Ethereum network. There are also plans to introduce more pools including the ones featuring tokens other than stablecoins.
1inch closed a $175 million Series B funding round in December and announced plans to begin offering institutional-grade services.