1inch Network Exchange is …Inflationary?
Originally posted on Hacker Noon.
With how volatile the crypto market is, in order to achieve success it’s vital to find projects that are positioned for long-term success. Given how useful 1inch is to the DeFi community and its potential, the goal of this is to understand the governance around minting new tokens, and not as a “gotcha”.
After a user on Reddit called out that there is a function in the smart contract allowing the team to create unlimited tokens, I became interested in looking at the max token supply of 1inch.
My interest increased when a moderator on 1inch’s Discord denied the existence of this feature in the code. Being skeptical that no one has had already looked at this given 1inch’s popularity and success, I reluctantly went traveling down the wormhole of learning how to deploy the code onto the testnet to see for myself.
Unlimited 1INCH Token Supply
What are the governance mechanisms around minting more tokens? This creates implications for many of the 1inch.exchange services that rely on the value of the 1INCH token if the token can be inflated just like fiat currency.
With often having one of the best values for swapping between ERC-20 tokens and the best selection of tokens, 1inch quickly gained popularity and value. In January 2021 the 1INCH token was worth ~$1.00 and grew over 300% to now in May 2021, even after this market cycle’s largest pullback yet.
Currently, DeFi Pulse has 1inch at the eighth-largest decentralized exchange (DEX) in terms of USD total value locked, right under ~$82m, down from $1.5b at the end of Q1 2021.
1inch offers more services than most standalone DEXs, from aggregating other DEX prices, offering earnings via staking in liquidity pools and liquidity mining, and rewarding users for holding 1inch’s governance tokens, 1INCH. This is where it becomes important to understand the 1INCH token and its maximum supply, or lack thereof.
As Cointelegraph reported on December 25, 2020, there is a claimed total token supply of 1.5b 1INCH. 1inch is built on top of OpenZeppelin’s set of Solidity smart contracts.
As smart contract developer Zachary Fogg (@zfogg) explains, typically, tokens with a limited supply built with OpenZeppelin, call the renounceOwnership function after the initial token creation in order to limit the ability to create or mint more tokens.
On line 1119 of 1nch’s smart contract, there is an external “mint” function that allows for the creation of new tokens. This functionality is removed by calling the above
renounceOwnership function. According to all of the functions called in 1inch’s smart contract,
renounceOwnership has never been called.
The main question is what is the governance for the 1inch Gnosis multisig wallet?
There is an OwnershipTransferred event to a Gnosis multisig wallet. This could be tied to a governance model around token creation. However, the 1inch team has not confirmed this via Discord, a Reddit post, and Twitter post.
An admin on the 1inch Discord denied the existence of the external “mint” function, but it is unclear their relationship to the 1inch core team. In addition, the question was posed to 1inch investor, Pantera Capital, during a conference call and via email, and their clarification is being awaited.
Minting New Tokens
Creating new 1INCH tokens is tested by deploying the 1INCH smart contract on the Ethereum Ropsten testnet. First, the initial 1.5b 1INCH tokens are created. Then, using the external mint function, we can create however many new tokens are desired. In this case, 3b new 1INCH tokens are created.
With a compelling product offering many services, it will be great to understand if there is a reasonable explanation in regards to the new creation of 1INCH tokens.
The best-case scenario is that there is a governance system set up around the Gnosis multisig wallet and that this system defines when and how new tokens are created.
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(Disclosure: I own a small amount of 1INCH tokens)