Mooniswap (launched August 2020) is a liquidity pool and Decentralized Exchange (DEX) created on the Ethereum blockchain. The platform utilizes an automated market making model similar to Uniswap. It is described as the next generation of an automated market maker with virtual balances. It was created by the developers of popular DEX aggregator 1inch.exchange. ^[1][2]

Backstory

The 1inch.exchange team noticed a problem with existing Automated Market Makers (AMM) like Uniswap, Bancor Network, and others in which their Liquidity Providers (LPs) are not earning slippage part of the trade. Whenever anyone performs a swap on an AMM, the exchange rate is the result of two parts, i.e. Fixed Swap Fee and Price Slippage. The exchange rate becomes worse with the increasing size of the user's swap.^[3]
The first part (i.e. swap fee) is earned by liquidity providers. However, the second part (i.e. slippage) is fully earned by arbitrage traders, who also share a significant part of the profits with the miners by setting high gas prices to take advantage of transaction ordering in blocks. Most liquidity pools miss out on 100% of the possible LP income, while some of them miss out on 300%-500% of potential income.^[4]
The team started digging into the 'AMM arbitrage issue' and found an efficient solution which they built in the form of Mooniswap within a few weeks.

Overview

Mooniswap Interface
Mooniswap is developed by creators of DEX Aggregator protocol 1inch.exchange. It connects a number of decentralized and centralized platforms in order to minimize slippage and find the best prices of Ethereum and ERC20 tokens for the users. It was established by Anton Bukov (CTO) and Sergej Kunz (CEO) in May 2019 and has a headquarters in Stuttgart, Baden-Württemberg, Germany.
As stated, Mooniswap is an AMM (Automated Market Maker) decentralized exchange created and launched by 1inch.exchange. It is similar to Uniswap and helps the users to swap/exchange Ethereum and any ERC20 token instantly. It also enables Liquidity Providers (LPs) to earn interest on providing liquidity on the Mooniswap liquidity pools.  To prevent loss of potential profit of Liquidity Providers (LPs), It introduced 'virtual balances technique', which decreases the profit of arbitrageurs due to temporarily mispriced pools, earning more profit for liquidity providers.

Slippage Earning for Mooniswap LPs

Comparision of Uniswap and Mooniswap LP earning from Slippage
Mooniswap is designed using an idea of virtual quantities mentioned by Ethereum founder, Vitalik Buterin in a discussion regarding market makers, but in a different context.  The new AMM model is capable of keeping most of the slippage revenue in the liquidity pool by maintaining virtual balances for different swap directions. When a token swap happens on the DEX, a market maker does not automatically apply the invariant algorithm and displays the new prices for upcoming trades. The AMM improves exchange rates for arbitrage traders slowly, over approximately a 5-minute time period. As a result, they are able to collect only a portion of slippage, while the rest remains in the pool and shared by liquidity providers which increases their earning.
Mooniswap v1.0 was launched on August 11, 2020, and its upgraded and rebranded version (i.e V2) came out in December 2020. The important aspect of the 1inch Liquidity Protocol version 2 is the 'price impact fee'. This is a fee that grows with price slippage to ensure that liquidity providers and 1INCH token stakers earn significantly more on volatility.

Native ETH Support

Apart from increasing profit for the liquidity providers, Mooniswap made swapping simpler by adding native ETH support. It introduced an abstraction layer on top of the native ETH asset and ERC20 token standard to allow direct usage of native ETH. This abstraction avoids wrapping and unwrapping of Wrapped ETH (WETH) token therefore not only simplifies the swap but also significantly lowers the gas usage on pools .

Price Oracles

Price oracle data is stored as a cumulative sum of all trade inputs and outputs in both directions and it is updated after every transaction. By choosing different periods, oracle users can configure the required level of price recency and manipulation resistance. Mooniswap launched on-chain volume-weighted average price (VWAP) oracles to cope up with oracle manipulation (so the price) from the malicious actors. The Mooniswap team believe that due to Mooniswap’s utilization of virtual balances VWAP oracles will be hard to manipulate.

Fees

Mooniswap DEX charges two types of fees - Swapfee and Referral Fee. Apart from these two, Mooniswap does not charge any other protocol fees but the users need to take care of gas fee.  Mooniswap initially utilizes 0.3% swap fee, which can be lowered in the future down to 0% as a way to provide more competitive prices to the market. Mooniswap also introduced a referral fee to incentivize integrations with more and more cryptocurrency wallets, decentralized applications (DApps) and other DeFi services that will help to increase trading volume and provide additional income for Liquidity Providers (LPs). The referral fee does not apply additional pressure on the exchange rate, but it rewards external participants who contribute to the protocol by providing additional trading volume. The referral fee is only charged when referral wallet is specified in transaction arguments. It is fixed and is equal to 5% of income earned by liquidity providers on the trade. So initial 0.3% swap fee will be split into 0.015% going to referral and 0.285% going to liquidity providers. Additional profits earned by using virtual balances are also split in the same ratio with 5% going to referral.

Governance

Mooniswap which is part of the 1inch Network is governed by 1inch Protocol's decentralized autonomous organization (DAO). The independent board of the 1inch Foundation released 1INCH, a governance and utility token on December 2020. The 1inch Foundation intends to support the adoption of the 1INCH token via the permissionless and decentralized 1inch Network. Users can check 1Inch tokenomics, distribution, and other details on 1inch.exchange and 1inch token pages.

Liquidity Mining

The Mooniswap team added a liquidity mining program for a 1inch token and according to that Mooniswap liquidity providers will earn a pro-rate claim of the total 2% of the 1inch tokens allotted to early-LPs subject to a 1-year vesting period. LPs will receive “vouchers” which represent a claim on future tokens, with their allocations unlocking in real-time over the course of the next year (similar to how Curve DAO Token vesting works). At the time of the launch event, the team announced that INCH tokens will be additionally distributed to users who provide liquidity for 6 pools that include 1inch token-ETH , 1INCH-Dai, 1INCH-WBTC, 1INCH-USDC, 1INCH-USDT, 1INCH-YFI.

Mooniswap Tutorial

To use swapping feature, or to add/remove liquidity on the liquidity pool, a user needs to login with any Ethereum wallet. Popular wallets are MetaMask, Coinbase Wallets and hardware wallets like Ledger and Trezor. Users can also use the WalletConnect interface to connect with any mobile wallet. Mooniswap allows users to swap ETH and any ERC20 Token that popular tokens like LINK, UNI, YFI and many others.

Adding Liquidity on Mooniswap

To add liquidity to a certain pair on Mooniswap, users need to deposit an equal value of each token. They can choose ETH, DAI, USDC, USDT or CHI as a base token. When they enter the amount for their base token or the other, the amount of other token will be auto-filled by Mooniswap. They need to enter an equal value of each token in the wallet to be able to add liquidity to that certain pair. When they add liquidity to a pair on Mooniswap, they need to approve the token by clicking on the ”approve X token” button and confirming the transaction on their wallet. Users will need to pay Gas (Ethereum) fees for the approval of a token.
After approving the token, users need to click on the ”supply” button to add liquidity to the pair. After clicking on the ”supply” button, they will be able to see rates, their share of the pool and the number of pool tokens they'll receive, and after clicking ”confirm supply” they will finalize the transaction. They will again be directed to confirm the transaction on their wallet. The pool tokens received after adding liquidity to a Mooniswap pool will accrue trading fees. Anyone can remove liquidity anytime from the pool to receive trading fees along with their contribution to the pool but they are encouraged to check gas prices before confirming transactions. The LP tokens received after adding liquidity to the pool will be burned during removal of liquidity.

Security

Mooniswap DEX underwent three security audits so far and the latest audit was done by PepperSec.  The first two audits were performed by dapp.org and Scott Bigelow respectively.

Partners

In September 2020, the 1inch.exchange team announced that they partnered with TRON blockchain for JustSwap and Mooniswap integration. With this partnership, the 1inch platform will integrate with TRON’s AMM Just Swap and Mooniswap will integrate into TRON which ultimately helps both 1inch and Mooniswap users. Support of the TRON blockchain in 1inch will enable the users to get the best rates for TRON assets.
This is what CEO Sergej Kunz said about the collaboration:

“Thanks to the partnership, Mooniswap and 1inch users will enjoy the best-in-class advantages that come standard with TRON’s blockchain. These include faster, cheaper service, high-throughput scalability, huge developer community and a massive social media following.”

Mooniswap business model

The Mooniswap business model is driven by the Referral Fee.
Mooniswap initially utilizes a 0.3% Swap Fee, which can be lowered all the way down to 0% in the future as a way to provide more competitive prices to the market. Moreover, Mooniswap introduces the Referral Fee to incentivise integrations with wallets and other services that increase trading volume and additional income for liquidity providers. The Referral Fee is only charged when the referral wallet is specified in transaction arguments.