In the mammalian olfactory system, crosstalk among diverse olfactory signals is minimized through labelled line coding: individual neurons express one or few olfactory receptors among those encoded in the genome. Labelled line coding allows for separation of stimuli during mammalian olfactory signal transduction, however, in the nematode worm Caenorhabditis elegans, 1,300 olfactory receptors are primarily expressed in only 32 neurons, precluding this strategy. Here we report genetic, pharmacological and behavioural evidence that β-arrestin-mediated desensitization of olfactory receptors, working downstream of the kinase GRK-1, enables discrimination between intra-neuronal olfactory stimuli, but that this discrimination relies on quantitative, rather than qualitative differences in signalling. Our findings suggest that C. elegans exploits β-arrestin desensitization to maximize responsiveness to novel odors, allowing for behaviourally appropriate responses to olfactory stimuli despite the large number of olfactory receptors signalling in single cells. This represents a fundamentally different solution to the problem of olfactory discrimination than that which evolved in mammals, allowing for economical use of an extremely limited number of sensory neurons.