What is 0x (ZRX)? Protocol for Building Decentralized Exchanges
0x provides the infrastructure for developers to build decentralized exchanges easier.
0x is a protocol for decentralized exchange of tokens on the Ethereum blockchain. What that means is that 0x provides the infrastructure to external companies to build a decentralized exchange (DEX).
0x was founded in October 2016 by Amir Bandeali and Will Warren. They released 0x’ white paper in February 2017 and in August launched their ICO.
The motivation behind the creation of the 0x protocol is based on the vision of the founders that anything that can be assigned a value in the world eventually is going to be tokenized and moved onto an open financial network. They believe that the Ethereum blockchain will give birth to thousands of different tokens.
0x vision is that things like traditional currencies, stocks, bonds, loyalty points, video games items, airlines miles and many more will find their way onto the Ethereum blockchain and when that happens there will be a need for low friction transfer of these tokens.
And 0x will be there to provide the tools for a quick and easy solution to this problem.
We can say that the team of 0x is tightly knit. It consists of around 20 people, distributed around the world – in the US, Poland, Switzerland, Australia. The entire team gets together once every few months in order to see how the land lies.
Decentralized vs. centralized exchanges
In order to understand better what problem 0x is trying to solve you should know the main difference between centralized and decentralized exchanges. Basically, the primary reason for people to choose a DEX over a centralized exchange is security.
When you deposit cryptocurrencies to a centralized exchange like Coinbase, Kraken or Binance, you give up the full control of your funds. When your funds arrive at the exchange, you basically have to trust it that it will keep them safe for you. However, if the centralized exchange gets hacked or goes bankrupt your crypto will be gone.
On the other hand, decentralized exchanges are peer-to-peer and allow all order functions and trades to take place through smart contracts, directly on the blockchain. This means that there is no middleman. People are trading directly with each other and are always in control of their funds.
However, the higher security comes at a cost. Currently, decentralized exchanges are a lot slower and with limited liquidity compared to their centralized counterparts.
So, 0x is basically trying to provide the infrastructure technology for building decentralized exchanges that can match the performance of their centralized competitors.
Existing approaches to decentralized exchanges
At the moment there is a handful of existing decentralized exchanges and decentralized applications (DApps) that require exchange functionality in order to operate. However, the problem with all of them is that they make their own proprietary and custom smart contracts from scratch which obstructs the interoperability between any of them and leads to low liquidity and high latency.
- On-Chain Order Book
The very first decentralized exchanges that were created on the Ethereum blockchain kind of took the same functionality of a centralized exchange and pulled it into a smart contract onto the Ethereum network.
This means that every time someone wants to post, modify or cancel an order, they must pay gas costs and create a transaction. This method is completely expensive and inefficient.
- Automated Market Makers (AMMs)
The second class of decentralized exchanges are AMMs. With them instead of having two parties on either side of the market trading directly, both parties trade with a smart contract. The exchange rate that is offered by the smart contract is modified deterministically according to how strong the market forces are on either side of the market.
However, it is proven that this method could be subject to front-running and it may be gameable.
- State Channels
State channels are great for reducing latency and increasing throughput because transactions occur off of the blockchain. They are perfect for day-trading but if you want to just buy a big amount of tokens and immediately use them you will face a lot of friction when using a state channel.
First, you have to move your funds into the channel. Then, you have to pay a security deposit to ensure that everyone is behaving honestly within the channel. Third, when you want to move your funds out of the state channel there is a challenge period which is also required to ensure that people are behaving honestly.
- Off-chain оrder relay, on-chain settlement
0x pioneered the off-chain оrder relay, on-chain settlement approach which allows users to broadcast an order off-chain and only value transfers to be executed on-chain. This reduces significantly the gas fees associated with the trading operations.
This is accomplished thanks to the so called “relayers”. Relayers act as a trading exchange, but they can’t execute trades. They just store and present maker orders to the network. In compensation for this work, relayers receive payments in 0x’s native currency, ZRX, for each transaction that they mediated.
What makes 0x a protocol is that anyone can become a relayer without the specific permission of 0x. Once you become a relayer, you keep 100% of all the trading fees on all the volume you can create.
0x is an open system with multiple stakeholders that each have their motives to invest and their own vision about the future of the protocol. That is why 0x decided to create a decentralized governance mechanism which uses token voting for future upgrades of the protocol. The more ZRX you have, the more impactful your vote is.
Token abstraction is a feature that 0x enables which probably will have real world use-case five to ten years from now. The idea behind token abstraction is to replace the need for using multiple tokens.
DApps are becoming more sophisticated. We see more often many layers in the decentralized application stack, and each layer is practically a specialized network with distinct incentive and token.
For example, a DApp might require a separate consensus layer, file storage layer and computation layer. Basically, if you have a big DApp built from several smaller DApps, each of them will require you to use a different token, in order for the big DApp to work properly.
0x could change that. Token abstraction will enable the end-user to hold some kind of tokenized fiat instead of holding all these tokens that people might not even know of. The takeaway from this is that in the future when end-users go to a sophisticated DApp they will just see that it will cost them $5 in order to access some of its functionality. Then, 0x will process all the transactions between the different tokens of the smaller DApps in the background.
How many DEXs are based on 0x?
The fact that 0x is a protocol separates it from any decentralized exchange out there. 0x is not building a decentralized exchange. The protocol provides the opportunity for developers to build one easier.
If we have to use a metaphor, we could say that 0x is giving the fishing rod and the bait in the hands of the fishermen who should make the catch themselves.
Currently there are around 10 decentralized exchanges based on the 0x protocol and even more are still in development. Some of the existing ones are DDEX, Radar Relay, Paradex, StarBitEx and The Ocean.
48-fold surge for ZRX price
0x token sale took place in August 2017 and the project raised $24 million. The ICO price of one ZRX was around $0.05 per token. Like most cryptocurrencies 0x peaked in value in the beginning of 2018.
From December 12, 2017 to January 13, 2018 ZRX spiked from $0.22 to $2.39, which is the current all-time high of the project. As of mid-August 2018, ZRX is trading at $0.70.
The total supply of the token is 1 billion ZRX, but the circulating supply is 537,454,675 ZRX, which places 0x at number 23 of all cryptocurrencies with a market cap of $376 million.
0x built its community organically without attracting many speculators. Most of the people that invested in 0x have technical background. Because 0x was one of the first application protocols to launch live on the Ethereum Mainnet, many developers saw it as a great opportunity to monetize their skills.
One of the main reasons why people are still using 0x to build decentralized exchanges is that the protocol massively lowers the barriers to entry for developers that want to create DEXs.
Many people believe there is a bright future ahead of decentralized exchanges. Even the owner of Binance – one of the biggest centralized cryptocurrency exchanges in the world – thinks that DEXs will be mass adapted in the next several years. That is why Binance is working on their own decentralized exchange.
If this happens 0x may be one of the main players in the crypto universe. Its interoperability among dApps and relayers could be the key to providing higher liquidity – one of the major struggles with DEXs. 0x’s off-chain order relays allow low-cost operations and provide users with full control over their funds.
DEXs are still far behind centralized exchanges in terms of adoption and performance. However, this gap will be reduced every year and 0x could have a significant role in that.
If the predictions about the promising future of decentralized exchanges turn out to be true, this early stage of their development could be a great time to invest in projects like 0x.