Robert has reported for a variety of international publications including the Associated Press, The Guardian, Vice, and Decrypt. Current areas of interest include the political economy of technology, cryptocurrencies, and privacy. Robert has a Bachelor of Science from UCL, and a Master's degree from the University of Oxford's Internet Institute.
Many in the crypto world are putting their money—literally—on “decentralized applications” that run without intermediaries and are supposedly more secure and less vulnerable to human failure. One such innovation is the decentralized exchange.
These use self-executing “smart” contracts and decentralized governance—which means the power to update the software is distributed across a range of people—to facilitate exchanges that are owned entirely by the users.
Unlike centralized exchanges, decentralized exchanges do not hold users’ funds in “custody,” meaning users retain their tokens in their digital wallets and do not have to entrust them to a third party. That’s arguably more in the spirit of crypto, which was born in part as a reaction to online gatekeeping.Buy and Sell Bitcoin, Ethereum, and over a dozen other cryptocurrencies with Wealthsimple. Sign up and Trade here.
The 0x protocol is a key piece of infrastructure underlying many of these exchanges. The problem it purports to resolve relates to a specific issue on decentralized exchanges, where there is often a need for a large amount of liquidity in otherwise small, thinly traded tokens.
But the Ethereum network itself is cumbersome and slow to log and verify new transactions, meaning it is often quickly jammed and overwhelmed by any upticks in the trading of these tokens. That also blows up trading fees, raising the price of what in Ethereum parlance is known as “gas.”
0x attempts to solve this problem by providing a means to broadcast transactions “off-chain”—that is, through a communication channel built by a third-party—prior to confirmation, allowing buyers and sellers to find one another more rapidly before logging the final, confirmed transaction onto the Ethereum ledger. This sort of off-chain communication channel is known as a “sidechain.”
The protocol has become something of an open standard for the trading of low-tier cryptocurrencies on Ethereum-based decentralized exchanges, rather like HTML is an open Web standard. If the thousands of different tokens on the Ethereum were unable to communicate with one another in the same standardized way, it would be impossible for them to be traded with one another seamlessly.
As such, 0x underlies many of the Ethereum ecosystem’s most widely used applications, including Matcha, Tokenlon, MetaMask, Augur, DeFi Saver, Radar Relay, Paradex, and DDEX. It can also be used for a variety of other crypto-applications—decentralized prediction markets, automated trading bots, over-the-counter trading desks and blockchain-based video games.
What’s the point of 0X’s token?
On August 15, 2017 0x’s small team of developers raised $24 million worth of “ZRX” tokens in an “initial coin offering,” essentially an initial public offering with unregulated cryptocurrency tokens instead of shares. These tokens are known as “ERC-20” tokens and run on the Ethereum blockchain. They aren’t “mined” like Bitcoin and Ethereum but minted ex nihilo by the issuing company.
Why does the 0x protocol need a token? First, it’s used for governance of the protocol among its users / stakeholders, who determine how the software is maintained and updated. Token-holders each receive one vote per token on proposed updates to the protocol (0x Improvement Proposals).
The voting process takes place entirely off-chain through the 0x website and concludes to coincide with the most recent block confirmation on the Ethereum blockchain. This confirmation is snapshotted, so any voters seen to move their funds before this point are disqualified. Updates tend to be minor and incremental. Because 0x is a modular protocol containing multiple different interlocking entities, only small parts of the protocol are affected.
The ZRX token is also used to incentivize market makers, who essentially buy and sell tokens on behalf of traders to keep the market afloat, to provide liquidity to decentralized exchanges. Holders can deposit their ZRX tokens into a smart contract known as a “staking pool’ that is run by a market maker.
Every time ZRX is traded, the staker receives a “liquidity reward” based on a combination of the proportion of the amount staked and a fixed percentage split into various tiers. The reward is funded by fees applied to 0x transactions.
At the end of a fixed staking period, a portion of the ZRX tokens in the pool returns to the stakers, the idea being that they’ll have already made a profit on the rewards. The purpose of this system is to provide an incentive to the market makers themselves, who will attract more willing stakers the better a job they do. It’s proven successful: A market maker late last year came away with profits of 100 percent.
How the off-chain stuff works
The majority of decentralized exchanges process and log transactions directly through the Ethereum blockchain, which means they don’t use third-party services and merely carry out the transaction from one wallet to another, public key to public key. The 0x protocol has devised a roundabout, supposedly faster way of doing this.
First, the protocol, which isn’t an exchange itself but prefab architecture used to build a new one, distinguishes “makers,” who place an order, from “takers,” the counterparties who fill an order. The details of a proposed trade (token to be traded, price, etc.) are first broadcast off-chain by the maker. If the taker is trusted this can be done through any normal communications channel, including mainstream messaging applications and social networks, such as Discord and Slack.
If the taker isn’t trusted, the maker can instead go through one of several “0x relayers,” such as MetaMask and the 0x-created Matcha, which maintain an off-chain copy of the details of the transaction. The final act, or “trade settlement,” is processed through the 0x protocol and logged onto the Ethereum ledger.
For instance, log onto Matcha, which works like a typical price or insurance comparison site, and you can search for any coin to order or allow autofill to generate options. Clicking on an option calculates the cheapest possible price across all exchanges and generates a price that the user can review. This saves the user having to search for appropriate counterparties across multiple exchanges and helps them find the exchange with the lowest possible fee (Matcha tells you how much you’ll save). It also resolves one particular concern about decentralized exchanges. Because they are maintained algorithmically, prices across them often vary significantly.
0x emphasizes that Matcha does not act as a middleman and carry out the trade itself. It simply connects the trader to a given exchange and streamlines the overall trading process.
0x: The company
0x, a company based in San Francisco at the glowing heart of the growing Ethereum industry, was founded by CEO Will Warren and CTO Amir Badeali. It currently has 45 full-time staffers.
The 2017 $24 million token sale was financed in part by several major blockchain venture firms, including Blockchain Capital, Pantera Capital, and Polychain Capital, as well as various Chinese investors. All involved received a 30 percent discount on future tokens; there were reportedly 12,000 further backers.
The company positions itself at the vanguard of the emerging decentralized finance movement, known as DeFi. Its website proclaims three “core values.” The first, “Doing the right thing,” refers to developing ethical software which doesn’t extract rent and confers value to its users. The second, “Consistently shipping,” refers to continuing to build through adversity. The third, “Focusing on long-term impact,” similarly describes the need to push through setbacks and skepticism by keeping lofty future goals in mind. As with many cryptocurrency products, use cases are still murky, the software is confusing and public interest is relatively low—persistence is a must.
With the massive surge in interest in DeFi since late 2020, the ZRX token’s value has soared to $0.5 to around $1.50, achieving a total market capitalization of $1.32 billion. The token can be purchased from a range of cryptocurrency exchanges, including Binance, Gemini, Huobi Global, Coinbase Pro, BitHumb, Bitifnex, BitStamp, as well as Binance US (Binance’s supposedly better regulated American sibling). It can also be purchased on derivatives exchanges like OkEx, which allow margin trading. Additionally, it’s available on Robinhood, the wildly popular day-trading app at the heart of the GameStop surge that took place early in 2020. The protocol now accounts for 12.9% of all decentralized exchange trading volume, after the DeFi colossus, Uniswap, which accounts for 59.5%.
The recent increase in 0x’s value was caused in part, perhaps, by the proliferation of stimulus checks during the pandemic as well as skepticism about government and corporate actors who seek to impose rent on newly blossoming digital economies. DeFi, indeed, has over the past year expanded its offering beyond decentralized exchanges to include complex investment products that offer services such as instantly repayable loans that don’t require approval from a commercial bank or middleman. DeFi devotees claim that this has proven especially popular in countries with repressive regimes like Venezuela, which police currency usage and print new money recklessly. 0x’s value to this infrastructure is enormous.
With growth reportedly reaching all-time highs—in January 2021 the protocol reportedly saw $6 billion in overall trading volume—0x is looking to evolve further. A “v4” update this year saw ZRX appreciate further, and the company has also announced plans to decentralize its own corporate structure using a “DAO,” or decentralized autonomous organization, which would delegate to its users decision making around a planned community-generated treasury fund.
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