What is 0x?
According to the 0x website, “0x is an open, permission less protocol allowing for ERC20 tokens to be traded on the Ethereum blockchain”. 0x believes that most digital assets and goods will be tokenized in the future. As of now, 0x has been built for trading ERC20 tokens, but was built in a way that it can be implemented on other chains in the future. The protocol is intended to aid interoperability between DApps that have utility tokens.
There are many decentralized applications on the Ethereum network that require exchange functionality to operate (examples: prediction markets, decentralized asset management platforms and stable coins). The issue is that each one of these existing projects use their own custom and proprietary smart contracts that they build from scratch. This means that each individual project needs to bootstrap liquidity. The biggest problem is that there is no interoperability between the DApps.
0x uses something called off chain order relay and on chain settlement. 0x allows anyone in the world to operate a trustless shapeshift. This means that anyone can act as a decentralized exchange for ERC-20 tokens. Someone who operates one of these trustless shapeshifts is called a relayer. A relayer is any party that hosts an off chain order book and collects transaction fees for offering that service. Example: Let’s say I want to swap my ERC-20 tokens for another token. I would go to a relayer’s webite and place a trade on their order book. In order to do this, I have to agree to the relayer’s fee schedule. The relayer then matches my order and sends it to the blockchain through smart contracts. I don’t have to trust the relayer because all orders are cryptographically signed. All of this happens off chain which prevents unnecessary transaction fees and also prevents the network from becoming overloaded with transactions.
ZRX has 2 main utility functions (from official 0x slack)
- Governance – ZRX will allow holders to vote on changes to the 0x protocol. This is a critical feature since relayers will want to upgrade the protocol and use the same 0x contracts as other relayers in order to maximize liquidity. A governance mechanism decreases the chance of update forks, allows an automatic update of the contracts, ensuring consistency across users, and therefore permits efficient updates to the protocol.
- Relaying fees – relayers will host off-chain order-books and matching engines to match orders of makers and takers (the users wanting to trade ERC20 tokens). Makers and takers being matched using the service will pay a fee to the relayer using ZRX.
The co-founders of 0x are Will Warren (CEO) and Amir Bandeali (CTO). They specialize in smart contract R&D. Warren studied applied physics at Los Alamos Nat Lab and mechanical engineering at UC San Diego. Bandeali was previously a fixed income trader at DRW and studied finance at the University of Illinois. The team has full stack blockchain engineers, digital marketing experts, graphic designers and more. Their advisors include Fred Ehrsam (Co-founder of Coinbase), Olaf Carlson- Wee (founder of polychain capital), Joey Krug (Co-CIO at Pantera Capital/ founder of augur, and Linda Xie (Co-founder at Scalar Capital).
The team is incredibly technical which could be a disadvantage for investor relations. The 0x protocol is difficult to explain in layman’s terms which may make new investors hesitant to get involved. Also, since the project is currently aimed at ERC-20 tokens, Ethereum’s scaling issues could prove to be problematic for 0x.
The 0x protocol is an excellent addition to the Ethereum ecosystem. The project allows for DApp interoperability as well as increased liquidity for ERC-20 tokens. It also helps Ethereum tokens become more decentralized since people will be able to trade tokens through relayers instead of centralized exchanges. Ethereum and ERC-20 tokens make up the majority of the cryptocurrency market and 0x is positioning itself to capitalize on that. Increasing DApp interoperability is a key step in advancing the usability of the Ethereum ecosystem and decentralized applications.