0x: Decentralized Crypto Exchange on Ethereum

About 0x Protocol

The 0x Protocol is an open-source protocol for decentralized token exchange built on Ethereum. Through smart contracts, 0x aspires to provide an efficient and secure means of exchanging tokens on the blockchain.

Currently, there are two types of crypto exchanges: centralized or decentralized.

A centralized exchange (CEX) is where users deposit their funds directly onto the platform. The platform then matches buy and sell orders. However, recent news has shown that centralized exchanges are more exposed to hacks or mismanagement by owners. In the end, users are relying on a central authority to store funds. This represents a potential point of failure.

Decentralized exchanges (DEX) were developed to address the privacy and security concerns of centralized exchanges. In a DEX, users have full control over their assets. Users also directly authorize each trade instead of allowing the platform to control transaction authorization. Since this type of peer-to-peer transaction requires the active presence of two willing parties, DEX transactions may take longer to execute and may result in lower trading volumes and liquidity.

Why do we need DEX Protocols?

Centralized exchanges provide an easy way to trade crypto with the lowest risk of liquidity issues. User funds are held and stored by the exchange. A third-party holding all user funds creates a potential single point of failure that hackers and bad actors within the exchange may exploit.

There are many cases where CEXs have failed to secure user funds. Cryptopia is a centralized crypto exchange that suffered a major security breach in January 2019. Its reported loss in crypto has already amounted to over $1.3 billion as of April 2019. The hackers gained access to Cryptopia’s centralized private key storage and accessed user funds. 

Coincheck suffered a hack in January 2018 resulting in a loss of over $500 million in crypto. Critics blamed its poorly managed custody model. Coincheck was found to have kept all of its users’ crypto in a single wallet. 

DEXs deal with these issues by providing a system that takes out the middleman from crypto transactions. It maintains liquidity by keeping a network of users active and connected on a peer-to-peer level, prepared to trade whenever they want. There is also no centralized authority that governs how the money will be kept and where it will go – users always maintain custody of their funds. Most DEXs rely on an order book that lists every bid for any kind of asset.

What does the 0x Protocol Offer?

0x aims to address criticisms against decentralized exchanges by using smart contracts to make trading more affordable, fast, liquid, and autonomous. Through a standard protocol, 0x makes sure that orders are relayed to the blockchain only when they are already settled. 

This innovation addresses a current problem with DEXs where every adjustment or new order has to be recorded on the blockchain for every order book. This forces users to incur extra transaction fees every time they make transactions. The 0x solution reduces time spent in each trade and lowers transaction fees by reducing these processes through an aggregated order book. 0x does not collect any fee for the use of their protocol.

0x has conceptualised another category of creating a functioning peer-to-peer network, called relayers. Relayers collect broadcasted buy and sell orders, and aggregate them into an order book. They are also responsible for broadcasting orders through public or private order books. Relayers help users easily create and sign orders, or find an order to fill from its collected broadcasts. They can only function as a trade facilitator between order makers and order takers. Relayers are paid relayer fees in 0x (ZRX) tokens. This helps provide liquidity to the 0x network because users can conveniently interact with each other to meet buy and sell requests without the need to deposit funds to a reserve pool before participating in exchanges.

0x’s Top 10 Relayers

Rank Relayer Trades (24H)
1 STAR BIT 291
2 Tokenlon 138
3 Radar Relay 62
4 Paradex 33
5 Ethfinex 22
6 Token Jar 13
7 LedgerDex 11
8 Veil 4
9 GUDecks 2
10 Emoon 1

Users can opt to not go through relayers in peer-to-peer exchanges. Instead, makers and takers directly transact with each other. 

0x also has 0x OTC, a front-end interface where peer-to-peer ETH token exchanges can be made without a Relayer. Parties to the transaction can interact and settle orders by themselves, and relayed by the blockchain. 

How Does 0x Work?

0x works on on-chain and off-chain solutions. Trades are confirmed off-chain and value occur on-chain. This way, transactions are only recorded on the blockchain after a trade has been completely executed. This results in lower gas fees compared to other DEXs.

Other Projects Offered to Developers

0x Instant lets users add crypto purchasing options to any app or website. Instant is open-source and developers can freely configure  code to allow the host website or app to earn fees on each transaction made. Currently, 0x Instant is hosted by non-fungible token marketplaces, non-custodial crypto wallets, dApps, and crypto price feeds. An example of firms using 0x instant is the eMoon market, a peer-to-peer marketplace for ERC20 and ERC721 assets, and the Coinbase Wallet that offers a decentralized exchange on top of its non-custodial wallet service.

0x Launch Kit lets developers easily start their own individual relayers. The kit includes a 0x relayer codebase which can be forked or referred to when creating individual marketplaces. Developers can just fork the repository and run it to begin making or taking orders. The aim of the kit is to allow people to launch their own secondary market for ERC20 tokens.

0x Multi-Asset Proxy is a protocol built on top of 0x to allow users to buy or sell multiple assets with a single order. This supports a number of transfers for any type of asset supported by the protocol, making multiple transactions easier and automated within 0x.

ZRX Token

The 0x protocol has a native ERC20 token called 0x (ZRX). Its current market cap is at $102.86 million with a circulating supply of 600,475,853 tokens (capped at 1 billion tokens). ZRX is listed on exchanges such as Huobi, OKEx, HitBTC, and Liquid.

ZRX is used to pay relayers their trading fees, while also functioning as a governance token for protocol updates.

ZRX’s Initial Coin Offering (ICO) ended on 16 August 2017 and raised $24 million, drawing support from known Venture Capitalist (VC) firms like Polychain Capital, Blockchain Capital, and Pantera Capital.

0x Goverannce and Business Model

0x Governance Model

0x has partnered with Aragon to build aragonOS, which uses smart contracts on its platform to create infrastructure open for upgradeable Decentralized Autonomous Organizations (DAO). For now, 0x relies on its community for governance, with token holders eventually assuming control over the protocol.

This governance model covers three phases: Community Managed Token Registry, Community Veto Power, and Liquid Democracy.

Currently, 0x has a Token Registry contract that stores all ERC20 token metadata and functions as an on-chain reference for users to check and review token addresses and exchange rates before entering into a trade. This registry is still managed by the 0x core team, but they are working on a community-based Token Curated Registry (TCR).

0x’s immediate plan is to launch a system that allows governance proposals and upgrades submitted by the 0x core team. These can be vetoed by ZRX holders. The core team will look at the proposals and sentiment of the users through an off-chain social consensus platform such as Carbon Vote and design a contract accordingly. The contract will be added to the 0x pipeline and ZRX holders can choose if they want to allow or veto the proposal.

The last phase is to transfer the governance system to a mature Decentralized Autonomous Organization (DAO). This is where 0x will introduce a delegative voting scheme that lets the community assign voting power to the core development team.

Business Model 

0x does not charge fees for individuals who want to join or use the network. Anyone can also build on the protocol since it is open source. People can choose to create their own DEX or become a relayer. The network built by 0x is developed by their supporters and GitHub contributors. The network relies mainly on community support to build on the protocol.

0x is funded by its holdings of ZRX tokens, with 15 percent earmarked for operational expenses.

0x Investors

Polychain Capital

Polychain Capital is a VC firm that invests in cryptocurrency protocols and companies based in San Francisco and founded by Olaf Carlson-Wee. It has invested in companies such as Dharma Labs, Anchorage, Coinbase, dYdX Protocol, Loanscan, and Bloqboard.

Blockchain Capital

Blockchain Capital is a VC firm that has invested in over 70 in blockchain tech companies. Blockchain Capital automatically utilizes part of the exit proceeds to purchase their own token to increase token price so that tokenholders can sell them.

Blockchain Capital’s tokenized fund is an evergreen fund, meaning that they continuously reinvest investment gains. The fund’s lifespan is undefined, but Partners have the option to redeem with investors and close the fund after 10 years.

Blockchain Capital’s security token, BCAP, gives tokenholders an indirect economic interest in the fund’s portfolio companies. In essence, these tokens don’t have any distribution rights such as dividends. When a BCAP portfolio company exits, the fund first reinvests a portion of the proceeds. It then has the option to use the balance to repurchase BCAP tokens and burn them, thereby increasing the value of the remaining tokens. Therefore, token holders can profit when they sell their tokens on the open market at a higher price.

Pantera Capital

Pantera Capital is a hedge fund and venture fund hybrid that invests in blockchain companies, tokens, and cryptocurrencies. It functions almost like a traditional venture fund with a 10-year investing period. Pantera buys into companies in the pre-ICO stage, helps them find a productive network and flourish. They launched their third crypto fund last year and have raised $71 million and reported a 10,000 percent return over the last five years.

0x Partners

Aragon

0x has been working with Aragon to create a governance infrastructure to allow 0x to transition into a complex and upgradeable DAO. Aragon functions under a system called Aragon Core, a Solidity DAO framework. Its focus is to create a system that enables a functional logic that allows organizations to automate management and governance. Their offer primarily focuses on four core components: automating bylaws that define user permissions and governance, capital and accounting systems.

StarkWare

StarkWare is a blockchain solutions provider focused on improving scalability and privacy of blockchains with the use of STARK technology. Its cryptographic solution, known as zero-knowledge proofs (ZKP), aims to enable faster blockchain transaction within DEXs. StarkWare will be working with 0x to test a ZKP solution called StarkDEX which is capable of processing around 500 blockchain transactions per second.

Harbor

0x’s partnership with Harbor seeks to strengthen the platform’s interoperability between different compliance protocols. The goal is to make trading through the 0x relayer ecosystem more compliant to regulatory requirements related to issuance and secondary trading. Harbor will centralize compliance systems and decentralize liquidity aspects for secondary trading. 0x and Harbor will work together to create open standards that enable interoperability between wallets, custodians, trading platforms, and other related services. 

Ethfinex

0x partnered with Ethfinex to help build a DEX that offers the liquidity of Bitfinex to the Ethereum blockchain. Ethfinex expects to attract users to trade securely and directly without requirements on deposits, sign-ups or other KYC details.

District0x

District0x is a network of decentralized and autonomous marketplaces and communities called ‘districts’. The districts are found in the d0xINFRA network under a decentralized and distributed open-source framework. Its aim is to create a frictionless digital platform where users can make buy and sell decisions, rank other participants to the community, and complete transactions in convenient ways.

0x also has a trusted set of advisers. They include Fred Ehrsam, Co-Founder at Coinbase, Linda Xie, Product Manager at Coinbase, Olaf Carlson-Wee, Founder of Polychain Capital, and Joey Krug Founder of Augur.

Issues and Concerns

Liquidity

Centralized exchanges are still more popular among many crypto traders because they are much faster and cheaper to use. Transactions on centralized exchanges are settled on a database instead of the blockchain, easing transaction times and providing greater liquidity. Because of this, transaction volumes in DEXs are still relatively lower. There is more demand than supply on DEXs. Additionally, because transactions are settled on the blockchain, it more time is needed for each transaction to fully settle. All these factors contribute to DEX liquidity issues.

Front-running

DEXs such as 0x protocol may still be vulnerable to front-running. This is because outside observers can still look at blockchain transactions and intentionally affect the outcomes of other incoming and on-going transactions. In practice, front-runners gain a price advantage against others by intercepting transactions from the network and subsequently influencing the market price of a blockchain-based asset. Front-runners usually expect miners to prioritize their transactions.

Cross-chain beyond ETH

Attaining interoperability for 0x is still an on-going exercise. Currently, 0x is focusing on enabling ERC20 cross-chain exchanges. 0x prefers to work with other blockchain projects to develop and integrate these solutions into the platform to solve to the cross-chain atomic swaps problem in 0x.

Protocol Governance

Protocol governance still mainly relies on decisions made by 0x’s core team. 0x is working to transfer more voting functions to ZRX holders. Today, network participants can only vote on protocol updates through an off-chain mechanism called CarbonVote. And with off-chain protocols, the outcome of votes only act as a signal to the community to download a code change. It does not trigger any update without users updating their own platforms themselves. 

Scalability

Scaling remains a challenge for 0x and other DEXs in general. Transaction settlement times are still lengthy as compared to centralized exchanges because transactions settle on the blockchain to ensure security, transparency, and decentralization. 0x is currently working on this by developing a double strategy on scaling called ‘Layer One’ and ‘Layer Two’. Layer One seeks to stop requiring every node to verify all transactions and divide them instead among the nodes. Layer Two seeks to ease the volume of transactions on the blockchain by moving some parts of the transaction off-chain.

Founding Team

 

Will Warren

Co-Founder and Chief Executive Officer
LinkedIn | Twitter

Will previously worked for Basic Attention Token as a Technical Advisor and was a Research Assistant at Los Alamos National Laboratory. He holds a degree in Mechanical Engineering from the University of California in San Diego.

Amir Bandeali

Co-Founder and Chief Technical Officer
LinkedIn / Twitter

Amir is an experienced trader who spent time with DRW and Chopper Trading. Amir graduated with a degree in Finance at the University of Illinois at Urbana-Champaign.

Competitors

Ether Delta

Ether Delta is a decentralized trading platform for ERC20 tokens. It uses smart contracts for activities related to deposits, trades, and withdrawals. Ether Delta’s interface does not require users to open an account but simply provide a link to existing digital wallets. Back in December 2017, however, they suffered a hack resulting in a loss of at least 308 ETH, amounting to $266,789 at the time. Today, the site still promises safety provided that users don’t reveal private keys on fake Ether Delta websites.

Binance

Binance is a crypto exchange platform that recently launched its own Decentralized Exchange (DEX). Binance partnered with Neufund to provide the world’s first Decentralized Stock Exchange. However, Binance suffered from a large scale security breach last May 2019 which incurred a loss of roughly $41 million in Bitcoin. 

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