What Is 0x Protocol?

The 0x protocol has been developed to enable peer-to-peer (P2P) cryptocurrency transactions on the Ethereum blockchain. According to its developers, anyone can use 0x to “service” several different types of markets including those involving the trading of gaming items and financial instruments. 

As mentioned in its whitepaper (published on February 21, 2017), the 0x (ZRX) protocol has been designed to facilitate “low friction peer-to-peer (P2P) exchange” of ERC-20 compliant tokens on the Ethereum blockchain. 

An Open Standard for Token Exchange

Co-authored by Will Warren, a mechanical engineering graduate from the University of California, San Diego, and Amir Bandeali, a finance graduate from the University of Illinois and the Co-Founder and CTO at 0x, the 0x whitepaper specifies an open standard for trustless token exchange.

As noted in its documentation, the 0x protocol aims to enhance interoperability between decentralized applications (dApps) that “incorporate exchange functionality.” Trades are performed by the 0x protocol through a set of publicly accessible, Ethereum-based smart contracts. 

The contracts are “free to use” and may be integrated with most dApps, the 0x protocol whitepaper notes.

0x Protocol Does Not “Impose Costs” On Certain Users to Benefit Others

DApps built using the 0x protocol can create their own liquidity pools or use existing pools formed by other users. Usage fees for accessing liquidity pools may be charged by dApp developers, which may be based on “resulting volume.”

As noted by its developers, the 0x protocol has been designed in a manner that doesn’t “arbitrarily” extract value or “impose costs” on traders, in order to benefit other users on the network.

0x Protocol Offers Off-Chain Order Books

Updates to 0x’s base protocol are made through a decentralized governance process that allows new features to be integrated “continuously and securely” – without disrupting end users or dApps running on the network.

According to its founders, the 0x protocol aims to further improve the standards created by IDEX and EtherDelta (both decentralized crypto exchanges). One of the main advantages of using the 0x network is that it provides off-chain order books.

EtherDelta and IDEX keep their order books on the Ethereum blockchain, which requires that users pay gas fees for modifying buy and sell orders or cancelling trades.

ZRX Token Used to Pay Transaction Fees Charged By dApps, Relayers

Orders books are managed by relayers, which are exchanges that run on the 0x network. When orders are broadcasted, the traders on the network may pick them up and once a transaction is confirmed (buyer commits to a certain sell order), the finalized transaction is registered on 0x’s blockchain.

The 0x platform uses a native cryptoasset, called ZRX, to process transaction fees that may be charged by dApps and relayers running on the network. 0x network participants may also use ZRX tokens to vote on matters related to making improvements or updates to the 0x protocol.

0x network users who own a large amount of ZRX tokens may have more voting power and could potentially have a greater influence on the network.

50% of ZRX Tokens Kept for Founders, Developers, Investors, and Ongoing Development

The total supply of ZRX tokens has been algorithmically capped at 1 billion. Half, or 50%, of all ZRX tokens were released on August 15, 2017, and 15% were reserved by 0x’s developers. 15% of all ZRX tokens have been set aside to help fund the project’s ongoing development. 10% of the total ZRX will be distributed to the 0x protocol’s advisors and investors and the remaining 10% will be retained by the project’s founders.

The tokens allocated to staff members, founders, and project advisors have been locked-up and will be gradually released over a four-year period – according to a fixed vesting schedule. ZRX tokens purchased during 0x’s public token sale may be liquidated immediately.

Aragon, Augur, Dharma Protocol Developed Using 0x Protocol

Over 30 different relayers and dApps have been deployed on the 0x network. These include: 

• Augur, an Ethereum-based decentralized prediction markets platform; 
• Aragon, an Ethereum-powered platform for “building unstoppable organizations”; 
• Dharma, a protocol that lets users borrow and lend cryptocurrencies without a credit card or bank account;
• dy/dx, an open-source protocol for creating decentralized markets for derivatives and margin trading

Some of the most widely-used relayers that support the 0x protocol include Paradex, a non-custodial crypto trading platform, OpenRelay, a relayer designed for developers working on the 0x project, and Ethfinex, a “digital tokens trading and discussion” platform.

0x Network Users May Conduct OTC Trades

0x network users may directly exchange ERC-20 tokens with other traders by using the platform’s over-the-counter (OTC) trading option. To perform OTC trades through the 0x network, users must send a request link to their counterparty. 

The link is used to create and issue the new order. Orders may be sent via users’ email, social media accounts, or even with pen and paper.

Coinbase Adds Support for ZRX Token

In October 2018, San Francisco-based crypto exchange Coinbase began listing the ZRX token on Coinbase Pro, a trading platform for experienced traders. The ZRX cryptocurrency is also available on “Coinbase Consumer” (Coinbase.com).

Coinbase has also acquired Paradex (in May 2018), in order to integrate the relayer into the Coinbase Pro platform. 

Stocks, Gold, Fiat Currencies May Be Represented As Ethereum Tokens

According to Linda Xie, the Managing Director at Scalar Capital, the main use cases for 0x and Paradex include being able to represent almost every type of asset as an Ethereum token. These assets may include traditional stocks, gold, fiat currencies, and digital game items.

Xie added that tokenization of real-world assets will result in thousands of digital tokens that will require a “method of trustless exchange.”

Largest 0x-based Exchange Decides to Fork the Original Protocol

The developers of DDEX, one of the largest 0x protocol-based, non-custodial exchanges, have  decided to fork the 0x protocol, in order to launch a new platform (called Hydro) that doesn’t support the ZRX token.

Tian Lie, the CEO at DDEX, noted that Hydro will use a “new order schema” and an engine that allows “true matching”, “robust market orders”, and a completely different liquidity sharing model (than the 0x protocol).

Li explained that the Hydro was launched because the 0x exchange protocol and its native ZRK token were “plagued” by various problems – including “order collision”, front-running, and poor liquidity.

The developers of Hydro have rewritten “a large portion of [0x protocol’s] codebase” to eliminate the “unnecessary friction.” Li believes that the Hydro protocol will significantly improve how decentralized token exchanges are implemented.