If you know anything about cryptocurrency trading, you know it's not as decentralized as it should be. Most cryptocurrency exchanges pull digital assets from millions of users into one centralized coffer and act as the intermediary of exchange between the traders.
That's not ideal for people who peg their motivation for crypto investing on decentralization. Well, two guys had that epiphany a few years back and decided to create a solution: 0x Protocol.
What Is 0x Protocol?
0x is an open-source protocol built on the Ethereum blockchain that enables direct peer-to-peer exchange of digital assets such as cryptocurrencies and NFTs. It was built to allow users to trade with each other without having to use an intermediary such as centralized exchanges.
It is a common building block enabling the exchange functionality between decentralized applications. Decentralized exchanges (DEXs) can be built and operated on it without imposing transaction fees on any group of users for the benefit of another.
In addition, it uses decentralized governance to securely integrate updates onto the base protocol without interrupting end users and DApps
Who Founded and Created 0x Protocol?
In October 2016, Will Warren, a graduate researcher at the Los Alamos National Laboratory, and Amir Bandeali, a fixed-income trader at DRW, recognized the need for a decentralized exchange infrastructure on the Ethereum blockchain.
Together they embarked on developing an open protocol that would enable the efficient and secure exchange of digital assets without the limitations and vulnerabilities of centralized exchanges.
In the next year after launch, 0x experienced tremendous growth following successful seed funding, a white paper launch, a token launch (to be used for decentralized governance), and an initial coin offering (ICO) to raise funds for further development.
Today, it remains an active project that has impacted the decentralized finance ecosystem providing the foundation for decentralized exchange solutions.
How Does 0x Protocol Work?
Let's assume you want to trade an Ethereum token for another crypto. If you have a pre-decided buyer, you can send them an 0x order through SMS, email, or social media. All they need to do is accept the trade, which will be executed instantly and securely.
If you don't have someone to trade with, you can find one on a relayer (marketplace that connects buyers and sellers). But that's just what happens on the surface.
At the core, the 0x Protocol comprises a set of standardized smart contracts that establish the rules and standards for trading digital assets. These contracts also handle the essential functions of each transaction:
- Order creation: 0x Protocol can create two main types of orders; a market order that allows users to buy or sell assets at the market's best price and limit orders that enable users to set a specific price and quantity for trades.
- Order matching: The smart contracts enable users and relayers to find compatible pairs based on price and quantity for match buying and selling. This is done off-chain, improving speed and reducing costs.
- Order settlement: The smart contracts execute transfers of assets within the Ethereum blockchain once the match transaction has been validated. This ensures the secure and transparent exchange of assets between the involved parties.
Relayers in the 0x Protocol connect buyers and sellers by maintaining and operating order books of the Ethereum blockchain. Users can submit their orders to relayers, which then display them on the platforms providing liquidity to the network. Those who prefer not to can still directly interact with the protocol's smart contracts.
0x Protocol vs. Centralized Exchanges
0x Protocol was designed to meet the need for a decentralized exchange infrastructure to counter the dominance of centralized exchange platforms in the crypto trading sector. As such, it has several inherent differences when compared to these exchanges.
- Centralized exchange platforms depend on user deposits into a centralized entity to facilitate trading, acting as intermediaries that execute trades on behalf of the users. 0x Protocol, on the other hand, provides a trustless infrastructure for trading.
- Centralized exchanges hold large amounts of funds to provide liquidity. This makes them ideal targets for hacks that might be catastrophic such as these enormous cryptocurrency hacks. 0x Protocol, in contrast, utilizes blockchain technology and smart contracts to provide security and transparency.
- Centralized exchanges have a more established user base and market presence. They also offer a wide range of pairs and advanced features. 0x Protocol conversely depends on various relayers that maintain off-chain books and offer a less diverse range of trading opportunities. However, you should note that the number of pairs on any 0x protocol-enabled exchange still depends on the specifics of the exchange.
The 0x protocol features characteristics of a decentralized trading system which is the opposite of what centralized exchanges offer. While it has several advantages, it also comes with a few flaws.
Benefits and Concerns of 0x Protocol
The benefits of the 0x Protocol include:
- It enables the development of decentralized exchanges, eliminating the need for centralized control or intermediaries.
- It comes with a higher level of security and immutability hence reducing the risk of hacks and thefts associated with centralized exchanges.
- Using smart contracts creates a system where users can transact directly without trusting a central authority.
- It reduces the number of on-chain transactions and fees, leading to cost savings for users compared to on-chain exchanges.
- It's easy for developers to customize and extend its functionality to suit their needs, enabling diverse trading experiences.
Unfortunately, the 0x Protocol is not perfect.
- Due to dependence on relayers with different off-chain books, the network's liquidity is fragmented, leading to suboptimal trading opportunities.
- It presents the risk of system downtimes and delays due to reliance on external systems (off-chain order relays) for order discovery and aggregation (though off-chain transactions typically increase processing capacity and reduce transaction fees).
- The decentralized nature of transactions in 0x protocol platforms may require users to navigate different interfaces, use multiple wallets and manage their private keys, which is a poor user experience compared with centralized exchanges.
Despite these concerns, the value of the 0x Protocol o the entire crypto world is not diminished. Rather, these flaws highlight the areas that need improvements, and considering the ongoing development and community participation, the concerns are likely to be mitigated.
Governance Within 0x Protocol
In 0x, governance is decentralized and community-driven. Members can hold the native utility token (ZRX) and have voting rights to determine the protocol's future. Anyone can submit proposals that the community will review, discuss and vote on whether to apply them or not.
However, while ZRX token holders have voting rights, the voting power is often proportional to the amount of ZRX they hold. This means that individuals or organizations holding a large amount of ZRX can potentially influence the direction of the protocol more than smaller holders.
This community-centered approach ensures the protocol evolves to reflect what the stakeholders desire. It also fosters transparency while making the ecosystem resilient and adaptable to trends in the cryptocurrency world.
The Future of 0x Protocol
0x will likely play an integral role in defining what's next for decentralized exchanges as DeFi grows. The pursuit for more decentralization in crypto is the reason why more innovations will come up.
0x's features could contribute to the development of a more interconnected and seamless trading ecosystem. Yet its success, like other projects, will depend on market conditions, competition, and regulations, among other factors.
