0x Protocol (pronounced “zero-ex”) is an open protocol for decentralized exchange on the Ethereum blockchain. A protocol is basically a system of rules that explains the correct conduct and procedures to be followed, used by 2 or more parties to make communication easier and more effective. In this wise, the 0x is a protocol on the Ethereum blockchain that makes the exchange of ERC-20 tokens possible without the risks of a centralized exchange or the inadequacies of an on-chain decentralized exchange.
The 0x protocol was founded in October 2016 by Will Warren and Amir Bandeali. They saw a need in the future for a trustless peer-to-peer token exchange platform for ERC-20 tokens. They envisioned a future where the financial world is heavily tokenized and people need to exchange those tokens for other tokens without the hassles of centralized exchanges. This is what gave birth to the 0x protocol.
The 0x protocol is different from other decentralized exchanges in that it offers off-chain order books. The other decentralized exchanges like Etherdelta and IDEX put their orders on the Ethereum blockchain, thus incurring Ethereum’s gas fees and then additional gas fees when orders are altered or cancelled.
0x Protocol makes use of relayers. Relayers are exchanges built on the 0x protocol that broadcast order books off-chain to be filled by another user. When an order is ready to be filled, meaning that there is a buyer for the sell order, the transaction then goes on the blockchain. The relayers can charge a fee for their service (of hosting order books), but the usage of the 0x protocol is without a charge.
The 0x protocol has a token known as ZRX, and it is basically a unit for fees by the dapps (and relayers) and for ease of governance, especially for the future. That being said, here are 5 reasons to keep an eye on 0x Protocol.
1. Protocol Is Already Live With Over 30 Dapps and Relayers
This is a very important point in the blockchain world. The majority of the projects with coins that are traded have no working product yet. This makes their outlook subject to a lot of questions and scrutiny. The 0x protocol is already functional. It includes sophisticated dapps such as:
- Dharma – tokenized debt agreements
- dYdX – decentralized financial derivatives exchange
- Augur – a decentralized prediction market
Relayers on the platform include Dextroid, Ethfinex, The Ocean x, etc. Also, the 0x protocol has the 0x OTC (over-the-counter) which is a peer-to-peer exchange of ether tokens as long as the seller is able to connect with a buyer (or counterparty). It is live on Kovan, the Ethereum test network. Anyone can generate and broadcast their order by sending a link to the counterparty. The link can be sent through any means; written on paper, tweet, mail, etc.
2. Token Sale as a Service
This is an interesting use of the 0x protocol. In fact, during the token sale of ZRX, the sale of tokens was carried out on the 0x protocol. The token orders were broadcasted and the participants (in the token sale) filled the order. Civic key was used to verify the participants before they were allowed to be part of the token sale.
This method was successful, and a number of projects have sought insights from the 0x team about how to use this model. The 0x team, however, cannot prioritize this over many of the other things they do. They have shared insights on how to conduct token sales on the 0x protocol, but they have decided not to partner with any individual project on the 0x protocol in a way that will create a bias considering other users of the platform.
The token sale as a service helped the ZRX tokens to be decentralized in distribution. This is because, with the system, they can tell how many tokens each person got and prevent a few from owning a majority of tokens. A number of platforms are expected to favor the 0x protocol as their platform for token sale.
Here is a chart that shows how decentralized the 0x community is as a result of their token sale approach:
3. Advantages Over Centralized Exchanges
Centralized exchanges have 3 basic problems: hacks, downtime, and fees.
The issue of hacks is well-known in the blockchain world. We have seen massive hacks like that of Mt. Gox, Bitfinex, and, very recently, Coincheck.
These constitute a growing concern for users. Many do not want to take on the risks associated with centralized exchanges. In fact, many of the top names in the crypto ecosystem have echoed time and time again: do not leave your funds on an exchange. You do not have the private keys to the wallet account on an exchange, hence your funds could potentially be accessed by hackers.
On the 0x protocol, there is no fear of this. This is because, until you exchange them with another currency, your funds stay in your wallet to which you own the private keys. This makes 0x more secure for users.
The downtime suffered by centralized exchanges do not apply to the 0x protocol. Exchanges like Coinbase, Poloniex, and GDAX have suffered significant downtime that has affected traders. On-chain decentralized exchanges also grind to a halt or charge high fees when the Ethereum network is congested.
The 0x protocol, however, is off the blockchain until the order is set to be filled. Congestion on the Ethereum network will not stop orders from being made, it will only affect the rate at which transaction happens.
And finally, as stated above, the 0x protocol does not charge a fee. The relayers can charge a fee (in ZRX) for their service, and the user also pays gas for the transaction on the Ethereum blockchain when the transaction is executed. These make 0x a better option to centralized exchanges.
4. Possibility of Integration to Other Chains in the Future
At the moment, the 0x protocol is restricted only to ERC-20 tokens. However, based on the current state of the Ethereum network and future changes to be made to the platform, the 0x protocol is setting itself up to no longer be dependent on Ethereum. There is a possibility of it being incorporated into other chains in the future.
This and many other decisions that are going to on the 0x protocol are subject to votes based on the ownership of ZRX tokens. The need to get more voting power by 0x protocol developers might drive the value of the ZRX up from time to time. Independence from ether might turn ZRX into one of the most valuable coins in the crypto marketplace. This is definitely a feature to watch out for.
5. Possibility of Being Added on Coinbase
The 0x protocol has a number of advisers strongly connected to Coinbase. This includes the co-founder of Coinbase, Fred Ehrsam. This connection creates the speculation from time to time that ZRX will be added on Coinbase.
So far, it has just been rumors, but there is a possibility of it happening in the near future. The value of the ZRX token was mildly inflated in May 2018 based on this rumor, another reason to be optimistic on the ZRX token and the 0x protocol adoption.
The 0x protocol shows promise on every front even as developers begin to favor it for dapps. The 0x team are working tenaciously to make 0x more friendly to developers. Recently, they have been lowering the barriers of entry for building dapps and encouraging healthy competition among relayers. For all these reasons and more, the 0x protocol is definitely a project to keep an eye on.