Ethereum positions itself as an open source infrastructure for digital assets.
Smart contracts that automate lending, NFT trading, play-to-earn games, and exchanges are just a few of the offerings that aim to transform traditional finance into decentralized finance (DeFi).
0x, a peer-to-peer software framework, is built on top of Ethereum infrastructure. 0x, an open-source protocol, uses Ethereum to tokenize real-world assets and eliminate intermediaries.
Mirrored assets
Virtually every asset is tokenizable. 0x makes traditional assets available on the Ethereum blockchain. Whether it is company shares, bonds or real estate, 0x can mirror them as a token on Ethereum.
In particular, 0x creates decentralized exchanges where these mirrored assets are traded. The 0x Launch Kit allows developers to create and customize their own DEXs.
In other words, 0x is the Lego of the DeFi world, providing components to build crypto markets:
- Over-the-Counter (OTC) dealing counters
- Etsy-like marketplaces for digital assets
- Arbitrage trading bots
- Decentralized exchanges for exchanging digital assets
0x supports all of its smart contract standards, from ERC-20 for regular tokens to ERC-721 and ERC-1155 for non-fungible tokens (NFTs).
One of the great advantages of 0x is its API (Application Programming Interface), which allows developers to link 0x to their own existing dApps.
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For example, 0x can deepen the liquidity pool of loans and DEX dApps by aggregating liquidity from on-chain and off-chain networks.
In addition to Ethereum, 0x has extended its API liquidity aggregator called Matcha to Avalanche (AVAX), Fantom (FTM), Celo (CELO), Binance Smart Chain (BSC), Polygon (MATIC) and Optimism.
0x origin
In 2016, Will Warren and Amir Bandeali founded ZeroEx to develop the 0x protocol. Warren holds a BS in Mechanical Engineering from UC San Diego.
Prior to his commitment to 0x, Warren was a technical advisor to Basic Attention Token (BAT) and won the Consensus 2017 Proof of Work Pitch Competition.
Amir Bandeali holds a degree in finance from the University of Illinois at Urbana-Champaign and served as Co-CEO and CTO of ZeroEx. He previously worked at Chopper Trading. In July 2017, the two co-founders arranged an ICO for 0X and raised $24 million by selling ZRX tokens.
In total, 0x has raised $109 million across 9 funding rounds led by Polychain Capital, Pantera Capital, Blockchain Capital to name a few. Coinbase co-founder Fred Ehrsam serves 0x in an advisory capacity.
How does DEX work?
The 0x protocol has a dual role: tokenize off-chain assets and facilitate trading in those tokenized assets.
To better understand how the 0x protocol works, it helps to understand how decentralized exchanges work.
Unlike centralized exchanges like NYSE or Binance, DEXs do not have centralized market makers providing liquidity. These market makers make trading quick and efficient as they cover ask/bid spreads on both sides of the trading equation.
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DEXs powered by smart contracts rely on users to provide liquidity. For example, Uniswap DEX consists of smart contracts that pool tokens from liquidity providers. Traders looking to exchange tokens then tap into these liquidity pools and give a small cut to the liquidity providers.
DEX liquidity depends on the number of liquidity providers and their focus on specific token pair pools like ETH/USDC for which they provide liquidity. This can become problematic if less common tokens are to be exchanged or if there is high demand.
How does 0x work?
0x protocol uses a hybrid off-chain/on-chain settlement protocol. While typical DEXs work exclusively on-chain, 0x can tap into liquidity beyond on-chain networks. This is because 0x stores trade orders off-chain and executes trade executions on-chain.
With this hybrid system, 0x gas fees are cost-effective. This process is performed with two 0x log actors:
- maker: They provide liquidity by creating 0x orders in the order book. When manufacturers place orders, they specify the tokens involved and their exchange price. Then they wait for the price to be adjusted.
- customer: They draw liquidity from the order book by immediately placing matched orders.
If a manufacturer is already familiar with a particular taker, they can send the order directly to them via over-the-counter (OTC) trading desks or general messaging apps. But in most cases, doers do not know customers.
This is when the order is first transmitted to 0x relayers via 0x Mesh, a peer-to-peer (P2P) network for sharing orders in 0x message format. The 0x relay, in turn, is matcha, making it easier to create and match orders.
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Instead of having centralized middlemen, 0x-Relayer runs the off-chain order book, including charging transaction fees. Once the order has been routed to a blockchain, the 0x fulfillment protocol verifies the manufacturer’s signature and performs the token swap. It is important to note that relayers do not hold tokens in custody at any time.
ZRX Tokenomics
Like all native protocol tokens, ZRX is both a utility and governance token for 0x. ZRX token holders can use their stash to vote on 0x Improvement Proposals (ZEIPs), just like ETH token holders do the same for Ethereum Improvement Proposals (EIPs).
In the case of 0x, this ZRX voting weight even extends to off-chain proposals due to its hybrid nature.
voting weight
Each ZRX token counts as one vote, so the voting weight is proportional.
Market makers can stake their ZRX token to earn rewards for providing liquidity on any 0x trade. These fees are denominated in ETH and are automatically aggregated into smart contracts for staking. While ZRX tokens are tied to a fixed period of time called an epoch, makers collect them from the staking pool after the end of each epoch.
The 0x staking rewards are in flux depending on trade volume and set log fees. Both staking and voting are handled on the 0x website. ZRX token holders can also deposit their funds into the 0x DAO treasury.
Not only will these funds be used to forge partnerships to strengthen the 0x ecosystem, but ZRX token holders can submit funding grants themselves.
Disclaimer for the series:
This series article is for general guidance and information only for beginners participating in cryptocurrencies and DeFi. Nothing in this article should be construed as legal, business, investment or tax advice. Consult your advisors for all legal, business, investment and tax implications and advice. The Defiant is not liable for lost funds. Please use your best judgment and exercise due diligence before interacting with Smart Contracts.
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