Game Theory Group

The Blockchain Brief

How 0x ($ZRX) Could Replace All Crypto Exchanges

The 0x project could well become the darling of the cryptocurrency community in 2018. I believe they represent the best hope of replacing our reliance on a centralized exchange that takes custody of our precious tokens.

If you store your tokens on a centralized exchange like Bitfinex, Bittrex, or Binance then you've experienced the same "Oh, Shit" feeling that I have:

Why is the exchange down? Why can't I make a new account? Why are withdrawals suspended? Why isn't $XYZ listed? Why am I not getting the liquidity I want?

If the vision behind blockchain technology is that we can be a decentralized community, why are there a handful of entities that have actual control over an enormous part of the ecosystem? Because, until recently, we barely had another choice. If we want liquidity (aka, ability to buy or sell within a narrow market price) we need to put up our tokens on an exchange, and place a buy or sell order. The exchanges have saturated communities of people willing to buy or sell, including market makers that arbitrage for profit, and thus can provide the liquidity we need to literally exchange one token for another.

Exchanges, of course, take a significant fee for every trade you make on their platforms. In order to operate, they have had to invest in the back-end scaling infrastructure necessary to process thousands of simultaneous transactions, build security systems (2-Factor Auth, Custodianship process, etc) and create a user experience that looks like your traditional order book. In short, they have built a mostly usable system.

To me, all of that effort is largely negated by the risks associated with using a centralized body to hold my tokens. The challenges faced by exchanges are many. From government regulation to hacking to insolvency, exchanges in the past few years have suffered numerous setbacks. You know this quite well if you were a member of Mt. Gox back in the day, or Bitfinex not too long ago. And compared to the size of the market today, these were relatively minor breaches. 

OK, we've agreed that exchanges are centralized, expensive and vulnerable. What is the alternative? Enter 0x and $ZRX.

0x has developed smart contracts that sit on top of the Ethereum platform. 0xprovides the infrastructure for other individuals or companies to build their own decentralized exchanges. These individuals or companies can now allow others to trade ECR-20 tokens (basically, all Ethereum tokens) through their websites or apps. These decentralized exchanges, in 0x lingo, are called "Relayers".

Relayers can be built by any developer. They simply use the 0x infrastructure to do so. Because the 0x software makes it relatively easy to build your own Relayer, there are already manymany Relayers operating professionally for your use. Relayers can individually decide which tokens to list, how much fee to charge (usually way less than central exchanges) and what their user experience will look like. You'll have your pick of the litter to decide which Relayer you like the most.

Why is this awesome? Because decentralized exchanges do not need you to deposit tokens, ever, for any reason. You maintain full custody of your tokens throughout the transaction process. How this works is not too complicated: you basically pledge a certain amount of tokens to the 0x/Relayer smart contract using a a similar web interface to what you will find on an exchange (remember, each Relayer built on 0x can build their own). If you have the pledged amount in your wallet, it enters the Relayer order book. If you dip below the pledged amount during the process of filling your order (all transaction are public, so any sneaky or accidental moves will be caught), the Relayer can simply remove your order from the book. Otherwise, the order is filled and you exchange tokens. 

Here is the coolest part: Relayers can talk to each other in order to pool their liquidity. Other decentralized exchanges (EtherDelta, for example) have largely failed due to poor user experience and lack of liquidity. They have to compete against each other for liquidity. In this new paradigm, Individual Relayers can choose to either share liquidity, or compete against each other. It is my view that the combination of all of these Relayers will result in greater liquidity than centralized exchanges, with lower fees, and of course, you hold your own tokens.

OK - we've covered 0x. What is $ZRX, the token that 0x released in 2017 to fund their development roadmap?

There are two important use-cases for the token:

1) Governance: those who hold $ZRX will get to vote on technical improvements to the platform.

2) Transaction Fees: You must pay Relayers on 0x with $ZRX tokens for settling your transactions. Whatever fee they decide is fair, and whatever fee you think is fair to pay.

There is true utility in this token, and as more and more Relayers go online, I expect folks to start moving some of their tokens into their own wallets and to exchange on 0x Relayers with transactions paid for by the $ZRX token.

I am eager to hear your feedback on centralized vs. decentralized exchanges and 0x in particular.

Boris Revsin