0x Project: Owning A Protocol
“Technology is an inherent democratizer. Because of the evolution of hardware and software, you’re able to scale up almost anything. It means that in our lifetime everyone may have tools of equal power.” — SERGEY BRIN
What is 0x?
In short, 0x is a decentralized exchange protocol designed and created to disintermediate the middle man. These days traditional brokerages have complete control over funds and can take unilateral action without consulting their users. Replacing intermediaries with a decentralized and distributed protocol can help resolve the short comings of a centralized exchange.
0x aims to create an ecosystem enabling users to trade various tokenized assets such as gaming items (NFTs), real estate, crypto assets, and even data storage. Unlike most decentralized exchanges (DEXs), 0x does not match orders on chain — this helps remove bloat from the network. Additionally, it reduces fees because you do not need to spend gas since the transaction occurs off chain.
ZRX Token Utility
For a potential long term investment, I like to review the utility offered by a token. In the case of ZRX, it currently has two main functions.
To begin with, the ZRX token is used to pay Relayers for matching orders. Relayers are third parties that build on the core protocol. They host off-chain order books and charge fees once an order is matched. To get a better understanding of Relayers and their unique role please click THIS LINK. Unfortunately, this utility feature is not rigidly enforced. In the current version, V3, Relayers maintain the freedom to accept fees in any token of their choosing. Hopefully, as ZRX acquires more liquidity, more Relayers will independently decide to accept fees in ZRX tokens. Many notable projects have cited tokenomics as a barrier for otherwise would be market participants. Due to this industry’s nascency and poor liquidity, many Relayers do not want to hold the ZRX tokens. For the sake of adoption I think the liberal fee acceptance policy is tolerable at the moment. However, as a ZRX token holder and liquidity provider, I would like to see this change in future iterations.
Secondly, the ZRX token bestows the token holder with voting rights in the governance process. In other words, token holders can vote on changes to the protocol. The long term goal is for the protocol to be completely self governing. Just as a child needs to be nurtured and guided before growing into an independent adult. The 0x protocol will require a great deal of guidance from the core team in the early stages of development and adoption. This means the protocol in its infancy will be heavily centralized. However, once the protocol is fully autonomous, voting rights will be a salient utility feature.
Passive Income Opportunity
New value extraction models are being created in the digital asset based industry. For example, in the 0x ecosystem, market makers require liquidity to generate income. The 0x protocol enables ZRX holders to stake their tokens in pools created and maintained by Makers. This pooled liquidity confers two benefits to Makers:
- They do not need to purchase ZRX tokens and expose themselves to the volatile asset
- Fifty percent of the voting power is delegated from the Staker to the Maker
The pooled liquidity is used to help generate a robust order book. In return for providing liquidity, the Maker shares the earned fees with Stakers. The transference of voting rights may seem extreme but the 0x team argues it is necessary. In their view, the Maker has the greatest incentive to grow the network. In theory the Maker’s fee intake should increase as the network grows. For this reason, Makers would be less likely to adopt changes that would undermine the ecosystem. In the context of governance, the team’s chief concern is greedy actors using voting rights to take monopolistic actions.
Investment Thesis
Full disclosure, I have purchased ZRX tokens for investment purposes. Given the rise of decentralized finance (DEFI) I wanted to add some exposure to my portfolio. In this new financial paradigm I believe everybody will have the opportunity to own a piece of the protocol infrastructure. Unlike the internet boom of the 90’s, retail investors can actually own a piece of the protocol layer by investing in tokens. This does not apply to all tokens because some project intend to centralize control indefinitely. In contrast, the 0x project has plans to give up control to the community once the ecosystem is sufficiently autonomous. For these reasons, ZRX is providing investors with a unique opportunity. Using this nuanced framework I have decided to purchase ZRX tokens for the following reasons:
- The team publishes recent developments routinely on YouTube. In my view, this is equivalent to a shareholder’s call. This empowers the community to make more informed decisions by giving them a sense of the project’s trajectory. Moreover, individuals can reduce or add to their ZRX position depending on the projects progress and direction. This also helps the team better gauge support for any given decision. For example, let’s say after a big upgrade the token price takes a significant dip. This may indicate the upgrade was not favorably received by token holders.
- I firmly believe the utility token model has real potential. To provide this point some context, I recommend reading Cryptocurrency Use Case: Chicken or the Egg Paradox. As the platform grows I suspect the staking rewards will grow in tandem. It takes a long time for tech companies to go public and provide investors with a dividend. With the new value extraction model, staking will immediately allow investors access their share of the cash flow.
- As I researched the project it became very apparent this team has thought very deeply about game theory. Collectively we have learned actors in any setting will behave in their self interest. On a marco scale, this is the principle flaw in socialist & communist doctrines. Unless you have a means of making the masses spontaneously altruistic, people will behave selfishly. Perhaps one day our collective consciousness will get there, but for the time being we cannot rely on peoples’ generosity. Instead, it is essential to construct a detailed incentive model. The best way to enforce a desired behavior is with carrots and sticks. The team seems to be aware of this and is acting accordingly. It’s going to be a process of trial and error, but they are using the right framework to align incentives. This is clearly demonstrated with voting delegation to the Makers.
- The team is creating products like 0x instant which enables websites and apps to plug into the 0x order book. Imagine gaming apps that allow users to easily trade gaming items directly on their platform. Not only will this bring additional liquidity to the 0x ecosystem but it will help broaden its adoption.
- The 0x API allows for order aggregation across multiple decentralized exchanges. Given the poor liquidity profile of the digital asset industry, pooling liquidity becomes essential. It helps by lowering costs to users and reducing slippage. I can envision most DEX’s using the 0x API to instantly gain access to a large liquidity pool. This could one day bring an end to liquidity silos.
I encourage all potential investors to watch AMA’s hosted on 0x’s YouTube page. If you are interested in a video format of this review, check out my video. The technology being built today will revolutionize and democratize finance beyond our expectations. Many intelligent investors are overlooking the opportunity and others are just following the crowd. Set yourself apart by beginning your deep dive into decentralized finance.
