Zero X is a protocol for the decentralized exchange of ERC20 tokens. Its an open source protocol and anyone can use it as infrastructure to build user-facing decentralized exchange applications. Sometimes referred to as a DEX.
As you probably already know, centralized exchanges require you to transfer your crypto into their custody while you trade.
The problem with this is that this transferring back and forth racks up gas costs but more significantly, the exchanges become giant honeypots for hackers because they’re sitting on huge piles of other people’s assets.
One of the genius features of Zero X is the fact that they it uses “off-chain” matching of orders and “on-chain” execution of trades.
This means that the tokens you’re trading never leave your wallet until the trade is executed, at which point the smart contract will debit and credit the wallets of the participants in the trade. Basically each trade is a peer to peer transaction.
Off-chain matching also allows for a large number of individual trades to take place fast, without bloating the blockchain with unfilled or cancelled orders.
As the crypto markets get more sophisticated, there’ll be more and more applications that require exchange functionality.
In most cases this functionality is the same or at least very similar. Until this project, each application team would have had to build their own infrastructure, in their own way.
If they all build on one protocol, they can leverage the open source trading infrastructure and get to what makes them unique much faster.
Even better, all their applications can much more easily be inter-operable.
To date a number of decentralized exchanges have already been built on the protocol.
A great example is Radar Relay. Aptly named because they call these parties Relayers. A relayer, gets to run their own order book and design their own user experience but all trades are executed using the Zero X smart contracts.
Relayers can get up and running much, much faster than if they were creating an exchange from scratch.
Besides saving on the duplicated development effort, by not taking custody of assets they also avoid having to comply with a mountain of financial regulation and red tape.
For their service, the Zero X protocol allows Relayers to charge a fee essentially giving them an incentive to exist and grow.
Now let’s take a look at the token itself – the ZRX. One billion tokens have been issued but only half are in circulation. The other half are reserved for employees, investors and advisors and are all subject to a 4 year vesting schedule. Even so expect 50% dilution over the next 4 years.
The token has 2 primary functions:
It’s used to pay fees to relayers.
It’s required to participate in the governance of the protocol
As relayers go live, users will need to acquire tokens in order to use them. New users will have to purchase tokens in order to trade, and frequent traders will likely hold a balance to reduce the friction of acquiring tokens for each trade. This inflow of capital will likely cause positive price appreciation.
However on the downside, even now, some relayers are not requiring fees in ZRX. Instead they’re charging fees from each side of the trade in the crypto trading pair. That said I understand that this is more due to the congestion on the Ethereum network than to a shortfall of Zero X.
Staying on the downside for a moment – much of the logic for injecting ZRX into the ecosystem is around governance, but so far thats to the detriment of the user experience. The risk is that someone invents a better way or Zero X invent a better way that reduces pressure to hold the tokens.
In conclusion, decentralized exchanges are a key piece of crypto infrastructure, and they’ll fundamentally improve the functionality of crypto economies.
Zero X is emerging as the leading DEX platform within the Ethereum ecosystem. Even better, the long term vision for Zero X is to become a blockchain-agnostic protocol for cross-chain exchange.
It’s still very early days but this is an important project with a great team.