The original vision for cryptocurrencies was a world where there were no central points of control. However, things haven't quite turned out like that. Most of the world's biggest crypto exchanges are centralized. That means they are relatively easy to shut down by governments, or easily hacked by criminals. So far exchanges have lost nearly a billion dollars in hacks as a result.
Much hope is being placed on an alternative design, known as decentralized exchanges. Because these exchanges aren't stored on a single, centralized server, they're harder to break into.
An architect of these decentralized exchanges is 0x. We explore more about the foundation below and their vision for the future.
What is 0x?
0x is a foundation for building decentralized exchanges on top of Ethereum.
At present, any exchange that is built upon ethereum has a problem: every time a transaction goes through, it has to be verified by Ethereum's sluggish network. Not great for people who might make hundreds of transactions each day. Ox allows transactions to take place without the need to be verified by Ethereum's main network. It does via a method known as sidechains.
It has a number of other key features, too:
It is an open protocol, so anyone can examine its code, make it easier to spot if something has been changed.
It allows for tokens to be exchanged without the need for a third party to verify the transaction.
It uses smart contracts, meaning it can perform a number of different functions without the need for a third party or middleman.
It works with ERC-20 tokens, the most common type on Ethereum, meaning it's compatible with nearly all tokens currently existing on Ethereum.
What is its purpose?
There are a large number of tokens built on the Ethereum platform. The majority of them conform to the ERC-20 standard. Yet many of them are not widely available in large quantities, when measured in fiat value. This means they are not liquid, a financial term referring to how much of a unit of value or currency is bought and sold.
0x aims to open up the market of these tokens. By enabling them to be easily exchanged for one another, the value in each set of tokens can be combined to form a larger liquidity pool.
It does so in a decentralized way. This means no one party is trusted with everybody’s tokens and enables Dapps to swap user’s tokens without taking possession of them.
Did you know?
90% of the top 100 tokens by market cap are built on Ethereum.
Who created it?
0x was founded in 2016. It is funded by Fintech Blockchain Group, Pantera, Polychain Capital, Jen Advisors, and Blockchain Capital. It was created by:
Will Warren (CEO) - a research assistant at the Los Alamos National Laboratory.
Amir Bandeali (CTO) - a trader at DRW trading.
”We are creating an entirely new paradigm for global exchange, and over time, envision 0x protocol serving as the rails for the exchange of many trillions of dollars in tokenized assets,” said Will Warren, CEO at 0x.
How does it work?
Orders are broadcast off-chain. This means they are cryptographically signed but not uploaded to the blockchain. It then uses a system of relayers which match up orders.
When someone wants to accept the trade, they sign it with their own signature and upload the whole transaction to the Ethereum blockchain. At this point, the trade is made and the tokens are transferred between the two parties.
Relayers are paid in 0x’s native token ZRX for each transaction they make happen. This encourages them to provide the matching service instead of a centralized platform doing so instead.
What can you do with it?
While 0x has built an exchange, the technology it is built on allows a number of other features to use the network, too.
- Decentralized governance – 0x can be used to create tokens to represent ownership, meaning organizations could operate seamlessly and autonomously
- Prediction markets – generating tokens that represent financial stake in the outcomes of real-world events
- Decentralized loans – creating liquid markets where investors can buy and re-sell loans.
- Fund management – because 0x uses smart contracts to help people exchange money in a trustless system, it can also be used to enforce security constraints for investing in pre-agreed upon assets.
What advantages does it have?
0x has a lot of potential benefits:
📈 - Scalable - By keeping unnecessary data off the Ethereum blockchain, it allows for more trades to take place without slowing the network down.
✊ - Decentralized - Unlike most forms of trading, 0x manages to facilitate trading without being a trusted third party.
🔑 - Open - The code is open-source meaning it can be checked by anybody.
What disadvantages does it have?
It also carries some risks:
🔢 - Code-based - Instead of trusting a third party that can take responsibility, it uses tools such as multi-sig contracts to keep funds safe. If there's a weakness in the code, it could be exploited, like the DAO hack.
🚿 - Illiquid - Decentralized exchanges typically have low user numbers which means trades for more obscure tokens may not go through.
Many companies are trying to create decentralized exchanges in order to create safe trading environments for cryptocurrencies. So far, no company has created a product that is widely used compared to mainstream crypto exchanges. If 0x can prove its worth, it could be a valuable addition to the Ethereum ecosystem, providing a wide source of liquidity.