0x Governance in 2020 and Beyond

ZRX economics unlock the next phase

7 min readMar 5, 2020

It’s been two years since we shared our roadmap for 0x governance, which outlined the need for coordinated upgrades that minimize market disruption, and which are handled by stakeholders that directly draw economic value from the system. Since the beginning, our vision for 0x protocol has been that all aspects of decision-making would eventually be handled by the community, including the administration of a monetary treasury used to continuously fund protocol development and ecosystem growth.

We concluded that an on-chain token voting scheme in combination with properly designed incentives could allow for effective decentralized governance. That token is ZRX. Governance over 0x protocol would need to function like a political process where stakeholders with varying needs and incentives use an on-chain mechanism to come to consensus around which contracts to drop into the 0x pipeline. It is helpful to notice that other projects, with Compound as the most recent notable example, are moving towards this model.

In our last update, we also acknowledged that there is a need to draw a connection between activities that create value within the ecosystem and the ability to influence governance. In other words, there should be a convergence of token ownership distribution (therefore, voting power) towards that class of users that have a strong natural incentive to achieve our mission for 0x protocol i.e. the proliferation of globally accessible, low-cost markets.

We made a good step forward in that regard with the introduction of the new ZRX token economics, which incentivize token holders to delegate their voting power to market makers, who operate staking pools, and who in turn share in the protocol fees generated by trading activity on 0x. This enables the convergence of token distribution on a representative sample of protocol stakeholders over time.

It’s been two months since the beta release of ZRX Portal, a simple UI where token holders stake their ZRX, share in their staking pool’s protocol fees, and vote on governance proposals. The beta phase has been successful, with more than 14M ZRX currently staked in the system by over 1600 addresses. Protocol fees have been steadily increasing each epoch, totaling greater than 65 ETH to date, as the trading activity has transitioned to 0x v3.0.

As the primary outcome of the new token economics, market makers operating staking pools have dramatically increased their voting power. The top two staking pools have now collectively reached almost 5M ZRX worth of voting power. These staking pools operators have identified themselves as professional market makers, the primary target audience for the stake-based liquidity incentive. To put things into perspective, the v3 vote turnout was 6M ZRX, which means that the top two staking pools (per number of ZRX) would have had the ability to have a significant weight in the vote.

2020 — the year of engaged 0x stakeholders

As we mentioned in our last update, there is a long road ahead to mature as a community, to ensure accountability in managing 0x protocol as a public good, and thereby create the conditions necessary for a tokenized world where value can flow freely. The following chart outlines our desired multi-year roadmap.

The focus this year is primarily to grow engagement in our community. We will measure our success through community voting participation and staking, which directly correspond to the empowerment of 0x stakeholders. We launched ZRX Portal to be the central hub for these activities, to complement our current channels (ZEIP, dev calls, open source repos, discord).

The actions we plan to pursue to achieve this objective are shared below.

Establish a new ZEIP process

We recently released ZEIP-76, which proposes the formalization of a new ZEIP process. ZEIP stands for “ZeroEx Improvement Proposal”, and was introduced to serve as a communal public square where anyone can propose and drive consensus around a change in the 0x smart contracts pipeline. This ZEIP creates more concrete guidelines around proposing future ZEIPs, based on feedback received from our peers in the ecosystem.

The principal changes introduced with this new proposal are:

formal categories and phases for ZEIPs, with corresponding tags/labels on Github
new mandatory fields in each ZEIP that identify a designated development team and security audit sponsor (where applicable)
signaling for specific types of ZEIPs, pre-implementation. Inquire the community via a poll to assess a ZEIP’s early specification and the potential impact
a committee that facilitates the ZEIP process and manages the ZEIP queue. The committee will initially be composed of core team members, but we intend to open it up to all interested/qualified individuals.

We’re planning to put this ZEIP up for a vote in March.

Governance over staking economics parameters

The stake-based liquidity incentives introduced in 0x v3.0 have begun shifting voting power towards market makers. A small set of parameters dictate how ETH flows through the 0x smart contracts and ends up distributed to market makers and token holders. These parameters were designed to be upgradeable by the community. Based on the feedback we’ve received from the community so far, there is significant interest in experimenting with these parameters through governance. We are planning to gather feedback, propose and launch votes that allow stakeholders to modify these parameters in the next few months (for example, epoch length, alpha, delegated stake weight).

Increase system modularity for smoother upgrades

Currently, even a small update to a single function within the Exchange contract requires the entire contract to be redeployed which causes breaking changes across the ecosystem. For example, all the developers that recently migrated to v3 had to point at a different exchange address, creating friction in the process and fragmenting markets.

We feel we need to solve this problem to increase the speed of iteration and allow for upgrades without lumping many proposals together into monolithic upgrades. Also, we want to reduce the disruption brought by fixing potential inefficiencies or vulnerabilities limited to very specific parts of the pipeline.

We are planning to work on a specification that will be presented to the community. The proposal will need to be accepted in the preliminary signaling poll, then implemented, and finally accepted again by the community before being deployed. It will dramatically decrease future breaking changes introduced by protocol upgrades.

On-chain governance

In 2021 we’re planning to work on maximizing the onchain portion of the governance system, reducing trust critical points in the deployment of upgrades. While this is subject to the completion of other roadmap items, we can start testing such a system for lower stakes changes that don’t require the deployment of new smart contracts.

As mentioned above, this year we will kick-off and encourage proposals and votes on staking parameters using our placeholder off-chain voting mechanism. In the meantime, we will work on a binding onchain system that will make it possible for the community to drive a change of parameters without any intervention of the 0x Core team. This will likely be coupled with a user-friendly experience in ZRX Portal where changes can be proposed.

Continue overseeing the growth and the health of ZRX stake-based liquidity incentives

While ZRX staking has only recently begun, the system is already showing dynamics that converge towards the game theory equilibriums we targeted. We are planning to evolve ZRX Portal to make it easier and clearer for ZRX tokenholders to delegate their voting power to the best staking pools. We will also work with the pools operators to help them maximize the rewards they collect and share to tokenholders, to approach market equilibrium.

Put your ZRX to work

We are very excited to watch the 0x community grow in 2020 and evolve towards our long term vision of an accountable community who is fully responsible for the development, maintenance, funds management AND good functioning of 0x as a public good. This will happen in steps — this year we hope to graduate together to become a more engaged one.