ANALYSIS: HYDRO FORKING 0x
On Friday (14.12.18), Hydro announced that they would be forking the 0x protocol and releasing their own implementation. This is the team behind DDEX, the largest relayer in the 0x ecosystem by volume. Among other things, Hydro believes the native token (ZRX) introduces unwarranted friction. Read the announcement from Hydro in full here: Why we are forking 0x.
A Layer 2 project having a token forked away has been discussed hypothetically, but this is one of the first times we’re seeing it play out in the wild. In the context of real tokens and projects with major capital backing, proposing a fork holds a fair bit of weight. Will this be a significant challenge, mutually beneficial, or just a bunch of noise for naught?
0x TOKEN (ZRX)
First, some background on the 0x token. Crypto tokens generally fall into distinct buckets, sometimes moving between buckets as limits are modified. Per the original whitepaper, ZRX was designed as a protocol, or utility, token: proper use of the platform and its services requires an integrated, native component. According to the authors:
Protocol tokens can align financial incentives and offset costs associated with organizing multiple parties around a single technical standard.
Beyond simple network effects, transaction fees paid to Relayers are denominated in ZRX. Encouraging continuous use of the token ensures it “converges on a representative sample of protocol stakeholders over time.” The primary intended benefit is to permit stakeholder participation in various governance activities. These include an ERC20 whitelisting process for trading on the platform, as well as an unspecified voting mechanism through which platform features are prioritised. Finally, there is an unmentioned use of the ZRX token — as a vehicle for fundraising. Setting aside current regulatory uncertainty, the 0x team was able to get significant fundraising via an ICO. This capital has allowed them to launch initiatives like the recently announced Ecosystem Acceleration Program (EAP).
The WP goes on to state that:
0x protocol and its native token will not impose unnecessary costs on users, seek rent or extract value from Relayers.
While architecturally and philosophically this may be true, it’s clear the Hydro team has a strong conviction that there might be a better way.
HYDRO CLAIMS (A WILD UTILITY TOKEN APPEARS!)
In their recent post, Hydro claims there are several issues with the current 0x platform, including order collision, front-running, and poor liquidity. These challenges have been pointed out by other users in the space, including the founder of dYdX, Antonio Juliano, in a recent tweet thread.
There are outstanding questions with ‘rolling your own platform’. Do these issues warrant an entirely new protocol? Or would 0x network effects and aligned incentives outweigh the desire for reduced friction? Could they have been resolved through active governance participation?
Somewhat paradoxically, the team already raised in excess of $31mm in a sale for its Hydro Protocol Token (HOT). Unfortunately for Hydro and its investors, the token is trading at significant discounts relative to the initial sale in January 2018. The uncharitable interpretation is that a new platform will support demand for HOT (read: price appreciation).
According to the Hydro website, there are several key differences when compared to 0x (accessed 14.12.18). They make no mention of fee requirements for each trade, instead intending to use HOT for liquidity pool membership, liquidity incentive mechanisms, and bounties for market makers.
Liquidity incentives could be structured similar to the Uniswap design (read under Fee structure), where providers are rewarded with a cut of platform trades. It is unclear whether Hydro’s fork will use HOT or another, like ETH or DAI, to facilitate these mechanisms. Additionally, they claim front-running will be punishable via an as of yet undescribed governance mechanism.
The public will have to wait until Hydro releases its implementation for further analysis; until then all there is to reference are open claims and past work on DDEX.
GOVERNING VALUE VS. VALUING GOVERNANCE
Hydro claims 0x has neglected their core competency by rapidly expanding into other domains, like Instant trade widgets, NFTs, and ironically, governance. Although 0x has consistently reasoned that integrated governance will allow them to properly accommodate stakeholder needs, they have not implemented this system yet. Had it been, 0x might have been able to accommodate Hydro’s improvements (provided they were a value add) This is a chicken-egg paradox, echoed in a recent twitter poll from Tom Shaughnessy:
Bitcoin has been around for 10 years, Ethereum has been live since mid-2015. The projects built on top of them even younger and it shows: new tech is hard, and these challenges won’t resolve on their own. Determining the structure of governance mechanisms will be an evergreen problem as long as protocols have stakeholders.
It’s important to remember that 0x has been one of the top teams in the Ethereum DeFi space, enabling tons of new experimentation. It’s also worth pointing out that projects are rarely forked like this unless there is something worth forking. Hydro’s protocol may or may not supersede 0x in the future, and that’s the beauty inherent in open-source development and permissionless markets. If a protocol design is better/faster/cheaper, users will move whether they like it or not (liquidity begets liquidity). Tian Li, the DDEX founder, summarizes the sentiment well in their forking announcement:
We either make something people want, or we die. And that’s the way it should be.
The entire space is looking forward to constructive developments from both teams and the continued growth of the DeFi ecosystem. A few things to keep track of over the next 6 months:
- Will 0x feel pressure to develop and deploy governance processes faster?
- 0x may implement some of Hydro mechanisms where applicable (already some hints)
- Open question: Is there a better way to ensure live token distribution besides requiring fees in ZRX?
- Will forking out a project token (and potentially replacing it with your native token) become more commonplace? What projects are ripe for this to happen to
For further context, 0x has released their response to Hydro, teasing some technical features that may match Hydro’s proposals and reaffirming their commitment to governance:
Today DDEX announced that they will be moving to Hydro protocol. We are disappointed to see them leave the 0x…blog.0xproject.com
Edit at 16–14–18 21:45 UTC: Here’s a link to an excellent perspective with thoughts on East vs. West VC cartels:
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