# ICO Review — 0x

Summary

Introduction

0x is an open protocol that facilitates operation of the decentralized exchange of Ethereum-based tokens and assets. Developers can use 0x to build their own custom exchange Dapps with a wide variety of user-facing applications.

Their 0x token (ZRX) is used by Makers and Takers to pay transaction fees to Relayers (entities that host and maintain public order books). ZRX tokens are also used for decentralized governance over 0x protocol’s update mechanism which allows its underlying smart contracts to be replaced and improved over time.

Symbol: ZRX

Crowdsale opening date: 15/08/2017

Platform for Fundraiser: Ethereum

Analysis

Problem

Centralized exchanges have the serious drawback that they require users to trust the exchange with their money. A fraudulent or compromised exchange can result in theft of user’s funds. There are also other drawbacks to centralized exchanges, such as the vulnerability of the users to front running by the exchange administrator.

Many decentralized applications (dApps) have created Ethereum smart contracts for peer-to-peer exchange. Multiple versions and a lack of best practices have left proprietary and application-specific implementations which are non-standardized. Which exposes users to varying quality and security of smart contracts though all these exchanges have similar functionality.

There are inefficiencies in the design of existing Decentralized exchanges that impose high friction costs on market makers as these implementations place their order books on the blockchain, requiring market makers to spend gas each time they post, modify or cancel an order. Frequently modifying orders in response to evolving market conditions is prohibitively expensive. Maintaining an on-chain order book results in transactions that consumes network bandwidth and bloat the blockchain without necessarily resulting in value transfer.

Solution

0x is an open protocol for decentralized exchange for ERC20 tokens on the Ethereum blockchain. 0x provides building block for developers to build various DEX applications on. Trades will be executed using Ethereum smart contracts. The 0x protocol can be used for free, except for the standard gas fees, but providers of DEX services will be able to charge transaction fees in ZRX.

Value Propostion for Investors

End users (traders) can exchange ERC20 tokens through a 0x OTC application which is currently released in a testnet mode, charges no transaction fees, but provides no real-time order book, or through any other exchange application that will be built by third party developers using the 0x protocol where for transaction fee 0x token (ZRX). Now the question is can ZRX tokens can be traded in other exchanges. My answer would be depending on where its listed it would make a great impact to the overall liquidity and performance of the token. It is purely a utility token and going by the questions raised on the actual utility of ZRX beyond the 0x protocol upgrade governance and paying as a transaction fees to Relayers (Decentralized exchanges built on 0x protocol) it remains to be seen if it will really have a significant value.

My View

0x project has been one of the most watched out projects and going by their github repo it has a healthy development on their base protocol code and also on supported tools. The 0x protocol allows to trade any Ethereum-based assets that comply with the ERC20 token standard but have plans to support ERC223 tokens in future. As of July 26, 2017, a total of 4269 ERC20 token contracts are registered 0x standard will be preferred by those who want to tokenize traditional securities, currencies and digital goods.

Their competitors can be DEX like OpenLedger, EtherDelta, OmisGo (When their DEX is ready) and also Khyber.network. But by going as a building block approach they have developed a much better strategy where they can improve their technology based on DEX using their platform. And their core team can focus on developing the core Decentralized Exchange protocol and platform rather than managing the risks of running a Decentralized exchange.

Platform

Key Functionalities

  • 0x is an open source protocol (code on Github) built using Ethereum smart contracts aimed at DApp developers who wish to build exchange applications for trading ERC20 compliant tokens
  • In future, the 0x token (ZEX) holders will be able to upgrade the protocol via a decentralized governance mechanism.
  • Trade orders will be relayed off the blockchain and will only the returned on chain for settling the order which reduces the volume of transactions processed on chain

The workflow of how Exchanges (Relays) can fulfill an order is given in the below diagram.

Key Components

The protocol development will go in two major steps: version 1 will be released to Ethereum mainnet prior to ICO and version 2 with a much broader array of features will follow up later

Some of the core functionality of 0x platform includes the following:

  • A system of smart contracts that facilitate the decentralized exchange of ERC20 tokens
  • 0x OTC (currently on Kovan testnet) powered by 0x protocol which is open and free-to-use browser-based web application for over-the-counter trading of ERC20 tokens between known counterparties. Users can generate, inspect and fill orders that adhere to 0x message format. Order makers must manually share their orders with a known counterparty via email or broadcast their orders across their social networks.
  • 0x.js is a javascript library built on top of web3.js that provides an API for developers to interact with and listen to 0x smart contracts
  • Token Registry: will allow users to verify ERC20 token addresses and exchange rates before executing a trade. To ensure the trustworthiness of the data, the registry will be subject to oversight; For now, only the 0x team will be able to do that. The oversight includes adding/modifying/removing tokens from the registry.

Other functionality that is planned for later releases includes among other:

  • Decentralized Governance: A web application for users that allows stakeholders to generate, inspect and vote on proposed updates to the protocol using the 0x platform token ZRX
  • Trade Explorer: an explorer for the 0x protocol similar to Etherscan.io to compile and present to users data related to trading activity on 0x such as trading statistics and history associated with each ERC20 token, Relayer and dApp, with individual addresses and performance leaderboards

Tokensale

ZRX tokens will be distributed to those that registered to participate in our token sale through The Genesis Trade. With this Genesis Trade, a long sequence of trustless ERC20 trades will follow, powered by a diverse global network of decentralized exchanges built on top of 0x protocol. The 0x team will create a large order to sell 500M ZRX in exchange for $24M worth of ETH. A custom Ethereum smart contract, will enforce the registration whitelist and individual purchase caps, allowing each registrant to capture a small chunk of this genesis trade.

Key Points

  • Only individuals who have successfully registered can purchase ZRX tokens. Check if your Ethereum address is registered here.
  • Sale starts at 8am PT (3pm UTC) on August 15 at 0xproject.com/sale
  • ETH to USD exchange rate will be communicated 3 hours prior to the sale
  • Equal size, individually assigned purchase caps for the first 24H — no need to rush. Full details on the increase in cap per day is here. Cap per registrant on day 1 is: $1,893*
  • Token sale address is zrxsale.eth. Warning: all other addresses are fake!

For more details on tokensale please refer the link ZRX Token Sale Purchase Tutorial

Roadmap

The immediate timeline for their tokensale is as below.

But their key Development Roadmap will focus on the below areas:

Developer tools

  • 0x.js v1.0.0
  • 0x.js Tutorials
  • Contract ABI Documentation & Tutorials
  • Standard Relayer API

User tools

  • ERC20 Token Wallet
  • Token Explorer (via TokenRegistry)
  • Trade Explorer
  • Governance Web Application

R&D

  • Governance Protocol
  • ZEIP Process & Contribution Guidelines
  • Privacy Preserving Cryptography
  • Decentralized Order Book

Team

Will Warren — Co-founder & CEO

Amir Bandeali — Co-founder & CTO

Fabio Berger — Senior Engineer

Alex Xu — Director of Operations

Leonid Logvinov — Engineer

The team has already done some great work in developing a open source framework for exchange of ERC20 tokens and also is contributing to the development of Ethereum Blockchain as well.

Concerns

Any complex new system is likely to suffer from design flaws. Decentralized exchanges have some definite advantages over their centralized counterparts, but also some distinct drawbacks. It is believed that in a decentralized exchange, users retain a degree of control of their own funds. Instead, trading orders, and thus the release of user funds, are authorized directly by users via digital signatures. But ability to sign off on transactions does not equate with real control. DEX enables users to control their own funds, but it has the side effect of abandoning the real-time nature of centralized exchanges in favor of slow, on-chain trading. Exposing users of decentralized exchanges to new risks of monetary loss. 0x’s governance scheme, which permits token holders to upgrade 0x contracts creates a systemic risk such that users’ funds could again be potentially exposed to theft, resulting in some degree of the worst of both worlds.

General issues in decentralized exchanges

  • Exposure to arbitrage
  • Vulnerability to miner front running
  • Exposure to exchange abuses

0x-specific concerns as stated by Cornell Tech’s IC3 website and also shared by me.

  • Why a dedicated token should be used for Relayer fees one could simply pay Relayers in ETH instead.
  • Questions about the security properties of the governance process. A simple voting scheme for protocol upgrade exposes it to 51% attack where one buys more than half of all ZRX tokens and then votes to replace the DEX with a malicious contract sending all assets to the himself. Hence its one of the key areas of their future R&D and currently the team will manage the protocol upgrades.
  • Side deals: 0x’s design allows for two kinds of orders, broadcast orders and point-to-point orders. Now a Taker can listen for broadcast orders from Relayers and contact directly to the Maker and fulfill the order. Now Maker can cancel the original order and another order for the point to point transaction, since cancellations are free and O is never filled, the Relayer will not earn any fees. Making it uneconomical for the Relayer to run a DEX.
  • Maker griefing — Where a cartel could place both legitimate and illegitimate orders, sharing information with each other out of band about which orders were legitimate. This would force outsiders to incur penalties, a potentially profitable strategy for a sufficiently powerful cartel.
  • Similarity to EtherDelta: And finally, EtherDelta and 0x share several similarities. EtherDelta is a full system that is currently operational and includes several in-production smart contracts. I am not sure where a potentially large ICO raise could be allocated beyond the development of equivalent technologies and distributed governance in 0x.

Conclusion

Despite the above concerns and the fact that the Swap protocol & Omega one can emerge as potential competitors, there are few reputed projects like Augur, district0x, ChronoBank and dharma are planning to use 0x and also they have a early mover’s advantage and their 0x OTC Dapp really makes transfer of funds using tweets, emails and even in social forums possible and hence is a great showcase of their capabilities and hence backed by a strong team and also running a airtight ICO they are hinting at positive outlook for their projects which reflects about the maturity of the team and commitment of making Ethereum a major Trade & Commerce Blockhain platform of the future.

Reference

Disclaimer: This is not investment or trading advice, always do your own independent research.

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