0x Price Analysis – Creating asset value remains elusive

0x (ZRX) is an ERC-20 token designed to power decentralized exchanges. ZRX is currently ranked 37th on the BraveNewCoin market cap table, while the current spot price is down 91% from the all time high set in January 2017. The market cap currently stands at US$135 million, with ~3.9% of the total market cap traded in the past 24 hours, or US$5.28 million.

The rise of the decentralized exchanges (DEX) is, in part, a response to more than a US$1 billion lost through centralized exchange hacks, malfeasance, or incompetence that have occurred in the crypto ecosystem over the past 10 years. While using most DEXs the user maintains custody of their assets, as opposed to centralized exchanges which require assets to be deposited in their wallets. The recent hack of a New Zealand-based exchange, Cryptopia, and custodial problems at Canadian-based QuadrigaCX are continual reminders of the risks of centralized exchanges.

Source: https://0x.org/

ZRX provides the architecture for a DEX through a system of relayers (shown below) on the ZRX platform. ZRX also uses a messaging format for trade settlement and a system of smart contracts for a decentralized governance module, which has yet to be implemented.

Decentralized governance was included in an attempt to reduce the friction associated with upgrades and any platform downtime. Relayers can use the ZRX token to approve or disapprove potential future upgrades, which decreases the circulating supply, and is reminiscent of Proof of Stake. This model does not prevent relayers from forking the ZRX protocol, should they wish to implement their own changes, or if they disagree with changes implemented by the ZRX core team.

A fork in December, initiated by a company called DDEX, created the Hydro protocol. CEO of DDEX, Tian Li, stated that the DDEX and ZRX teams had divergent opinions on what constituted an urgent protocol improvement, and whether fee-based tokens create unnecessary friction.

The ZRX protocol was founded by engineer and self-proclaimed U.C.S.D. Ph.D. dropout, Will Warren, and a former fixed-income trader, Amir Bandeali, neither of which had a body of technical work experience before starting the project. Bandeali previously worked for a leading Over The Counter cryptocurrency trading platform, DRW.

Notable project advisors include Joey Krug, co-CIO at Pantera Capital and founder of Augur, as well as three Coinbase alums; Fred Ehrsam, co-founder of Coinbase, Linda Xie, co-founder of Scalar Capital and Will Warren’s wife, and Olaf Carlson-Wee, founder of PolyChain Capital.

The ZRX token ICO occurred in August 2017, when 500 million tokens were sold, raising US$24 million. One billion tokens were created in total. The remaining 50% were split between the 0x company, a developer fund, the founding team, early backers, and advisors. Tokens allocated to founders, advisors, and staff members were locked up in a 4-year vesting schedule.

While there were no pre-sale or reservation agreements, PolyChain Capital lead an early seed round which covered legal fees. The ZRX team continues to hold 18,600ETH in their treasury, currently valued at US$1.93 million. At least half of the treasury was spent during 2017, with a further 11,000ETH spent in late December last year (red bars, chart below).

Source: https://app.santiment.net/projects/0x

In September 2018, ZRX released V2 of the protocol which brought several new features including; the 0x Portal, Non-Fungible Token support (ERC-721), increased order matching efficiency, and the option for permissioned liquidity pools where token addresses must meet specific requirements that enable the enforcement and adherence to KYC/AML regulations. Wyre has also been working with DEXs to help integrate a KYC token, as well as a fiat to Dai on-ramp.

DEX legal compliance was thrust into the spotlight in November 2018 when the U.S. Securities and Exchange Commission fined the founder of EtherDelta, a non-ZRX DEX, US$388,000 for operating an unregistered national securities exchange.

Source: 0xproject.com/portal

0x Instant was released in December, which enabled crypto purchases on any app or website with a few lines of code. Instant is open-source, configurable, and allows hosts to earn affiliate fees on every transaction. The process works by aggregating liquidity from 0x relayers and finding the best price for the purchaser. The transaction occurs using Ethereum (ETH) through MetaMask, Ledger, Trezor, or any other Ethereum wallet. 0x has also attracted NFT marketplaces, like Emoon, to the family of relayers. Emoon also has 0x instant enabled.

In a move to improve liquidity across ZRX relayers, the team announced a market maker program. Market makers increase liquidity by adding to order book depth when necessary. Accepted applicants can receive up to US$15,000 for completing onboarding.

Future protocol changes will come through 0x Improvement Proposals (ZEIPs), including support for multiple assets on each side of a trade, support for the ERC-1155 token standard, and a Trade Execution Coordinator which will attempt to prevent frontrunning and order collusion.

Over the past six months, total USD network volume (chart below) across all relayers has decreased substantially, while ZRX fees are basically non-existent (not shown). Exchange fills have dropped off substantially since mid-December, when DDEX left the ZRX protocol. Of the 10 DEXs tracked, Paradex leads by trade volume and the number of trades. The most popular tokens traded between all relayers is Wrapped ETH, an ERC-20 compliant derivative of ETH, followed by Dai (DAI), a USD stablecoin, and then Maker (MKR).

Source: 0xtracker.com

Transactions per day (line, chart below) spiked dramatically through October and early November, likely due to speculative demand and/or transactions from a Coinbase listing at the time. Since then, transactions per day have continued to decline. The average transaction value (fill, chart below) has been in a downward trend since May 2018, and is currently sitting at an all time low.

Declining ZRX token transactions can be attributed to an inherent lack of importance regarding the ZRX token itself. The ZRX tokens are almost purely a speculative vehicle and are not required to trade on relayers. Without any pending governance decisions or ZRX denominated fees, relayers themselves have no reason to hold the token. Warren has discussed this issue, including the possibility of relayers adding a staking feature to decrease user fees, as well as the ZRX team focusing on long term value creation rather than short-term token price increases.

Source: coinmetrics.io

The 30-day Kalichkin network value to estimated on-chain daily transactions (NVT) ratio (line, chart below) has begun to rise after falling to an all time low of ~20. A rising NVT suggests the coin is overvalued based on its economic activity and utility, which should be seen as a bearish price indicator.

Daily active addresses (fill, chart below) increased dramatically throughout October and early November, but have since declined. This rise in active addresses corresponds with the Coinbase listing in mid-October. Active and unique addresses are important to consider when determining the fundamental value of the network using Metcalfe’s law.

Source: coinmetrics.io

The ZRX project has 51 repos on GitHub with 48 developers contributing over 5,000 commits to the ZRX repos in the past year. Most of the ZRX related commits have occurred in the 0x-monorepo (shown below).

Most coins use the developer community of GitHub where files are saved in folders called "repositories," or "repos," and changes to these files are recorded with "commits," which save a record of what changes were made, when, and by who. Although commits represent quantity and not necessarily quality, a higher number of commits can signify higher dev activity and interest.

Source: https://github.com/0xProject/0x-monorepo/graphs/contributors

Exchange traded volume has been led by the Bitcoin (BTC) and Ethereum (ETH) pairs on Binance, BitMart, and Coinbase Pro. Over the past year, ZRX was newly listed or gained new pairs on several exchanges including OKCoin.com, Poloniex, Coinbase, Bittrex, and Ethfinex.

Technical Analysis

With the ZRX/USD price pushing yearly lows, value speculators will likely begin to take an interest. Knife-catching, or attempts to buy the bottom of a trend, can be profitable if done with discipline and patience. To determine entries and exits throughout a trend, as well as the potential for trend reversal, exponential moving averages (EMAs), chart patterns, volume, divergences, and the Ichimoku Cloud can be used. Further background information on the technical analysis discussed below can be found here.

On the daily chart, the 50/200EMAs have been bearishly crossed since August 2018 with price mostly held below the 50EMA since the cross. The 200EMA should act as both a magnet and strong resistance for price if a mean reversion attempt is made. There are active and growing RSI and volume bullish divergences as price continues to make lower lows on less momentum and less volume. Additionally, a falling wedge chart pattern has formed, suggesting a reversal attempt in the near term. Both the 200EMA and volume profile (vertical bars) show a resistance zone between US$0.52 – US$0.76.

Turning to the Ichimoku Cloud, four metrics are used to determine if a trend exists; the current price in relation to the Cloud, the color of the Cloud (red for bearish, green for bullish), the previous Tenkan (T) and Kijun (K) cross, and the Lagging Span. The best entry always occurs when most of the signals flip from bearish to bullish, or vice versa.

The status of the current Cloud metrics on the daily chart, using doubled settings for more accurate signals, are all bearish; price is below the Cloud, the Cloud is bearish, the previous TK cross is bearish, and the Lagging Span is below Cloud and below price. A traditional long entry will not trigger until price is above the Cloud with a bullish TK cross, which has not been the case since May 2018. However, a reversal trade will trigger if price enters the Cloud with a bullish TK cross. These trades are referred to as Edge to Edge trades (yellow arrow).

Lastly, on the daily ZRX/BTC pair, the picture is also bearish; price is below the 200EMA and below the Cloud. If price breaks the 8,300 sat resistance level with a bullish TK cross, an Edge to Edge reversal trade will likely trigger with a target of 11,300 sats. The reversal will likely have a pitstop near the 200EMA at ~9,500 sats. There is no bullish divergence on the current low but the RSI recently reached the lowest level ever recorded in the asset’s short history.

Conclusion

Fundamentals show relayer fills and token use continues to decline after one of the biggest relayers, DDEX, forked the ZRX protocol in late December. Users and relayers are no longer required to hold the ZRX token to trade on any ZRX platforms, giving almost no reason to interact with the token at all. The spike in transaction volume following the Coinbase announcement and addition to the platform was not sustained. Although the ZRX core team continues to be very active, creating or retaining token value remains elusive. Relayers leaving ZRX, as well as a lack of governance structure for the protocol, yields a bearish outlook in the near term as organic demand is all but non-existent.

Technicals show a sustained bear trend with the potential for a mean reversion in the near term. Although price is currently near an all-time low, there are signs of a bullish relief rally due to the formation of a Falling Wedge with bullish oscillator divergences. Targets for the reversal will likely find resistance near the psychological levels of US$0.50 and 10,000 sats. Any bullish rallies are unlikely to sustain themselves until there is an organic demand to hold the token, beyond speculation.