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0x Price Analysis – Use cases in development

The ZRX token price currently sits on all-time-lows, and bearish technical indicators suggest there may be further pain in the near future. Fundamentals point to suppressed token use and relayer activity. However, if the roadmap improvements are implemented, ZRX token use cases and value may increase.

0x (ZRX) is an ERC-20 token designed to power decentralized exchanges (DEXs). The current USD spot price is down 93% from the all-time high set in January 2018. The token has a total value of US$100 million with US$27.56 million in trade volume over the past 24 hours.

The ZRX protocol was founded by an engineer and self-proclaimed U.C.S.D. Ph.D. dropout, Will Warren, and a former fixed-income trader, Amir Bandeali. Neither had significant 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 rise of DEXs is, in part, a response to the more than US$1.5 billion lost by centralized exchanges in the form of hacks, malfeasance, or incompetence over the past 10 years. On a DEX, the user maintains custody of their assets, as opposed to centralized exchanges which require assets to be deposited in exchange wallets. This key difference removes the incentive for hackers to steal coins.

ZRX provides exchange architecture for DEXs through a system of relayers (shown below). 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.

FA1

Source: 0x.org

Decentralized governance was included in an attempt to reduce the friction associated with upgrades and 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.

In December 2018, DDEX forked the ZRX protocol and 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 token ICO occurred in August 2017 and raised US$24 million through the sale of 500 million of the one billion tokens created. The remaining 50% of the tokens 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 in a four-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 12,220 ETH in its treasury, currently valued at US$2.26 million. At least half of the treasury was spent during 2017, with a further 11,000 ETH spent in late December 2018, and 6,386 ETH spent this year (red bars, chart below).

FA2

Source: Santiment

In September 2018, ZRX released v2.0 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 (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.

FA3

Source: 0xproject.com/portal

0x Instant was released in December 2018, 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 January, ZRX announced a market maker program to improve liquidity across ZRX relayers. Market makers increase liquidity by adding to order book depth when necessary. Accepted applicants can receive up to US$15,000 for completing the onboarding process.

Throughout this year, the ZRX team has updated the roadmap for future protocol changes, or 0x Improvement Proposals (ZEIPs). One key upcoming change is the inclusion of improved networked liquidity amongst relayers in the ecosystem through 0x Mesh. This change would increase market access for relayers, making it easier to connect to and share orders with other members of the 0x ecosystem. Each node in the network will also score its neighbors based on the quantity and quality of the orders it shares. The beta version of 0x Mesh went live in mid-July.

FA4

Source: blog.0xproject.com

In April, Warren proposed a stake-based liquidity incentive (ZEIP-31) aimed for a Q3 2019 release. ZEIP-31 changes will mean that market takers pay a small protocol fee on each ZRX trade and market makers receive a liquidity reward proportional to the protocol fees generated from their orders and their stake of ZRX tokens. Market makers who do not own sufficient ZRX to collect liquidity rewards will also be able to form a ZRX staking pool for third-party delegators.

In July, the ZRX team introduced coordinators, a service that combines order matching and open order book relayer models. These coordinators allow for pooled liquidity across all DEXs, quickly finding the best price for an asset. A demo implementation of a coordinator is currently live on Bamboo Relay.

FA5

Source: blog.0xproject.com

A contract vulnerability was found in July before it was exploited, and the network was briefly halted. The 0x v2.0 contract was shut down temporarily, patched, and brought back online. No user funds were lost and the bug reporter was awarded US$100,000.

FA6

Source: blog.0xproject.com

Since April 2018, total USD network volume (chart below) across all relayers has decreased substantially, while ZRX fees are non-existent (not shown). Exchange fills have dropped off substantially since mid-December 2018 when DDEX left the ZRX protocol. Of the 12 DEXs tracked, Radar Relay 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, Dai (DAI), and Tether (USDT).

FA7

Source: 0xtracker

Transactions per day (line, chart below) spiked dramatically through October and early November, which is likely due to speculative demand and/or transactions from a Coinbase listing at the time. Transactions per day have since been on the decline, nearly returning to pre-October 2018 levels. The average transaction value (fill, chart below) has been in a downward trend since May 2018 and is currently sitting near the range lows.

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.

FA8

Source: CoinMetrics

The 30-day Kalichkin network value to estimated on-chain daily transactions (NVT) ratio (line, chart below) is currently 135 and falling. A falling NVT suggests the coin is undervalued based on its economic activity and utility, which should be seen as a bullish price indicator.

Daily active addresses (fill, chart below) increased dramatically throughout October and early November, but have since declined to yearly lows. The 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.

FA9

Source: CoinMetrics

The ZRX project has 71 repos on GitHub with over 60 developers contributing over 4,700 commits to ZRX repos in the past year. Most of the ZRX related commits have occurred in the 0x-monorepo (shown below). There are currently 34 issues in the ZEIP repo, 14 of which are marked for launch in v3.0, pending ZRX token holder approval.

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.

FA10

Source: GitHub

Exchange traded volume has been led by the Bitcoin (BTC) and Tether (USDT) pairs on Binance, Coinbase Pro, and Bitfinex. Over the past year, ZRX has been listed or gained new pairs on several exchanges including Binance, Bittrex, Coinbase, Ethfinex, OKCoin.com, and Poloniex. In June, dYdX integrated 0x-based liquidity using Radar Relay. ZRX is also being considered for the launch of Binance.US.

FA11

Technical Analysis

As ZRX makes new all-time lows, value speculators may 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 a trend reversal, exponential moving averages (EMAs), 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-day and 200-day EMAs have been bearishly crossed since July 2018 with price mostly held below the 200-day since the cross. The potential for a bullish 50/200 EMA cross is low over the next few months. Resistance at the 200-day EMA matches the VPVR (horizontal bars) resistance level, suggesting price action above this zone would move to at least the US$0.34 level. There are no volume or RSI divergences at this time.

FA12

Turning to the Ichimoku Cloud, there are four key metrics; the current price in relation to the Cloud, the color of the Cloud (red for bearish, green for bullish), the Tenkan (T) and Kijun (K) cross, and the Lagging Span. Trades are typically opened when most of the signals flip from bearish to bullish, or vice versa.

Cloud metrics on the daily time frame with doubled settings (20/60/120/30), for more accurate signals, are bearish; price is below Cloud, Cloud is bearish, TK cross is bearish, and the Lagging Span is below Cloud and Price. A traditional long entry will trigger once the TK cross flips bullish with price above the Cloud, which has not been the case since May 2018. An inverted head and shoulders, which completed in May, never found bullish momentum while price was in bullish territory.

FA13

Lastly, on the daily ZRX/BTC pair, trend metrics suggest a bearish picture: price is below the 200-day EMA and below the Cloud. Based on the distance of price from the 200-day EMA and the formation of a TK disequilibrium on the Cloud, price action suggests oversold conditions. Mean reversal targets include the Kijun at 2,700 sats and the 200-day EMA at 4,600 sats. A high volume node based on VPVR also sits at the current all-time low price level. There is a mild bullish RSI divergence currently, with RSI also reaching below 20 for the third time since May.

FA14

Conclusion

Fundamentals show relayer fills and token use continues to remain muted. Users and relayers are not 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 has largely not been sustained over the past few months. Although the ZRX core team continues to be very active with an extensive upcoming roadmap, 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. If the potential roadmap improvements are added, ZRX token use cases and value may increase.

Technicals for the ZRX/USD and ZRX/BTC pairs are both leaning heavily bearish with prices sitting at or near all-time lows. Any upside bounce should be a mean reversion play, with both pairs showing potential for a move to US$0.33 and 2,700 sats, respectively. Trend following traders will likely abandon both pairs entirely until a semblance of bullish momentum can form, whereas value traders may start catching knives as prices push further all-time lows on panic size volumes.


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