Voting has begun on the 0x (ZRX) governance platform for a new improvement proposal to reduce transaction fees on the network. The proposal is driven by the recent rise in gas prices on the Ethereum platform.
0x (ZRX) is an open-source protocol that provides smart contract infrastructure and liquidity to enable the peer-to-peer exchange of tokens on the Ethereum (ETH) blockchain. The networks native token, ZRX, allows 0x users to vote on Improvement Proposals that evolve the system over time. ZRX token holders can also delegate ZRX to market maker staking pools to earn protocol liquidity rewards.
The original ZRX token ICO occurred in August 2017 and raised US$24 million through the sale of 500 million of the one billion final supply of 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.
The ZRX token currently has a market cap of ~65 million USD and trades for ~0.40USD. It has risen in value by ~17% in the last week and by ~23% in the last month.
ZRX holders voted to implement a third version (v3) of the network on the 3rd of November 2019. 0x v3 introduced a trading fee that scales linearly with the gas price. The amount of the protocol fee in USD terms was derived from a fee constant, the price of gas on the Ethereum network, and the price of ETH in USD. Gas refers to the fee, or pricing value, required to successfully conduct a transaction or execute a contract on the Ethereum blockchain platform.
The initial fee constant was set equal to 150,000. At that time, the median gas price for 0x trades stood at approximately 8 Gwei and the ETH price was approximately US$165. The typical 0x protocol fee worked out to about US$0.19.
The latest 0x improvement proposal (ZEIP-79) asks the community to vote on a proposal that reduces the current protocol fee multiplier from 150,000 to 70,000. The ultimate intent of the proposal is to increase the adoption of 0x and the liquidity rewards received by market makers and by token holders who delegate their stake to them.
The reduction is in response to the Ethereum network fee increasing dramatically in recent months, resulting in the current 0x fee equating to range from US$0.74 to US$1.49. In theory, market makers that collect these higher protocol fees should be able to adjust their pricing as gas prices grow. However, the 0x team states that they have not yet found this to be the case, likely because this is a relatively new and complex problem.
The 0x team is focused on ensuring that the 0x protocol remains cost-competitive at the most common trade sizes. In order to ensure this, they have proposed a reduction in the protocol fee constant from 150,000 to 70,000. This adjustment would make the protocol fee US$0.35 to US$0.70 per trade. For context, the median DEX trade size is around US$500, so a fee of US$0.35 USD to US$0.70 USD equates to 7 to 14 basis points at the median trade size.
The team expects the fee reduction to spur growth in trading activity in the long term, particularly at smaller trade sizes. These smaller trades generate the bulk of protocol fee revenue.
The fee reduction will also make 0x v3 liquidity more competitive on DEX aggregators and lowers the barrier to entry for trading 0x v3 liquidity. The potential risk of the fee multiplier reduction is that it would decrease liquidity rewards in the short term.