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0x Price Analysis – Liquidity plagues the DEX

Cryptocurrency has a growing, ever-present problem. Despite blockchain being a centralization disruptor, the ecosystem is filled with single points of failure. Over US$1 billion has been stolen from exchanges in exploits, hacks, and thefts. These events are becoming a mainstay thanks to systemic custodial risks, ballooning coin valuations, and an increasing number of investors on exchanges.

Cryptocurrency has a growing, ever-present problem. Despite blockchain being a centralization disruptor, the ecosystem is filled with single points of failure. Over US$1 billion has been stolen from exchanges in exploits, hacks, and thefts. These events are becoming a mainstay thanks to systemic custodial risks, ballooning coin valuations, and an increasing number of investors on exchanges.

Decentralized Exchanges (DEXs) are an answer to the most obvious flaws in the cryptocurrency space. Generally, DEXs have the ability to facilitate trading without holding funds in a central location, which prevents a honeypot of user funds attracting bad actors. A decentralized service also provides censorship resistance, as regulators have no central operator to target.

Another benefit of a DEX is the listing criteria for a coin or token. Ideally, without a central intermediary, any token can be listed or traded on any DEX-type platform. This allows any ICO to be traded immediately post-token generation, and non-fungible tokens, like CryptoKitties, can be traded between users in a broader marketplace. Exchange listings are often huge catalysts for speculative price action, attracting liquidity, attention, and brand awareness for smaller projects.

1billion and counting

The idea is nothing new. Bitshares, Waves, and Stellar are examples of DEXs that currently sit on top of existing blockchains. Unfortunately, none of these exchanges, and a few others, have yet to capture the volume and liquidity enjoyed by centralized exchanges. This makes these platforms unusable for most traders.

DEX implementations can also lead to issues. EtherDelta is one of the newest DEXs, and was built specifically to trade ERC20 tokens and Ethereum based currency pairs. Users can sync a software or hardware wallet directly to the exchange, or import private keys. Orders are placed directly on the Ethereum blockchain, which means Ethereum transactions and the associated Gas cost are required for depositing, withdrawing, and trading. The only fee that EtherDelta directly charges is a 0.3% taker fee, which goes to the developers of the platform.

Despite being decentralized EtherDelta was hacked through a DNS hijack and redirect, which sent users to a fake site. The hackers siphoned 308ETH and various amounts of ERC20 tokens before the exploit was stopped. Only users who imported their private keys were affected, a silver lining for some, as synced third-party wallets can trade directly with the platform.

As the DEX space continued to develop and evolve, a new approach emerged in mid-2017. The 0x (ZRX) protocol is an open and permissionless platform for trading ERC20 tokens on the Ethereum blockchain. ZRX uses both a messaging format for trade settlement and a system of smart contracts for a decentralized governance module. While the protocol is less of a DEX in itself, ZRX provides the architecture for DEXs to be developed.

The protocol uses off-chain order books, generated and maintained by a relayer, for trade settlement between two parties. The end result is a variety of non-custodial models, each of which provides off-chain order relay with on-chain settlement. Relayers are incentivized to create these channels by charging and collecting fees, denominated in ZRX. They compete to attract users by providing a better user experience or a more enticing fee structure.

0x liquidity2Several dApps and relayers have already begun using the protocol. The network experienced record traffic on January 9th, when ~US$13 million was sent in only 482 trades. ETHfinex is the most prominent exchange to adopt the protocol. The subsidiary of Bitfinex is currently in development and will offer a market maker incentive with a separate token, Nectar.

Looking forward, the ZRX protocol has a decentralized governance module that allows for the nascent protocol to be upgraded over time, reducing the friction of upgrades and downtime. Relayers and large holders of ZRX will likely be acutely interested in the progress of the platform, and whether or not it can adapt to competition.

The ZRX token was initially offered in an ICO during August 2017, which sold out in just over 24 hours, and raised US$24,000,000. One billion tokens were created, of which 50% were sold in the ICO. The remaining 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 up in a 4-year vesting schedule. Although there was no pre-sale or reservation agreements, PolyChain Capital lead an early seed round which covered legal fees.

The 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 has a body of technical work experience. Bandeali previously worked for one of the leaders in handling OTC for cryptocurrencies, DRW.

Notable advisors to the project included 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 heavy Coinbase influence suggests that the ZRX token will eventually be listed on GDAX and/or Coinbase. Whether or not ZRX follows GDAX’s digital asset framework, or if ZRX represents a competitor to Coinbase itself, is open for debate. Coinbase CEO, Brian Armstrong, said in a December 6th Bloomberg interview that a top request among users was “more assets on the platform.”

However, Coinbase already has an app with a ZRX-based ERC DEX. Toshi serves as a dApp browser, Ethereum wallet, and identity and reputation system. There is also some wild speculation and loose connections that Goldman Sachs, which is in the process of developing a cryptocurrency desk, may potentially use the ZRX-powered platform, TheOceanX.

The ZRX token is currently traded on a number of exchanges, with Binance accounting for ~55% of the market volume. Poloniex, Bittrex, and Huobi contribute a further 10% each. The token is typically traded for Bitcoin (BTC) and Ethereum (ETH).

0x Price Analysis 26 Feb 2018 1

Technical Analysis

Being a small fish in a big pond means that ZRX will essentially move in tandem with the wider market cycles. ZRX briefly swung to a record high of US$2.70 in early January and is currently sitting below daily 20EMA. With less than a year of trading history, higher timeframe analysis is extremely limited.

The ticker in TradingView, “BINANCE:ZRXBTC*COINBASE:BTCUSD,” can be used to capture the USD price, the highest volume BTC trading pair.

Fibonacci retracements on the twelve-hour chart, using the all time high to extreme low, yield a 50% retrace of ~US$1.66 and a 1.618 of ~US$4.00. Volume has essentially disappeared since December, as is the case for the crypto markets broadly.

0x Price Analysis 26 Feb 2018 2The twelve-hour chart has continually printed bullish reversal fractals since January. A bullish inverted head and shoulders with descending volume profile developed through January but failed to come to fruition. A small Adam and Eve bullish reversal fractal completed in early February. There is currently a larger Adam and Eve bullish reversal pattern. If this pattern completes, price will return to US$1.43, then move higher.

0x Price Analysis 26 Feb 2018 3On the six hour chart, the Ichimoku Cloud metrics are all bearish. The Ichimoku Cloud is typically used to identify trending markets. Despite the bearish indicators, the long flat Kumo at ~US$1.40 should act as a magnet for price in the near term. There is also a multi-day double bottom forming, which may act as a catalyst for reversal. Buyers will be looking for the price to be above a bullish Cloud, and a bullish TK cross.

0x Price Analysis 26 Feb 2018 4Lastly, the Ichimoku Cloud metrics are mostly bearish on the twelve-hour ZRX/BTC chart. The Cloud is currently bullish. The next resistance level is the Cloud and Kijun. Sellers will be looking for the Cloud to flip bearish, which is likely to occur within the next few periods, although price has previously found support at the monthly S1 pivot.

0x Price Analysis 26 Feb 2018 5Conclusion

Early adoption metrics and DEXs using the ZRX protocol suggest a bright future. DEXs will continue to be developed and deployed during 2018 and beyond, fulfilling the need to decrease the custodial risk inherent in centralized exchanges. Based on the ETHfinex market maker trading incentive, coupled with Bitfinex brand awareness and marketing, ETHfinex has a high chance of quickly becoming the most successful DEX to date.

Although the ZRX protocol will likely be successful, the value of the token itself is much more questionable. Demand will be driven by speculation and relayers being paid fees in ZRX. Technicals suggest the possibility of a reversal in the near term, with a target of US$1.50. Long term, the metrics to move price will include continued platform development and being added to a retail fiat gateway like Coinbase.


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