Application coins, or “appcoins,” are being minted at an astounding rate. Many of these coins have gone through a fundraising process named Initial Coin Offering (ICO), token sale, or token distribution event.
The company behind the 0x project, Zero Ex Intl, recently raised US$24 million in a token sale utilizing a sybil-resistant distribution process by using Vinny Lingham’s Civic mobile application. 50% of a total 1 billion tokens were distributed to sale participants, who were limited to 20 ether’s worth of ZRX per account.
ZRX is an ERC-20 compliant token, launched on Ethereum, the platform for decentralized applications, or dApps, built on smart contracts. The number of ERC-20 token complaint contracts in existence, at the time of press, is above 5,297. This rapidly growing token economy’s market capitalization is above $2.2 billion.
Zero Ex Intl estimates that the market capitalization of the entire token market will range from the 10s to the 100s of billions in USD by 2020, and without third party APIs like centralized exchanges, value transfer between these various networks remains severely isolated. The company intends to solve this issue with a trustless mechanism to seamlessly exchange and transact in these varied assets.
“The first open protocol for exchange 0x represents the beginning of the end for the exchange industry’s rent seeking oligopoly: zero exchange.”
- Zero Ex Intl
The 0x Project is an open protocol that enables secure peer-to-peer exchange of Ethereum-based ERC-20 tokens without the need for a third party centralized cryptocurrency exchange. Seeing the potential behind this project, notable hedge funds like Polychain Capital, Pantera, and Blockchain Capital, among others, have backed 0x, hoping that this implementation is a crucial piece of infrastructure.
The need for such a protocol is compelling when single points of failure like Mt. Gox, Shapeshift, and Bitfinex demonstrated the attack vector that centralized exchanges provide. Indeed, the driving value proposition of decentralized protocols is in the elimination of intermediaries.
The most notable product coming out of 0x is something called the 0x OTC, which enables users to execute over-the-counter trades directly through their Ethereum blockchain connected wallet, like Metamask, without first having to send funds to an exchange. Users on Reddit are already using this capability, by posting orders anyone can fill.
“Rapid iteration and a lack of best practices have left the blockchain scattered with proprietary and application-specific implementations. As a result, end users are exposed to numerous smart contracts of varying quality and security, with unique configuration processes and learning curves, all of which implement the same functionality.”
- 0x White Paper
The 0x protocol is a hybrid implementation of a few existing technologies, combining the off-chain functionality of state channels with on-chain settlement, which is referred to as “off-chain order relay with on-chain settlement” for making transactions.
Orders are relayed off-chain and then settled on-chain. This lowers the transaction fees for market makers. Additionally, this facilitates near-instantaneous transaction settlement time on the Ethereum blockchain.
Some key components of the protocol are known as point-to-point order, broadcast orders, and relayers. Point-to-point orders are orders that are filled only by the specified “Taker” addresses, which protect against eavesdroppers and outside attacks.
Relayers are users who host and maintain order books by relaying generic messages between the makers and takers without the ability to execute the trades themselves.
Broadcast orders allow Takers to execute their own trades, thus eliminating the need to trust a third party, who, in this case, is the independent Relayer. Relayers are paid in transaction fees within their cited fee schedules for hosting a specified order book.
Because the exchange facilitator shifts from a centralized platform to the market participant itself, it opens up this emerging token economy to a more free market. Since “relayers” replace such platforms as facilitators, orders are filled by any takers that intercept the broadcasted orders.
Decentralizing the exchange functionality does not only eliminate the vulnerability posed by centralized exchanges that act as honeypots, but in doing so, it obfuscates obvious targets for governments to target.