The past year has been a whirlwind. This post highlights some of the 0x core team’s accomplishments in 2019 plus some commentary on the tectonic shifts taking place within the DEX landscape.



Before getting started, it is important to zoom out and review why all of this matters: today, an individual’s economic freedom and opportunity in life is largely determined by the geographic location in which they are born. Public blockchains present us with an opportunity to eliminate the geographic lottery by democratizing access to financial services in the same way the internet has democratized access to information. The 0x core team’s mission is to eliminate the geographic lottery by creating a tokenized world where all value can flow freely.



Widespread adoption of public blockchains will likely take at least one or two decades to play out, we are still in the formative years. The major technical challenges standing between us and widespread adoption are:

Scalability. Need to develop more scalable blockchains — blockchains that can support large populations — without sacrificing censorship-resistance or permissionless-ness.

Accessibility. Self-custody and the process of interacting with blockchains must become a seamless yet secure user experience, accessible via mobile device.

Governance. As netizens come to rely on increasingly complex blockchains and systems of smart contracts, we will need functional governance structures that allow these systems to evolve with the needs of the community. History has taught us that governance is hard to get right.

Privacy. As blockchains come to replace bank accounts for individuals and organizations — as organizations themselves move onto the blockchain — privacy will become a necessity.

We also must address the entirely separate challenge of finding product market fit for 0x protocol today. Since Ethereum can’t yet support a global financial system, and since early adopters are likely adventuresome/affluent technology enthusiasts, dApps will need to go through a toy phase. Chris Dixon wrote in 2003 that “the next big thing will start out looking like a toy,” and in the context of DEXs, the markets that find an early audience might look different from traditional financial markets.

In 2019 we focused on liquidity and R&D

In 2018, the focus for the 0x core team was growing a diverse ecosystem of relayers and shipping quickly. We established the 0x Ecosystem Acceleration Program (EAP) to support community-driven projects (and awarded over $1mm to date). Recipients included infrastructure projects (0x Tracker, Rivet) and relayers from a variety of geographic locations (US/Canada, South America, Asia, Europe), spread across a range of market verticals and trade execution models. A flood of relayers followed. When Coinbase acquired Paradex and Bitfinex established Ethfinex, it felt like DEXs had arrived. It was an exciting time for the 0x ecosystem, but there was still little organic traction for DEXs outside of ICO token markets, which we didn’t view as particularly sustainable. Every Ethereum-based DEX product was focused on the long-tail of ICO tokens, EtherDelta and IDEX were the big players, and it was challenging for any DEX product or technology to differentiate itself.



With the emergence of decentralized finance (DeFi) and a more competitive DEX landscape in 2019, our focus shifted to liquidity and R&D. On the liquidity front, we built out our data pipelines to analyze liquidity across the various DEX solutions and established the 0x Market Maker Program. Over 100 teams submitted applications and four teams were selected to participate in the first cohort. By Q3, the prices available on 0x markets were frequently uncontested by alternative open DEX solutions. On the R&D front, we heavily invested in a number of medium-term projects including 0x protocol v3, the new ZRX token economics, Mesh, scalability, and Bridge contracts. A number of these R&D projects are just wrapping up, setting the stage for an exciting 2020.

The DEX Landscape

In 2019, DEX activity continued to migrate away from speculative ICO tokens to stablecoins such as DAI, USDC, and USDT.

With DEX activity consolidating around stablecoin trading pairs and a flood of new DeFi applications driving demand for contract-fillable liquidity (CFL), the DEX landscape became much more competitive. The introduction of Uniswap — an automated market maker (AMM) — was far and away the single biggest change to the space. Uniswap took the Ethereum community by storm, garnering significant mindshare, and driving a new narrative around dApp UX and composability. In less than a year, Uniswap captured 25% of DEX market share by $-volume. Kyber also focused in on dApp composability and integrations. Despite this increasingly competitive environment, 0x market share by $-volume quadrupled in 2019.

Within the 0x ecosystem

Trading activity for ERC20 tokens remained split across multiple 0x relayers in 2019. Radar Relay — the first open orderbook relayer to launch on top of 0x protocol — remained the de facto source of contract-fillable liquidity for DeFi dApps. Tokenlon was a major new entrant to the space, launched as the native DEX solution within imToken, the most popular mobile wallet in Asia with over one million users. Tokenlon built a request-for-quote (RFQ) system on 0x that supports aggressive prices and that is accessible through their mobile wallet and recently launched web portal. imToken initially used Kyber as their DEX solution; by switching to a novel RFQ system on 0x, they were able to support custom assets (imBTC, imATOM, imEOS) and monetize trading volume. Ethfinex, a matching relayer that mirrors the Bitfinex orderbook, spun off from Bitfinex and rebranded as DeversiFi. Paradex, the matching relayer acquired by Coinbase, appears to still be live for non-US peoples.

Liquidity and Slippage

2019 was the first time we’ve seen different DEX solutions providing liquidity for the same set of highly liquid trading pairs, allowing for an apples-to-apples performance comparison. One of the primary metrics for performance comparison is slippage, which describes how far the market price will move (%) in response to a trade of certain size. Lower slippage means deeper liquidity and thus better prices. One hypothesis that we set out to test this year is that, in equilibrium, the 0x open orderbook model allows market makers to support better prices than on-chain liquidity pools.

When slippage decreased within 0x markets, a corresponding decrease in slippage followed in competing markets. Liquidity providers on other DEX platforms were quick to respond to tightening prices on 0x, but many DEX traders were not. Trading volume continued to flow through venues with suboptimal prices, even when better prices were merely a click away. We expect that traders will be more sensitive to DEX prices as DeFi markets grow in size and as usage emphasizes utility over novelty. That said, we learned that traders and dApp developers don’t simply want good prices, they also want liquidity in an easily consumable format.

User Experience

When it comes to the end user experience, the “simple swap” UI has proven to be more broadly accessible to retail traders than the traditional orderbook-based UI. The Ethereum community seems to associate the simple swap UI with on-chain liquidity pools and associate the orderbook-based UI with 0x. But while most 0x relayers surface off-chain orders via an orderbook-based UI, there is no technical limitation that requires this approach. For example, 0x Instant provides access to 0x liquidity through a simple swap UI and is currently integrated into Etherscan, MyCrypto, and Augur.

A “simple swap” UI (left) and orderbook-based trading UI (right).

As DEX aggregators become more popular, blending liquidity from a number of different sources together, associations between specific modalities of exchange and UIs will fade.

Developer Experience

The need for liquidity to be in an easily consumable format extends beyond the end user interface. We must also consider third party smart contract developers interested in programmatically consuming DEX liquidity from within their own smart contracts (dYdX, Set, Nuo, etc). Mechanically speaking, pulling liquidity from Uniswap is easier than pulling off-chain orders from an API endpoint and then feeding these orders into a smart contract. Asset Swapper represents our initial effort to simplify the developer experience of consuming 0x liquidity, allowing developers to treat 0x as a composable building block.



In 2020, we are doubling down on developer experience and creative innovation. With Mesh and new features available in v3.0, 0x protocol will be well positioned to serve as the de facto liquidity API for DeFi.

Downsides of on-chain liquidity pools

Uniswap launched in 2019, leading to a number of discussions within the Ethereum community about the benefits of AMMs and other on-chain liquidity pools such as Kyber. But there has been little discussion about these systems’ weaknesses. Ultimately, our belief that there will be millions of tokenized assets drove the design decisions behind 0x protocol and we believe on-chain liquidity pools are not well suited for this future.



Existing on-chain liquidity pools denominate markets in ETH. Instead of getting out of the way and allowing for organic market formation, the current solutions introduce friction to markets that fall outside of the target design space. For example, to trade DAI for USDC on Uniswap/Kyber, one must perform two trades and incur two fees plus slippage. So, why don’t we just create additional on-chain liquidity pools that are denominated in other assets?



Capital efficiency. AMMs are extremely capital inefficient. In orderbook-based markets, market makers compete to provide the best prices with the minimum amount of capital required, so capital is naturally focused where it provides the most utility: near the spot price. AMMs can’t focus capital, instead capital within the pool is spread out to provide incremental depth at every price level. Further, capital can be only be used to provide liquidity to a single trading pair, whereas with orderbook-based DEXs the same capital can be used across multiple markets (though Balancer is attempting to address this limitation). Since capital deposited into an AMM liquidity pool is capital earning zero interest, liquidity providers must extract more fees from traders to make up for that opportunity cost. My feeling is that the economics for on-chain liquidity pools won’t work out for most markets.



In the case of Kyber, each market maker must lock up assets in a reserve and then post price updates to the Ethereum blockchain for each trading pair they support. The frequency with which market makers update their prices directly corresponds to the quality of the prices they can offer. To be competitive, price updates must occur frequently. This mechanism of updating prices on-chain is expensive, increasingly so as the number of trading pairs and competing market makers increases. Market making on Kyber is only worthwhile if the profit generated from selling assets at a premium exceeds the cost of frequently posting price updates to the blockchain. Only high volume trading pairs can overcome the costs of market making on Kyber, which is not ideal in a world where there are millions of markets.



As a greater number of digital assets emerge in 2020 along with new use cases that are uniquely enabled by 0x protocol’s design, we believe the DEX narrative will continue to evolve.

Liquidity Aggregation

Not only did we see native DEXs jockeying for market share, we also saw the emergence of DEX aggregators such as Totle, dex.ag and 1inch.exchange. These aggregators blend liquidity from different sources to provide the end user with the best average price. In the traditional finance world, this is called smart order routing. One of the positive aspects of liquidity aggregators is that they direct demand for liquidity to the venues with the best prices, which will include 0x a disproportionate amount of the time. A negative aspect of liquidity aggregators is that they typically layer on additional fees.

0x v3 supports liquidity aggregation for on-chain pools like Uniswap, Kyber, and Oasis with zero aggregator fees. Stay tuned for the upcoming release of 0x API, which includes this functionality and more.

Tokenized video game items and digital collectibles

As an avid gamer, I’ve been excited about the potential of tokenized video game items for a while now. Dapper Labs gave us the first glimpse of this vertical’s potential in 2018 with CryptoKitties, which single-handedly congested the Ethereum blockchain at launch. What CryptoKitties lacked in game mechanics, it made up for in character. This year saw the next evolution of “blockchain gaming” with the launch of Gods Unchained — a trading card game somewhat similar to Hearthstone — which brings an entirely new level of depth and production value to the space. I hesitate to call Gods Unchained a “blockchain game” because the gameplay doesn’t take place on the blockchain at all, the Ethereum blockchain is only used to track ownership of the trading cards which are represented as ERC721 tokens. Tokenizing the cards allowed the Gods Unchained development team to raise almost $6mm by pre-selling packs of cards and to bootstrap an avid community of players.



While DeFi markets generated the most trading volume on 0x by $-value in 2019, when Gods Unchained cards were unlocked for trading, their official marketplace and the community-developed marketplace TokenTrove triggered a 10x spike in the number of 0x trades overnight. The launch also drove an increase in the number of unique traders on 0x protocol, many of which were using a DEX for the first time. The below figure shows the total number of 0x trades over a rolling 7-day window, segmented by relayer.

In the following years we expect to see more indie game studios follow in the footsteps of Gods Unchained by pre-selling game items to bootstrap loyal communities and in-game economies. We released Launch Kit earlier this year for this exact purpose: to allow anyone to launch a fully-functional custom marketplace in minutes. A couple of other upcoming blockchain game titles worth keeping an eye on include SkyWeaver and Neon District.

Mesh: the holy grail for off-chain liquidity

0x Mesh is a permissionless and censorship-resistant p2p network for propagating 0x orders; a global liquidity pool that can’t be taken down. This idea was originally proposed in the 0x white paper almost three years ago, but we couldn’t realistically kick off the project until early 2019. Mesh development progressed more quickly than expected, in nine months Mesh transformed from a somewhat speculative R&D project into a fully-functional network that is humming with activity. Mesh will become the center of gravity for 0x liquidity in 2020.

Mesh is up and running! The dashboard pictured above (to be released soon) shows Mesh activity in real-time.

One aspect of Mesh that is particularly exciting is that it is the first p2p network with a node that can natively run in the browser. Why is this so powerful? It allows any website to plug into p2p markets without hosting the markets directly and/or requiring users to download custom software. 0x Mesh will play a central role in Augur v2, supporting globally accessible prediction markets that can be accessed through a web browser, and with more liquidity than Augur v1 due to 0x protocol’s efficient off-chain design.



Browser-based Mesh isn’t without tradeoffs: spinning up a node, connecting to the network, finding peers, and pulling orders into the browser can take up to 30 seconds. And orders posted to Mesh may not persist in the network unless pinned to a node. So, for example, if you post an order to a local Mesh node running in your browser and then close the associated browser tab, your order may eventually be purged from the network, even if the order remains valid. Relayers can serve as persistent Mesh nodes that pin users’ orders and provide instant access to liquidity without warmup time.

Protocol governance and token economics

One of our objectives for 2019 was to establish precedent for governance over 0x smart contract upgrades and to practice running through the governance process with the community. We formalized some aspects of the process and communications for vetting 0x improvement proposals (ZEIPs) with the dev community, conducting security audits and bug bounties, putting finalized ZEIPs up to vote for ZRX token holders, queuing approved smart contract upgrades behind a mandatory two-week time lock, and working with the ecosystem to adopt new features. In all, the community voted to approve four ZEIPs in 2019.



The most recently adopted ZEIP was the major protocol upgrade, 0x v3, which includes a complete overhaul of the ZRX token economics. Over a year of R&D went into the modeling and design of the new token economics; it should shift governance power to market makers by introducing a financial incentive that is tied to the amount of liquidity a market maker injects into the ecosystem. Over time the new economics should shift the ZRX token distribution such that there is strong incentive alignment between the users that create utility for the platform and those that govern it. Incentive alignment is necessary for effective governance and therefore a prerequisite for binding on-chain governance.



What does this unlock for us in 2020?

As the new economics begin to pull ZRX tokens into the orbit of staking pools, ZEIP votes can be decided by stake-weighted vote. We will continue to use our current trusted and non-binding voting process — cryptographically signed votes that are tallied off-chain by the 0x core team — before formalizing every aspect of the governance process by implementing it in Solidity.

We can explore binding on-chain governance over ZRX economics parameters. A handful of parameters determine how value flows through 0x’s staking system. These parameters may be the ideal testbed for binding on-chain governance as the potential changes are limited in scope but ultimately quite impactful for stakeholders. This would set the stage for binding on-chain governance over more open-ended smart contract upgrades in the future.

There isn’t a firm timeline for the second bullet, the ecosystem is still in the process of migrating to 0x v3. However, during a recent internal hackathon Amir did built out a concept implementation of the smart contracts needed to govern the economics parameters…

Scalability

Scalability is one of the major technical challenges holding public blockchains back from widespread adoption. Of the many approaches to scalability that are being explored, our team is most excited about validity proofs, which can be used to verify a computation was carried out correctly without having to repeat that computation over again. In the context of the DEX use case, a validity proof can be used to verify a snapshot of account balances following the execution of thousands of off-chain trades. We worked with the StarkWare team to demonstrate this capability with STARKs by building a proof-of-concept scalable DEX called StarkDEX. Subsequently, we released OpenZKP, an open source STARK implementation that makes zero knowledge proofs fast and easier to work with.



Two learnings from the past year have informed our roadmap with respect to scaling:

Scaling is not the primary bottleneck for DEX adoption today. It isn’t worth rushing a highly scalable DEX solution to market if users won’t make use of the additional throughput. It is challenging to build a scalability solution that is permissionless and censorship-resistant, the properties that make public blockchains interesting. Recent scalable DEX solutions (StarkDEX, IDEX, Loopring) are better characterized as non-custodial exchanges. They all rely on a centralized operator/process to decide which trades go into the next batch, which is not permissionless, censorship resistant or fault-tolerant. The non-custodial aspect is somewhat appealing, but overall these solutions offer a weak value proposition versus traditional centralized exchanges.

Today 0x protocol is only supported on Ethereum 1.0, but as we move towards a multi-blockchain world, technical standards such as 0x protocol will become even more important. It follows that our scalability efforts likely fit into a broader long-term effort to create a 0x blockchain hub, driven by a consensus mechanism that manages trade execution, batching, proof generation, and interaction with other blockchains, but that doesn’t cut any corners with respect to decentralization across any layer of the stack. Our dedicated R&D team will share more information on these efforts in 2020.





Special thanks to Alex Kroeger for providing the figures for this post.

🤝 Join the Global 0x Community

Twitter | Discord Chat | Reddit | YouTube | Facebook | LinkedIn

👨‍💻👩‍💻 Developer Resources

0x Documentation | GitHub

🙋‍♂️🙋‍♀️ The 0x Core Team is Hiring!

Work at 0x | Open Positions