An executive summary is presented below. Download our complete 19 page analysis, including full valuation and price targets:

DISCLOSURE: At the time of publication of this report, Multicoin is long ZRX.

EXECUTIVE SUMMARY

0x is a protocol for decentralized exchange (DEX) of ERC20 tokens. ZRX is the native token of the protocol. At its core, 0x is a system of smart contracts that can be used by anyone—it is open-source and completely free to use. Developers can use the 0x protocol as infrastructure to build user-facing decentralized exchange applications. 0x is one of the early examples of a protocol using the franchising go-to-market strategy.

Of the many technical approaches to building DEXs, we believe that 0x’s is the best. 0x utilizes off-chain matching of orders and on-chain execution of trades. This allows for a large number of individual trades to take place quickly without bloating the blockchain with unfilled/cancelled orders.

0x accomplishes this through a novel form of private key-signed messages. Users who wish to conduct a trade create a message that includes specific parameters about the trade—which tokens they’d like to trade, the price, and the order expiry. This message is signed by the user as authorization and broadcast to the network. Once broadcast, this order is open and can be filled by counterparties. Alternatively, the user can name a specific counterparty and send the order directly to that party to fill. The order can only be filled according to the parameters set by the user that generated the order. When the taker signs the order, it is submitted to the Ethereum blockchain, where the trade is executed trustlessly by the 0x smart contract. This means that the smart contract simultaneously takes balances from both the maker and the taker and sends them to the counterparty at the exact same time. No third party must be trusted.

0x is an open source protocol for order discovery and execution. The 0x team aims to provide a real exchange with order books and liquidity. As such, the protocol incentivizes third parties to create channels, called “relayers,” for users to generate and broadcast these messages. 0x allows relayers to charge a fee, denominated in ZRX, for their services. While 0x offers the back-end infrastructure for decentralized exchange, relayers will provide the front-end services that allow 0x to compete with existing centralized services.

Relayers

In addition to facilitating exchanges within existing DApps, the 0x protocol also makes it possible for any third party to run a dedicated decentralized exchange built directly on top of 0x. These parties are called relayers; they run their own order books and user interfaces but conduct trades using the 0x contracts. Radar Relay, The 0cean, Kin Alpha, Paradex, and EthFinex are all independent companies that are building 0x relayers. Other projects such as dYdX, Dharma, and Market are building derivatives and other financial products using 0x.

Relayers are one of the most important parts of the 0x ecosystem, and will likely be critical to the success of the protocol. By creating a set of smart contracts that any relayer can use, 0x will benefit from the natural competition that emerges among different relayers. There are currently upwards of 9 relayers building on 0x, with more to come. Each of these relayers will compete for customers, and each will independently market their services and bring new users into the 0x ecosystem.

Relayers offer the best traits of the centralized exchange model and the decentralized exchange model. Relayers can invest in high-quality user interfaces and charge additional fees for specialized services, but they are never in control of users’ funds. Furthermore, the barrier to entry for building a relayer is orders of magnitude lower than the barrier to entry for building a centralized exchange (primarily due lack of need to maintain an internal ledger of customer balances, build settlement infrastructure, and most importantly no need to conduct KYC/AML due to lack of asset custody). There will be a diverse ecosystem of relayers competing for customers and catering to different niches.

0x also offers a way for relayers to share order books, creating a global liquidity pool and associated network effect that will benefit all stakeholders in the 0x ecosystem.

Protocol Mechanics

The 0x Protocol has the following components:

Makers are those who initiate orders.

Takers are counterparties who fill orders.

Relayers are parties who host order books and match makers and takers.

The 0x Smart Contracts are the Ethereum accounts that execute orders trustlessly on the blockchain.





Relayers offer a front-end interface that allows users to interact with the 0x protocol. They can specify required fees for their services. All fees in the 0x system must be paid in ZRX.

Relayers can offer any fee structure they’d like; relayers are likely to be price competitive.

Users generate an order (signed with their private key) with a specific set of parameters and send it to a relayer. Parameters include:

Which token pair and amount they’d like to trade.

The price at which they’re willing to trade.

A fee to be paid to the relayer.

A time at which the order will expire.

Relayers add the order to their order book, as long as it’s valid and includes the relayer’s (optional) fees.

Takers scan the order book and find orders that they’d like to fill. Once they’ve found an order, they can execute the order by sending it to the 0x smart contract. Alternatively, some relayers will provide “automatic matching” services so that takers are automatically matched with counterparties without having to scan the order book.

The Ethereum smart contract executes orders on-chain. Makers and takers receive their new tokens, and relayers receive their fees. 0x users trade directly from their own wallets. The smart contract takes balances from both the maker and the taker and swaps them at exactly the same time.

ZRX VALUATION

0x’s native token, ZRX, has two primary functions:

1. ZRX is used to pay fees to relayers. 2. ZRX will be used to establish some form of decentralized governance of the 0x protocol by token holders.

Assigning a price target for ZRX tokens is a difficult exercise because there are so many factors at play. Not only must we make estimates for variables like trading volume, fees, velocity, and percentage of tokens being held as investments (vs. being used for their actual utility), but we must also consider the token economics of ZRX, the speculative premium that applies to nearly every cryptoasset in this market, and more.

Our bullishness on the 0x project ultimately stems from the fact that 0x has an extremely talented team that is tackling one of the most pressing needs in the crypto ecosystem using the best technical approach (off-chain relay with on-chain settlement) coupled with strong market validation. The ecosystem that has emerged around 0x is incredible– not only are relayers building traditional exchanges on 0x, but others are using the protocol to offer other financial instruments, and many of the biggest projects in the Ethereum ecosystem are integrating 0x directly.

In the short-term, we foresee significant upward price movement in ZRX from two factors:

The first is utility. As relayers go live, users will need to acquire ZRX tokens in order to use them. Both Radar Relay and Paradex will launch soon, and we expect that, at a minimum, they will quickly surpass EtherDelta in volume. New users will have to purchase ZRX tokens in order to trade, and frequent traders will likely hold a balance of ZRX in order to not have to go through the friction of acquiring tokens for each trade. This influx of capital will likely cause short-term price appreciation.

The second is speculation. 0x-powered relayers will go live soon, and these relayers will serve as powerful proofs of concept for the potential that the 0x protocol has. Cryptoasset markets are not yet mature enough to trade on utility value alone, and hype and speculation continue to be major factors in price movements. As users begin to trade using 0x relayers, we believe they will recognize this potential and purchase and hold ZRX. Decentralized exchange is one of the biggest opportunities in all of crypto, and we expect serious market speculation on this vertical as investors place bets on the protocols they expect to win. The 0x team has consistently proven their ability to execute, and new advancements on their end will likely fuel this speculation.

In the medium-term, we believe that the token mechanics of ZRX will become much more of a factor. As new relayers enter the space and compete for customers, fees will collapse. Some relayers will likely abstract away ZRX-denominated fees entirely in order to provide a more fluid trading experience. As fees collapse and velocity increases, the monetary base needed to support the ZRX economy will become very small. This will likely mean a sustained price decrease for ZRX tokens.

In this same time frame, however, we’ll see the emergence of a formalized governance system for 0x. Large token holders (relayers, investment funds, DApp developers, and speculators) will seek to protect their investments, and they’ll have a process through which they can influence the direction of the project. This is exciting because it means that 0x will continue to evolve. The project is in the very early stages of its life cycle, and it will continue to change in response not only to market forces, but also to changes in Ethereum, its underlying blockchain. Ultimately, the vision for 0x is to be a blockchain-agnostic platform that facilitates cross-chain token exchange. Having a governance system is paramount to support this evolution.

We recognize the shortcomings of the current ZRX token mechanics in the long-term. Fees paid in ZRX would be more easily paid in ETH and will likely be abstracted away in time. It is entirely possible that participants in the 0x economy will seek to implement mechanisms like staking or burning that reduce velocity and supply. We see 0x in its current form as a blueprint for a protocol that will experience significant changes as time goes on. The core team that will guide it through its early stages is one of the most talented in the entire Ethereum space. The ecosystem of relayers, DApps, and other projects that has emerged around 0x is extremely impressive, and it has show itself to be a critical infrastructure component of the Ethereum stack. We are confident that the 0x protocol brings huge value to Ethereum and to the crypto space as a whole, and we believe that there is a big opportunity to profit from that value creation.

CONCLUSION

Decentralized exchanges are a key piece of crypto infrastructure, and they will fundamentally improve the functionality of crypto economies. 0x is emerging as the leading DEX platform within the Ethereum ecosystem. Not only is the core protocol well-designed and fully functional, but 0x has also incentivized a whole ecosystem of third-party relayers whose services will make using 0x even easier than using a centralized exchange. DEXs built on 0x will have significantly lower fees and lower barriers to entry than their centralized counterparts. 0x’s ability to integrate directly into various DApps will mean greater fluidity and interoperability among Ethereum-based applications. 0x represents a huge step forward for the Ethereum ecosystem. The long term vision for 0x is to become a blockchain-agnostic protocol for cross-chain exchange, and we look forward to seeing the project progress in that direction.

Disclosure:

As of the publication date of this report, Multicoin Capital Management LLC and its affiliates (collectively “Multicoin”), others that contributed research to this report and others that we have shared our research with (collectively, the “Investors”) may have long or short positions in and may own options on the token of the project covered herein and stand to realize gains in the event that the price of the token increases or decreases. Following publication of the report, the Investors may transact in the tokens of the project covered herein. All content in this report represent the opinions of Multicoin. Multicoin has obtained all information herein from sources they believe to be accurate and reliable. However, such information is presented “as is,” without warranty of any kind – whether express or implied.

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