Trail of Bits Consensys Diligence ABDK Consulting
Trail of Bits Consensys Diligence ABDK Consulting
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Last updated: Aug 21, 2023
0x Protocol provides infrastructure for the peer-to-peer exchange of digital assets, mainly used for building decentralized exchange platforms. Although 0x isn’t an exchange or any other type of platform by itself, the set of smart contracts it provides is deployed by numerous projects including dYdX, Coinbase, Zapper, and many others. The 0x ecosystem includes dApps consuming liquidity and such providing it and since the project also provides tools and open access to pools of shared liquidity, developers can integrate with the protocol at smart contract or application layer and share the opportunities provided by the infrastructure.
The two major consumer groups of the company’s product are referred to as Makers and Takers. While the first group creates 0x orders and provides liquidity into the system, the latter consumes it. The protocol aggregates liquidity from sources such as DEXes, AMMs, Professional Market Makers, and the 0x’s Open Orderbook Network. Liquidity is being consumed through projects using the 0x Swap API, or its NFT trading support, among other possibilities.
The project is governed by a community DAO as part of a decentralization roadmap aimed to make the community “fully accountable” and “directly responsible” for the protocol’s sustenance.
At its core, the 0x Protocol is a network of smart contracts working together and forming a public, permissionless settlement layer for swapping on-chain assets. It includes an Exchange Proxy acting as the main smart contract for makers and takers interaction when managing and performing exchange of assets through the protocol. This contract executes swaps generated by the 0x API, manages and fills ERC-20 limit orders, as well as ERC-20 to and from ERC-721 and ERC-1155 limit orders.
The 0x swap API facilitates liquidity consumption from the ecosystem by querying prices from on- and off-chain liquidity networks and aggregates it to provide the best possible prices. The API also has a smart order routing algorithm that can split transactions across different sources to maximize the overall return of a swap. Furthermore, API responses are returned in a format that can be executed using whichever Web3 library a developer prefers.
0x also provides limit order functionalities that can be integrated into a dApp or utilized for MEV (the additional profit a miner can make by reordering transactions from the blocks they produce) searching strategies. That happens through the 0x Orderbook, currently available on Ethereum, BNB Chain, and Polygon.
While to access on-chain liquidity, the 0x API only needs to sample smart contract liquidity pools, to source off-chain liquidity the API connects to professional market makers and either aggregates quotes from them and AMMs, then shows the better quotes to the end-user, or fills 100% of the user’s order by a professional market-maker – in this case users don’t pay gas fees or network fees.
0x’s support for NFT swaps is available on all 0x-integrated blockchains. The 0x NFT swap SDK can be used to build NFT marketplaces, exchanges and can be used as peer-to-peer infrastructure for exchange of ERC-20, ERC-721, and ERC-1155.
0x itself is not a decentralized exchange, the protocol was created as an infrastructural framework for DEXes to be built on top of. It contains a number of open-sourced and externally audited smart contracts, tailored to work together as a trading protocol. 0x has a modular structure, which means the developers can easily integrate separate tools into their projects.
0x doesn’t store orders on the blockchain, keeping them off-chain instead. The protocol helps to reduce gas fees for the whole procedure, as long as only trades are happening on-chain. On the 0x Protocol app, nodes are called relayers. They host off-chain orderbook with user interfaces to create, execute or cancel transactions. For that, users have to pay fees 0x Protocol collects in ZRX.
0x presents itself as an efficient set of useful tools aiming to help decentralized finance products reach more people. One of such tools, or building blocks for DEXes is 0x API, an API with decentralized exchange aggregation that could easily be integrated with supported by 0x wallets and dApps, adding swap functionality and sharing liquidity across the network. 0x API aggregates liquidity from 0x Mesh, Kyber, Uniswap, Oasis, and other DEXes.
Another prominent dApp on 0x is Matcha, a DEX and a global search engine for markets and liquidity automated market maker crafted to search for best price across offers on different exchanges and from various liquidity sources.
There is also 0x Mesh, an off-chain peer-to-peer exchange used to share orders within the 0x ecosystem. DeFi developers can access p2p liquidity by running a Mesh node or by using 0x API. When utilizing 0x API endpoints, developers get the best prices automatically across multiple sources: Mesh, Uniswap, Balancer, Curve, Kyber, Oasis & RFQ market makers.
To unlock the ZRX token utilities, users are required to stake it. Staking is incentivized with liquidity rewards generated by a protocol fee denominated in WETH and proportional to the gas cost of filling an order. To redirect proceeds from arbitrage-driven gas auctions back to market makers, the fee scales linearly with gas price. When holding staked ZRX tokens, users can participate in the governance of the protocol.
Market makers can provide liquidity by creating 0x orders filled by takers through the exchange contract, which charges the fees from the takers and forward them to the staking contract. The fees are distributed to makers as long as they have created a staking pool holding at least 100 ZRX. Fees are distributed at the end of each seven-day epoch.
ZRX is used to incentivize users to host and maintain order books for 0x markets. It can be earned in exchange for this service in the form of fees paid by traders on the platform. The token has a maximum supply of 1 billion, half of which was sold to investors in the 2017 ICO. 10% of the entire supply of the token was reserved for the founding team, 10% for early backers and advisors, and 15% went to the 0x core development organization, as well as towards an external project development fund.
0x Labs is a San Francisco-based company standing behind the development of 0x Protocol and all of its featured products. The project was founded in late 2016 by Will Warren and Amir Bandeali, both co-founders are still engaged with the project as its CEO and CTO, respectively.
0x Labs is actively growing, adding more projects into the 0x ecosystem, and expanding on different L2 blockchains. The 0x Protocol team shares a mission of bringing the tokenized future where any asset with value may be presented as a token and traded freely across different blockchains closer.
0x partners with DeFi dashboard and portfolio managers Zapper, DeFi Saver, DeBank, and Zerion.
Besides expanding the protocol’s ecosystem and launching across more Ethereum L2 solution networks, the team is focused on further decentralizing the governance of the project. According to the current governance roadmap, for 2022-2025 it is planned to switch from the Elected ZEIP (0x improvement proposals) committee and community-led vote cadence to a community-led release pipeline. Currently, voting for changes on core contracts happens on-chain, but in the future, that would be further developed into a trustless voting-based deployment process.
For the same period, the company plans to give control over the development of the protocol from 0x core team members to fully community-funded or self-funded teams and businesses. To make this switch more gradual, the core team is working closely with 0x enthusiasts and community-funded teams.
Another change set for the 2022-2025 timeframe is switching the control of the Development funds from a 0x Core team and Community controlled Treasury to a fully Community controlled Treasury with self-funded teams.
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