What is 0x protocol?
0x protocol (pronounced “zero-ex”) is a decentralized, permissionless exchange protocol that allows ERC20 tokens to be traded on the Ethereum blockchain. Developers can also use the 0x protocol as a platform to build their own decentralized exchange applications for Ethereum-based assets.
The project aims to facilitate and decentralize the rapidly growing economy of tokens, which creates a fragmented experience for end users who are left with numerous tokens that don’t always interoperate easily in terms of security and functionality. Lack of decentralized exchanges means that users end up incurring unnecessary costs, while the network loses liquidity.
When Amir Bandeali and Will Warren founded 0x protocol in October 2016, they were inspired by the vision of a future where assets of all types and kinds – fiat currencies, stocks, bonds, commodities, debt instruments, real estate, video game items, digital collectibles, software licenses, reputation and much more – will be traded using blockchain technology.
As they set out in their vision and values document, the 0x team believes that “public blockchains have the potential to act as a potent equalizing force for the world. As more assets are tokenized and moved onto blockchain rails, public blockchains have a greater chance of democratizing access to financial services in the same way that the internet has democratized access to information.”
How does 0x protocol work?
Following that same logic, the rapid tokenization is bound to create an abundance of tokens that are difficult to spend or exchange – and that’s where the 0x project comes in.
The team behind 0x have built a standard protocol on the Ethereum blockchain that facilitates the exchange of tokens or the creation of new decentralized applications. These new projects building on top of the 0x protocol are called relayers because they maintain an off-chain order book and can charge transaction or other fees for their services.
Many other projects have already chosen to build on 0x, including Augur, Status, district0x, Dharma, Blocknet, Request Network, and many more.
As a decentralized exchange, the 0x protocol doesn’t have any of the disadvantages associated with more centralized exchanges. While centralized exchanges often leverage the ease-of-use, high-performance trading and advanced tools, there are a number of downsides associated with them, including security failures (the middleman can get hacked, shut down, or run away with customers’ funds), downtime (caused by hikes or high traffic spikes), plus there are various associated fees.
In that sense, decentralized exchanges remove the need for trust and allow people to exchange through the Ethereum blockchain without depositing their funds with the central party.
Trustless environments come with their own challenges and have their own shortcomings. Some of the downsides of decentralized exchanges are that they can be expensive and slow because every new transaction or adjustment needs to be confirmed on the blockchain.
The 0x protocol aims to solve these inefficiencies by combining off-chain ordering relays with on-chain settlements. This means users are able to broadcast an order off of the blockchain to be filled by another user and only value orders are executed on-chain, allowing users to save on gas fees associated with the trading operations. It is simply a more secure, cheaper and faster way to trade ERC20 tokens between users.
A look to the future
The 0x protocol benefits greatly from being a crossover between a centralized and a decentralized exchange, as it combines the best of both worlds. With the possibility to broadcast orders off-chain, users can enjoy the ease of use that centralized exchanges are known for without compromising fund security, or sacrificing personal asset management.
At the same time, the on-chain transaction settlements ensure that transactions are executed only if both parties hold up their end of the bargain. Plus, both processes have the additional security provided by smart contracts.
Interested in learning more about other altcoins? Check out our Ultimate Altcoin Guide.