Everyone who trades cryptocurrencies is probably familiar with crypto exchanges at this point. Much like having an account with E-Trade, depositing money on the exchange, and then buying shares and stock through the account, crypto traders jump through the same hoops when exchanging their crypto assets on the markets.
While many first-time crypto users and traders go through one of the more reputable and frequently used exchanges, like Coinbase or Gemini, there can be several disadvantages to using a third party exchange for a transaction. Due to increased scrutiny and concern over the activity in the crypto markets, regulators are cracking down around the world on cryptocurrency exchanges.
Many are implementing “Know Your Customer” and “Anti-Money Laundering” requirements, which is putting off many of the original cryptocurrency enthusiasts. As a whole group of crypto exchanges are trying to play ball with regulators and bring their operations into the light, there are another group of exchanges further incorporating the decentralized aspect into the crypto exchange.
This new group of exchanges are called Decentralized Exchanges and are circumventing a lot of the regulations being handed down to traditional exchange platforms. They are taking the decentralized nature of blockchain and implementing the model to an exchange platform.
What is a Decentralized Exchange?
Let’s start here with what we know as a traditional centralized exchange. This is like any exchange that is managed by a third-party to facilitate trades and exchanges between two parties on the network. This usually looks like the centralized party accepting deposits of funds, and hosting order books to match together pairs of buy and sell orders.
Decentralized exchanges (DEX) in the cryptocurrency space are a little different. Instead of relying on the third-party to facilitate the exchange, decentralized exchanges remove the single third-party and allow users to trade using a peer-to-peer (P2P) system. It’s essentially removing the middleman component of the cryptocurrency exchange.
Under the DEX model, users no longer send funds to their exchange-controlled wallet, which is susceptible to hacking and loss of funds. Users aren’t subject to Know Your Customer requirements and forms. And users don’t even have to create an account when using most decentralized exchanges.
DEXs allow users to go to the platform and trade, no border restrictions or deposits, no headquarters or corporate jurisdictions to worry about. Decentralized exchanges have been around the crypto landscape since 2015. However, none of the solutions provided the full benefits and capabilities and user experience as traditional exchanges. Many users find DEXs challenging to manage and function, case in point EtherDelta.
However, DEX protocols are starting to lay the foundation for a very user-friendly and intuitive DEX infrastructure.
What is 0x?
0x (ZRX, and pronounced ‘zero x’) is a decentralized exchange protocol with the intent of providing a wide array of Ethereum assets on an open platform for decentralized exchange. Like the Ethereum network, which allows other applications to build on top of their blockchain platform, 0x enables participants to build decentralized crypto exchanges using their unique protocol.
On top of the primary use case, decentralized applications can also leverage the 0x protocol to build their blockchains application to incorporate the asset exchange or trading capabilities, such as a prediction market.
As mentioned, Ethereum’s network is primarily used by companies that wish to create and distribute their standardized tokens on the platform called ERC-20 tokens, and many blockchain companies have gone that route to get an active token economy without having to start from scratch and build their own solution. This makes it a good target market for the 0x protocol as there are hundreds of ERC-20 tokens in the crypto markets and all are potential use cases for 0x.
How does 0x impact decentralized exchanges?
Many of these tokens are starting to realize the struggles and hurdles that come along with using the Ethereum blockchain network. Because so many tokens are trading actively, network speeds are easily congested, leading to an overall slow and expensive blockchain at this point. There have been many cries from the community to improve and innovate the Ethereum blockchain, and ETH founder Vitalik Buterin is working to help with a solution for the scalability issues.
These issues make it too expensive to run a decentralized exchange on the Ethereum blockchain, because every time a transaction is posted, canceled, or even modified it costs fees in ETH tokens. 0x protocol reduces this problem by using off-chain order books provided by network participants called ‘relayers’ that receive 0x tokens as small exchange fees. But the benefit is only having the execution of transactions occur on-chain.
So the primary concern for the 0x platform is the relation of the number of decentralized applications using the network and the number of relayers supporting the network. In recent months, a 0x relayer called Radar Relay announced that they integrated the 0x protocol with the cryptocurrency hardware wallet Ledger. This gives a quick look at the new possibilities with decentralized exchanges using the 0x protocol.
How does 0x impact cryptocurrency users?
Users are now able to trade and exchange their crypto assets directly from their hardware wallets, providing a considerable increase in security and convenience over traditionally centralized exchanges. This means that crypto users can keep their coins stored offline in their cold storage wallets for maximum security, and still have the capability to execute a trade sending and receiving crypto straight from their hardware wallet.
So basically there is no custody risk for users, they don’t have to place any trust in the exchange to protect their crypto tokens. Instead, they maintain responsibility and control right up to the point when tokens are exchanged.
Cryptocurrency enthusiasts are excited about the potential for decentralized exchanges to enter the market. Many see this as a way to re-incorporate the private and anonymous nature of the blockchain, allowing users to trade coins and tokens without having to subject themselves to the onerous exchange requirements and unnecessary fund transfers in and out of exchange wallets.
This combination of security and convenience makes a compelling case for the 0x protocol in the blockchain world, as it could enable a whole host of other users to enter the space and use crypto assets quickly. During the last boom and bust cycle, the crypto community watched as first-time crypto users were creating Coinbase accounts and wallets, and then those same new users were distraught after the market fell, creating a lack of trust.
Protocols and tools like 0x provide for trust to be built into every facet of the cryptocurrency landscape. Specific cryptocurrencies are being developed to provide ultimate decentralization and privacy for users, crypto wallets are being innovated to give users privacy and responsibility for their keys, and now exchanges are incorporating the decentralization aspect.
0x separates itself from the pack by providing a protocol for developers to use, rather than requiring a complete product to be built from scratch. 0x itself is an ERC-20 token, so investors and traders can store it on their MyEtherWallet and Exodus wallet. The coin has most of its liquidity on Binance, and Exodus users are able to integrate their wallet with Shapeshift to purchase tokens.