Decentralized exchanges (DEX) are a quantum leap in permissionless and transparent trading, and they exist as fantastic alternatives to centralized exchanges.
While DEXs facilitate the process of listing new ERC-20 tokens and eliminate the need to pay high listing fees to a central authority, they still face high gas costs. This is exactly the problem that 0x Protocol (ZRX) wants to solve.
The 0x Protocol (ZRX) ICO raised $ 24 million for 50% of the offering in August 2017, with no pre-sale. As an ERC-20 token, the consentless protocol connects liquidity providers through smart contracts, aggregating liquidity.
The protocol enables interoperability between different decentralized applications and DEXs. ZRX should therefore not be seen as a competitor to Uniswap as it benefits from the increased liquidity of the sectors.
While the ZRX token has been quite volatile for the past few weeks, it has been trending upward as it attempts to establish USD 0.50 as a support level after a 22% price hike in the past 24 hours.
From servers to service
Initially launched as a board proposal voting mechanism, ZRX tokens received staking options after the v3 update in late 2019. Market makers were then able to earn ETH rewards for liquidity-providing services. Meanwhile, holders could benefit by delegating their tokens using pools.
In June 2020, the project launched a DEX liquidity aggregation service known as Matcha. After serving exclusively as a backbone for three years, 0x Protocol created a smart order routing service that includes DEX, such as Uniswp, Curve and Kyber.
Community and DEX activity are probably the most critical metrics for measuring DeFi token growth. Data from Dune Analytics shows that Uniswap and SushiSwap both account for over 60% of the volume, but it is important to remember that liquidity aggregators are not direct competitors of 0x Protocol.
Hence, the overall DEX market growth of the past year is actually a positive driver for ZRX token. If we look at using the 0x protocol, we can see that the weekly 0x volume has more than doubled from the weekly average of $ 350 million from October to November, reaching a market share of 10%.
Taking a closer look at 0x’s network activity, the graph above shows that multiple platforms are using 0x Protocol’s liquidity aggregation capabilities. These trades can take place with a variety of DEXs, including Uniswap, Curve and Balancer.
Market makers returns and v4 update
On December 15, Theo Gonella, product manager of 0x Labs, showed data from a market maker who has achieved 100% return in 2020 by offering liquidity at 284 ETH in 41,000 trades. More recently, 0xTracker stated that 1,782 ETH was split across 0x market markers as liquidity rewards in 2020.
The 0x Project v4 voting process will take place from January 16 to January 23 and aims to reduce bids for gas costs by 70%. According to the 0x Labs blog, this release allows customizable modules to perform atomic operations, including wrapping and extracting tokens.
For those unfamiliar with front running, the problem lies in on-chain data. Smart arbitrage desks monitor Ethereum’s backbone for transactions, then add additional gas to a similar transaction and buy (or sell) the asset before the other party. Thus, the transaction with a higher fee will be able to perform the executions of other users.
While it’s not just a 0x issue, it certainly limits the use of DeFi aggregators.
Data from TheTie shows that the recent price spike was accompanied by increased social network activity. Nevertheless, the indicator remains 50% below the previous highs of May and August. Therefore, judging by social network statistics, there may be a huge benefit to the ZRX price.
0x Protocol may continue to achieve success as the DeFi industry continues to grow and mature. As long as there is a need for lower gas costs and multiple price providers, liquidity aggregators will have to fill a void.
Finally, for those who believe that the v4 update will be a game changer, there is room for a lot of growth in DEX’s market share, and thus in price potential.
The views and opinions expressed here are solely those of the author and do not necessarily reflect Cointelegraph’s opinion. Every investment and every trade move carries risks. You should do your own research when making a decision.