The State of Decentralized Exchange w/ Will Warren & Amir Bandeali of 0x

The State of Decentralized Exchange in 2019 w/ 0x Founders Will Warren & Amir Bandeali

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Description

Welcome to our two-part conversation with Will Warren and Amir Bandeali, co-founders of 0x (which issues the ZRX token), an open-source protocol that facilitates the decentralized exchange of tokens and the creation of decentralized exchanges or DEXs. As of this recording, there are more than 30 projects in development on the 0x protocol, which has just upgraded to version three.

This interview is part of a series with exchange operators. We’ve interviewed Binance CEO Changpeng Zhao (CZ), Binance CFO Wei ZhouIvanPoon from SwitcheoAlex Wearn from IDEXSam Bankman-Fried from FTXJohn Jansen from Deribit, and Mario Lozada from Liquid.

My conversation with Will and Amir is split into 4 chapters: 

  • Chapter 1: Decentralized exchange before DEXs
  • Chapter 2: A short history of DEXs and 0x
  • Chapter 3: The current state of DEXs and 0x
  • Chapter 4: An exploration of the future

In Part 1, we cover chapters 1, 2, and the beginning of chapter 3. In Part 2, we finish chapter 3 and cover chapter 4.

Topics Discussed In These Episodes

  • How Amir and Will got into cryptocurrency
  • Why Ethereum (ETH) needed a protocol like 0x
  • Why 0x decided to open source
  • The early days of decentralized exchange
  • The benefits of moving order books off-exchange
  • Obstacles to the mass adoption of DEXs
  • Present-day DeFi vs. ICO Mania
  • Why the protocol needs the ZRX token
  • 0x’s corporate structure
  • Changes to token economics in v3
  • Ways that 0x relayers can compete for users
  • How 0x Mesh enables a more efficient marketplace
  • KYC and AML on DEXs
  • How exchanges exist along a spectrum that runs from 100% centralized to DEXs
  • The introduction of “bridge contracts” in v3
  • Lesser-known use cases for 0x
  • Why DEXs are suited for security tokens
  • The potential of prediction markets like Augur (REP) & Gnosis (GNO)
  • Launching a 0x relayer in just a couple of minutes

Quotes

“Our long-term thesis was always there were going to be millions of tokens in the long run, like the entire world is going to be tokenized.” ~ @abandeali1, co-founder @0xProjectClick To Tweet

“We’ve started to see another wave of adoption in DeFi that feels much more organic and sustainable… Users are deriving value from DeFi without some of the questionable aspects of ICOs.” ~ @willwarren89, co-founder @0xProjectClick To Tweet

“Our mission is to create a tokenized world where all value can flow freely. We want 0x protocol to be… open and accessible and free, not like a proprietary platform that is extracting rent.” ~ @willwarren89, co-founder @0xProjectClick To Tweet

“One of the really powerful characteristics of 0x Mesh is that it is decentralized, censorship-resistant, and permissionless. It’s essentially forcing these powerful properties that we value into the ecosystem.” ~ @willwarren89,…Click To Tweet

“We’re seeing some pretty significant traction throughout DeFi. That being said, it’s really important to zoom out and take a look at where the entire space is at. We’re still so, so early.” ~ @abandeali1, co-founder @0xProjectClick To Tweet

Part 1 Transcript

Clay: Welcome to Flippening, the first and original podcast for full-time, professional, and institutional crypto investors. I’m your host, Clay Collins. Each week, we discuss the cryptocurrency economy, new investment strategies for maximizing returns, and stories from the frontlines of financial disruption. Go to flippening.com to join our newsletter for cryptocurrency investors and find out just why this podcast is called Flippening.

Clay Collins is the CEO of Nomics. All opinions expressed by Clay and podcast guests are solely their own opinion and do [00:00:30] not reflect the opinion of Nomics or any other company. This podcast is for informational and entertainment purposes only and should not be relied upon as the basis for investment decisions.

Welcome to part one of this two-part conversation with Will Warren and Amir Bandeali, co-founders of 0x. 0x is an open protocol that powers the decentralized exchange of tokens on Ethereum. One of my favorite things about 0x is that you can [00:01:00] use it to create an exchange in less than a day. It’s pretty remarkable.

This conversation is part of a larger series we’re doing on crypto exchanges. As part of this series, we’ve already interviewed Binance CEO Changpeng Zhao (CZ), Binance CFO Wei Zhou, Ivan Poon from Switcheo, Alex Wearn from IDEX, Sam Bankman-Fried from FTX, John Jansen from Deribit, and Mario Lozada from Liquid. 

As a side note, if you run a top 50 exchange by volume, I want to speak with you as part of this series. Please reach out to set that up. [00:01:30]

Now for a bit of background on 0x. Will and Amir launched 0x in 2016 as a free and open-source protocol that developers and businesses can utilize to build exchanges or products that enable the purchase and trading of crypto assets on the Ethereum blockchain. In August of 2017, 0x held an ICO for their token ZRX and raised $24 million dollars. At the time of this recording, 0x has completed 713,000 total transactions, has done over [00:02:00] $750 million in total volume, and has over 30 active projects developing on their protocol.

My conversation with Will and Amir is broken up into 4 chapters. In Chapter 1, we discuss the history of decentralized exchange before DEXs. In Chapter 2, we review the short history of DEXs and how 0x fits in that timeline. In Chapter 3, we explore the current state of DEXs and 0x. Finally, in Chapter 4, we close our conversation by exploring the future. In this episode, [00:02:30] we cover chapters 1, 2, and begin chapter 3. In the following episode of this podcast, we finish off chapter 3 and conclude with 4.

We’ll get right to this episode in just a second, but before we get started, I’d like to pause for a moment to tell you that this episode is brought to you by the good folks at Nexo. Here’s a word from them. Nexo is the only lender offering INSTANT crypto credit lines, which let you use digital assets as collateral to get cash in 45 fiat currencies and stablecoins. And Nexo has a BIG announcement related to credit lines: their annual interest rates [00:03:00] for credit lines are now starting at just 5.9%, which may very well be the lowest borrowing rate in the whole industry.

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Okay, back to our regularly scheduled program. Here’s part one of my conversation with Will and Amir from 0x. Enjoy.

Amir Bandeali, How Did You Get Started In Crypto?

I was working at a proprietary trading firm for about five years before starting 0x and discovered Bitcoin. It was like late 2013 or early 2014 or so, right before the first really big run up. I initially got interested in it from the trading angle and a macroeconomics perspective, but eventually just fell down [00:05:30] the rabbit hole of the actual technology and just got pretty obsessed with it. We had a small group of people at my firm who also got obsessed with it with me and consulting about the technology, discovered Ethereum and realized all of the really cool things you could do with it. At some point I just knew I had to make a career change and get into the space. Shortly after, I ended up meeting Will. [00:06:00]

Will Warren, How Did You Get Started In Crypto?

I was on more of a research track before going into crypto. I did mechanical engineering at UC San Diego and I was doing undergraduate research in robotics, computer vision, and control theory stuff. I spent a year-and-a-half at Los Alamos National Lab in New Mexico doing research stuff there and then started started a PhD program back at UC San Diego and in the engineering program there. I was [00:06:30] interested in Bitcoin quite early on and had been following it for a while.

Actually, my girlfriend at the time (who is now my wife), Linda Shea, we both shared an interest in Bitcoin. She actually ended up joining Coinbase pretty early on and got much more interested in cryptocurrency just because she was living in it. Eventually Ethereum came out and I was in grad school at the time. I was spending [00:07:00] all my free time hacking around on Ethereum and eventually I just decided that I’d have a much larger opportunity to have an impact by building something on Ethereum. So, I decided to drop out and focus on Ethereum full-time. This was around May or June of 2016. I met Amir soon after.

Clay: It sounds like somewhat common story, at least for people with a technical background with Bitcoin. There’s not a lot that you [00:07:30] can do as an engineer other than maybe decide that you want to contribute to Bitcoin core, build some service layer on top of Bitcoin. But with Ethereumm what I’ve heard from a lot of people is that it presented a unique opportunity to actually get involved to write smart contracts, to do something other than just watching price movements. Was there something about the programmability of Ethereum that got you involved in a way that perhaps you wouldn’t have gotten involved if it were just Bitcoin? [00:08:00]

Will: Yeah. Ethereum came out. I thought it was just super interesting and cool. Eventually, started just hacking around, writing smart contracts and solidity in my spare time. As I spent more time doing it, I realized that you can actually build some pretty cool stuff with smart contracts. That was what led me to leave grad school and focus on the project full-time.

Amir: A lot of the companies that were just getting started building on Ethereum around then like Maker, Augur, [00:08:30] Gnosis, like these are the same companies that are building on Ethereum today and still have some of the core most exciting use cases of smart contracts.

Clay: It definitely drew me into the space. I heard Charles Hoskinson interviewed on a podcast and he was talking about Ethereum prior to the main net launch and he’s talking about the presale and I had been sitting on the fence for a while but there was a spark there, that drew me in.

Let’s transition to you guys getting together and deciding to start, [00:09:00] one of the shippingest organizations out there in the space, at least in the Ethereum space. How did you guys meet and what was the genesis idea and conversations that pushed you over the edge and led to the founding of 0x?

Will: It was actually a not very direct path towards us building 0x protocol as it is today, like this open protocol for exchanging Ethereum assets. I originally dropped out of grad school to focus on [00:09:30] building a standard for tokenized derivatives on Ethereum. The idea being that cryptocurrencies are just way too volatile for most use cases. So if there was a way to hedge against that volatility, it could open up new possibilities. Amir and I met through a mutual friend a really good childhood friend of mine who was Amir’s coworker at DRW and we decided to pursue this tokenized derivative idea. [00:10:00]

We had it spec’d out and it was pretty much ready to go, but at the time we realized that these tokenized derivatives on Ethereum weren’t going to be listed on a centralized exchange and really the only place where these things could be traded would have to be like a decentralized exchange on Ethereum. But there just weren’t any decentralized exchanges on Ethereum back then. This is [00:10:30] September of 2016. We decided at that point that we had to make our first pivot and that was to just build a decentralized exchange on Ethereum because it needed to exist.

We were originally pursuing this decentralized exchange concept as more of like a for-profit company where we would own the decentralized exchange. It would be more of a non-custodial exchange, I guess. It would be something we own [00:11:00] and we’re charging fees, et cetera. We were in San Francisco at the time and we were getting deeper and deeper into the Ethereum community, going to meet-ups in Silicon Valley and meeting with other teams that were building on Ethereum. As we met with more and more teams like Maker, Augur, Gnosis, and Mellon Port, what we found out was that all of them needed a decentralized exchange functionality to empower them [00:11:30] in the core use case they were going after, and they were all building their own custom decentralized exchanges.

After having a number of these conversations and as the evidence piled up, we eventually realized that instead of building our own proprietary for-profit decks, the smart contracts that we had been working on would be much more impactful if they were openly accessible and anyone could build on top of them, so more like an open protocol or [00:12:00] public infrastructure. That was the second pivot that we made and that’s what eventually led us down the path of building 0x as it is today.

Clay: It’s definitely a novel design approach to decide that you’re going to be a platform for decentralized exchange as opposed to just building one. A couple of interesting pivots from building tokenized derivatives to decentralized exchanges and then from building a decentralized exchange to building a platform for this.

Let’s transition [00:12:30] to chapter 1, which is about the history of decentralized exchange before DEXs.

What can you share about, how people were attempting to execute trades outside of centralized exchanges prior to DEXs?

Amir: I think the main issue prior to DEXs was if some asset that existed that was not a centralized exchange, you didn’t [00:13:00] really have anywhere to trade that, right? I’m not too versed into the history but I’ve definitely heard of people trading with each other, OTC over random Slack channels and stuff like that. To some extent, that probably still goes on today. To my knowledge, these peer-to-peer OTC type exchanges were what were being used [00:13:30] before decentralized exchanges, although they were certainly not trustless or non-custodial.

Clay: I’ve certainly heard of people meeting other people that they met on Craigslist or through local Bitcoins or some of these telegram groups where the trade would progress with maybe a 10th of the transaction being sent from one side and then vice-versa, and would go back and forth until the full exchange had been made. Suffice to say it was risky, [00:14:00] there were threats to personal security, there were just all kinds of complications doing this, of course. Tt was pro- problematic before. What else did you guys know of being done prior to DEXs?

Will: Back in the Bitcoin days when Bitcoin was really the only thing in town, I remember hearing about if you people doing cryptocurrency exchanges on the internet not in person through escrows, so basically trusted escrows. Someone on the Bitcoin forum [00:14:30] or something like that like with a reputation in the community, who people respect would more or less offer to be the escrow, the middleman between two counterparties. So, both counterparties to the trade would send their cryptocurrency or whatever it is they were trading, it could be Bitcoin and Litecoin, or it could be Bitcoin and a PayPal payment. They would both send these sides of the trade to the escrow and the escrow would complete the trade for them. [00:15:00]

There were also examples of these trusted escrows building up their reputation in the community and then exit scamming where people would trust them to do larger and larger trades. Eventually, once they saw an opportunity to leave with the proceeds of the trade, leaving and leaving the two people that were trading out of luck.

Clay: It definitely seems like in the early days clout or some reputation in the Bitcoin forums was the [00:15:30] most that anyone had. If you wanted to collateralize a Fiat loan, you could use reputation and Bitcoin talk forums or for this example that you described where they would custody escrowed funds and stuff. It definitely seems like a huge pain.

Will: Yeah. It’s, it is more or less what the centralized cryptocurrency exchanges are today. Instead of an individual person with a reputation, it’s just a company with [00:16:00] a reputation. You send your cryptocurrency to them and you hope that they don’t disappear.

Clay: Let’s transition to chapter 2 which is a review of the short history of DEXs. Can you take us through the history of decentralized exchanges and place 0x in that historical context?

Will: I’m not as deeply familiar with the history before Ethereum. I know that blockchains like counterparty and supported non-custodial exchange back in the day, to my knowledge, it never [00:16:30] really got the same level of attention and traction as, decentralized exchanges on Ethereum are today. As far as Ethereum goes, the first decentralized exchange that I remember was either MakerDAO’s on-chain order book decks called Oasis Decks at the time and I think it’s been rebranded. I think it’s Oasis Trade now.

The way that Oasis Decks worked was they took all of the functionality of a traditional centralized [00:17:00] exchange and translated it into smart contracts into an Ethereum smart contract. You had this order book where people are offering to buy or sell an asset at an exchange rate and basically taking this entire order book, this list of offers to buy or sell, and storing that within a smart contract on the blockchain.

Clay: Hey, this is Clay cutting in from the editor’s booth to explain what an order book is for people new to the space and how exchanges work. An order book refers to the [00:17:30] list of pending orders that users are putting on a particular exchange. There are two components to an order book: the buyers’ side and the sellers’ side. The pending buyers’ side contains all the pending buy orders, while the pending sellers’ side has all the pending sell orders. On each side, you can see the amount of tokens users are looking to buy or sell. Okay, back to the show.

Will: And it worked. It was non-custodial, but the downside was that since the order book was stored on chain, every single time you wanted to post an order, [00:18:00] modify an order, or cancel an order, you would have to send a transaction to the Ethereum blockchain consuming gas. And it was pretty costly and friction full for market makers. But it worked. I think around the same time, I actually don’t know which one came first, but around that same time was EtherDelta, which was created by Zach Coburn. I believe that Zach Coburn the first person to launch a decentralized exchange with an off chain order book. The concept [00:18:30] there was instead of having that order book stored on chain, move it off chain so that it’s less costly for market makers to maintain an order book.

Clay: I remember when EtherDelta came on the scene and it was the early days of DeFi. Perhaps it wasn’t even a thing then, people weren’t using that term but it was definitely one of the killer use cases for Ethereum in my view. It was one of the really first interesting things other than just issuing a token that I thought [00:19:00] had happened in the space. EtherDelta comes on the scene, we don’t need to go into the whole history there, but it’s no longer around. How soon after the launch of EtherDelta is 0x born?

Will: We actually we’re working on 0x around the same exact time that EtherDelta was being born. We actually independently came to this approach of having the order book stored off chain. I think EtherDelta launched in [00:19:30] late 2016 before we did.

Clay: Let’s sit there for a second in terms of, the early exchanges. If we take stock of what worked well, what were the important innovations that attracted users and what were the points of friction? What didn’t work well?  We covered having an on-chain order book is being a problem, it’s costly, you can lose money even if your trade doesn’t get executed, there’s probably issues around potentially [00:20:00] front running and all kinds of things (maybe), but of that initial set, what was positive? What was the market excited about? And what was a pain?

Amir: I think aside from the technicals, one thing that started just after we started working on 0x was the whole ICO boom. That was certainly unexpected for us, but it definitely attracted a lot more users to these decentralized exchanges. I remember [00:20:30] there were probably four other projects building on Ethereum. Back when we started, they had tokens in some form and our long-term thesis was always there were going to be millions of tokens in the long run, like the entire world is going to be tokenized.

Clay: Hey! I wanted to pause for a second to let you know that this episode of the Flippening podcast is brought to you by Nexo. As someone who personally uses Nexo, I wanted to point out a few things that I especially like about [00:21:00] their crypto-backed loans.

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The second thing I really like about Nexo is that you only pay interest on the amount you borrow. I’ve seen Nexo competitors require you to take out loans and force [00:21:30] you to essentially borrow the entire amount of your credit line. With Nexo, you get a credit line and can only borrow the funds you need and pay them back whenever you want, with interest assessed daily. Again, this just isn’t something I’ve seen other providers do and I think it’s pretty neat.

The final aspect of Nexo I’d like to highlight is that they give you the ability to borrow against a basket of crypto assets. For example, if you post BTC, ETH, and BNB as collateral to your Nexo account, the Nexo oracle calculates the real-time market value of those [00:22:00] assets and adjusts your credit line accordingly. To my knowledge, other providers in this space only allow you to borrow against one asset per loan.

Okay, back to the show.

Amir: We think that this is going to just create huge efficiency gains in the world, it’s going to create a much more fair and equitable world. But then, when the ICO boom happened, part of this was unfolding right in front of us and I think that just escalated the entire [00:22:30] space, and was actually good for DEX innovation, although I don’t we ever really expected the ICO boom to last.

Clay: One of the reasons why I was interested in Etherium an investor is that I thought there was this real opportunity for second order network effects. There were the network effects that exist around Bitcoin. Ethereum seemed interesting because not only were there the network effects [00:23:00] around the Ethereum token itself, but there could be network effects around ERC20 tokens that were built on top of Ethereum. I thought that it would be this unstoppable ecosystem that just had layers upon layers of network effects.

That might still be the case, but the utility of that investment thesis has waxed and waned during several periods. That was a welcome surprise. It must’ve been cool to see that part of your hypothesis play out [00:23:30] so quickly after you started building this. What has been surprising in terms of friction? I imagine you have anticipated some of the challenges as well, but what was challenging about using these from a user’s perspective? What were some of the growth hurdles?

Will: Definitely user experience. In order to use a decentralized exchange, you have to have a self-custodial wallet, you have to fund it with Ether. If you’re going to be [00:24:00] trading ERC20 tokens on a DEX you either need to deposit them or if you’re using a DEX like 0x protocol, or a DEX protocol like 0x, you have to unlock these ERC20 tokens so that the 0x smart contracts can access them. I think that this is like a pretty non-intuitive step in the process that users are still getting used to.

Amir: To be honest, I don’t think a ton has changed [00:24:30] with the DEX model since then. I feel like the hurdles have been less technical and more related to like attracting users and stuff like that. Our overall DEX architecture has evolved quite a bit, but the overall architecture of often orders and on-chain so many and stuff is still the predominant model today and then there are a couple of different variations of it. I think it actually has been [00:25:00] working fairly well from a technical level overall.

Will: I would say too like the reason why DEXs saw the first wave of adoption was because of the ICO boom and for better or worse, there was this explosion of ERC20 tokens that were being sold and ICOs. Some of them were being listed on centralized exchanges and that was providing the market with liquidity which was in high demand. [00:25:30] But a lot of these tokens were not available anywhere except for a decentralized exchange. Maybe that was like EtherDelta at the time.

This forced users to go through the UX hurdles to access these markets at all. There was quite a lot of volume going through DEXs back then and there was a lot of volume going through all cryptocurrency exchanges at the time. I would say at least [00:26:00] on our team, we never built a strategy around ICO token markets because we definitely saw it as a transient phenomenon that would disappear over time. It’s exciting because in the last nine months, last year or so, we’ve started to see another wave of adoption in DeFi and it feels like the adoption is much more organic and sustainable. It is something where users are deriving [00:26:30] value from DeFi without some of the questionable aspects of ICOs.

Clay: Let’s kick-off chapter 3, which is about the current state of DEXs and 0x.

What does the landscape look like today in terms of what’s out there, what’s available, how is the ecosystem working, what are the use cases under which people are using 0x protocol?

Will: DEX volumes definitely follow [00:27:00] the crypto currency markets as a whole. When there’s a lot of volatility, centralized exchanges and decentralized exchanges, the increased volumes. Today, I think over the early sort of the last three months, we’ve seen Ethereum-based DEXs do daily volumes ranging from $25 million in a day to over a $100 million in a day. But an important point to note is that DEX market share, [00:27:30] if we’re taking centralized cryptocurrency exchange and DEX exchange volumes in consideration, DEXs have seen an increase in market share over the last three months. I think the trend extends back even further than that.

For 0x, typically we see daily volumes in the range of $500,000 to multiple millions of dollars. Historically, over the last three years, over a billion dollars of volumes have gone through [00:28:00] the protocol and there’s been over a million trades. It is growing. We are seeing this DeFi wave lead to more volume over 0x.

Amir: 0x’s volumes are pretty comparable today to what they were during the peak of the ICO boom, I would say. But the major differences being that volumes have really consolidated onto just a handful of token pairs, whereas back then there were all these ICO tokens. [00:28:30] A lot of people have heard of them and now we’re seeing real demand for people trading stablecoins, Ether, and really the more repeatable tokens that have survived over time.

Will: If listeners are interested in getting a view into usage statistics, there’s a website, 0xtracker.com, and it shows you real time trading [00:29:00] activity going through the protocol. It breaks down volume by a token pair, by a relayer, and it’s a pretty good resource.

Clay: It’d be good to also discuss the 0x token. Will, I recall you sharing a bunch of different ideas over time on your experience as a token issuer. As someone who’s seen the ICO boom, who’s issued a token, who’s seen ebbs and flows and maybe as a team, [00:29:30] has dealt with maybe many of the similar things that public relations challenges that maybe a public company might face that has a bunch of retail investors popping in and asking questions and telegram groups about when moon and X, Y and Z.

Clay: When you step back and consider your experience issuing this token, what are your thoughts? If you could go back and do it all over again, would you have issued the token? What’s gone well? What’s been challenging? And what advice would you give to others considering [00:30:00] issuing a token?

Will: Specifically for 0x protocol, having the 0x token is a core part of the system and how it functions. I don’t really think that the system could work without a token. It isn’t immediately apparent but I’m happy. It’s important to understand how the token functions within the network and why it exists at all, so I’m happy to dig into that a little bit.

Back before we were building 0x protocol as an open protocol [00:30:30] or platform for exchange, it was just Amir and I building a for-profit business. We had this system of smart contracts that we had designed. We felt the design was pretty optimal and that it allowed for upgradability of the system. We’re building on top of this rapidly evolving technology stack that is Ethereum.

Will: The Ethereum virtual machine is changing on a monthly basis. There are new token standards emerging [00:31:00] every so often and there needs to be a way to upgrade the system of smart contracts to support the evolution of markets on top of Ethereum. So, back when it was just Amir and I building our own proprietary system for exchange, upgrading that system of smart contracts was a very straightforward process. We own the smart contracts, we can more or less make the necessary changes to support whatever markets people want. [00:31:30]

But if the system of smart contracts is now a piece of public infrastructure and there are many businesses that are building on top of it and people relying on it, then the question of who has the ability to upgrade this system of smart contracts becomes a lot more nuanced. So we were thinking about what are the different ways that we could structure governance decisions to be made? The only solution that seemed viable at the time was to have some sort of governance token [00:32:00] that would allow people to vote on upgrade decisions. ZRX is first and foremost a governance token, that’s really important to keep to note that.

For governance to be effective it’s extremely important that the token is in the hands of the users, the people that are actually using the protocol. If it’s people that aren’t actually using the protocol, maybe they just are purely focused on some sort [00:32:30] of profit motivation, the changes that they’re going to make to the system of smart contracts are not going to be in the best interest of users.

The way that we initially designed the token was such that it would be used to pay for access to liquidity. If you’re someone that’s consuming liquidity, you’re a taker, or if you’re a market maker that’s providing liquidity, then you would be paying a fee to the marketplace that is facilitating the market you’re trading on. That marketplace is [00:33:00] called a relayer.

There are these three categories of users in our ecosystem: the takers, the makers and the relayers. We didn’t really have a strong thesis around which category of users should own the governance process. We wanted all of them involved. So, the thought process was by having the 0x token used to pay fees for liquidity, all of these three categories of users would, more or less, have [00:33:30] their hands on 0x tokens over time. They would therefore all naturally be participating in the governance process over how do we upgrade the system as smart contracts.

It’s really important to note that our mission is to create a tokenized world where all value can flow freely. We want 0x protocol to be public infrastructure, where anyone can come and trade with anyone else in the world who want it to be open and accessible and free, not like a proprietary [00:34:00] platform that is extracting rent. It is really important that the people relying on the platform are the ones that are making decisions over its upgrade process.

Clay: You use a lot of interesting language. You talked about public utility, the open nature of what you’re doing. When you think about 0x as an entity, are you guys for-profit? Are you nonprofit? And then in terms of operationally how you go about making [00:34:30] decisions in the business, sort of spiritually, what are you guys?

Amir: We are structured as a regular corporation. Primarily for practical reasons, it’s very difficult to become a nonprofit. We are not seeking revenue anytime in the short term, I would say. I think we’re really here to support the entire ecosystem and make sure that incentives are aligned and that the resources [00:35:00] being devoted in the right place where the protocol meets our highest return on our time is definitely just growing this ecosystem to as large as it can be.

Clay: When you think about some of these relayers and the fact that they’re probably competing with each other and with centralized exchanges, how does that affect design decisions and the ecosystem as a whole? I imagine [00:35:30] if a given exchange has a lot of network effects around the depth of their order books or liquidity on the platform, that might be a competitive advantage that they don’t want to share. Whereas if you’re a newer exchange, it probably is great to have access to shared liquidity pools. How does shared liquidity work or not work on your platform? What other factors have come up around the competitive dynamics of users of your platform?

Will: There are two interesting paths [00:36:00] to go down here. The first, 0x mesh, is one of our bigger initiatives that we’re focused on at the moment. 0x mesh is a censorship-resistant peer-to-peer network for propagating 0x orders. The traditional model for 0x marketplace or relayer has been to spin up a database and a server, and people can post and receive orders from that server. With 0x mesh, [00:36:30] we’re not only allowing people to propagate orders in this peer-to-peer network, but we’re also allowing relayers to plug in and to allow these orders to more easily and freely propagate across marketplaces.

The second interesting point here is around the incentives associated with relayers and the competitive nature of exchanges as a business. This is actually something [00:37:00] that we recently addressed in our 0x protocol version 3 proposal, which we actually just announced it two days ago. We’re going to be going through the governance process to either roll out or not roll out version 3 in the next few days. So November 4th is when the governance process begins.

One of the biggest changes in version 3 is the token economics. When I was describing the design of the [00:37:30] 0x token early on, we didn’t have a very strong thesis around a specific category of user that should be driving governance decisions. We just knew that we have three categories of users: makers, takers, and relayers. They’re all really important, they all rely on 0x protocol, and we want them to be the ones that have their hands on tokens.

But over the last three years, we’ve learned a lot more about the incentives associated with each of these categories of users. [00:38:00] We’ve also learned more about the economic incentives that we want to create within our ecosystem. I think it was a year-and-a-half ago we hired a research fellow at 0x, Peter Zeitz. He was previously an economics professor at the National University of Singapore, but he also had a history working in the crypto space, working on economic incentive design.

We asked Peter to come in and help us redesign the [00:38:30] 0x token economics such that we could maximize the overlap between the people that are actually trading on 0x protocol today, using 0x protocol today, and the set of people that are holding the 0x token. Through his research efforts, he identified market makers as the category of users that we really want to focus in on and that we want to [00:39:00] have greater influence over the protocols upgrade process in the future.

To provide a little, short explanation for the rationale here, if we were to consider takers—the people that are going to DEX they want to consume some liquidity and they’re a little bit more of the casual users—this category of users doesn’t really care which DEX they use. They don’t have a strong sense of loyalty. They’re willing to use whatever DEX will provide them [00:39:30] with the liquidity they need at a good price. Therefore they don’t really have a strong incentive to participate in 0x governance. They’re just naturally pretty neutral.

Then, we have the relayers and the relayers are these marketplaces that facilitate markets and help makers and takers connect with each other and trade. As you pointed out relayers are competitive, they are building a business, and they do have this natural incentive [00:40:00] to grow their business, build up these network effects, and build a monopoly of sorts or an oligopoly. If they reach that point and they have a large percentage of the influence over upgrades to the protocol, then they’re in a position where they can ratchet up fees, they can make changes to the protocol that are anti-competitive, or they can fork off of the protocol altogether [00:40:30] and try and bring their users with them.

In the short term, their incentives are very strongly aligned with ours, they want to help facilitate markets and grow them, but longer-term, once they reach maturity, their incentives aren’t really aligned with maintaining 0x protocol as this public infrastructure that is low cost, open, and that isn’t extracting as much rent as possible.

Finally, we have that third category of user, which are the market makers. [00:41:00] The market makers are very strongly-aligned with our mission and vision for the ecosystem. That’s because their natural incentives align with our own. The way market makers make money is by moving inventory. They have these digital assets on Ethereum. They take a spread on every trade they help facilitate, and they just want to grow the market and move as much inventory as possible. They want to maximize turnover and [00:41:30] to increase the size of the ecosystem. They also want to help new markets emerge because that is also an opportunity for them to grow their business.

Once the ecosystem is large and it’s reached maturity, these market makers don’t have an incentive to charge fees on trades because they’re not extracting fees. It’s the relayers that are doing that. They want to keep fees [00:42:00] as low as possible and to attract as many takers as possible. Also, market makers aren’t as likely to end up creating monopolies or oligopolies in the 0x ecosystem.

Typically there will be consolidation in markets where there’ll be a few top firms that are the top market makers for a given industry or a type of asset class. There would be consolidation of governance power to a few firms. [00:42:30] But in this future we envision where there are millions of assets tokenized and all forms of value are being traded over 0x, there are going to be market makers that are highly specialized in different verticals. This will naturally create fragmentation and a greater level of decentralization in the governance process if the market makers are the ones controlling it.

That was a little bit longer of an explanation than I was hoping. [00:43:00] Hopefully, it communicated why market makers are most long-term aligned with our mission of keeping 0x protocol low cost, open, permissionless, and to grow as large as possible.

Clay: Well, that concludes part one of my conversation with Will Warren and Amir Bandeali from 0x. I hope [00:43:30] you enjoyed it. Before you go, I want to mention that since we’ve started producing episodes at a much higher rate, we now have room for a few more sponsors. If you like the work we do and would like to support this show, then a sponsorship might be a good fit for you. I can say from our own experience that Flippening sponsorships work. In fact, we would do these shows even if nobody else sponsored because of the business it brings to us. And over 80% of paying customers mention that they heard of us through our podcast. If you’re interested in sponsoring the show, please hit us up at support@nomics.com.

All right, that wraps up things for this week. Stay tuned [00:44:00] for part two of my conversation with Will and Amir which will come out in the next few days. Until then, take care.

That’s it for this week. To sign-up for our free crypto investing newsletter, listen to other episodes, or get the show notes from this episode, please visit flippening.com. I also invite you to check out the startup that funds this podcast, Nomics at nomics.com. Finally, if you got value from the show, the biggest thing you can do to help us out is to leave [00:44:30] a five-star review with some comments and feedback on iTunes, Stitcher, or wherever you listen to podcasts. Thanks for listening and see you next week.

Part 2 Transcript

Clay: Welcome to Flippening, the first and original podcast for full time, professional, and institutional crypto investors. I’m your host, Clay Collins. Each week, we discuss the cryptocurrency economy, new investment strategies for maximizing returns, and stories from the frontlines of financial disruption. Go to flippening.com to join our newsletter for cryptocurrency investors and find out just why this podcast is called Flippening.

Clay Collins is the CEO of Nomics. All opinions expressed by Clay and podcast guests are solely their own opinion and do [00:00:30] not reflect the opinion of Nomics or any other company. This podcast is for informational and entertainment purposes only and should not be relied upon as the basis for investment decisions.

Welcome to the final installment of this conversation with Will Warren and Amir Bandeali, co-founders of 0x. 0x is an open protocol that powers the decentralized exchange of tokens on Ethereum. One of my favorite things about 0x is that you can use it to create an exchange [00:01:00] in less than a day (and people have).

This conversation is part of a larger series we’re doing on crypto exchanges. As part of this series, we’ve already interviewed Binance CEO Changpeng Zhao (CZ) Binance CFO Wei Zhou, Ivan Poon from Switcheo, Alex Wearn from IDEX, Sam Bankman-Fried from FTX, John Jansen from Deribit, and Mario Lozada from Liquid. As part of the series, we’ve also interviewed Nathaniel Whittemore on the history of crypto exchanges.

As a side note, if you run a top 50 exchange [00:01:30] by volume, I want to speak with you as part of this series. Please reach out to set that up.

Now for a bit of background on 0x. Will and Amir launched 0x in 2016 as a free and open-source protocol, that businesses can use to build exchanges or products that enable the purchasing and trading of crypto assets on the Ethereum blockchain. In August of 2017, 0x held an ICO for their token ZRX and raised $24 million dollars. At the time of this recording, 0x has completed [00:02:00] 713 total transactions, has done over $750 million in total volume, and has over 30 active projects developing on their protocol.

My conversation with Will and Amir is broken up into four chapters. In chapter one, we discussed the history of decentralized exchange before DEXs. In chapter two, we reviewed the short history of DEXs and how 0x fits in that timeline. In chapter three, we explored the current state of DEXs and 0x. Finally in chapter four, we close our conversation [00:02:30] by exploring the future.

In the previous episode, we covered chapters one and two, and a portion of chapter three. In this episode we finish chapter three and conclude with chapter four.

We’ll get right to this episode in just a second, but before we get started I’d to pause for a moment to tell you that this episode is brought to you by the good folks at Nexo. Here’s a word from them. Nexo is the only lender offering instant crypto credit lines which let you use digital assets as collateral to get cash in 45 fiat currencies and stablecoins. And Nexo has a big [00:03:00] announcement related to credit lines. Their annual interest rates for credit lines are now starting at just 5.9%, which may very well be the lowest borrowing rate in the whole industry.

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If you are looking to borrow lend or swap digital assets Nexo is your go-to partner. Definitely explore nexo.io or reach them on institutions@nexo.io. If you’re an institution, again that email address is institutions@nexo.io.

This episode is also brought to you by the Nomics API and CSV Data Export Service. If you need an enterprise-grade [00:04:00] crypto market data API for your fund, smart contract, or app, or if you need historical CSV dumps of trading data, or crypto market cap data from top exchanges (or even obscure ones) then consider trying out the Nomics API or our historical data export service. Our cryptocurrency API enables programmatic access to clean, normalized, and gapless primary source trade data across a number of cryptocurrency exchanges. Instead of having to integrate with multiple exchange APIs of varying quality, you can get everything through one screaming fast fire hose. [00:04:30] And if you’d like to order historical cryptocurrency market data as CSV exports from top exchanges, email us at sales@nomics.com.

Okay, back to our regularly scheduled program. Here’s part two of my conversation with Will Warren and Amir Bendeali from 0x. Enjoy.

[00:05:00] There’s a lot of interests that converge on this. I imagine it wasn’t easy to figure out what the game theory was across the board here. Digging into this a little bit more, let’s talk a little bit about relayers. It would be helpful to break down what the responsibilities are of the relayers versus the 0x protocol. In other words, are the relayers only competing on marketing and user experience? [00:05:30] Or are they competing on other factors as well? What’s on-chain, what’s off-chain, what’s relying upon the relayers, all of that.

Amir: This something that’s actually been evolving quite a bit over time. When 0x first launched, the idea was relayers were basically compete on everything. There would be all these different relayers. They would be responsible for attracting their own liquidity, their own users, they would provide a user experience, APIs and all [00:06:00] of that, just compete on all these different angles, and hopefully this would create this decentralized competitive marketplace.

We found that there were certain areas that we’d to make more of a public good for the entire protocol. Will was just talking about the focus on liquidity in version three and I think that’s definitely the primary resource that we think should be more of a public good, that can then be consumed and utilized [00:06:30] by relayers, which they can figure out how to how to monetize in their own way.

With the introduction of 0x mesh and the new liquidity incentives, these things were introduced to draw liquidity into the middle and allow the protocol to aggregate liquidity at the protocol level itself, which relayers could then utilize.

Today, in this new world, what does the role of a relayer [00:07:00] look like? What are they competing on? User experience is definitely an important point. I think relayers for the most part are still responsible for attracting their own users and it’s fairly easy for them to utilize global liquidity pool, add affiliate fees, or whatever they want to do to monetize.

In addition to that, there are just extra services they can provide for the users. For example, there are a handful [00:07:30] of different execution models within the protocol. They’re better suited for different things. An example of this one model we’ve been putting some work into is called the coordinator model. This has some advantages for liquidity providers, for running protection and stuff like that. Relayer could run a coordinator server on top of this global liquidity pool.

There are all sorts of other [00:08:00] DeFi services that have some nice synergy with decentralized exchanges. We’re probably going to start to see relayers who are integrating more of these DeFi services and where to allow their users to margin trade, for example, or maybe create stop loss orders.

There’s really this huge amount of flexibility in the protocol and things that relayers can compete on. With 0x mesh, [00:08:30] we’ve made it easier to do the core barebones responsibilities of a relayer, which would just be provocating orders. I think there’s really a wide open space that they can compete on. With the introduction of new markets, all of these markets are probably going to require specific user interfaces and ways for users to interact with them.

Clay: Amir, you mentioned that 0x mesh [00:09:00] provides liquidity at the protocol level. Can that be thought of as perhaps an aggregated meta order book across the protocol that relayers can voluntarily decide to opt into selectively? How does it work? How is that going to affect relayers? What decisions do they have and what decisions won’t they have with version three?

Amir: I envision it starting with the market makers, [00:09:30] who would be the ones to primarily utilize 0x mesh. They dump their orders into 0x mesh. And they’re just floating around in this peer-to-peer network. It’s not necessarily a fully formed order book because they can’t be sorted by price or anything. It’s fairly agnostic to the type of 0x order that’s propagated through the network. But if market makers aggregate on mesh, then relayers have to utilize mesh [00:10:00] in order to utilize all of that liquidity and it’s just there’s no downside for them to do so.

I think there are reasons why if someone posted an order directly to a relayer, maybe they wouldn’t want to share it on mesh themselves for competitive reasons. I could see that taking place as well. It’s hard to say. In the future there will be better mechanisms for fee sharing and it will be [00:10:30] thoroughly more incentive for a relayer to throw their own proprietary orders onto mesh. In the short run, it definitely makes sense for them to consume those orders from mesh.

Clay: Thinking of someone I know, Benjamin Roberts at Citizen Hex, we interviewed him on this podcast. He’s a market maker in the space and deals primarily with the Ethereum ecosystem. Rather than having to go off to a bunch of one-off DEXs to provide liquidity [00:11:00] or to make markets, he could do this at the protocol level. Then, the relayers could decide whether or not they want to include his orders on their order books. Is that how it works? Like you can selectively include?

Amir: Yes.

Clay: Okay. Got it.

Amir: It makes a lot of sense because today, as a market maker, there are 10 different relayers. None of them are charging any fees. [00:11:30] How do you really choose which relayer to post your order to? You don’t know where the demand is actually going to flow in. It forces you to introduce some bias into that decision. Now, we’re just trying trying to create this single entry point to the 0x ecosystem.

Will: It’s also important to point out that one of the really powerful characteristics of 0x mesh is that it is decentralized, [00:12:00] censorship-resistant, and permissionless. It’s essentially forcing these powerful properties that we value into the ecosystem.

Clay: From the exchanges point of view, we talked about market makers, making liquidity available to protocol level. What about going the other direction? Can a relayer decide that they want to expose all or perhaps some subset of their taker orders [00:12:30] via mesh? Is that something they can do selectively or at least in some form?

Will: They could, but the natural incentives would prevent that or at least it I don’t think it would be economically wise to do that. The most efficient and effective market is one that has the most people on either side of it trading with each other and the strong network effects around liquidity. In order to provide the very best experience [00:13:00] for their users, a relayer will want to expose their orders to the largest audience possible. And also to provide their users with the best price as possible, they’ll want to expose them to all of the orders that are out there on mesh, regardless of whether they’re being entered to a relayer or not.

Clay: Do you envision that’s the evolution of the role of relayers is building up the user base, aggregating taker orders, [00:13:30] and then the maker side is filled at the protocol level? Does that sound right?

Will: Could be. That’s how we envision it. We’ve historically tried to be less opinionated and more open to experimentation. We don’t want to be prescriptive about how people use 0x. It is public infrastructure. It is just a tool that we want to be free to use and accessible to anyone to use as they want. I do think that [00:14:00] to create the healthiest markets, we would need the speed mesh to become the gravity well for liquidity and that relayers would more or less build a business on monetizing their user traffic.

Clay: Market makers, high frequency traders, liquidity providers, whatever you want to call them, thrive on access to data and information, speed, things that that. That seems like it could be potentially a little bit incompatible with an on-chain [00:14:30] order book for lack of a better term.

What would market makers have and what tools would they have at their disposal, that would help them be good at their job? How would they go about querying this data? Would there be a traditional RESTful API or a WebSocket that they would consume? How does this get implemented by market makers?

Amir: To be clear, the bare core of mesh doesn’t necessarily do this hard work for people, but there will be [00:15:00] wrapper APIs on top of mesh that make it really easy to actually sort, filter, and consume the liquidity as you’d like. I think it definitely makes sense for relayers to host these APIs as well.

Clay: What is the state of KYC and AML? ShapeShift, which is not a decentralized exchange but is a non-custodial exchange, now has KYC and AML in place. IDEXX, which has been at various points in history [00:15:30] the largest decentralized exchange on the Ethereum blockchain has been required to implement KYC AML.

I was speaking the other day with the Radar Relay folks and they mentioned that it is not required on their exchange because the 0x smart contracts are taking custody of the funds and not their smart contracts. What is the state of KYC AML, and regulatory compliance?

Amir: There are two angles to look at, two [00:16:00] important regulators. Well more two important regulators in this space, but two that might be relevant to discussion. One is the SEC. If you’re listing securities, you’re going to have have some KYC AML process. We’ve seen that hasn’t really been the case. The tokens being traded today are, for the most part, commodities and they’re not as worried about the SEC guidelines for that reason.

There was also [00:16:30] somewhat recent guidance out of FinCEN things in the past few months that essentially said that non-custodial exchanges would not be considered money services businesses.

Clay: Hey, this Clay cutting in the from the editor’s booth to shed some light on what FinCEN is. FinCEN is a bureau of the US Department of the Treasury and stands for the Financial Crimes Enforcement Network. Okay, back to the show.

Amir: Which would also mean that they wouldn’t need to provide KYC AML. [00:17:00] It’s really just a matter of the assets being traded in terms of levels of custody that are taken. These regulators care a lot about protecting users and having DEX be non-custodial really helps with that argument. There’s not really anything they could do to harm their end users or steal funds or anything like that.

Will: I think another important distinction, too, is that [00:17:30] DEX or decentralized exchange has become a blanket term and even non-custodial in some sense. But if you were to actually really dig into the inner workings of the smart contract, you’ll find that there’s a spectrum. For example, with IDEXX, there really is a much higher level of control and centralization required for the IDEXX system to function and it’s hard to know [00:18:00] what constitutes non-custodial.

With IDEXX, you you have to deposit your assets into their smart contract. You are unable to manually, on your own, trigger transactions that result in trades being settled. You’re also unable to withdraw your funds at any time. You have to rely on this centralized matching engine and administrator to approve of these functions. That’s not [00:18:30] to say it isn’t a good thing that they do that. I think that their priority is to provide a very seamless user experience that feels low-latency and hides the rough edges of the underlying theory of Blockchain.

But by doing so, it isn’t necessarily the same level of decentralization that you have with something like 0x, where it really is the users that are driving every single trade [00:19:00] and they really are in control of everything that happens with their funds.

Clay: Maybe it would be helpful to consider the range of things that actually go into an exchange. On one hand there’s a centralized exchange on one extreme and then there’s something where everything’s on-chain on another extreme. There’s a lot in between there. For example, ShapeShift is non-custodial [00:19:30] but centralized. There’s a number of dimensions across which an exchange can be centralized versus decentralized. I think it’d be helpful to really understand on 0x where you stand. Let’s start with the order book. The relayers control the order book and that is done off chain is that correct?

Will: Yeah. I would say that in the model we’ve seen historically, the order book consisting [00:20:00] of these cryptographically signed orders that are floating off of the blockchain, are more or less hosted by a relayer. But it’s also important to note that again, the protocol defines how to specify a trade and how the trade is settled. It doesn’t necessarily define the message passing semantics that lead up to trade settlement.

What I mean by that [00:20:30] is that first of all, you can use 0x in a completely peer-to-peer way. You can create an order, sign it, and send it over email to a counterparty to do a private OTC trade. You could send it over Messenger or whatever it may be. Then, you have these relayer models where someone is aggregating this liquidity and helping people that don’t know a counterparty personally to find a counterparty. Actually, there’s a variety of different [00:21:00] ways that relayers can actually function.

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Will: From this open order book model [00:22:30] where they’re really a bulletin board and this Radar relay. There are a variety of other models and one of them is Paradex, where it it isn’t just a bulletin board where anyone can come in and try and fill an order. Instead you have to ask this relayer to push your transaction through a matching engine that they run. There is a spectrum of ways that 0x protocol can be used and [00:23:00] with mesh coming out in the future, that also changes changes the level of responsibility taken on by the front-end.

Clay: The order book is handled by the relayers. The relayers might decide they want to do it on-chain or off-chain, but it’s up to the relayers. What about the matching engine? Is the matching engine handled by 0x or is that also handled by the relayers?

Will: By the relayers. 0x is just to set a smart contracts [00:23:30] in a message format. You can use it how you want. You can really think of it as a way of conducting trades, but it’s up to the people that are entering into the trades to decide how to use the protocols.

Amir: By default, your users are essentially in-charge of their own match. They’re literally picking specific orders that they want to fill. But if a relayer chooses to, they can provide [00:24:00] their own matching engine on top of that, have a little bit more control, and potentially be able to prevent things like fraud from happening and stuff like that.

Clay: It sounds like the user can elect to outsource through the matching aspect of all of this to a relayer that then pairs people up and then the trick is executed.

Amir: That’s right.

Clay: What about custody? is it accurate to say that the smart contract is taking custody of the funds? What’s happening with custody? [00:24:30]

Amir: Actually, the smart contracts typically do not take any custody of the funds. The way it works is a user approves the smart contracts to be able to transfer their assets, then as soon as a trade is executed, the smart contract would pull those funds directly out of the wallets of the maker and taker and swap them.

The funds never actually need to leave the user’s wallet until the point of the trade. However, in version three, [00:25:00] things become much more flexible. There’s this concept of a bridge contract that will also allow you to very easily plug in whatever custom deposit contracts you want. These deposit contracts would not be owned by the protocol in any way. It would most likely be some external set of smart contracts. For example, maybe you have your funds deposited in some lending protocol. [00:25:30] 0x would still be able to pull funds out of there for the purpose of making a trade. But the protocol itself does not provide a deposit contract.

Clay: Order books the relayers matching engine relayers custody, if you guys don’t take custody or the smart contracts don’t take custody. But they can get access to funds when the trade needs to be executed and then the trade execution sits squarely on 0x. Is that correct?

Will: No. Actually not. [00:26:00] That’s another interesting thing. 0x really is like a protocol for trade settlement. Trade execution is something that sits a layer above settlement, like the example I provided earlier where you can do a private OTC trade with a known counterparty by creating an order and sending it to them over email. In that situation, the person [00:26:30] that’s taking that order and filling it is the one that is responsible for execution because they’re the one that’s triggering this transaction the Blockchain.

For an open order book relayer like Radar relay, where it’s more of a bulletin board, the person that reaches for that order on the bulletin board peels it off and injects it into the 0x smart contract. They’re actually the one that is executing that trade because they’re the one that is injecting [00:27:00] it into the Ethereum blockchain. Then, in the case of a matching relayer like Paradex, they add this additional layer of execution top where all of the transactions, all of the trades are arranged into a serial order and injected into the 0x smart contracts, according to the rules that they lay out in their matching engine.

There’s alternative models as well. I don’t know if we necessarily need to get [00:27:30] into right now, but it’s really neat the amount of flexibility that is available building different types of trade execution systems on top of the 0x protocol.

Clay: Basically, the only area where 0x is participating in all of this prior to 0x mesh is on post-trade settlement. Is that right?

Will: Yeah, it is.

Clay: Got it. [00:28:00] Let’s talk about use cases for a second. I think the most familiar use cases or examples of 0x use are exchanges like Paradex and Radar Relay. There’s a lot of DeFi use cases that require access to liquidity, shared liquidity, et cetera. What are some of the lesser known but still highly interesting use cases for 0x?

Will: There are many. I’ll try and highlight a couple that I personally find [00:28:30] really exciting. People do typically think of DeFi and trading Ether for stablecoins as the most apparent use case for the protocol, but actually, 0x supports a lot of interesting alternative markets and methods of exchange. 0x is this upgradeable modular system of smart contracts and it supports not only the ERC20 Token standard, it also supports [00:29:00] the ERC721 token standard, which is the CryptoKitties non-fungible token asset type. These can be things like CryptoKitties or Cheeze Wizards or digital collectibles of any form.

Clay: Domain names.

Will: Yeah like ENS, the Ethereum Name Service domains. 0x also supports this third generation token standard called ERC1155, which allows you to [00:29:30] create an asset universe within a single smart contract. This is ideal for things like if you’re creating a video game that has tokenized game items. All of those game items live within a single smart contract but you can index them by assets, by item ID, or something like that. We were definitely thinking about how token standards are going to evolve back when we were originally designing the protocol, and [00:30:00] we’re starting to see some of these new token standards, see some early traction.

Another feature that’s really cool is the ability to trade bundles of assets. The 0x allows you to create a bundle of any kind of asset types and to exchange one bundle for another bundle or a five Dai for two ERC721 tokens and one CRX token. It’s very [00:30:30] flexible in that way.

One final feature I’m really excited about and that I feel like has not been explored at all but has massive potential for interesting use cases, is the ability to create conditional orders. These are orders that can only be filled if a certain set of conditions are met. These conditions are directly encoded into the order. This unlocks capabilities like stop loss limit orders, where you create an order but it can only be [00:31:00] filled if an on-chain price oracle is below a certain threshold. Or really any other interesting use case that you can imagine.

Clay: Are there any other squarely not exchange users that have used the protocol for some interesting purposes? Do you have some favorites?

Will: There are a handful of nonrefundable token or collectibles marketplaces built on 0x. [00:31:30] Emoon is an example of one. There’s another one I’m particularly excited about called Token Trove. Another specific marketplace called GUDecks is a marketplace for trading these collectible cards for a game called Gods Unchained.

Clay: Yeah, I’ve heard of it.

Amir: Yeah. This is a card game that’s, in some ways, similar to the very popular game Hearthstone. It has really [00:32:00] great UX. For the most part, it is a traditional video game, the difference being that users actually own their own cards and they’re in the marketplace for the same stuff that can be traded. GUDecks don’t do huge dollar amounts of volume, but they actually have a good amount of users. Once these cards actually become unlocked for trading, I could really see that market taking off. [00:32:30]

Will: Actually, a random interesting fact about GUDecks. I was just looking at their creative volume numbers for the previous month. GUDecks the marketplace had created a market for Gods Unchained raffle tickets. They created this promotion where if you win matches against other people, you can win raffle tickets. These raffle tickets enter you to win a very rare, [00:33:00] powerful card. It’s really cool as these raffle tickets are tradable. You can trade them with anyone in the world.

On gudecks.com, there was actually $55,000 of trading volume for these raffle tickets in the previous 30 days. What’s really cool is not only did they create this little mini economy, but it allowed God’s Unchanged to incentivize people to beta test [00:33:30] their game while it’s still in these early stages, and they’re trying to bootstrap users and usage through this little mini raffle ticket economy. I don’t know. I thought that was just fascinating and I expect that we’ll see thousands of these unexpected little niche internet marketplaces and markets to emerge.

Clay: It seems like another potentially huge use case that perhaps hasn’t [00:34:00] ramped up yet, but it’s probably coming around security tokens. It seems like the way security tokens work and the control that must exist at the protocol level in order to stay compliant, really lends itself towards a decentralized exchange versus centralized exchange. What movements have you seen there?

Will: It’s been slow. I remember around a year ago, I was extremely excited about security tokens and optimistic about the timeline. [00:34:30] There has been significant progress in the security token vertical and all of the hard work and infrastructure that needs to be built to allow tokenized securities to flourish, is being done and it continues today. I could still see it being another couple of years for the regulations to catch up with the technology.

Amir: I do think you’re right about decentralized exchanges being particularly well-suited [00:35:00] for security tokens, though, just because they can literally encode all of their requirements into smart contracts, which would just be automatically enforced when using a decentralized exchange like 0x. And that’s because 0x does not take custody of these tokens. They’re still sitting in the user’s wallet. Any extra functionality encoded in those tokens will always hold for any trade that has been executed [00:35:30] over the protocol.

Clay: It seems like over time, exchanges are behaving more and more like wallet providers are providing a lot of value-added services that you can provide once you have custody, and then wallets are becoming more like exchanges in terms of being able to provide the ability to swap assets. Is there a significant user base there around wallet providers that want to allow people to swap tokens using 0x? Is that a meaningful use case so far? [00:36:00]

Will: Yes. actually our second largest relayer it’s called Tokenlon. This a relayer that is built into a mobile wallet called IAM token. It’s really, really impressive with what they’ve accomplished. IAM token is something like a million monthly active users. I know that they have at least 10,000 monthly active users on their 0x relayer. [00:36:30] It has significant traction. They’re using a unique execution model that’s different than most of the other 0x relayers that we’ve seen, but it seems that’s a very defensible vertical.

Clay: Let’s transition to chapter four, which is about the future.

It seems like you’re on the verge of releasing a lot of new things that are informed by everything you’ve learned thus far. We could talk about the future of crypto, we could talk [00:37:00] about the future of decentralized exchange, but probably the best use of our time is to hear about the future of 0x and what you envision that looking like.

Will: Since the very beginning, our long-term thesis has been that the world is going to become tokenized. All forms of value will be represented as tokens on public blockchains like Ethereum. We’ve been seeing Fiat currencies being tokenized with USBC, Tether, and GUSD. We’re even seeing things Bitcoin [00:37:30] tokenized on Ethereum as well. Security tokens are slowly but surely emerging. We’re starting to see exciting exciting development in tokenized video game items with Gods Unchained, Sky Weaver, and a variety of other really high quality teams building games.

One vertical that I’m particularly excited about and that will really capture or unlock the full benefits of decentralization is our [00:38:00] prediction markets, in particular Augur and Gnosis. Prediction markets, for those that aren’t familiar, basically these are markets where you’re betting on the outcome of some future event. Augur and Gnosis are these prediction market platforms that allow you to create markets for future events. These events can range from political events like  elections, Brexit, sports betting, [00:38:30] you can bet on your favorite team or whatever it may be. And it they can also support all types of interesting derivatives that might not actually be possible to create without the decentralized properties of these platforms.

Augur is shipping their second version of their platform in January of 2020 and a core piece of their tech stack is going to be [00:39:00] 0x mesh, so allowing people to have these liquid off-chain markets for all sorts of different events. That’s something that I’m just extremely excited about and it really unlocks these markets that were just not possible in a centralized setting. I felt I had to highlight that before.

Amir: Right now, we’re seeing some pretty significant traction throughout Defi. It’s really insane to see this just being [00:39:30] built from the ground up and getting much use. All these different synergies are being enabled throughout all these different protocols. That being said, I think Will is right. It’s really important to zoom out and take a look at where the entire space is at. We’re still so, so early.

There are 5–10 tokens that are being regularly traded on decentralized exchanges right now. [00:40:00] The vision is there going to be millions. If we just focus on the fundamentals of decentralization, liquidity incentivization, and in the meantime gradually build up demand in markets that users actually want. The long term vision is going to be very, very exciting.

Clay: Last question. What is the shortest amount of time you’ve seen someone launch a 0x relayer? Not talking about marketing it or a marketing launch, [00:40:30] but just in terms of zero to up and running.

Amir: I think it’s just a couple of minutes actually. You don’t even need to be technical. There’s a wizard that just walks you through it, click a few buttons and that’s it.

Clay: That concludes my conversation with Will Warren and Amir Bendeali from 0x. [00:41:00] I hope you enjoyed it.

Before you go I want to mention that since we’ve started producing episodes at a much higher rate, we now have room for a few more sponsors. If you like the work we do and would like to support the show, then a sponsorship might be a good fit for you. I can say from our own experience that Flippening sponsorships work. In fact we would do these shows even if nobody else sponsored because of the business it brings to us. And over 80% of paying customers mention that they heard of us through our podcast. If you’re interested in sponsoring the show please hit us up at support@nomics.com.

All right. That wraps up things for this week. [00:41:30] Stay tuned for next week’s episode. Until then take care.

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