0x, also known as 0x Protocol and 0x Project, is a decentralized exchange protocol on which peer-to-peer (P2P) distributed trading platforms can operate. As of current, 0x powers some of the industry’s most widely utilized decentralized cryptocurrency exchanges such as Radar Relay and Paradex.
Previously, Coinbase co-founder Fred Ehrsam stated that decentralized exchanges have some combination of decentralized properties. But, hosting independent order books can be extremely inefficient due to the scalability issues of the Ethereum network, which still remains as the only public blockchain network with a capacity that can handle decentralized exchanges.
“First, extending the idea of global order books, decentralized exchange protocols create even more global pools of liquidity. Orders share the same format and can be matched by anyone in any venue, from a p2p relay network to a decentralized exchange app to a text message,” explained Ehrsam.
0x is unique because it employs a system called “off-chain order relay with on-chain settlement,” which allows decentralized exchanges to operate with full capacity without being in conflict with scaling issues. On decentralized exchanges, each buy or sell order is executed as a single transaction broadcasted to the Ethereum network. Modifications are also considered transactions of their own.
As such, when hundreds of thousands of active users begin trading cryptocurrencies and file many buy or sell orders at once, it becomes difficult for both the decentralized exchange and the Ethereum network to handle the volume.
The 0x protocol compiles orders into one transaction and sends it to the main Ethereum blockchain. In concept, it is similar to a tab in a restaurant or a bar. Instead of customers paying for each drink or dish directly after consuming them, customers can pay everything at once using a tab.
The 0x decentralized exchange protocol also solves liquidity issues for decentralized exchanges and applications. If a decentralized app launched on top of the Ethereum network is required to use many different tokens to seamlessly run its services, the developers of the dapp cannot assume that its consumers will have all of the tokens needed to use the app.
“Decentralized exchange protocols significantly lower the friction of running a decentralized application (dapp). Most decentralized apps will require multiple tokens to work in concert to power them. For example, an app might use a combination of Ether to commit transactions to the blockchain, Filecoin to store and retrieve data, something like Golem to perform more heavy computation, and a token native to the application itself,” Ehrsam further explained.
Conclusively, while decentralized exchanges and applications can function on their own using independent order books and digital asset conversion systems, it is significantly more efficient for dapps to rely on exchange protocols like 0x for seamless digital asset trading. The rapid rise in the popularity of and demand for decentralized cryptocurrency exchanges could lead to the increase in the adoption of decentralized exchange protocols like 0x.
Already, on 0x, decentralized exchanges like Radar Relay are processing millions of dollars worth of trades on a daily basis. In the long-term, to prevent regulation FUD and cryptocurrency ban rumors affecting the market, traders and investors will likely migrate to decentralized exchanges, particularly for cryptocurrency to cryptocurrency trades.