The 0x Protocol mission may seem cloudy to some, but to co-founder Will Warren, it couldn’t be more clear.
Blockchains are accelerating at incredible speeds, with developers flocking to the industry to take part in building tomorrow’s distributed systems. Ethereum has benefited more than most from this exodus of developers from traditional tech fields to blockchain.
Like a spring super-bloom of wildflowers after a particularly wet winter, the Ethereum ecosystem is bursting with talent, ideas, and DApps. DApps, or decentralized applications, are the bread and butter of Ethereum development in its current form – and, rightfully so. Ethereum is, after all, a world computer being specifically built to host and run unstoppable applications that are distributed, censorship-resistant, and accessible by anyone.
If all seems well up to this point, that’s because it is, until we consider, as 0x Protocol’s Will Warren has, the effect of app coins without standardization.
Too Many App Coins, not Enough Standardization
Great – the Ethereum ecosystem is booming with the development of decentralized applications. As a result, every time you refresh coinmarketcap.com, there’s a handful of new ERC–20 tokens added to the list.
With every new DApp comes an app coin specifically created as a form of entry credit to that application’s services. Let’s make an example out of ERC–20 coin HYDRO. Hydrogen is a suite of financial applications that run on top of Ethereum. Some of their apps require the use of HYDRO to access the features therein.
So, I’m a user wanting to use a Hydrogen application, but I don’t own any HYDRO. In fact, I don’t own any crypto at all! I’m going to have to get to work. First I’ll need to have a bank account linked to an exchange that does fiat currency –> cryptocurrency trades. Then I’ll need to buy either bitcoin or ethereum since they are the only two major trading pairs at most exchanges. Next, I’ll have to find an exchange that lists HYDRO. Then, I’ll need to send my BTC or ETH to that exchange, wait for the deposit to settle, and finally, I can buy HYDRO.
Cryptocurrency advocates are always talking about adoption, adoption, adoption. Imagine being an enterprise party interested in using Hydrogen’s financial tech applications. Will you want to go through this lengthy, time-consuming, and convoluted process just to access Hydrogen’s services?
This situation isn’t specific to Hydrogen – it applies to every app coin tied into a DApp out there. There are hundreds, nay, thousands of app coins, but, as Warren puts it in his blog article on the subject:
Herein lies the problem. App coins that are directly coupled into a dApp’s system of smart contracts are the antithesis of standardization: many custom and incompatible contracts with varying levels of quality and security, all implementing the same functionality. What do end users get out of it? A larger attack surface, multiple configuration processes, app coins and learning curves to deal with.
With a glut of app coins in existence and no standard to bind them, potential users are faced with the complicated task of chasing coins across far-flung exchanges, using exotic trading pairs, and worse – all to use and support different blockchain applications.
If adoption is the goal, then surely, this isn’t the way. App coins are a good way to fundraise without stepping into the murky waters of securities laws, so in that sense, investor and app developer interests sync perfectly. But, the proliferation of app coins without any standard amongst them fragments the network effects of the underlying protocols and the network itself.
What 0x Protocol asks is: Will users want to track down 7 different tokens to access 7 different forms of utility?
What 0x Protocol Is and How They’re Building Token Standards
The 0x Protocol mission statement is:
Create a tokenized world where all value can flow freely.
In the previous section, we went over the fact that while the creation of decentralized apps shows abundant interest, talent, and momentum in the space, the tokenization of those applications based on utility is often dubious, confusing, and blocks the flow of value in the tokenized world.
App coins are more often than not dead-ends in the network, trapping value and shattering the valuable network effects that the underlying protocols propagate.
0x is a protocol for decentralized exchange that allows anyone, anywhere to create a decentralized exchange using smart contracts on Ethereum. Sure, that sounds great, but how does it relate to the problem of app coins, and how will it smooth the user experience of the decentralized application ecosystem?
Imagine a DApp that’s using Filecoin, Golem, and Aragon. Without 0x Protocol, a user would have to buy the app coin specific to that DApp, then the DApp would need to buy the app coins specific to Filecoin, Golem, and Aragon to use their services. In other words, what we have here is a huge mess.
With 0x Protocol, however, the DApp developers can create a decentralized exchange specifically for their application and have it run as follows: The DApp will accept a stablecoin like Tether for payment, and with 0x running on the protocol level, it will automatically exchange that Tether for the other tokens it needs (it’s own token, IPFS, GNT, ANT). The whole process occurs seamlessly and in the background of the user experience.
The beauty of the 0x Protocol is that it allows for the proliferation of tokenized applications without hindering user experience. It enables users to use one coin that can be exchanged for any other on a decentralized exchange, and hides the complicated interplay of hundreds of app coins out of view.
The 0x coin, ZRX, is used to pay for exchange fees, but whether such fees are required or not is up to the one who creates the exchange. Apart from that, ZRX coin grants holders governance rights, allowing them to vote for and against protocol upgrades as they arise.
On the whole, 0x Protocol’s aim to standardize Ethereum-based token trading is original, innovative, and necessary. It brings clarity to the network and is a needed piece of infrastructure that encourages the adoption of cryptocurrencies.