ZRX receives lots of attention as Ethfinex uses the 0x protocol to launch exchange

Rhys Muter 4 January 2018

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With excitement surrounding the price of ZRX, work has ramped up to integrate the 0x protocol onto Ethfinex

ZRX began trading on 16 August 2017, floating at around US$0.11 and quickly shooting up to US$0.51 over a period of days. After tapering off from those initial highs, ZRX’s price hovered between US$0.17 and US$0.24 until mid-December when its value multiplied by more than four times to sit at US$1.08 at the time of writing.

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ZRX is a premined token with a final issue of 1 billion units, 500 million of which are yet to be released in order to maintain price stability. Of the 500 million already released, varying portions have been given to developers and owners, some has been put in escrow and a relatively small amount has been released for public trade. That amount is set to increase as the number of “relayers” increase because they will be rewarded for their services to Ethfinex by receiving ZRX tokens. That is how the integration of the 0x protocol will create liquidity for the market.

To understand the effects of this integration on the price of ZRX, it's important to have some background on the role of the 0x protocol and how Ethfinex will utilise it. After all, the 0x protocol is the justification for ZRX’s existence. The 0x protocol and its native token, ZRX, are being marketed as decentralising the trade functions of Ethfinex, although their usage of the term decentralised is likely to be the subject of considerable debate.

Ethfinex utilising 0x protocol to become a major Ethereum-based exchange

Ethfinex is the Ethereum-blockchain-based trading subsidiary of Bitfinex, a well-established name in global cryptocurrency markets. Bitfinex was subject to a disastrous hack losing millions of dollars' worth of cryptocurrencies held on the exchange’s servers. Bitfinex, along with somehow repaying the stolen funds, has maintained a good reputation among other cryptocurrency exchange providers.

Recognising the vulnerability of centralised exchanges, Ethfinex has sought to offer a decentralised exchange. This means that the traders hold their own funds, and Ethfinex provides the network service, acting as a conductor of trade for ERC20-compliant tokens. The network transactions are done in such a way that they require a “counterparty” to act as a “relayer” to hold open order books of proposed trades. It is important to note that the proposed trades can and mostly will be separate actors from the relayers.

This is important because the role of the relayer in providing the order book for trades is what makes the use of the term decentralised debatable. This particular protocol is being marketed as the decentralising factor of the Ethfinex network. Others argue that the 0x protocol introduces a third-party accounting mechanism that outsources a crucial function of trade at the expense of some privacy features and the potential for efficiency gains with scalability.

In the sense that assets are not stored with Ethfinex, it's correct that the 0x protocol decentralises the Ethfinex network. However, there are two problems with the existence of a counterparty relayer. The first has to do with scalability. The Ethereum blockchain has shown signs of stress recently. This means that whether the blockchain can continue to scale and keep transaction fees low is doubtful. In the event that transaction fees do rise and unconfirmed transactions also go up, the function of the relayer to settle the trade is crucial.

Relayers: Counterparties or third-party accounting mechanism?

That leads to the second problem with relayers. The trades being entered on the blockchain depend on whether the relayer is able to finalise the trade and more importantly on whether the relayer is willing to do so. The trouble here is the question of the relayer’s motives. This places a great deal of trust in the integrity of the relayer, which is contrary to the concept of the trustless peer-to-peer transaction that defines decentralisation. As a result, relayers will have a great deal of market leverage if scalability goes on to dog the Ethereum blockchain.

The potential upside of the 0x protocol on the Ethfinex network is that it will provide a real-time market to trade ERC20-compliant tokens. The potential for this market place to grow in a very short time is very promising. The incentive to relayers in the 0x protocol is that they are rewarded with ZRX tokens, which will also be traded via the Ethfinex network. This establishes liquidity for Ethfinex and has the potential to significantly grow its daily trading volume.

On a less positive note, no reliable data has been released regarding Ethfinex’s daily trading volume. Another concern is the reply that Will Warren, 0x’s co-founder and CEO, posted in response to some critical media reviews concerning 0x. The response had little relation to the points made by the critic and was posted on reddit with the alias "theonetruesexmachine": hardly professional nomenclature. What this means for the price of ZRX is unclear.

It must be remembered that the incentive for relayers is the reward of ZRX. Depending on market forces and similar competition on the Ethereum blockchain, the 0x protocol seems likely to succeed with Ethfinex. This is because the incentive for relayers is high. If enough relayers provide enough liquidity, this will mean that the exchange, regardless of whether it is actually decentralised, will be a highly effective Ethereum-based cryptocurrency exchange.

This means that ZRX must maintain the profitability of the relayer service. If that falls away, so does the price of ZRX and the trading volume of Ethfinex. But for now, Ethfinex's strong marketing campaign and clear vision are indications that the 2018 prospects for ZRX are looking strong.

This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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