A cross-section of midrange altcoins received an unexpected boost when Coinbase recently announced that they were exploring potential additions. Each coin exists within their own ecosystem, serving vastly different purposes – and 0x is perhaps the most antithetical to Coinbase itself. Using off-chain channels, 0x (ZRX) is designed to facilitate decentralized exchanges. Further, it is a not-for-profit and utilizes open source design. Combined, these two factors make it an interesting choice for the fiat gateway giant. Of course, the announcement itself states that there is no certainty that these coins will be added.
0x’s protocol is designed to make decentralized exchanges or DEXs simpler to create and cheaper to operate. Traditional decentralized exchanges are transfer-fee heavy – with no central authority, each transaction must be run in-full between disparate users. Centralized exchanges bypass this by having most funds held in a single “exchange wallet.” 0x exchanges use off-chain channels and user relays to offset this problem.
A Non-Profit Decentralized Exchange
Originally envisioned as a more traditional DEX, 0x branched off to create a new protocol after seeing the state of the decentralized exchange market. At the time, centralized exchanges cost less and offered better incentives than their less structured counterparts. Now, with the 0x protocol available, anyone can create a decentralized exchange for the assets of their choosing. More importantly, all DEXs created with the 0x protocol have internal liquidity with one another.
0x also circumvents the high-fee structure of traditional decentralized exchanges through the use of off-chain channels. Funds stored within the blockchain can be traded back-and-forth between makers, takers and relayers at will – until someone exits the system and the entire off-chain channel is closed. At that point, the funds are distributed as per the channel ledger. Instead of hundreds of small transactions, this reduces the network burden to a handful of larger balancing actions.
Other Off-Chain Solutions
0x’s system is unique for decentralized exchanges, but off-chain solutions are becoming the norm for major networks. Late 2017 and the sudden crypto-boom exposed serious problems with blockchain infrastructure. Bitcoin and Ethereum both suffered massive slowdowns as transaction volume spiked. Transaction fees sky-rocketed and users were left waiting extended periods of time for their actions to validate.
The Lightning Network provides an off-chain solution to Bitcoin that would considerably alleviate this problem. Much like the 0x protocol, it creates a system of channels between users. A separate ledger records any changes in balance between the users until such a point that one leaves the network. At that time, all transactions are totaled out and a minimum number of transactions occur on the Bitcoin blockchain itself. The Raiden Network performs the same purpose for the Ethereum blockchain.
Article By: Adam Stone
