0X Protocol

(08 JUNE,2019)

The development of any decentralized exchange requires an underlying protocol. The 0x protocol uses both the on-chain (recording on Ethereum blockchain) and off-chain (no recording on Ethereum blockchain) techniques. 0x was introduced to solve the issues related to decentralized cryptocurrency exchange i.e. expensive, time consuming and difficulty in interaction with other exchanges. We cannot call 0x a decentralized cryptocurrency exchange but it is a protocol that can be used to make decentralized cryptocurrency exchange. It is open source. There are many token of Ethereum blockchain in market. It was built to make use of those Ethereum tokens. It provides an efficient way to exchange thousands of Ethereum tokens. Founders of 0x were Will Warren and Amir Bandeali (CEO and CTO). Orders are relayed of the blockchain and are brought back on blockchain when the need to settle the orders so in this way less time is required for a transaction. 0x is also free but someone who is building decentralized cryptocurrency exchange (he is called relayers) can charge money if he wants to.

The 0x protocol utilizes Ethereum blockchain for sometime only

The 0x protocol specification recommends using Smart Contracts. These contracts are written in Solidity. Once the terms that are mentioned in the contract are fulfilled then the smart contract will be automatically executed. The concept of smart contracts is closely associated with Ethereum blockchain.

The below diagram taken from the 0x protocol White Paper describes the on chain and off chain Parts of the protocol.

Off-chain order relay, on-chain settlement diagram (Source: 0x Protocol White Paper)

For explanation of the above diagram refers the points mentioned below taken from the 0x protocol white paper:

1. Maker approves the decentralized exchange (DEX) contract to access their balance of Token A.

2. Maker creates an order to exchange Token A for Token B, specifying a desired exchange rate, expiration time (beyond which the order cannot be filled), and signs the order with their private key.

3. Maker broadcasts the order over any arbitrary communication medium.

4. Taker intercepts the order and decides that they would like to fill it.

5. Taker approves the DEX contract to access their balance of Token B.

6. Taker submits the makers signed order to the DEX contract.

7. The DEX contract authenticates maker’s signature, verifies that the order has not expired, and verifies that the order has not already been filled, then transfers tokens between the two parties at the specified exchange rate.