The path towards a blockchain-agnostic protocol
0x protocol follows tokenized value
Our mission at 0x Labs is to create a tokenized world where all value can flow freely. We set out to build 0x protocol because we believe that blockchain-based digital assets in conjunction with global p2p markets will help to eliminate the geographic lottery. In this post, we will share 0x Labs’ strategy with regards to driving expansion of 0x protocol beyond Ethereum.
Our core thesis is that all forms of value will end up tokenized on public blockchains. Thanks to Ethereum’s strong developer ecosystem and focus on establishing community standards, the tokenization thesis is playing out more rapidly than we initially anticipated. Among the 300,000+ token contracts on the Ethereum blockchain today, there exist stablecoins representing billions of tokenized US dollars, thousands of ICO tokens, real estate, video game items, community tokens, personal tokens, synthetic assets, derivatives, and so much more. We’re seeing a Cambrian explosion of innovation and creativity, and it’s only just getting started.
While Ethereum is the platform on which most tokenized value has emerged in the past years, we believe we are heading towards a multi-blockchain world with a vast web of interconnected networks forming the backbone of web3. Given our vision for 0x protocol as an open technical standard for p2p exchange, it is natural that the standard expand into new ecosystems as they emerge.
Expanding beyond Ethereum
New L1 developments. Signals we are looking for in fledgling blockchain ecosystems.
Many L1 blockchains have recently launched or will launch in the coming months, including Filecoin, NEAR, Polkadot, Solana, Celo, Dfinity, and ETH 2.0 phase 0. Many of these networks introduce innovative new capabilities or differentiating features. We are excited to see them foster healthy virtual economies.
Technology alone oftentimes isn’t enough to spark product market fit on top of a developer platform: new blockchains will need to grow robust developer ecosystems, which hopefully yield applications that attract an audience of end users, kick-starting a flywheel where even greater opportunities await the next wave of developers.
Expanding to a new L1 blockchain requires a significant investment of time and effort with no guarantee of success. It took ~3 years from the time we launched 0x v1 on Ethereum for the DeFi ecosystem to gain traction, driving the recent growth in user numbers and DEX volume. In this context, we believe the best approach for driving expansion of 0x protocol to a new L1 (or L2) is to be data-driven and spot early signs of end user adoption before making an investment in expansion efforts. We’d like to observe signs that a new network is on a high growth trajectory with unique digital assets and use cases that would benefit from peer-to-peer exchange and composability.
We have already started engaging with prominent blockchain teams in the space, but if we missed you contact us at firstname.lastname@example.org. To summarize, we are looking for a combination of breakneck growth metrics, unique assets, use cases requiring p2p exchange primitives, and a milestone-based path that allows testing the waters with a MVP.
The process of expanding 0x protocol to a new L1 blockchain
While monitoring these signals, we will take preliminary steps to get ready for a smooth and quick expansion when the time is right. As we’ve witnessed with the yield farming craze, liquidity and users can practically arrive overnight if the right incentives are in place.
To prepare for such an event, we are evaluating designs for 0x protocol’s off-chain infrastructure to accommodate multiple chains. For example, how does a Mesh network distribute p2p orders to be settled on different blockchains? How does 0x API provide such liquidity? Will there be existing liquidity pools on this new blockchain to use for aggregation?
We will spend the next months researching and answering these questions.
The medium-term goal is to have a 0x off-chain platform able to accommodate multi-layered liquidity networks, connecting liquidity providers with traders within each specific token ecosystem.
DEX blockchain hub
Let’s now fast forward and imagine a world where tokenization of value is spread across multiple blockchains. The next logical step is to ask ourselves: how can value ‘flow freely’ across them? How can I exchange, say, DAI with SOL in a decentralized, p2p venue? In such a scenario, what the 0x ecosystem needs is some sort of a DEX blockchain hub that can power trustless, efficient, p2p exchange of assets belonging to different blockchains.
To achieve this, there are several challenges that need to be overcome. More research is needed across all of them.
The first is around how to bring non-homogenous tokens (i.e. with a different standard) to the same venue. Cross-chain bridges will become a critical part of this infrastructure. We expect to see a variety of different models of such bridges, with the first examples already going live with NEAR and Solana. Porting BTC to Ethereum has been the first prominent use case of such bridges, with notable examples such as WBTC and renBTC.
Given 0x’s mission, we are interested in approaches not relying on centralized entities — even though a progressive decentralization approach might be advisable.
The second challenge, perhaps the most thorny, is about the introduction of opportunity costs for users. Pretty much all bridges — including the ones that involve a centralized 3rd party — require users to send their assets somewhere (typically a contract) to perform the transfer. Leaving the UX challenges aside, this means that tokens cease to be useful in the original chain — for example, they stop earning interest in lending protocols. The very same problem is experienced when using Ethereum L2 scaling solutions.
The third challenge is specific to 0x: its off-chain infrastructure (Mesh, 0xAPI, RFQ server) will be updated in order to support an integrated liquidity funnel connecting entire token ecosystems. Also, the network economics (governance, ZRX staking) will have to be orchestrated by the DEX Hub.
At 0x Labs, we are making good progress researching these topics, in parallel to exploring L1 colonization. As per this latter, before investing heavily in productization, we will look at market signals that tell us with a fair amount of confidence that that’s what the ecosystem needs to continue the process of tokenization of value.
In this post, we went through how 0x Labs’ mission will progress in a world where the tokenized value spans across multiple blockchains. To fulfill this mission, 0x Labs will pursue two strategies: colonize other blockchains with emerging tokenization of value, and build a p2p exchange blockchain hub. These are not necessarily sequential nor conflicting. We have already made good progress in the latter, and now will likely spend more focus on the former.
We are looking forward to working with the many talented teams in the space contributing to the tokenization of value in new blockchain venues. Reach out at email@example.com if we missed you.
Thanks to Amir Bandeali.
WRITTEN BY Theo Gonella