0x ($ZRX) is an under-the-radar project that powers nearly all of the top products and services in DeFi. While generating outsized revenues for its users, ZRX token holders, developers, and market makers, its true value has been concealed by confusion and misinformation. It’s not just a question of wrong interpretations — though there are plenty of those to go around. Even the facts are misleadingly reported. At first glance, 0x looks like a small fish in a pond of DeFi behemoths, but when you dig deeper it’s clear that 0x has its tentacles extended across the entire DeFi ecosystem and is poised to win no matter how the market matures.
Let’s start at the beginning.
0x and Matcha
0x debuted in 2017, aiming to solve a major problem many dapps faced: bootstrapping liquidity. But they needed traction to gain liquidity — and liquidity to gain traction. 0x saw a potential fix and launched 0x Labs, which then spun out DEX aggregator Matcha, powered by its developer-focused product – the 0x API.
Matcha is quickly building a reputation for offering the best prices for the exchange of Ethereum-based tokens. Even where competitors appear to offer better pricing, they usually do it by eliding things like positive slippage. This means traders lose the gains from marginally better pricing on a number of trades by giving up the positive slippage from a single trade.
Imagine 10 trades, in each case selling 1 ETH for USDC at 1ETH ~=1,300 USDC.
A quotes 1,301 USDC;
B quotes 1,299 USDC. Seems like there’s an obvious winner here. But
A pockets positive slippage and
B doesn’t. So after 10 trades:
In this example,
A is 1inch and
B is Matcha. Increase the size of the trades and the effect is magnified.
As we can see, opting for better quoted prices in exchange for forgoing positive slippage is a losing proposition for the trader. At its core, this displays the importance of realized prices versus quoted prices, a reality traders are slowly waking up to. This kind of pricing is less cost-efficient, but more importantly it’s the sort of hidden-fee bank-style behavior that we as a community should penalize.
This isn’t an exaggeration – there are documented cases of as much as 8 ETH in positive slippage on a 38-ETH trade. As the size and number of the trades increase, the likelihood of positive slippage on at least one trade approaches 100%. If you make large enough trades you’ll almost definitely be giving 1inch — or any aggregator that uses this pricing method — at least the gains you appear to get from using it over Matcha.
This isn’t accidental. And neither is the buried-in-the-small-print attitude. ‘The 1inch aggregation protocol provides 1INCH fees through what’s known as positive slippage,’ explains Messari.io — ‘(or as 1inch calls it “Spread Surplus”).’ This is a business model predicated on traders not bothering to do the math on quoted pricing vs realized pricing. As traders wise up to this, 1inch stands to lose reputation and traders.
Isn’t Matcha far behind in market share? No, it’s a reporting problem.
The bottom line is that Matcha is a superior product. Superior products, however, don’t automatically win more market share, and most reporting indicates Matcha lagging behind 1inch. Matcha is growing fast, but an initial glance at market share graphs like this one from The Block give a simplistic and misleading picture.
1inch’s reporting isn’t very scrupulous either. It includes ETH wrapping (ETH<>WETH) as ‘volume,’ while Matcha doesn’t. This isn’t industry standard: Coinbase doesn’t include USD-USDC wrapping in its volume reporting. Why does 1inch? It may be because ETH<>WETH pairs approach 20% of 1inch’s monthly reported volume.
Moreover, what we really need to compare is 0x API volume versus 1inch volume. That’s the only sensible way – the two are the analogous products from each project. When we make that comparison, both growth and market share look markedly different:
We’ve left out ParaSwap (~1% of volume) for a direct comparison. So when you use a apples-to-oranges flawed comparison and inflated self-reported volume, you get one picture, in which 1inch is the undisputed market leader. Adjusting for that, we see a markedly different one:
Switch that out for an accurate view and what jumps out at you is Matcha’s rapid, sustained growth: its market share is ~25% vs. the commonly-reported ~13% in January this year. Notably, the graphs also show strong, consistent growth in this number over the last few months.
So much for Matcha. There’s more to 0x.
0x market makers earn more than the reported figures too
0x suffers from the misperception that it’s somehow old-fashioned (by crypto standards), left over from some prior stage of the evolution of crypto. For instance, CoinMarketCap refers to Uniswap as a ‘modern alternative’ to 0x — but there is no evidence that Uniswap represents a modernization of 0x, nor is Uniswap an alternative to 0x. In fact, 0x sources from Uniswap. “In short,” says Messari.io, “it’s aggregators who compete for traders, while it’s AMMs that compete for trades.” They’re complements, not competitors.
As insightful as Messari can be, their info is sometimes out-of-date or incomplete. Messari says 0x is a company that ‘is not managing a decentralized exchange itself’ — in fact, 0x manages Matcha; it talks about 0x Launch Kit, which was deprecated six months ago.
Other sites misreport because their reporting model doesn’t match some part of Matcha’s operating model. For instance, CryptoFees is a commonly-screenshotted source of project fees information, especially on crypto Twitter. But its reporting doesn’t show 0x fees accurately because it focuses on on-chain fees and most of 0x’s fee model lives off-chain.
Correcting for this gives an even more dramatic result than the market share numbers we reviewed earlier. It shows 0x participants earning an estimated $510,000 in 24 hours, placing fifth behind only Bitcoin, Ethereum, Uniswap, and SushiSwap – a 32x difference compared to what CryptoFees reports.
0x uses versatile liquidity sources — ideal for the emerging hybrid MM/AMM DeFi market
There’s a final, more abstract, but equally crucial point: 0x is often confused with an open orderbook-only model; when in fact, it sources from a superset of liquidity models — RFQ, aggregation, and so on. That makes 0x extremely well-positioned to serve a variety of traders and market makers.
What does this mean?
It means the DeFi space is attracting more professional market makers, and seeing rising demand for more competitive pricing.
Hasseeb Qureshi lays it out in Unbundling Uniswap: The Future of On-Chain Market Making:
“Fully algorithmic AMMs will always have a place in DeFi. They will be critical for contract-fillable liquidity, they are amazing for incentivized pools and bootstrapping liquidity for long-tail assets. But the majority of volume in crypto has always been power-law distributed across the core trading pairs, and almost all of the flow on DeFi today is from retail buying and selling regular assets from an interface. I expect the majority of DeFi volume will become dominated by professional market makers via mechanisms such as this.“
Professional market makers will make their way into DeFi as volumes grow because there are too many retail investors who stand to benefit — and an opportunity to make money too big to ignore. This is a ‘when,’ not an ‘if,’ and it’s already happening. When that happens, 0x will be best-positioned to serve them because of its focus on a superset of liquidity models.
Conclusion: we’ve slept on this too long
0x has been misunderstood (and misreported on) by many in the crypto press, as well as by traders. Other voices repeat what they think are authoritative viewpoints and accurate stories, but the facts tell a different story. Some of this is down to ‘reverse-bagholder bias’ — investors who lost money after the $ZRX peaks in 2017 discount the project without further thought. It deserves better and so do we. As the market sheds this bias and the performance of 0x products like Matcha becomes impossible to ignore, investors will recognize this and act on it. Like all things in crypto, when it happens, it’ll be quick.