Initial Coin Offerings (ICOs) also known as token sales are being used to drive network effects around specific applications (dApps) rather than the common building blocks (protocols) that make applications possible within the Ethereum framework. And that’s a problem according to Will Warren, the Co-founder and CEO @0xProject.
To develop building blocks faster we must embrace a philosophy of standardization and decoupling. Unfortunately, the current culture surrounding token sales has created incentives that do not align with these beneficial practices, stated Warren.
App coins and protocol tokens are two completely separate classes of digital assets. Protocol tokens provide the financial incentives needed to drive a cryptoeconomic protocol which may or may not be implemented within an Ethereum smart contract.
Decentralized applications merely facilitate access to protocols for a particular use case and have no cryptoeconomic mechanisms. The current trend of coupling dApps to their underlying protocols leads to redundant smart contracts that impose unnecessary costs on end users. For non-native protocols to be standardized and future-proof they must incorporate a decentralized update mechanism; such an update mechanism is likely cryptoeconomic in nature.
Warren’s 0x Project is an attempt to address these problems. And according to their white paper:
We describe a protocol that facilitates low friction peer-to-peer exchange of ERC20 tokens on the Ethereum Blockchain. The protocol is intended to serve as an open standard and common building block, driving interoperability among decentralized applications (dApps) that incorporate exchange functionality. Trades are executed by a system of Ethereum smart contracts that are publicly accessible, free to use and that any dApp can hook into. DApps built on top of the protocol can access public liquidity pools or create their own liquidity pool and charge transaction fees on the resulting volume. The protocol is unopinionated: it does not impose costs on its users or arbitrarily extract value from one group of users to benefit another. Decentralized governance is used to continuously and securely integrate updates into the base protocol without disrupting dApps or end users.
At a fundamental level – 0x is an open protocol for decentralized exchange on the Ethereum Blockchain and is intended to act as a basic building block that may be combined with other protocols to drive increasingly more complex Blockchain applications. It uses a publicly accessible system of smart contracts that can act as shared infrastructure for a variety of dApps. In the long run, open technical standards tend to win over closed ones, and as more assets are being tokenized on the Blockchain each month, we will see more dApps that require the use of these different tokens. As a result, an open standard for exchange is critical to supporting this open economy.
Open protocols should be application-agnostic. Decoupling the protocol layer from the application layer provides mutual benefits for dApp developers and end users alike.
Summary
- Off-chain order relay + on-chain settlement = low friction costs for market makers + fast settlement.
- Publicly accessible smart contracts that any dApp can hook into.
- Relayers can create their own liquidity pools and charge transaction fees on volume.
- Standardization + decoupling = Shared protocol layer →
- provides interoperability between dApps
- creates network effects around liquidity that are mutually beneficial
- reduces barriers-to-entry, driving down costs for market participants
- eliminates redundancy, improves user experience and smart contract security
- Decentralized update mechanism allows improvements to be continuously and safely integrated into the protocol without disrupting dApps or end users.
See website here for more information and whitepaper.
