[ZRX] - MCD collateral application

Hi everyone,

we propose to include ZRX as a collateral asset for MCD following the latest collateral onboarding process.
As a reference, ZRX was already considered as potential collateral in the past community poll.

Here is the filled MIP6 template

1) Who is the interested party for this collateral application?

0x Core team

2) Provide a brief high-level overview of the project, with a focus on the applying collateral token.

0x is an open-source protocol that facilitates the decentralized exchange of Ethereum assets. At its core, the protocol is composed of a system of smart contracts (“the 0x Exchange contract”) that enables a p2p exchange of tokens between two Ethereum wallets. The two parties agree on and sign the terms of the exchange off-chain, utilizing a common standard message, the 0x order. The 0x tech stack is also composed of a p2p network for distribution of such orders (0x Mesh), plus tools and services (including 0x API) that allow developers to create apps operating on 0x markets.

ZRX is a governance token that allows holders to vote on protocol improvement proposals called ZEIP (ZeroEx Improvement Proposals). In addition to that function, ZRX is used in a stake-based liquidity incentives system that rewards market makers as they provide liquidity in 0x markets. Liquidity providers can increase the accumulated rewards by sharing of their portion with other ZRX holders, who delegate their ZRX to (and 50% of their voting power) to staking pool operators.

Both ZEIP votes and staking takes place primarily in ZRX Portal.

3) Provide a brief history of the project.

0x was launched in 2017, founded by Will Warren and Amir Bandeali. The project leaders were commissioned to drive the development of the protocol by a community of token holders.
Since then, the protocol went through two major versions, with the latest one launched at the end of 2019. This latter introduced a ZRX stake-based incentive system that redistributes voting power to 0x liquidity providers, whose incentives are aligned to the need to grow network effects in the 0x ecosystem. In 2019 the 0x Core team also started working on a decentralized, p2p orders distribution network called 0x Mesh. Since its inception, 0x Core team also developed tools and solutions for external developers to integrate the 0x standard and liquidity in their apps. This effort culminated in early 2020 with the launch of 0x API.

Today 0x is one of the leading protocols used in the DEX (decentralized exchange) industry, with tens of projects that integrate natively the protocol and its liquidity, across DeFi and other emerging verticals (such as NFT marketplaces and prediction syndicates).

4) Link the whitepaper, documentation portals, and source code for the system(s) that interact with the proposed collateral, and all relevant Ethereum addresses. If the system is complex, schematic(s) are especially appreciated.

2017 whitepaper
0x v3 specifications
Staking specifications
0x Docs
0x website
ZRX Portal
0x Governance roadmap

5) Link any available audits of the project. Both procedural and smart contract focused audits.

Consensys Diligence Report on Exchange contracts
Consensys Diligence Report no Staking contracts
Trails of Bits Report (Exchange + Staking contracts)

6) Link to any active communities relating to your project.

Discord
Reddit
Forum
ZEIP

7) How is the applying collateral type currently used?

ZRX is a governance token that allows holders to vote on protocol improvement proposals called ZEIP (ZeroEx Improvement Proposals). In addition to that function, ZRX is used in a stake-based liquidity incentives system that rewards market makers as they provide liquidity in 0x markets. Liquidity providers can increase the accumulated rewards by sharing of their portion with other ZRX holders, who delegate their ZRX to (and 50% of their voting power) to staking pool operators.

Both ZEIP votes and staking takes place primarily in ZRX Portal.

8) Does one organization bear legal responsibility for the collateral? What jurisdiction does that organization reside in?

The total supply of ZRX is hard-capped at 1 billion, all of which was minted in August 2017. There are no admin privileges in the token contract that would allow any third party, including the organization that initially minted and distributed ZRX, to control the collateral.

9) Where does exchange for the asset occur?

ZRX can be exchanged in most decentralized and centralized exchanges. It was one of the first tokens listed in Coinbase and in other centralized exchanges.

8 Likes

Hello everyone, checking-in here to see what supplemental information the domain team might need to help push forward the domain greenlight process.

Has the domain team been established yet?

According to Collateral Status Index the expected deadline for domain greenlight is end of this week (05/15)

1 Like

Appreciate the comment by @LongForWisdom in another thread on what are the properties MKR Holders are primarily looking for in collateral:

  • Uncorrelated with major cryptocoins
    I am sure MakerDAO have comprehensive tools to measure that extensively, but I ran something quick on https://cryptowat.ch/correlations (assuming that can be trusted) and it seems that ZRX has a relatively lower correlation with ETH, BTC and BAT. However, ZRX price did slide ~20% on Black Thursday.

  • Large marketcap.
    FWIW, ZRX marketcap has consistently been over $100M in the last 2 years

  • Lots of demand for credit using that collateral.
    I’m not sure I am able to answer this.

  • Decentralized where possible.
    The application highlights that the entity that first issued ZRX tokens does not have any control over the asset.

4 Likes

Hello! Personally it seems to me that ZRX would make a great collateral addition. I did not realize that its correlation was so low vs eth, btc, and bat, that is great! Like you said also the marketcap is great.

I think one issue that should be noted here and which @LongForWisdom has made on several occasions about other tokens is that since ZRX is used by the protocol for staking. Because of this, our protocol would be directly competing with demand for staking. This could potentially limit the utility of ZRX as collateral for dai loans.

Can you speak to what percent of ZRX tokens are staked and this compatibility issue between the ZRX liquidity use case and ZRX as collateral on makerdao?

2 Likes

Very good question.
Currently, there are ~15M ZRX staked, out of a total 1B ZRX supply (~1.5% staking ratio, ~5% of tokenholders with >1000 ZRX holdings).
After the recent ZRX price surge we observed ~1-2M ZRX being withdrawn in the last week (demonstrating that staking demand is pretty elastic based on value perceived by tokenholders).
You can check the total amount of ZRX staked here.

Discussing internally with a few member of the project core team we assessed that this incompatibility does not represent an issue for a variety of reasons

  • current low staking ratio
  • creating an alternative way to put the token to work introduces opportunity costs that will better align tokenholders incentives. For example, current ZRX tokenholders not interested in participating in 0x governance or staking (~hodlers) might be more inclined to use the asset to mint DAI, taking the risk of perhaps losing their ZRX holdings (liquidations) which will eventually pass hands to a tokenholders potentially more interested in participating in the ZRX staking mechanics.
  • No entity is in control of ZRX tokens anyway so this choice is permissionless. Similarly, there are other ways today to earn interest on ZRX today that locks that asset.
  • a safer and useful (through DeFi lego apps) DAI is aligned with 0x’s mission of creating a tokenized world where value can flow freely. It aligns quite directly with the growth of 0x ecosystem (including ZRX stakers) as well, as DAI is one of the most traded ERC20 assets on 0x.
  • there is potentially a way forward to have collateralized ZRX to be used for voting and staking simultaneously, provided that that’s something the 0x community wants to do and votes on. However, I personally feel the circumstances would arise only with way higher staking ratios and with significant (>100M ZRX) debt ceiling
2 Likes

Oracle Team Collateral Onboarding Evaluation

V1.0.5
Author: Niklas Kunkel (Oracle Team)
Contributors:
Date: 05/14/20

Explanation of the Oracle Team Collateral Onboarding Methodology

Economic Impact

How much Dai can be expected to be generated against ZRX?

Concrete Data:
Token Contract Address: 0xE41d2489571d322189246DaFA5ebDe1F4699F498
Circulating Token Supply: 652,985,067* ZRX
Token Market Cap of Circulating Token Supply ( TMC ): $233,932,309
Total Number of Holders: 137,725
Token Distribution: Top 20 holders hold 55.29% of Circulating Token Supply*
Avg Collateralization Ratio of Maker Protocol ( avgCR ): 361.38%

*this excludes:
0x: Ext Dev Pool
0x: Team Vesting
0x: MultiSig 1

Assumptions:

  1. Assume a reasonable minimum collateralization ratio ( minCR ) based off empirical values in collateral portfolio. Since ZRX is likely to be at least as risky as ETH/BAT, let’s assume minCR = 150%.
  2. Market Cap Utilization ( MCU ), the amount of the TMC that can reasonably expect to be deposited in the Maker Protocol, is bounded by empirical values in collateral portfolio.
    Currently the lowest and highest MCU in the Maker Protocol are [0.73%, 3.73%]

Formulas:

Estimated Lower Economic Impact = TMC * MIN(MCU) / avgCR 
Estimated Lower Economic Impact  = $233,932,309 * .0073 / 3.6138 = 472,551.3 DAI

Estimated Upper Economic Impact = TMC * MAX(MCU) / minCR
Estimated Upper Economic Impact  = $233,932,309 * .0373 / 1.5 = 5,817,116.75 DAI

Due to the average of the estimated lower and upper economic impact, the Oracle Team is assigning ZRX a High Economic Impact label

Given the distribution of token holders relative to the total number of token holders, how many users with significant sums of the proposed collateral are we reasonably targeting with this integration?
~1300 people (90th percentile)

Technical Complexity

Determine how complex integrating Oracles for this collateral type would be and how long it would take to implement such a solution.

Is a solution currently not possible because of a key missing component?
There is no immediate indication that ZRX would be difficult to integrate from an Oracle perspective.

Are there enough high quality data sources available to construct a reliable, resilient, and secure Oracle for the proposed collateral asset?
Yes, there are a multitude of quality exchanges we can query price data from.

Can the current tooling support the types of data sources that are needed?
Yes.

Can the current tooling support the types of data modeling that are needed?
Yes, the median model is already supported in the Oracle stack.

Does adding these features interfere with ongoing or planned development of new tooling on the Oracle Team roadmap?
No this should be fairly simple to add and won’t interfere with longterm projects in a meaningful way.

What dependencies (both technical and system), risks, costs, and latency are added to the Oracle Protocol as a function of these added features?
No added dependencies, risks, costs, nor latency associated with adding support for ZRX to the Oracle stack.

Does adding these features require work from other stakeholders such as the Smart Contracts Team(s)?
No.

How long would it take to design, implement, test, and deploy such a solution?
About 1 week to develop and test.

Given the simple nature of the ZRX integration the Oracle Team considers this a low technical complexity project.

Evaluation

The combination of Economic Impact mapped against the Technical Complexity of onboarding a new collateral type can paint a picture of whether an Oracle Team ought to accept, decline, or defer a collateral onboarding application.

Low Technical Complexity High Technical Complexity
Low Economic Impact maybe decline
High Economic Impact accept maybe

High Economic Impact x Low Technical Complexity => accept

Reccomendation

The combination of high economic impact and low technical complexity to implement an Oracle inclines the Oracle Team to accept the ZRX onboarding application should the governance community decide to greenlight the collateral onboarding process.

10 Likes

As the senior lawyer on the 0x core team, I thought it might be helpful if I jumped in and provided additional information on some of the legal questions in the application in case folks are interested.

8) Does one organization bear legal responsibility for the collateral? What jurisdiction does that organization reside in?

For context, the entity that originally minted and issued ZRX is ZeroEx International SEZC, a Cayman Islands-based company that is part of the broader 0x corporate structure. The other 0x entities that help develop the underlying protocol and build products on top of the protocol are based in the US and have the same US parent holding company. As @mintcloud mentioned, none of these entities have any admin privileges within the ZRX token contract.

10. (Optional) Has your project obtained any legal opinions or memoranda regarding the regulatory standing of the token or an explanation of the same from the perspective of any jurisdiction?

Both internal lawyers at ZeroEx (the company) as well as our external counsel have analyzed ZRX from a US securities law perspective. It is our position that ZRX does not represent an investment contract security for several reasons including that the core team has not marketed ZRX as an investment opportunity that would generate returns based on the team’s efforts, the protocol has been in operation and used for almost three years with present functionality for ZRX during that entire period, and there is an independent network of market participants that generate staking rewards and participate in governance from use of ZRX. We take some confidence in our legal position based on the fact that third parties that must conduct a similar analysis, such as exchanges like Coinbase, presumably have come to the same conclusion independently.

I will just add that I am personally very active in the legal discussions around the regulatory treatment of digital assets in the US, and there are new developments in that space fairly regularly which lead me to spend considerable time ensuring our company’s good standing under the law.

11. (Optional) Describe whether there are any regulatory registrations for the token and provide related documentation (including an explanation of any past or existing interactions with any regulatory authorities, regardless of jurisdiction), if applicable.

It is our position that ZRX represents a digital commodity and as such, spot market transactions of ZRX do not require any particular regulatory registrations in the US. As mentioned, I am active in discussions on the legal issues relating to this industry, and frequently communicate with many stakeholders, including those inside the US government.

5 Likes

Thanks, Jason. Understand the (reasonable) reluctance to share legal memoranda in a public forum, but appreciate you laying out the tl;dr. Other projects with ERC-20’s that also performed ICOs (e.g. , Decentraland) should look to the 0x team as an example for voluntary disclosure.