[ZRX] MIP12c2-SP1 Collateral Onboarding Risk Evaluation

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Summary Proposed Risk Parameters

Risk Premium: 4%
Liquidation Ratio: 175%
Debt Ceiling: 5 million
Auction Lot Size: 100,000
Minimum Bid Increment: 3%
Bid Duration: 6 hours
Max Auction Duration: 6 hours
Liquidation Penalty: 13%
Dust: 20 Dai

Outline

  1. Overview
  2. Metrics and Analysis
  3. Risk Parameters

Overview

Protocol Summary

From the documentation:
“0x is a protocol that facilitates the peer-to-peer exchange of Ethereum-based assets. The 0x exchange process works by allowing market makers to signal their intent to trade a specific Ethereum asset at a certain price for a fixed period of time off-chain, where market takers may see and accept the trade by adding their cryptographic signature. The transaction is only settled on-chain and value is transferred between wallets as a final step facilitated by 0x smart contracts. 0x enables anyone to join the network as a relayer by maintaining an off-chain order book where makers and takers can discover one another. Transactions can be executed either point-to-point or broadcast through relayer-maintained order books.”

ZRX Token Value Accrual

With the introduction of 0x v3 in 2019, the ZRX token accrues value in two ways:

  1. Staked based liquidity rewards
  2. Governance function

Staked based liquidity incentive

From the documentation:
“Market makers (MMs) that stake ZRX tokens — directly or by proxy — receive a liquidity reward that is funded through a protocol fee applied to every 0x trade. The fee is denominated in ETH and deposited into a staking contract. Fees are pooled within the staking contract over a fixed window of time, which are referred to as an epoch. At the end of each epoch, MMs that stake ZRX tokens collect a portion of the accumulated pool. Liquidity rewards are a function of fees collected (which is supposed to be a proxy for volume) and ZRX staked (including delegated stake).”

The protocol fee for a trade equals 150k units of gas (this number is configurable) times the gas price. Once MMs collect their liquidity rewards at the end of each epoch, a predetermined percentage is shared with their ZRX pool holders.

From the documentation:
“A market maker, for example, can increase their liquidity reward without exposing themselves to the price fluctuations of the ZRX token. Market makers, in turn, incentivize delegators to contribute their ZRX by paying them a portion of the liquidity reward.”

Governance function

From the documentation:
“Staking pools can also be used to increase voting power. Delegators share a portion of their vote with the pool (50% of their vote goes to the pool operator and 50% is retained by the delegator), amplifying the pool’s impact in governance over 0x. This allows stakers to form cliques within the greater governance system.

Governance over the protocol is conducted by voting on ZEIPs (ZeroEx Improvement Proposals). A ZEIP generally corresponds to a modification or upgrade to the 0x protocol. The ecosystem votes on the proposal, collectively deciding whether the feature will be included in a future version of the protocol. One Staked ZRX equals one vote.”

Metrics and Analysis

ZRX Token Metrics

Daily Active Addresses

There were roughly 700 daily active addresses in the last 2 years on average. This figure increased to ~1,000 in the last month due to the ZRX price rally. To put this figure into context, DAI has roughly 3,000 addresses interacting with the token daily.


Source: Saniment

Token velocity

The token velocity is a rough gauge for how active or passive token holders are. In other words, it can describe how utilized the token is for its intended function (such as trading). Velocity for ZRX has been steadily increasing and indicates user adoption is growing. However, for staked tokens (that are not used as a currency) velocity becomes less meaningful.


Source: Santiment

Daily Onchain Transaction Volume (denominated in ZRX)

Daily onchain transaction volume for ZRX measures about 50m on average and is increasing, although this metric might not be the most appropriate for measuring the health of networks that are staking-based.


Source: Santiment

Daily New Addresses

About 2,000 new wallets holding ZRX are added daily, but the number has been trending slightly downward.


Source: Santiment

Token distribution, return & inflation metrics

A third of the ZRX supply is still held by the team, although the largest chunk (15%) is reserved for incentivizing ecosystem development. Team vesting tokens represent 10% of total supply.

The team unlocks tokens regularly and the inflation figure (data from Coinmarketcap about circulating supply) is increasing by about 10% annually.

Looking at the seniority distribution below, about one third of the tokens have moved in the last year during the time the ZRX price stayed flat (although it experienced a significant price increase in recent weeks). More than 50% of supply hasn’t moved in more than 2 years (indicating potential long term holders).

Token supply ZRX 1,000,000,000
circulating supply 652,985,067 65.30%
price $0.322
market cap 210,261,192
implied market cap 322,000,000
returns tokens circulating inflation since
3m 23.30% 626,287,373 4.26%
6m 32.84% 0.2424 602,053,243 8.46%
1y 1.90% 0.316 597,444,833 9.30%
2y -76.32% 1.36 531,182,473 22.93%
since listed (aug 2017) 570.83% 0.048 500,000,000 30.60%

Source: Etherscan

Source: Etherscan


Source: Nansen

Treasury funds

The team may have already diversified its ETH treasury and converted into fiat. It is hard to estimate current holdings in fiat, but a large chunk of ETH was likely sold in the period between August and December 2017. Assuming a decrease in the ETH treasury corresponds to conversion to USD on the same day, the 0x team has potentially managed to convert their initially raised $24m (at ETH price of about $300) to about $32m (at average ETH price of $380) in the last 2 years and 9 months.

Source: Etherscan

Tokens on Exchanges

About 55% of circulating supply is held on exchanges, which represents a relatively high risk. Of that amount, Coinbase represents more than half of the tokens held on exchanges. Some of the figures below may also indicate inaccurate or inflated ZRX volumes. For instance, OKEx reports similar volumes to Binance, but holds 30x less ZRX in its wallet. Accordingly, the volume figures remain in question and have not been independently verified or confirmed.

tokens on exchanges ZRX
Coinbase 204,157,619
Binance 95,548,252
Bittrex 13,619,611
Bitfinex 13,040,782
Poloniex 11,739,143
Huobi 9,253,542
OKEx 3,040,712
KuCoin 1,703,334
Gate.io 1,074,466
EtherDelta 1,069,322
Crypto.com 816,521
Other 793,602
Bithumb 790,815
Coinone 255,726
HitBTC 118,733
CoinEx 54,237
Hotbit 39,743
Kraken 27,426
Total 357,143,586
out of circulating supply 54.69%
out of total supply 35.71%

Source: Nansen

Source: Nansen

Trading data - CEX Volume

By omitting what we believe are non-relevant and questionable volume figures from exchanges, we can see that most of the volume happens on either Binance or Coinbase with USD and USDT pairs. The daily average volume measures about $2.5m until the recent price rally where volume has increased to about $5 - $10m per day.

Source: Cryptocompare

Source: Cryptocompare

Trading Data - DEX Volume

DEX ZRX Daily Volume 30d median USD Volume
Uniswap $19,740
Kyber $29,032
0x $1,490

Source: Protocol trackers

Volatility

hourly yearly
90d vol 1.83% 171.25%
1y vol 1.33% 124.57%
2y vol 1.50% 140.13%

Source: Cryptocompare

Downside risk

Interestingly, drawdowns for ZRX are more frequent vs ETH when it comes to 5%-15% price decreases, but during Black Thursday, ZRX price decreased about 41% versus ETH which fell 58%.

Source: Cryptocompare

Correlation with ETH and BTC

ZRX correlation with BTC is 0.39 and with ETH is 0.48.

Source: Cryptowatch

DeFi Presence (ZRX used for lending, integration with other protocols)

  • $1.4m ZRX (0.4% of total supply) supplied to Compound, $180k ZRX borrowed, LR = 167%, 5 holders over 50% supply, 0.7% supply rate
  • $250k ZRX supplied to Aave, $50k ZRX borrowed, 2.3% supply rate
  • Other lending markets enabling ZRX borrowing and lending: Celsius
  • 1inch, dex.ag integration

0x Protocol metrics

Stake rate

There is currently only 16.17m ZRX staked out of total 1bn ZRX (1.6%) and there are 10 staking pools, of which 6 are active. The low stake rate could be due to a relatively low yield on staked tokens (1.21% APR), likely due to low trading volume. Additionally, market makers only share roughly 10-20% of their trading fees with stakers.

Source: Dune Analytics

Source: https://yield.netlify.app/app/0x

Source: Dune Analytics

Adoption of v3

Source: https://0xtracker.com/

Relayers (number, growth, v2 vs v3)

Relayers can add a transaction fee, therefore applying the same business model CEXes do. Only a few currently apply the fee, as they have received various forms of subsidies/grants/VC funding and are focused moreso on creating robust infrastructure with higher volumes.

Currently, most relayers are unprofitable and market entry has low barriers to entry due to the availability of ready-made backend infrastructure (i.e. 0x protocol and libraries). They can benefit from the shared liquidity of the 0x Mesh network, where they can (potentially) access deep order books.

Tokenlon appears to have the highest volume amongst relayers, but it has yet to upgrade to v3.

Source: https://0xtracker.com/

0x Protocol DEX Weekly Volumes / Market Share

The market share for 0x across all DEX protocols over the past 6 months is roughly 10%.

Source: Dune Analytics

0x Protocol Weekly Volumes in USD

Volume on the 0x Protocol has been increasing steadily over the past 12 months.

Source: https://0xtracker.com/

0x Protocol Daily Unique Trades

Source: Nansen

0x Protocol Unique Traders

Unique traders appears to be downtrending slightly.

Source: Nansen

0x Protocol Users

0x is tracking the overall user growth in the DEX space.

Source: DeBank

Protocol Fees / P&L Analysis compared to other DEXes

Weekly protocol fees collected measure between $3,000 and $4,000 in the last few months. Only 10-20% of these fees are shared with stakers (which explains the low yield). Annualizing sampled weekly fees amounts to about $180,000. If we assume all v1 volumes will eventually migrate to v3, the annual earnings should amount to approximately $750,000.

Source: https://0xtracker.com/

To put this number into context, see competitive DEX venues below and their projected 12m forward earnings estimates calculated by Tokenterminal.

Top DeFi Earners - 12m estimates

Protocol Earnings Dominance
Uniswap $4,982,184 34.76%
dYdX $2,553,737 17.82%
Kyber Network $2,214,475 15.45%
Bancor $956,471 6.67%
Loopring $935,131 6.52%

Source: https://tokenterminal.xyz/

Miscellaneous

  • Currently there is an admin key that can wind down the 0x Protocol, although there are initiatives in place to upgrade to a proxy model (proxy contract with storage plus upgradable library contract for methods and logic implementation).
  • 0x governance works as follows https://0x.org/zrx/vote
    • Voters do not need to be stakers (merely token holders)
    • Votes are revealed off-chain. Protocol upgrades are of course executed on-chain, but others are executed offchain (i.e. APIs, libraries, toolings, project fundings).

Summary of Notable Risks:

  • Version 3 staking is still gaining traction, but currently the staking yield is low.
  • Low profitability versus competitors in the DEX space.
  • Low ZRX token volume on DEXes.
  • The majority of ZRX trading happens only on Coinbase and Binance.
  • Large amount of tokens on exchange: 55% of circulating supply
  • Annual inflation of circulating supply up to 10% (due to token vesting), with one third of supply still locked. Roughly 11% of ZRX tokens are still in team vesting account.
  • Shorting ZRX is available on Compound, Aave, Bitfinex and Binance. After the recent price increase, short open interest increased.
  • Some reports indicate an overvalued ZRX token. Market cap of 0x measures 1.7x of Kyber, although Kyber makes significantly more money from fees.
  • Most relayers don’t have a defensible business model. Introducing additional fees may make 0x less competitive versus other protocols.
  • Admin key can wind down the protocol.

Proposed Risk Parameters

Risk Premium: 4%
Liquidation Ratio: 175%
Debt Ceiling: 5 million
Auction Lot Size: 100,000
Minimum Bid Increment: 3
Bid Duration: 6 hours
Max Auction Duration: 6 hours
Liquidation Penalty: 13%
Dust: 20 Dai

We use the model described from the governance call here: a credit risk model that estimates the loss distribution of a portfolio of ZRX Vaults. Risk parameters are estimated from this hypothetical loss distribution. Inputs to the model are derived from trading data along with stressed input parameters. A link to our model specification with inputs and outputs can be found here. Auction parameters have been selected to mirror those for ETH, with the exception of the lot size that has been normalized to a ~$20,000 amount

Lead Researcher: Primoz Kordez

Sources:
2017 whitepaper
0x v3 specifications
Staking specifications
0x Docs
0x website
ZRX Portal
0x Governance roadmap
V3 explained
0x Tracker
Voting
Staking
Staking ROI
Santiment
Nansen
Debank
Tokenterminal
Dune Analytics DEX Volume
Dune Analytics Staking Stats
Cryptocompare

14 Likes

That’s a comprehensive research, @cyrus and @Primoz

For the convenience, here is the chart layout for the metrics mentioned in this report:

https://app.santiment.net/studio/zrx-network-overview-345

ZRX is something I would like to see added. I am hopeful that there will be more DEX volume before MakerDao adds any substantial debt ceiling for this token though. With all of the growth in the DEX space, this should not be too far off.

1 Like

Governance Poll is now live.

https://vote.makerdao.com/polling-proposal/qmtq2u4vfakyk8mqkcdvclo6dqihims6smx1fvkru8m7sz

1 Like