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r/0xProject•
mattytay0x

ZEIP-31 AMA: New 0x Network Economics | Monday 11am PT, April 15th 2019

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We have published a draft for ZEIP-31, which proposes an upgrade to the 0x protocol to utilize new ZRX token economics. ZEIP-31 proposes new network economics that are intended to create the incentives necessary for effective token-based governance, set up the community to sustainably fund ecosystem growth, and reward market makers for providing liquidity.

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Under the proposal, takers pay a small protocol fee on each 0x trade. Market makers (MMs) receive a liquidity reward that is proportional to: 1.  the protocol fees generated from their orders and 2. their stake of ZRX tokens. MMs who do not own sufficient ZRX to collect liquidity rewards will be able to form a ZRX staking pool for third-party delegators. We aim to include ZEIP-31 in 0x protocol v3.0 in Q3 2019 if approved via token vote by ZRX tokenholders.

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The 0x Core Team is very excited about this proposal and is looking for feedback from the community! After reading through all the ZEIP-31 content, feel free to start asking questions in this thread. We will begin answering inquiries on April 15th at 11am.

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ZEIP-31 Resources

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Posted Apr 11, 2019, 5:48 PM UTC · edited

5747
sharpieeraseme•

Very interesting and novel approach. Surprised not to see more discussion on this. Incentive to provide liquidity. Great video by Peter. I’ve never heard of anything like this before.

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Lifeofahero•

First of all, excellent work! This has been a long road and a lot of us are excited to see progress in this area.

"MMs can contribute stake on their own behalf, or establish a ZRX staking pool that allows third parties to delegate stake to them. Each staking pool specifies a fixed percentage of future liquidity rewards to be shared with the pool’s set of delegators. Establishing a staking pool allows MMs to participate in the liquidity reward program, without locking up funds that may otherwise serve as working capital."

Does this mean passive ZRX holders can join a staking pool for market makers?

If that's true, Coinbase Custody could offer a ZRX staking service for institutional users, however, that doesn't address retail users, which means more retail focused staking pool services will start to appear.

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willwarren890x •

Ideally there will be a number of staking interfaces and anyone with ZRX will be able to participate.

Tokenholders need to proactively select one or more MMs to delegate their ZRX to. One factor to consider as a delegator is the percentage of liquidity rewards a MM sets aside for the collective group of delegators. MMs that provide significant liquidity will likely have leverage over tokenholders early on since the MMs are the scarce resource. They might offer X% of their total liquidity reward to be split proportionally among all delegators according to each delegator's contribution to the staking pool. Therefore, delegators will also want to consider the number of ZRX tokens that are already contained within a MM's staking pool.

Expressed another way, as delegator j delegating to MM i's staking pool, my reward r_j will equal

r_j = X_i * (z_j/z_i) * r_i

where X_i is the percentage of liquidity rewards shared by MM i, z_j is number of ZRX tokens staked by delegator j, z_i is the total size of MM i's staking pool, and r_i is the total liquidity reward earned by MM i's staking pool.

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steeneen•

this is very well researched. i had to read through everything a couple times to get it all down. i'm curious how you think this will affect the relayers. how will they need to evolve to build a viable business? were 0x relayers excited about this proposal??

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BambooRelay•

The team at Bamboo Relay is excited about the proposed changes.

In our view this should bring stakeholders in the protocol into better alignment.

I would also mention that the Coordinator that is currently being developed will lead to a far better experience for Market Makers and users as a result.

Standing limit orders in an order book are free options for takers - but when makers are unable to cancel these (quickly enough or by having to go on-chain), they become option contracts with zero premium.

The Coordinator directly addresses this - and goes even further with a selective delay - so market makers wont be assuming so much risk.

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steeneen•

that is really encouraging to hear!

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willwarren890x •

Thank you for taking the time to dig into the proposal u/steeneen.

My impression is that the viability of relayers and the broader ecosystem depends on two things in the near term (1) the number of interesting new assets and/or underserved markets that are uniquely enabled by tokenization/permissionless smart contracts and (2) the amount of liquidity that can be brought into these markets by lowering the barrier to entry for MMs and through incentivization.

The core team is doing its best on (1) by supporting relayers and other infrastructure projects at the application layer via the Ecosystem Acceleration Program, Infra Credits, longer-term R&D, Coinbase Earn, and other efforts. We believe that ZEIP-31 combined with solid MMing tools puts us on the right path for (2).

were 0x relayers excited about this proposal??

I want to be careful not to generalize or misrepresent anyone's opinion here. There is quite a bit of nuance to the proposal that I imagine relayers need to dig into and consider on their own. I'd encourage the relayers to communicate thoughts and constructive criticism here in this thread.

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zerohedge101•

Sooo...I just watched Peter on the video. Great job in the presentation BTW.

In a general sense--the intent is to incentivize MM's for add'l liquidity in market(s)--and incentivize passive holders to participate?

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zerohedge101•

After looking at some add'l recent comments, I am picking up some concerns about DEX markets whereby some traders are arbing price differences between DEX exchanges using gas fees to frontrun trades? If there is a protocol fee attached to trades on DEX exchanges built on the protocol, this fee might wash the spread, thereby making this practice obsolete? Did I get that right or am I just thinking tinfoil conspiracy stuff?

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dekz0x •

It is unlikely it will make the practice of arbitrage obsolete. There’s still money on the table. But when multiple arb bots participate in a priority gas auction rather than high fees being paid to the miner, the protocol is able to share in these fees and distribute them back to the MM.

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zerohedge101•

Good point about the miner...thanks much

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oaktownjerk•

Your understanding seems correct. That was my read on it.

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usuallyiusually•

Very exciting direction, Peter & Will! I have a series of questions about how the overall architecture fits with the goals of the economic design. All of these Qs stem from the role of TECs, described in Part 2:

Trade execution coordinators (TECs) are little services relayers can opt into. These coordinators provide a variety of benefits including protection against front-running, innovative marketplace mechanics, and soft cancels. They can do this while still allowing unrestrained liquidity sharing.

  1. It seems like TECs are a necessary module to avoid front-running and collisions from orders floating in the P2P network. If thats correct, then is there a risk that a single TEC becomes the schelling point for all trade ordering, and thus a silo for liquidity (in the same way matching relayers are?)

  2. A specific concern is that a TEC operator is incentivized to 1) silo liquidity 2) fork away from the canonical 0x contracts 3) redeploy the logic of liquidity rewards for MMs, but with their own token. So long as MMs get the same economics from the TEC operator, what reason is there to use the canonical 0x instance? Have you considered economic rewards for TEC operators to incentivize them to stay in the canonical 0x network?

  3. Could TECs be replaced with a blockchain where independent nodes run consensus on trade ordering, and are rewarded with 0x tokens for doing so? This seems like it'd offer strong network effects around a single liquidity pool, with both the ordering function and MMs rewarded directly in the economic design. Have you considered this approach? (I think this is what Binance is doing with their DEXchain, a fork of Cosmos SDK.)

  4. If the architecture described in #3 isn't completely off base, what are the key reasons for prioritizing the current approach?

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willwarren890x •

Great questions u/usuallyiusually, thank you. I think it is important to point out that 0x protocol is designed as a modular building block that developers can use in whatever way is best for their use case (p2p, OOB, matching, TEC, auctions, commit-reveal, all token standards and asset classes). The smart contracts can be extended or composed with other systems to enable custom market designs and custom order types. In addition to highly liquid markets where trade execution is critical, we hope 0x protocol will be used to facilitate a long-tail of markets.

  1. TECs prevent front-running/collisions while still allowing for networked liquidity. Some relayers will find networked liquidity appealing for their use case, others may prefer matching, or even virtual settlement similar to Ethfinex (bridging/mirroring CEX orderbook) or IDEX (low-latency UX) (Note: ERC1155 support makes it easier for relayers to cleanly implement virtual settlement). For markets where trade execution, soft cancels, and networked liquidity are desirable, trading activity could definitely centralize around a single TEC.
  2. For existing 0x traders to move to a more decentralized TEC that sits on top of 0x, switching costs should be relatively low as orders for both TECs can just be aggregated onto a single orderbook with zero disruption to traders as they transition over. For existing 0x traders to move to a centralized TEC that sits on a fork of 0x, switching costs should be high because every trader will need to opt-in to the fork to access the associated orderbook. Costly and harder to coordinate. The community treasury is also intended to create a financial Schelling point; it doesn't make sense to commit to a fork that doesn't have the financial resources necessary to improve and maintain itself.
  3. Yes! This is exactly what we are working towards, at least from an architecture standpoint. Our work with the Starkware team is an initial step towards a super scalable, cross-chain DEX that is responsible for trade execution. You can learn more about our early work in Remco's roadmap post. I imagine we have 2-3 years of intense R&D ahead of us before the tech becomes feasible w/o introducing significant points of centralization. There will probably be a number of teams that rush out and monetize centralized solutions, but this approach doesn't align with our mission and vision for the future.
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willwarren890x •

AMA for Relayers:

Digging into the technical details of ZEIP-31 and how it effects the ecosystem is interesting. But a number of these questions will be better answered by relayers than the 0x core team. Please respond to this post with your questions for relayers and hopefully relayers can share their thoughts.

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willwarren890x •

How do you feel about setting aside a portion of protocol fees to fund a community treasury that is controlled by tokenholders? What would you like to see these funds used for?

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willwarren890x •

How do you view the pros/cons of ZEIP-31 given your relayer model (p2p, OOB, matching, other) and target market?

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mattgeale•

Proposal seems very interesting and well thought through. Great work to all involved. My question my be a simple implementation issue.

I hold ZRX on a hardware wallet and want to start market making using a trading bot (say Hummingbot). I don’t want to delegate as I would get 10% less of the liquidity reward. But, and please correct me if I am wrong, trading bots cannot use hardware wallets to trade. So under the current proposal there will be a trade off between less 10% for liquidity reward or less secure wallets that are required for making making bots.

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0x_hysz•

@mattgeale market makers will have the option to use multiple addresses, so you can keep your ZRX on a hardware wallet and trade from a hot wallet.

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b0xTeam•

I'm probably a bit late to this thread, but my thought on this is that protocol level fees in order to hedge MMs at the expense of arbitrageurs is an excellent idea that will increase liquidity. However, I believe that the α parameter of the Cobb-Douglas function should be set at α=0 to maximize liquidity for ZRX. The total gain to liquidity that results from hedging MMs is likely to be small to moderate. As you increase the value of α you are funneling those efficiency gains into value capture for the token. There is some (small) value α that keeps the protocol at neutral liquidity relative to the current state. It is possible that raising α too high will actually erode liquidity for the protocol at the expense of value capture.

While I understand the necessity of value capture for the long term sustainability of the protocol, 0x needs to first prioritize liquidity above all else.

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Lifeofahero•

While I understand the necessity of value capture for the long term sustainability of the protocol, 0x needs to first prioritize liquidity above all else.

So you'd prefer a separate ZEIP to vote on parameters of the Cobb-Douglas function, similar to how MKR holders vote to increase the stability fee for single collateral Dai? I get where you're coming from. I wonder how the 0x team can avoid some of the negativity with increasing fees if they go that route.

For example, let's say your theory works. They set the CD function to 0 and the other improvements start bringing in liquidity. Then they have a separate ZEIP to increase the CD function, but then it starts lowering liquidity. So the team starts playing around with what's the optimal CD function, except this time there's serious liquidity on the protocol. Orders of magnitude more liquidity similar to Maker. Suddenly ZRX voting has weight and the team finds themselves in a similar position as Maker. Twitter and Reddit discussion starts to increase etc. Just a thought.

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pr0nh0li0•

I see you had some input from relayers and developers on this--can you give us a high-level overview of the input you've had from them so far? What's been their biggest concerns?

Because this arguably may introduce some economic friction to the protocol, I could imagine some developers may also closely associate this effort with ZEIP 28. I.e. "I'd be willing to accept a protocol fee as a potential point of friction for users, but only if the friction introduced by ZRX as fees is removed."

The Venn Diagram in the Medium post for ZEIP 31 also suggests that the roll of ZRX as fees is not working for its intended function as well as hoped. I understand ZEIP 28 was written by someone not on the core team, but do you see these ZEIPs as intertwined at all internally?

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willwarren890x •

Ah yes, this wasn't communicated clearly in the post: ZEIP-28 and ZEIP-31 would be implemented together.

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polezoCommunity Ambassador•

Does that mean we can effectively treat them as a single ZEIP? Or will ZEIP 28 be voted on independently first, and ZEIP 31 voted on if ZEIP 28 passes?

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willwarren890x •

These two ZEIPs and a number of others would ideally be bundled together and shipped with v3.0. Then there would be a single vote on the integration of v3.0. But before we get that far, we need to first discuss ZEIP-28 and 31 with the community, dig into the open questions, and get a sense for how different stakeholders feel about the proposed change.

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Mindsink•

Would the community benefit from a visual display of the communal discourse process per major implementation that requires a vote? You laid out a road-map of objectives broadly that would make up the 3.0 implementation per communal vote. Discussing Zeip-28, 31, and a number of other aspects that would encapsulate the 3.0 vote. For most constructive communal oversight the community theoretically could benefit from visually being able to view a progress metric display towards final implementation of the 3.0 update by viewing each major subgroup that composes the implementation package. The community discourse "terminal" could be a data tool that could direct hive focus towards topic areas that need more focus energy. Community members involved would naturally begin to work towards filling the void with research, participation interactivity. Each stage could show time metrics that are allocated towards meeting the ultimate consensus objective. This portal tool could be vastly important towards a future where tokenized voting is used in many areas of hive progressive self governance.

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zerohedge101•

See my other post/question, but I am picking up that real world problems have surfaced on exchanges and that this (newer) fee might help solve the problems...?

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polezoCommunity Ambassador•

My understanding is that under the new proposals, it would be required to stake and market make (or stake with market making pools) to take a share of profits from the new protocol fee (ZEIP 31), but it would not required to pay fees (ZEIP 28).

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marmavresearch•

Is the new protocol fee a required fee (which seems to be best) or can the fee be opted out of? Thanks

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polezoCommunity Ambassador•

It would be required.

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zerohedge101•

Stake pools/MM's would share in the fee to offset operational pool/node costs and/or offset trading costs?

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0x_peter0x•

It is to offset trading costs and to encourage the MM to quote a lower spread.

The MM signs an agreement that

  1. associates his trading activity with a set of Ethereum address (or contract)
  2. specifies the percentage of rebate income he pays to the ZRX delegators who stake him.

Other than this one-off event, there are zero operational costs borne by the MM. After signing a contract, the MM can continue trading as normal.

We expect the MM to quote a slightly lower spread as he will now receive additional income (say USD$0.05 to USD $0.075 on average) whenever he completes a trade.

The taker is expected to pay

  1. a lower spread if he offers a sufficiently low gas price. The ability to obtain a lower spread should make the platform slightly more attractive to retail traders.
  2. a higher spread if he offers a high gas price. This additional charge on high gas price transactions helps to recoup a portion of the money MMs lose to arbitrage.
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willwarren890x •

AMA for Market Makers:

Digging into the technical details of ZEIP-31 and how it effects the ecosystem is interesting. But a number of these questions will be better answered by existing market makers than the 0x core team. Please respond to this post with your questions for MMs and hopefully a few MMs will share their thoughts.

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willwarren890x •

How do you view the pros/cons of ZEIP-31 given the scale of your market making activity, your target markets, and strategy?

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willwarren890x •

If you are a MM that is taking advantage of arbitrage opportunities across different DEXs on Ethereum such as Uniswap, Kyber, Bancor, DDEX, and 0x relayers: how do you think ZEIP-31 could impact your strategy or the performance of your current strategies?

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nijita0x•

Would it be possible for token hodlers to do MM/provide liquidity in a layman way as in Uniswap?

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mikke012•

This is an extremely complex mechanism and not explained very simply...
In my opinion the staking reward is not clear enough to simple token holders who just believe in the protocol future but are not Market Making. How will be decided the % interest rate on renting our own tokens to MM? How the tokens will be protected? (Ie. Tokens need to be sent to the MM ETH address or can stay in the simple user ETH one? ) Why would MM pay an interest rate or share his revenue on an asset he has an interest to hold for his short and long term ROI?

Also, how this fee on takers will compete with other non 0x DEX? (Binance...)

Don’t you think simple holders and relayers who bet on your protocol today should also have a financial incentive other than value increase of the asset for the risk taken? Why would investor A (not MM) invest in 0x today instead of ETH which he will be able to stake soon with a nice return?

Thanks for your answers

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pr0nh0li0•

How will be decided the % interest rate on renting our own tokens to MM? How the tokens will be protected?

Not on the team but this will almost certainly be decided by the market. Market making firms will compete over rates to get users to stake with them. There are several other staking protocols that already have staking market economies like this.

Don’t you think simple holders and relayers who bet on your protocol today should also have a financial incentive other than value increase of the asset for the risk taken?

Relayers still have a need for governance, and I suspect many will also market make or at least work with market makers pretty directly (many already have close relationships with market makers).

Re: regular holders, Holders of Bitcoin don't have financial incentive other than "value increase of the asset for the risk taken." Neither do holders of Eth (at least not until proof of stake, and even then you'll need to have at least 32 Eth or rely on trusting a pool). If you don't have personal need to use the native asset of any protocol and are only someone making a "bet" you need to evaluate how much others value the token's use enough for the token's scarcity to drive its value. There will still be opportunities for individuals to stake in pools here, but it will also require careful evaluation of which market making firms are worth staking with.

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iammagnanimous•

I was planning on using hummingbot arbitrage strategy. Will this not negatively affect the possible succes of this product?

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0x_peter0x•

This program is likely to have a slight negative effect on the profitability of arbitrage strategies. On the flip side, liquidity provision on 0x relayers is likely to be slightly more profitable. Balancing these tradeoffs in favor of liquidity providers is critical to the overall growth of the ecosystem.

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Vol_Har•

Will MM have to pay their small protocol fees in ZRX or will ZRX only be used to decide what kind of share of the fees the MMs will earn? If it's the latter, that would be great! Paying fees in ZRX is a hassle

Update: found the accompanying article and the asnwer:

"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 we refer to as an epoch. At the end of each epoch, MMs that stake ZRX tokens collect a portion of the accumulated pool.

(...)

Once MMs collect their liquidity rewards, the remaining ETH is passed into a community treasury that tokenholders control via a DAO."

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RogueAdventurer16•

​

With α=1, the liquidity reward is solely based on ZRX stake size and tokenholders are effectively collecting rent. With α=0, the liquidity reward is solely based on liquidity contribution, there is no financial incentive to stake ZRX tokens, and the reward function is equivalent to a system in which the protocol fee is directly passed to the MM upon settlement of each trade.

Maybe I need to brush up on my math here, but if α = 1, wouldn't (zi/z hat)^(1-α)=1? Meaning, liquidity reward is solely based on liquidity contribution (ti/t hat)^α ?

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RogueAdventurer16•

Thus, wouldn't the lever to change ri be the liquidity piece of the function?

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MusaTheRedGuard•

you're right, seems like a typo

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ethbtc•

Isn't the liquidity staking sort of a waste for the locked up capital? It's not like it inherently serves any purpose.

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sarahT03•

I'm curious how you think this will affect the relayers.

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