Ethereum’s liquidity protocols continue to grow in volume. The past 18 months for prominent DeFi DEXs like Uniswap, Kyber, and others have been filled with upward trends across volumes, fees, and more. 

One of the emerging projects in this sector is 0x. While the liquidity protocol has always been recognized as a backbone to the Ethereum ecosystem, fundamental metrics are beginning to live up to its reputation. In April 2020, 0x put up solid numbers competing with other major DEXs as the liquidity protocol aggregated over $90M in monthly volume. This is on par with Kyber ($92M) while Uniswap dominated the month with $143M. However, the AMM-based liquidity protocol is likely reporting inflated volumes as HEX – the controversial ponzi game-like project – managed to trade for $50M+ in volume in the month of April alone.

Background on ZRX

0x is a permissionless liquidity protocol built on Ethereum for building decentralized exchanges (DEXs). The protocol connects liquidity providers and incentivizes market makers to fuel trading. It’s important to recognize that 0x is not a DEX itself but simply the infrastructure for developers to build DEXs by connecting liquidity providers across a range of sources. 

In late 2019, the 0x team released v3 of its liquidity protocol featuring major improvements to deepen liquidity and streamline the developer experience for building on 0x. The upgrade also the protocol’s economics for its native token, ZRX, as well as a powerful set of bridge contracts that aggregate liquidity from 0x and other major liquidity protocols like Kyber, Uniswap, Oasis, and others. 

The new ZRX staking mechanism provided 0x market makers (MMs) with economic rights over the protocol and encouraged governance participation by giving MMs ETH-based rewards and additional voting power for providing liquidity. What we’re seeing is that the v3 upgrade is ultimately serving as one of the pivotal changes for 0x as, since the upgrade, the protocol has seen a surge in volumes, trade sizes, and annualized earnings. 

Now, 0x is gearing up for the release of Matcha – their consumer-facing DEX set to rival Uniswap V2 and Kyber Swap. With this, we expect the protocol to continue seeing growth throughout the rest of the year.

0x Analysis 

In the first week of January, 0x volumes were a mere ~$590,000 with the average weekly volume in the month reaching just shy of seven figures for a total of ~$887,000. Fast forward to the month of April and the liquidity protocol increased its average weekly volume by 3x, hitting $3M in trading volume every week. Like many exchanges (both centralized and decentralized), volumes hit record highs in light of Black Thursday – a high-volatility event that cut the price of many crypto assets in half. 

In addition to the fundamental increase in trading volume, the average trade size for 0x has seen a substantial uptick over the past 18 months. In 2019, the average trade size was less than $500. Now, nearly halfway through 2020, the average trade size for 0x users has increased by over 2x to reach $1,182 per trade. With that, the liquidity protocol recently hit ATHs in average trade size in early May, surging to nearly $2,200 per trade. The combination of significant increases in both trading volumes and trade size is a foundational indicator that 0x has seen more usage and is now beginning to fulfill its reputation in the space as a critical piece to DeFi and the overarching Ethereum ecosystem.

The other key metric when looking at liquidity protocols is the fees generated. With the v3 upgrade now shifting Market Maker (MMs) rewards to ETH, the incentive to provide liquidity to the 0x ecosystem becomes increasingly more attractive – especially with the positive trend in volumes. At the beginning of 2020, the protocol only generated ~$53 in daily fees to liquidity providers. Looking at fees four months later in April, protocol revenues have increased by 550% to the tune of $343 in daily fees generated. As a result, cumulative fees for 0x are likely to surpass $50,000 by the time of publishing, surging by over 12,000% year-to-date from its starting point of $402 in total fees.

Zooming out from daily fee revenue, we can look at the growth in projected annualized revenue on 0x. Naturally, the protocol has seen a substantial rise in revenues since its inception in 2017. The protocol’s 20-week moving average on projected annualized revenues recently hit its peak for around $1.5M in liquidity provider revenues. With that said, 0x still lags behind other major liquidity protocols and DEXs in terms of annualized earnings. 

According to Token Terminal, Uniswap currently leads the pack, projecting to reach $5M in earnings as of writing. This is followed by dYdX and Kyber which are estimating roughly $2.5M and $2.2M in total revenues, respectively. Finally this is followed by 0x which is projecting around $1.1M in annualized revenues, beating out Synthetix – the derivatives protocol – as they’re reporting just shy of $1M in projected earnings. 

Key Takeaways

0x is beginning to live up to its reputation. Since the v3 upgrade, the liquidity protocol has been competing with other major Ethereum DEXs while the whole sector is lifted by increased volumes across the board. With fundamental metrics like volumes, average trade size, and projected earnings all reaching all-time-highs within the past three months, ZRX tokens are slowly beginning to realize a fair valuation. At the start of the year, ZRX’s PE Ratio was astronomically high, sitting at around 7,750.

However, the surge in protocol revenues have brought the token’s PE ratio down to a more manageable number of 294. For reference, Kyber’s KNC holds a PE of 62.50 while Synthetix sits at around 152 as of writing. 

All in all, 0x’s launch of ZRX’z token economic upgrade has served rather well. The addition of the 0x API is allowing the liquidity protocol to realize its potential as a sector-leading liquidity protocol. With ZRX tokens acting as one of the most valuable DeFi assets in the space today, it’s a positive sign to see the speculative and fundamental valuations reaching parity.