Just some observations on ZRX tokeneconomics

Was pulling some data today and wanted to share it here, mostly as an observation and maybe trigger a conversation around token economics
*(excluding Pool 37, as they’re not sharing rewards so not relevant)

  • In the last 30 days protocol fees totaled $361619 (can calculate it on Dune)
  • The total amount of ZRX staked is now worth approx. $15m (30m ZRX - 7m staked in Pool 37). Source

Assuming staking pools share 33% (equilibrium with current alpha parameter), that means the rough yearly return for ZRX holders is currently ~9.5% ( 362 * 0.33/ 13000 * 12 )

As a reminder, protocol fees are collected only on Open Orderbook liquidity, which is less than 5% of total volume settled via 0x contracts.

Just a validation point that if we were able to find a way to capture value from other parts of the 0x markets without affecting price competitiveness, the returns for ZRX staking could match and surpass the ones seen on DeFi, without introducing yield farming / inflationary mechanics.

The hard part if finding a model that:

  • doesn’t affect overall price competitiveness. Pretty much, this should not affect the competitiveness of 0x API vs other aggregators. If the fee worsens prices users get, they will use another product.
  • is implementable in smart contracts. This is not always easy. For example, we discussed in the past adding a flat % fee on trades. This not easy because there is no real way to know the price of an asset from a contract level. You need oracles (and it’s not good design to add dependencies). If the protocol collected a % fee on the asset itself, it would be required to swap them into ETH at the end of every epoch. Complicated
  • is gas-efficient in computing and extracting the fee (for reference, it takes approx 9k gas just to extract the current protocol fee). This is not a trivial problem, and especially painful when the traded amount is low.

Curious if this sparks any reactions or ideas!

10 Likes

I tried to tackle this here:

Uniting communities through cross-chain solutions, by giving governance incentives, could draw volume outside of Ethereum, saving users fees and allowing the marginal difference in transaction fee savings to be where you can cut ZRX into the equation.

Example:

Option on Matcha to buy Ethereum on Harmony One’s blockchain. Savings in fees, taking into account liquidity for the best price, is $15. 10% of the fee is used to buy hZRX and pair with Ethereum and add to liquidity on Harmony’s blockchain. User can later redeem accrued hZRX/Ethereum, and it can be used for voting.

I’m not a dev, so this could be a pipe dream. If it is, let me know.

-Drew

2 Likes

Thanks for kicking this off mintcloud! “Returns for ZRX staking that match and surpass the ones seen on DeFi” might be a bit of an overstatement. But, on the other hands, 0x staking returns are much lower risk and much more sustainable in the long-term relative to inflationary yield farming, so maybe it’s not a fair comparison.

Theo brings up an important point about monetizing the 0x tech stack. One of the key limitations we face is that it is expensive to levy a fee. If we try to collect a $0.50 fee for an individual trade, for example, we could end up paying $2 in gas just to transfer that $0.50 to the staking system. This has significant implications for any monetization strategy. If we’re going to collect any revenue at all from an individual trade, it needs to be a significant amount, e.g. $5 or more. Paying $2 to receive $5 is viable,

So suppose we are collecting $5 from an individual trade on any type of 0x API order or maybe just on 0x RFQT orders. This will increase the overall cost of filling the order by around $7 (back of the envelope). If we charge $7 for a $10,000 order that would be 7 bips. This is really too much. It will erode our pricing advantage against Uniswap and (especially) 1inch, so that we’ll have difficulty retaining users.

One idea I’ve been playing with is charging ~$5 (+$2 in overhead) for a large order of 50k or more. We get a good number of these large orders these days. For a 50k order, a ~$7 cost increase would worsen our pricing by about 1.4 basis points. I feel like we can afford that without losing customers. If we want to be extra cautious, we could only apply this fee if an order utilizes 0x exclusive liquidity or is split across multiple sources. In these cases, the taker is obtaining value that he could not get elsewhere, which puts us in a stronger position to levy a fee.

Anyway, I’m really curious to hear what the community thinks about this and also if the community has any other clever ideas for ‘gentle’ monetization.

Disclaimer: This is very much in the ideation stage. I’m not aware of any concrete plans to do anything, so don’t read anything in to this other than a contribution to the discussion.

6 Likes

Layman, longtime 0x project fan here. Some of you all may know me on twitter - d4bbasi.
I am personally in favor of doing this and spending fees earned from it on marketing.

Is it possible to charge fees and then allow folks to get fees ‘refunded’ with a referral program? 'You’ve spent $40 on fees. You can get them refunded by making 4 referrals."

The formula to determine fee refund availability can be dynamic. If wallet’s ‘fees paid to-date’ going up, each referral can be worth more to make it juicier. Or not. idk.

Let me know if I’m missing something basic; not trying to take this thread off-topic but just think we can think of fees/monetization in the context of broader growth.

2 Likes

Why not use chainlink oracles? What’s wrong with them as dependencies?

Thanks for sharing your thoughts @mintcloud. I agree to senselessly introduce a fee would not be feasible for long-term viability and also not the interest of the user. Remember we want to remove that middlemen from that great marketing video that 0x shared a while back. I also agree with @0x_peter not to introduce fees in this way.

However, if we take a look at https://cryptofees.info, Uniswap is returning capital to those who provide liquidity, stake capital, etc. For example, today they generated $2M in fees vs 0x $13K. 0x should be able to close the gap without losing competitiveness. Perhaps there is some creative way to introduce a network fee without friction that would incentivize people to use 0x more compared to other options.

Tokenomics is about incorporating the interest of all stakeholders, and incentivizing them to return value to the growth of the network. The focus should be on network effects, because those who will win in the DEX space will win from network effects. Uniswap’s lead so far is from ability to create network effects by incentivizing capital to provide liquidity in return for fees, at least that was one factor. 0x has powerful technology but it must not forget network effects.

At the moment I feel community is not leading 0x as much they could. Why do you think that is @mintcloud @0x_peter? Clearly you are doing so much to support community efforts and the principles you have put in place support more community engagement. Some of the grants you issued for relayers etc and even the many ZEIPs that have passed successfully show some engagement. For example, look how many proposals people have been posted over at Uniswap https://gov.uniswap.org/c/proposal-discussion. There must be some way to learn from Uniswap and incorporate what they are doing into 0x, as @mintcloud suggested the other day.

2 Likes

This summarizes much of what I’ve heard from folks, and something I feel as well.

One partial response may be that the network effect that 0x is focusing on is the one between the ‘B2B’ integrations like Opyn, DeFi Saver, etc., not necessarily the network effect between takers. The more apps we have using the 0x API, the better the liquidity, the better the prices/availability, the stronger the network effect, the more apps will want to use the 0x API, and so on. End users could simply be a consequence of that virtuous cycle.

But, I feel that solely focusing on the network effect between dapps compared to the network effect between the everyday users can be too narrow a focus. Why? You can imagine a variable that exists in the shadows w/r/t every crypto project: even after controlling for how much $ I have invested in the token, how important is it to me, an end user, that this product succeed over other inferior products? How enthusiastic am I about the mission? This ‘missionthusiasm’, if very large, can help drive a virtuous cycle of price → development → growth → price. It’s really an element of tokenomics.

0x’s mission is to help all value flow freely. Spreading the word about the incredible focus of the team to build for the long-term, operate in a sustainable fashion, and more is not just about marketing in a cheap sense. It’s a part and parcel of focusing on the ‘fundamentals’.

4 Likes

I also agree with this.
Hope there can be a bit of a shift in the narrative from the core team, moving towards more attention to tokenholders ‘everyday users’

that’s an interesting proposal but…who pays for the refund? Needs to be self-sustained somehow

Loving all of this.
@abandeali1 just today shared some thoughts on why putting Uniswap 0.3% LP fee and 0x fees side by side is actually misleading.
In fact, each time a trade is happening on 0x, the LP (Market Makers are earning a 0.X which should not be that distant of 0.3%). Unfortunately, in 0x that is hidden.
The beauty of AMMs is that LPs are the user themselves! Which gave them that nice network effect you’re calling. We’re all big fan of that. However, my belief is that it’s not a model that can compete as volumes scale up, and you’ll see more and more of 0x native liqudity settled because…capital efficiency.

But I want to actually focus more on the engagement of the community, that you’ve rightly brought up. I think there is the potential to tie more virtuous loops as the governance of the protocol gets more and more decentralized. Today it is complicated for pretty much everyone outside of 0x Labs to push for protocol updates and make ‘investment’ decisions such as assigning grants, championing projects, running marketing campaigns etc. I expect that a 0x Treasury governed by a 0x DAO should help giving us more promising signals. Curious to hear your thoughts on this (point 3 in upcoming list)

In terms of network effects, here are the ones I see
the more volume on 0x…

  1. the more market makers are incentivized to provide liquidity because they see more takers. They are ready to incorporate the liquidity rewards fee in their pricing, so to make 0x native liquidity more attractive.
  2. the more fees are distributed to ZRX holders
  3. the more fees are distributed to the Treasury (TBD how), on which ZRX holders have control and can use to push for more adoption (marketing, grants etc…)
  4. the more voting power is distributed towards actors that care about having a protocol that works well (Market Makers via staking gain voting power)
  5. the better the price on 0x, the more volume on 0x (back to 1)
4 Likes

Yes @abandeali1 made some good points in that tweet and I agree with you long term 0x infrastructure is more capital efficient than AMMs. I also like your idea of decentralizing the community more through a DAO @mintcloud and having community decide over treasury and the general course of direction of how to allocate capital within the community.

I think it comes down to making holding the token necessary for the functioning and growth of the network. That is not about artificially creating incentivizes to the token, or manipulating the price, or any of those related things. I actually like that 0x core team is focused on shipping and building and not talking about the price at all. Economically until recently, it would have been irrational to stake your tokens, and the less capital you have, the higher the cost of staking. It is also about creating more awareness through the token and showing people how powerful 0x is. Again there have been a lot of great initiatives and Matcha is a good example of the power of 0x. A token enables this kind of community-led growth that in some ways because of the heroic effort 0x team has been creating without the power of the community that it could tap into.

In general a token is integral to any network and capital is rational. There needs to be economic incentive to hold the token and by holding I don’t just mean have it sit in your wallet, that could include staking or other things. The returns of staking I agree are probably safer but the nascent capital of this industry has abandoned the token for other tokens that provided more returns. Economically to be LP for Uniswap or stake with Aave or Synthetix rewarded the early community. It is again not something that 0x should or can manufacture, but my point is that you need more awareness around how 0x is so powerful. 0x is ahead in so many ways, but people just don’t know. In some ways 0x is also unfairly punished for its virtues. But I don’t think that is a bad thing, and in the long-term 0x should be rewarded for its principles of honesty and transparency.

Perception drives markets via reflexivity. Of course you want to decentralize your token so your token won’t be classified as a security, but for everyday people who are not market makers, it is just does not make sense to hold the token or even how do you get involved to support the growth of the network? Also what has the early 0x community gained? I can see the value of joining the 0x team, but it feels like the community has been forgotten. Its sad to hear from many early community supporters because they say 0x does not care about the token. Maybe it is just miscommunication, because I do not think that is 0x. I think 0x cares a lot about community. Unfortunately for most people because of lack of understanding for the technology that provide capital or some type of support for the community by spreading awareness. An idea that I liked from Origin recently they introduced a stablecoin that introduces APY without staking. I think it would be great if 0x can remove friction and introduce staking without having to send the token somewhere. For small holders, they can eaten by fees and we want to empower anyone no matter how much capital you have. Or allow staking the token and then 0x automatically allocates to the most profitable APY so staking pools have to compete to get the tokens.

My main point is to have the token be an integral part of the network and make it a powerful symbol for the community to champion the growth of the 0x going forward. At the moment there is very little community. This is merely feedback and there are so many things to applaud 0x for. My feedback was also often misunderstood, and if you misunderstand then you do not see the value of what I am saying. Reflexivity drives market. The most powerful technology will not always win as we can see with all the Ethereum L1 killers.

It is about making things simple, removing friction and actually creating network effects from an active community by creating incentives for the community to provide capital, time, energy, etc that would grow the network and return value to the community. I see so many people who have given up at a loss despite having supported the project. And holding capital is signaling to the market where innovation should occur. Compared to early supporters of Ethereum, Aave, Uniswap, Chainlink, Synthetix, these people have been rewarded one way or another. Otherwise speculators come in because of depressed token prices and push the price up and they will sell for a profit eventually not having been part of the community in any way.

Another question: if we remove the token, will the network still work? The token should not be an instrument to manipulate the price, it should be an integral part that makes the network work, and without the token, the network does not work. At best it should not even be a tool for the growth of the network, that should flow from having organic use for the token.

Keep in mind my thoughts on tokens and networks apply generally to any project.

2 Likes

I don’t have any specific ideas to propose at this point, but in general terms, I feel that there are potentially huge opportunities to monetize 0x Mesh. In many ways the opportunity space is analogous to the new use cases and business models enabled by 5g and edge computing. It is also a space where there are fewer competitors. I look forward to fleshing out some of these opportunities within the community treasury governance framework.

3 Likes

I agree with most of your post, especially your thoughts on reflexivity. 0x can certainly create stronger reflexive loops than it does today, and I believe that is where changes to the token economics can make the largest impact.

Another question: if we remove the token, will the network still work? The token should not be an instrument to manipulate the price, it should be an integral part that makes the network work, and without the token, the network does not work.

This is an interesting point, but I can’t say I fully agree that it needs to be absolutely necessary. I can’t think of a single DeFi protocol today where this is true – however, there are plenty of protocol that are made better by the existence of a token. I believe that tokens should be used to align incentives of ecosystem participants, incentivize necessary network behavior (eg liquidity, development, community), create viral growth loops, create stickiness, and maximize the potential of protocols.

Of these use cases, what does the community feel like is lacking most? Where can ZRX make the largest impact? What is interesting to me is that providing liquidity is no longer the main behavior that needs to be incentivized – there is plenty of opportunity to go around right now for market makers.

I’m also curious how the community views maximizing actual fees (likely at the expense of growth) vs fee potential. Some of the most successful DeFi protocols don’t currently accrue any fees for token holders (Uniswap, Compound), where others accrue relatively small amounts (Aave does less than 0x, Curve does slightly more). It seems to me that most people place more value on potential as long as there is a clear future path to generate fees. Interested to hear views on both sides!

4 Likes

I think you’re right - people place the most value on potential value…all else being equal. But, given 0x is on a similar exponential growth path, it would stand to reason ZRX would be seeing similar growth…so clearly, all else is not equal.

  1. From a pure marketing standpoint, the fundamentals of ZRX really appeal to investors who make it into the “consideration” phase of the marketing funnel. Once there, there’s ample information about the protocol’s overall value proposition, prospects for long-term value accrual, demos of how the protocol / proprietary products (e.g., Matcha) work, research demonstrating competitive differentiation, etc. In other words, once someone goes down the rabbit hole, it’s easy to close the deal. But, the token itself suffers from a major top-of-the-funnel problem with the average investors. While the typical DeFi investor may be aware that ZRX exists, they have no idea of the recent exponential volume growth, that staking exists, or what the long-term prospects are. There’s a reason I’ve seen it lumped together with OMG as a “dinosaur,” and many think it’s dead. I think this is much larger problem than “well ZRX isn’t the flavor of the month…” but, easily fixable with the right focus.

  2. There’s little desire for the average holder to participate in governance. Without going into detail, increasing awareness around staking and rolling out a community owned treasury should go a long way here.

  3. There’s been a historical “protocol first / market makers second” focus by the team, and many investors feel that they’re at the bottom of the pecking order. Protocol first makes sense, but a tradeoff of prioritizing market makers in the token economic design is that token holders feel / have felt unappreciated. Once you lose them, it’s hard to get them back. Fair or not, that’s the general feeling I get when I try to raise awareness across the reddit-sphere. Personally, I believe you made the right decision and the design prioritizes the right things for the long run, but until holders get a larger share of protocol fees collected they’re always going to feel like third banana.

I lean towards maximizing fees at the expense of growth, but I’d want to understand what exactly we were trading off. Uniswap, Aave, YFI et al are in a better position to maximize growth because they are younger projects, so there’s still a promise of delivering fees to token holders ‘upon maturity.’ If they were still maximizing growth at Year 4, the average investor would feel the same. Unfortunately, 0x may have passed that window, which is admittedly too small in the crypto world.

2 Likes

I have been closely following and holding the token since ICO and I can say “Link” post is amazing. She completely summarised the main issue of 0xProject. Call after call, email after email, I’m trying to explain this to the team.
A network effect can’t gain traction if you can’t start the wheel.

Why People care of Uniswap and others except 0x today? Because of their beautiful Github Repo and API saving 30% gas less?
Nope they attracted users and ton of free press coverage because of the free money they gave away. This created a word of mouth that boosted usage of the protocol. And when you have users, MM arrive by themselves, and when you have all that the wheel turn exponentially and you become #1.
The mistake you made and you keep on doing is to think volume and users will come by themselves only because of the cheapest gas cost you advertise. But users don’t care of that. If they care of gas efficiency they go to trade on Cex or L2 Dex.

Remember, at the end, the one who always win are the ones with users. Once you get users, you can do everything and hire a ton of dev. to improve your tech and become the leader network with a beautiful tech. (Facebook, twitter…). Talk to any VC, they’d tell you the same. At the time back in 2007, they were more beautiful and advanced UI than Twitter… But all of them lost the game and closed because Twitter got the user traction than the other didn’t have. A network as beautiful and advanced it is, but without a well dynamic user acquisition can’t work and become a network.

Everybody know that the best marketing in crypto is money. Uniswap, now a 20B market cap project is making huge volume with a shitty product. You could win 200 times. But you are blocked on the idea to inceltivize in a clear way your token holders. That would have given you a huge press and gave you the chance to put fuel to your rocket ship and start the network effect and get your brand on the medias and users.

1inch, Uni, Bake, Sushi… All of them might be pump and dump, but they are used and noticed by users and press. Matcha is barely noticed. It’s unfair but that’s crypto.

I also made the mistake to build my previous startup in a proper technically and well dev. before launch but when others have the mic to talk to users/press and you don’t have the mic, then you can yell as much as you want to say that your product is the best…

At least, rewarding the users with the duration of staking or deflationary mechanism would help to make any random holder believe today their token and investment will be worth much more in case you succeed later.
More time goes, and more the risk to hold the ZRX token is higher due to competition getting bigger. More times goes, and more the other projects are in the front line and less people would be inclined to put their money at risk holding or staking for a few %.
Put yourself in an investor shoes (why put my funds at risk) when I’m getting 15% APY staking ETH that is a secure asset less inclined to competition, delisting, failure, SEC… or Compound USDC at 6% if I’m being very risk adverse…
There are absolutely 0 interest to risk betting on you for such a low reward vs. risk. If I put $100K at risk, I want to make sure that this risk = exponential reward.
Now with Uniswap, risk is getting even bigger, and reward is not to a point where capital make sense to be locked.
I would like to know that the fact that I stake now, give me privilege in terms of APY, deflationary mechanism… compared to someone that will enter only if they see the project is taking off.
If nothing is done to retain remaining holders and increase new holders to stake now, this is going to be difficult once we enter the bear market…

One note, I disagree with the post saying that we get a 10% APY. This data is extrapolated from 1 month of extreme bull market on a full year. The full 2020 APY on the few month Matcha was live - gas cost would be more around 2%/3%.
90% of the time, crypto market is in bear and trades reduce considerably specially that all pump and dump tokens are ERC. I’d be curious to know the exchanged volume during that period and hence the APY 90% of the time.

1 Like

Talk to the well known Dave Morin in SF with the network “Path” he created after leaving FB. It was such an amazing and well designed app… Everything to be a winner. 5 years in advance of its time, much cooler, faster, better than instagram but couldn’t start the network effect. Amazing project, but failed. A network is also everything or nothing. You can’t be in the middle.

If you can’t be “hyped” and get users, the network can’t start. And being hyped in crypto is through specialized and non specialized press talking about you. Through giving insane profits to your holders through various mechanism that you decide to create. Through well known crypto influencers telling how cool you are and how much money they made.

Hype doesn’t mean pump and dump. Hype means people talk about you constantly and recommend using/buying your token for profit purposes not for the repo.

Once you get into the hype, you get your network starting and just then it make sense to improve your tech. I know you are a dev. centric company which is great and give you a competitive advantage (for a year until Uniswap will hire 30+ devs/ 3 PR and 5 biz dev. with their 20B valuation and their token they might be dumping to finance their future runway), but you really need to remove from your head the fact that giving free money through airdrop or deflationary mechanism… would be negative to your project.

You should use those things to start your network as a free extremely powerful marketing tool to give your tech a chance to be used exponentially.

I reduced my exposition to your token by 2, my point can’t be heard and I feel the team is closed to any kind of thing that would target user acquisition and word of mouth through a mechanism that all token holders in the crypto sphere are expecting for.

One last example, your referral marketing campaign was an idea I proposed recently to Alex. Nice reward. But did you see any crypto influencers or any press talking about it? Nope… Your winners looks like Bot, and I was tracking how viral the campaign went, and 3/4 average influencers talked about it.

Don’t take this as a free criticism. I know how hard it is to build and run a startup. Pivoting, seeing competitors arriving… It’s easy to judge, a bit less to take decision. I’m just here to give you my personal input from an external standpoint. I’m a big supporter of your project and it breaks my heart to see and feel that some things do not go (in my view) in the right direction strategically.

Please do not make the mistake that I made to be convinced that what people around where asking was bullshit because they talk about things for their own interest and do not have the long term vision of the project. If people ask, it means that they expect it from you. If you give what people want, they’ll love you even more and talk about you. If you don’t, your remaining users/holders will go where they’ll receive what they expect. You need to be open to that today.

The worst it could happen to a project is when you don’t receive this kind of blog post or even messages to ask to fix things. That’s when you know it’s too late…

1 Like

I expect everyone in the space to switch to ZK Rollups in 2021/22. Putting a $5 fee on top of the gas is not noticeable by any users from transaction more than $500. I’m paying $80/100 gas those days on Matcha, and won’t see a difference with $5 more. What I really want is to save those $100 completely… I’m not against paying a $5 fee, but completely against paying $100 for a trade, but I have no choice today. Once L2 will be in place in a good Dex, I’ll switch to this L2 Dex to save those $100 and won’t mind paying $8 fee on my little trades as a service fee for this Dex. I do pay that on Binance as well.
Users will massively switch from L1 to L2 once it will be on point for that same reason. Can’t wait for dYdX L2 :slight_smile:

1 Like

Would you leave 0x if they were #1 in terms of volume and users? No
Uber is #1 and drivers pay their huge 25% commission because they bring them volume and ton of business…
So all comes back to Users… You don’t want to pay that fees because you do not see any interest in volume and $ you can make. Not because of the fee.
As for creating the pool, I agree with you

Forget it. Not going to waste any more of my time with you fools.

This may be against my better judgement, but are you the same person who showed up in the discord less than 2 weeks ago expecting everyone to be at your beck and call just because you make $1 million worth of trades per day?