Some of the major concerns with traditional decentralized exchanges are that it is slow (requires many verification before transaction can be done), high transaction fees (entirely on-chain order book), lack of liquidity in the network (only one entity providing decentralized exchange) and cannot be functioned with other decentralized exchanges since different protocols are used amongst exchanges. Therefore, the primary goal of 0x protocol is to facilitate various decentralized exchanges to be able to operate in conjunction with each other by allowing developers to build decentralized applications on the 0x protocol. Another major problem with traditional decentralized exchange is that every order and adjustment have to go on the traditional blockchain, which means that everything is held to block times. This results in network transaction fees at every interaction.
0x resolves these issues by developing an open protocol which can be applied to all orders relayed off the blockchain. In this case, the orders will go on the blockchain only when they are settled instead of at every transaction adjustment.
For example, a user called “Maker” creates new orders which are broadcast “off” of the blockchain, another user called “Taker” see these orders and wish to purchase it so they decided to add these orders into the Ethereum smart contract to execute trades directly on the blockchain without third-party intervention. As a result, makers’ transaction costs are greatly reduced since they can create, modify or cancelling orders “off-chain”. Only when value is transferred between maker and taker then transaction is completed and fees have to be paid. Hence it speeds up the process and eliminates some of the unnecessary transaction fees. This approach is called “off-chain order relay, on-chain settlement”.
The open protocol for decentralized exchange also facilitates networked liquidity by allowing anyone to build a decentralized exchange on their own (0x calls them “relayers”) using 0x protocol. This allows relayers to share liquidity across the network since all the decentralized exchanges are built on top of the 0x protocol (shared infrastructure) instead of running their own proprietary infrastructure. Relayers will receive transaction fee in return for their service of providing liquidity in the network.
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