0x has undergone much change since it launched in 2017. For a detailed write up on 0x core concepts, please refer to our first report from December 2019.

Introduction to 0x

Before we get into 0x, here are a few important participants in the 0x ecosystem that you should know:

Market Makers: Traders that add liquidity to 0x’s orderbook and earn a fee for doing so.
Takers: Traders that utilize 0x orderbook liquidity to swap between any assets and pay a fee for doing so
Relayers: Entities that host 0x orderbooks
Mesh Operators: Entities operating an 0x Mesh node

Understanding the Workings of the 0x Protocol

Firstly, it’s important to restate that trade settlement on 0x is never done off-chain. All funds are settled on-chain, so users get to enjoy a non-custodial trading experience. 0x’s off-chain architecture is widely misunderstood, so I’ll try to break that down as simply as I can. The off-chain side of things includes two main components:

Hosting orderbooks and trade matching
0x’s aggregation algorithm

Off-Chain Components

Hosting Orderbooks, Trade Matching, and Order Flow

You can think of each relayer as an entity that hosts that their own 0x orderbooks. On the surface, liquidity is fragmented with each relayer. Market makers have to submit their limit orders to a specific relayer in order to provide liquidity on 0x.

Say there’s $100,000 of ETH-DAI liquidity on relayer ABC’s order book and $10 million across all 0x orderbooks. If I want to buy $200,000 of ETH with DAI, I can only source $100,000 from relayer ABC. I’ll have to find another relayer with liquidity to fill the remaining $100,000 of demand I have.

This isn’t an actual concern for users because 0x has devised two tools — the 0x API and the 0x Mesh — to network liquidity between relayer orderbooks. The 0x API has multiple use cases, one of which is a standard module for relayers to tap into each other’s liquidity. Now, larger relayers may not want to share their order flow with other relayers and may decline to connect via the 0x API. For this to work, they will also need to organically attract taker liquidity. This is viable for private market makers and relayers simply using 0x’s infrastructure, but not for those looking to tap into 0x’s users.

A majority of demand for 0x liquidity comes