DEFINITION of 0x Protocol
0x is an open protocol for decentralized digital asset exchange that runs on the Ethereum blockchain. A protocol is a set of standard rules that can be used by a system or by various transacting parties to smoothly communicate with each other. 0x protocol essentially is a standard messaging format and suite of smart contracts based on which the transacting entities can exchange digital assets or tokens.
BREAKING DOWN 0x Protocol
To draw a parallel, think about how banks across the globe use the standard SWIFT messaging system to communicate with each other about money transfers. A standard defined set of message fields and their corresponding values are used in the SWIFT system to securely convey details like sender, recipient, amount, currency, source branch and destination branch, among others. Since each bank adapts to the standard rules of SWIFT messaging system, they are able to transact with each other directly. The situation would go awry if each bank followed its own distinct protocol, as each bank would then have to adhere to a one-on-one communication channel with every other bank. Following a standard, universally acceptable format allows for smoother operations with higher efficiency. (For more, see How the SWIFT System Works?)
0x protocol attempts to work similarly to SWIFT, but for operating decentralized exchanges for trading digital tokens and assets that run on the Ethereum blockchain. Built on the foundation of Ethereum token standards, 0x protocol acts as the key infrastructure layer for the burgeoning number of financial applications and instruments that are on-boarding the blockchain technology stack and are getting traded in digital forms. As loads of the world’s financial value is getting tokenized with every passing day, the requirement to trade such digital assets and tokens in a secure and efficient manner is growing. With its clearly defined message formats and smart contracts, 0x protocol attempts to fill up for the need.
0x protocol’s message format is a set of data fields that carries key information like the digital asset or token to be traded, the price value of transaction, the expiration time and the defined identities of the transacting parties. The smart contracts take care of the necessary business logic responsible for generating, sending, receiving and processing the data linked to the trading activity. It also allows room for the necessary upgrades, if any, in future. Provision for upgrades is necessary owing to any changes required for adhering to the modified regulations, or for any changes linked to the intrinsic working of the Ethereum blockchain network. The system also uses relayers, which act as order aggregators and are responsible for broadcasting the orders from designated market participants to the market place or exchange.