It was an intriguing move at the time as it seemed to be a back-handed vote of confidence in DEX platforms. Clearly, Coinbase was covering all the bases with its acquisition. Paradex enables trading of Ethereum tokens.
There has been much talk about the future of exchanges being a decentralised one, as you would expect in the crypto space. However, the DEX platforms to date all leave much to be desired.
The problem with DEXs
The main problem with the DEX model flows precisely from its decentralised nature. With no one in charge it also means there is no-one doing the work of supporting the platform codebase and development, let alone the issue of security.
According to one cyber security expert in local government who spoke to coinintelnews, one north London borough receives on average 38 attacks per day against its network.
The thieves are after personal details as there is no money to be had. With exchanges that’s a different story – there’s plenty of money washing around to tempt cyber criminals. We can lay a bet that the attacks on exchanges and DEXs will be at a much higher rate.
Now think about a DEX that is “self-medicating” if you will. Who is doing the surveillance, doing the daily checks of the web logs for strange patterns etc? Well, the whole point of decentralisation is to push the security and storage issues back on the DEX user. As such, DEXs are exchanges for the tech savvy crypto investor who (rightly) sees as essential to have full access to the private key of the asset being held.
Ok so with Paradex things are now probably a little different, given the support of Coinbase to lean on. Paradex had 10 employees when it was bought by Coinbase.
So we have doubts about the DEX model as it stands.
Coinbase, Paradex and oX
However, it is 0x and Coinbase’s listing of the asset – its first ERC20-compliant token – that has got people talking. 0x (ZRX) is a trading protocol and Paradex runs on its rails.
If you were wondering why Coinbase has listed 0x, well now you know – it is for its gateway into Ethereum tokens, apparently.
However, take a closer look at 0x and it is a strange sort of token. Here’s what co-founder, Will Warren says about it:
“ZRX is a governance token. The primary value proposition for ZRX was never that it would serve as a medium of exchange. Value is derived from the network effects around liquidity that are uniquely enabled by 0x protocol’s open design and sustained through governance.”
Essentially, ZRX doesn’t do anything other than fee collection. The governance part hasn’t been built-out yet.
Worse still perhaps, half of the tokens are held by the team (see below).
Research by Diar has revealed into the web of connections between Coinbase, Paradex and Andreessen Horowitz. Maker, the stablecoin AH has just invested in, runs on 0X. Marc Andreessen and Ben Horowitz founded their venture firm in 2009 and it has grown in size to circa $30 billion.
The A16z Mafia
The Diar October 15 newsletter reports on the links of Paradex execs to AH: “The exchange’s President & COO Asiff Hirji, as well as its CTO Balaji Srinivasan are both A16z alumni. A16z Crypto General Partner Kathryn Haun sits on the board at Coinbase. And the projects now seem all very intertwined between investors (see chart).”
Who gets the listing benefit – Andreessen Horowitz?
It could be that Coinbase has plans to pull together a number of DEXs to pool liquidity using ZRX, but that seems extremely unlikely.oX also doesn’t appear to fit with Coinbase’s digital asset framework that sets great store by “decentralisation” and community support. Both of those things are lacking, especially in the decentralisation area.
The cynical among us might prefer the more straightforward explanation.
However, what we do know about listings on Coinbase is that when they happen the asset gets a bumb. Who benefited from the oX bump? I think we’ve already answered that.
And what about the governance? Community voting is not due until sometime next year according to the roadmap and Diar thinks it will be a centralising affair. Here’s Diar’s conclusion and it’s not pretty:
“ZRX, at this point in time at least, with nearly no relayer collecting fees in the token, no governing model, and current asset holdings by the team centralizing future governance voting, means the investment would be a little more than pure faith in 0x development team and its investors. Which begs the question whether or not all the current factors have the hallmarks of a security.”
ZRX is 17% higher on a week view. Put that another way – it passes the Howey Test that is used by the US Securities and Exchange Commission to determine whether a financial instrument is a security. Perhaps all that liquidity guff was really about some “utility token” window dressing.
ZRX as at 19 October, 19:50 UTC+1
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