okay so I'm going to be giving a little
bit of an introduction for Peter who's
gonna be talking about staking rewards
to encourage user ownership within
platforms I think this work is pretty
broadly applicable to a bunch of
different use cases and yeah you know if
you're in systems of a theory and smart
contracts on aetherium I'm just gonna
quickly give a little bit of like
motivation for what went in you know why
we focused on this work and how it you
know how we came to focus on it in the
context of 0x specifically
okay so 0x which is you know we're not
really focused on 0x protocol as much as
like the governance aspects of it in
this presentation but a little bit of
background so 0x protocol is basically a
system of etherium smart contracts for
peer-to-peer exchange of digital assets
on the etherium blockchain and about
three years ago when we were initially
designing the smart contracts we
realized that we were building on top of
a rapidly evolving technology stack and
that the smart contracts that we build
you know built three years ago will
probably need to be changing pretty
frequently every six months or so and so
if we were to have like a single
monolithic smart contract that was not
upgradable we run into these problems
where every time we have to upgrade we
have to ask our users to withdraw their
assets from the first smart contract
deposit them to the next and this leads
to fragmentation ensuring you sirs so
some people just like won't upgrade at
all they'll just like stop using the
system period and then we'll also run
into the situation where some users will
upgrade but others just won't and so
specifically for exchange in
marketplaces where liquidity network
effects are so important it's really
important that we allow everyone to
upgrade in a seamless process without
disrupting markets and so the 0x
protocol architecture is designed in an
upgradable way where we can basically
plug in support for
new types of token standards we can
upgrade swap out pieces of this this
kind of pipeline of smart contracts and
we can kind of do it in a seamless way
where users traders can just kind of
gradually shift to the newest version
and you can deprecated the older
versions and retain these Network
effects around liquidity and you know
people ask like why do you need to have
upgrades it introduces all this
complexity I think like actually just
recently there is a perfect example of
why upgrade ability is important with
the repricing of the S load op code in
aetherium which is going to be going to
the next hard work and will probably be
breaking a lot of contracts that are
currently live today and no one could
foresee that happening so you have to
have a way to upgrade and specifically
in the case of 0 X you know 0 X protocol
isn't supposed to be like a for-profit
profit generator for like a private
company it's supposed to be public
infrastructure that anyone can plug into
and when you have public infrastructure
ok when you have public infrastructure
it's really challenging to figure out
how do we upgrade these systems of smart
contracts because the stakes are high
you know the you know today 0 X is
moving approximately a million dollars
every day and you know ideally well this
number will increase many times over in
the next years and so this public
infrastructure is like pretty security
critical many people are building
businesses on top of it so how can we
decide on upgrades so when we first
released version 1 of 0 X 2 years ago
you know we release 0 X with a
governance token the zr x token and the
idea is that instead of having like a
single group or private entity decide on
upgrades there would be a token that
allows people to vote on these upgrades
and we're you know make sure upgrades
are representing the needs of the
ecosystem and we pretty quickly realized
after launching version 1 with the zr x
token that the design was not working
out as
we intended it to so the system was
designed such that these marketplaces
built on 0x could receive fees in the
form of ZRX tokens for people that are
accessing their liquidity and what this
would do in effect if you know ideally
is it would push the token distribution
into the hands of people that are
actually using the protocol we want the
protocol to be owned by its users but
this was the early days there weren't
many depths that existed back then and
we learned very quickly that you know
end-users don't want to fuss with tokens
they just want to like do a trade and be
done with it and these took you know
having a usage token adds a lot of
friction and so a couple years later we
looked at the numbers and kind of
compared you know are the addresses that
own ZRX actually trading on the protocol
and are the addresses that are trading
on the protocol actually owning ZRX and
the answer is that you know absolutely
not like we saw that there is very
little overlap between these groups and
so at that point we brought on peter and
to you know research this problem how
can we increase this overlap and in what
this overlap represents is incentive
alignment between the protocols users
and the people that are making
governance decisions over the protocol
and so Peters gonna be talking about how
we can create incentives that maximize
this overlap thank you will so you can
see this Venn diagram here and this is
gonna relate to kind of a Venn diagram
and next slide describing the evolution
of the Xerox token you know where we're
trying to go in order to address this
problem of getting our users a voice in
the process of smart contract upgrades
so so far we have this governance taupe
token and which allows these Xerox
holders to vote on whether we make
upgrades go live in the blockchain so
that's been achieved
right but in order to have this process
work as intended that people with voting
power need to be the users of the
software and not third parties who you
know are purchasing a perspective
motives or other reasons and so our plan
to address this in version 3 the
software which gonna go live in coming
months is to introduce incentives that
update our ZRX token mechanics
and that provide a new reason for people
to hold and use ERX and components of
this will be the addition of user fees
so that takers when they see a standing
offer to buy and sell an asset and they
want to take advantage of that currently
they pay no fees whatsoever to the Xerox
software there's no sort of revenue
generation aspect with this modification
they will need to pay a fee that's
proportional to the gas price that they
pay when they submit a trade to the
blockchain so the CRX will collect some
revenue and that it can use to to create
incentives so these fees are there I'm
gonna go into liquidity incentives that
encourage people to create these
standing offers to buy and sell assets
so market makers who get their offers on
0 X 3 layers and get them taken for
receiving a share of this income that's
generated through user fees and there's
also going to be staking rewards so that
token holders holding the 0x token will
be able to receive a share of the
revenue generated through these fees and
our philosophy here is related to the
vendor I diagram you saw previously
where we want governance our governance
objectives to be achieved and to do this
we've recognized we need to have
incentives for people to hold the 0x
token and specifically we need to to
encourage the people who we think have
an interest in voting right we need to
encourage this group who's actively
using their protocol who has an economic
interest or stake and the decisions we
make we need to encourage them to be the
people who holds your X tokens so that
rather than say like okay we have these
token holders they are a motivated they
didn't interact much with the protocol
how do we make them vote we think
instead we have these users and they're
very interested and they engage with us
regularly how do we encourage that group
to hold more tokens and buy them from
this sort of this group of speculators
that's the philosophy so why is this
important to us right well it's this
gets back to sort of our vision for the
organization and so what we're trying to
work together set out to achieve which
is to create a token ice world where all
value can flow freely right and we can
sort of think of that as summarizing
this concept of open access open and
low-cost access to the ability to do
online exchange of tokenized assets
right and if
cheevus mission so that everyone can
sort of go online and use a Dex to trade
into and out of whatever asset they want
we want to measure the progress we're
making in terms of the amount the volume
of tokens that are exchanged in terms of
the prices that are available to users
right so that the more the larger
quantity of specific assets available
you know the better job we're doing the
better price you can get when you're
moving you know back and forth between
tokens you know the bet more effectively
we achieve our goal and the wider
variety of assets that are available on
our real ayres the better job we're
doing and then in order to commit to
this mission of just of ensuring that
exchange is low-cost and open to
everyone and there's no sort of rent
extraction or you know profit taking
that that is going to create barriers to
to exchange happening we want to create
a governance mechanism that commits us
to our mission we want to use token
voting mechanisms to ensure that the
people who benefit from open access to
online exchange are the same people who
determine the choices we made we want
them to to have accountability to the
users that are benefiting from our
software so that they will vote for for
upgrades that are in their interest
rather than the interest of some sort of
speculator or investor who might might
want to profit off of the exchange
process okay so we can see though from
the Venn diagram at the beginning right
that we don't have a structure that
really enables that accountability right
now we have tokens very few of which are
actually held by active users of the
protocol who would then vote you know
for things that that are in their
interest for things that align with our
organization's mission so we have to
have some means of persuading these
users of the protocol to become Xerox
owners right and it's not just going to
work through exhortation we could say in
order to preserve the decentralized
future you know do your duty and buy
some Xerox tokens and vote you know
participate in the voting process right
but if a user is happy with the way the
software works and he thinks that we're
making good decisions so that other
people are voting then he doesn't really
have any incentive personally to sort of
bear this cost and responsibility you
can say well some other one else should
vote for me I'm happy why should I you
know bother it's too much trouble the
next person will say the same thing
because of this free writing problem and
this is not going to happen
you know without some intervention that
motivates people to do this there has to
be personally beneficial for individuals
before we can expect that to happen so
we see right now is that under our
current system the incentive structure
encourages tokens to be owned by
speculators and does not really motivate
users to buy the tokens a voting rights
have not are not enough you know there's
a free writing problem they're not going
to cause a transition in the owners
ownership distribution what we need is
some way in which 0x users can realize a
material benefit from holding the token
so that they can get something as a user
from owning the token that's not
available to anyone else
so Alice uses the protocol alter token
and she can get a really nice benefit
from that where's Bob you know holds the
token and because he's not a user it's
not beneficial to him it doesn't have
the same economic benefit attached to it
right so we need to create that dynamic
so it's to encourage the Bob's of the
world to sell their tokens to the
Alice's who will be owner users okay and
this is like I think this is a critical
part of governance that is kind of
under-recognized that is it's not just
about the mechanisms we create that
allow owners to influence or have voice
in decisions it's also about the
identity of owners the identity of
owners matters quite a bit for what an
organization will set out to achieve it
will set out to sort of represent the
interests of its owners so if we want to
target a particular long term goal we
need to pick people as owners or
encourage people to be owners whose
interests align with what we want to do
all right we can't just sort of blindly
assume that they will we need to sort of
introduce incentives that encourage that
so the first you know sort of part of
this chain is token incentives and we
want to introduce
systems is that 0x ownership provide
specific benefits that are available to
0x users but not to someone who's simply
a speculator or a third party who
doesn't engage with a software right and
then we expect that to influence the
ownership distribution so the non users
sell tokens to users who can derive a
greater benefit from them all right and
then this feed
to our voting process or as users come
to hold a larger proportion of the the
tokens that he will vote for decisions
and policies that are in their interest
and in particular if we think go back to
this like the users will prefer systems
that offer specific benefits for them
rather than for other outside groups all
right so this is self-sustaining like
once once an organization sort of set on
this path the people the incumbents who
hold the tokens tend to vote you know
for this for policies that sustain it
because they benefit from them all right
so in thinking about the long-term
trajectory of the organization we want
to sort of lay a foundation right now of
owners whose interests align with our
vision okay so that doesn't lead to the
what do we mean by users right who is a
user of the protocol do we want everyone
who ever interacted with the 0x Mart
contracts to own does that make sense
or do we need to be more specific about
you know what it's sort of a rational
structure of ownership and voter
participation so the zero x protocol has
three main classes of users who might
target you know police types of
incentives the first are three layers
which sort of host order book data they
host these offers to buy and sell assets
and the next is market maker so market
makers create these standing offers to
buy and sell tokens and then finally at
the bottom of the period pyramid there
are retail traders who sort of are the
the final end and customers that the
customers who take advantage of the
offers of market makers and the sort of
data availability platforms of real
layers in looking at these three groups
they're not all necessarily equally
sensible as people who might own and
participate in voting we need someone
who a group that has a strong enough
interest a strong enough economic
interest in the protocol that
decision-making is decisive for them
that the decision can influence you know
their welfare that they they feel
powerfully impacted upon it enough with
sufficient motivation to become
well-informed and then go through the
hurdles of the voting process we also
need besides that a group whose
interests align with the organization's
mission organization's mission to sort
of enable online exchange in the public
interest
rather the interests of sort of
maximizing private benefit and so
looking through these groups you know
real ayres you know they have this
they're building businesses in the
protocol um but there's a little bit of
ambiguity in in their their incentives
or goals because these are mostly you
know for-profit businesses and they
might prefer that the protocol be run in
a manner that maximizes their business
income rather than provides this public
good of free and open access to online
exchange at the bottom we have retail
traders there are certainly
beneficiaries of free and open access to
exchange but at the same time you know
they're not likely to be motivated to
sort of become informed or participate
in governance because there's so large a
number and because they can't sort of
reap a personal benefit and in the
middle we have market makers and this is
the group that we sort of identified as
the most logical candidate owners so why
do we think you know that among our
users we should target market makers
with incentives to own the token and
vote with the token as opposed to anyone
else well we believe that market makers
because of their line of business you
know they benefit from free and open
access to venues to do business right
they're their business is to buy and
sell token inventories and charges small
margins that when they sell they sell us
like premium when they buy they buy to
slight discount and the more volume they
can do the more easily they can you know
connect an offer make these offers
they're the more money they can earn so
from this perspective market makers you
know share our goal of ensuring that
there's no sort of rent seeking
intermediaries who extract fees in the
exchange process right so that they can
have say peer-to-peer connections make
an offer to an end user directly rather
than have to go through a platform which
will levy a large fee on the exchange so
this market maker ownership addresses a
problem that the market structure of
exchanges and exchanges have significant
networked economies that lead that mean
that when as an exchange grows it does
host more and more liquidity as it does
more and more volume the prices that
exchange is able to offer to people fall
right the market becomes more efficient
the more co-located liquidity you have
in one place
and that gives this exchanges bargaining
power right if they're big enough they
can offer these much better prices than
anyone else and they can begin to charge
fees they can begin to a levy
substantial fees in every single trade
such that even though they're extracting
this cut users are still better off
going to the largest exchange rather
than going to a much smaller one that
doesn't demand any fees at all so
there's this sort of tendency towards
monopoly or oligopoly market structure
and ownership matters a great deal here
so third party owners who have created
the exchange for profit maximization
without a direct participation they
prefer to set high fees that will
maximize fee revenue that will maximize
the income for the sort of exchange
owner market maker owners in the other
hand they're running a business on top
of the process where the the income they
generate from this business is
proportional to the amount of trade
volume the more trade volume is done the
more they can earn through this activity
that's enabled by the exchange so this
group has an interest in much lower fees
that maximize the revenue they get or
the profit from this kind of business
that's built on the platform right and
that aligns with our goal of keeping
fees low keeping access to the exchange
process free and open and this is you
know this is a powerful motivator this
isn't just you know one of the things
that is very important to me in in
deciding upon this system as opposed to
alternatives is that there's a large you
know a very impressive historical
precedent for this ownership form so for
the past hundred years
you know most equity chain exchanges for
most of the people most of the this time
ensayo saw and Japan or in New York or
in London most major equity exchanges
have been organized as nonprofits owned
owned by market makers a sort of mutual
organization so they don't sort of the
market makers vote on rules for trading
and the exchange itself does not
distribute profit to market makers but
instead just supports their business
activity and another thing that's really
important is is okay so it's thinking
about whether market makers have a stake
in this process right with it whether
they it's important enough that for them
to have a voice that they would be
motivated to purchase your X tokens and
you know go through the house
and our experience in market-makers
interact with us extensively giving
advice or recommending changes or making
demands for how they want the software
to operate to make it easier to do their
business
now these market makers are making a bet
on the protocols long term success and
there in order to learn how to market
make on index they're paying a
substantial upfront cost and so they
have a strong interest in ensuring this
bet pays off by participating working
with us to build this kind of
decentralized future okay so I'm going
to then that sort of wraps up this
discussion of what is our motivation
what is it our vision for governance of
the protocol and I want to talk about
sort of the mechanics very briefly of
staking and market maker incentives so
first we have like a maker he had
creates an order and then takers
whenever they take and orders that is
listed on a real layer they're gonna
have to submit a fee in aetherium which
is proportional or equal to the gas fee
they're paying to the miner so if you
pay 15 cents to the miner when you
submit a transaction you'll now be
paying an additional 15 cents of
aetherium as a protocol fee which is
accumulated here and ultimately these
fees are going to be distributed back to
market makers and then in once we've
collected all this revenue right we have
to distribute it somehow and this is
where the staking process comes in here
we have a market maker who's gonna
receive a portion of the collected
revenue and the amount that he received
is going to be influenced by two things
one is the amount of trades that he does
so the more fees he's he collects by
posting liquidity on order books the
more revenue he'll get and the other is
steak the more steak that he owns or
rents from 0 X 0 X token holder the more
money he will collect right so he has
this incentive then to either buy Z or X
himself or rent it from a third party in
order to maximize his rebate income and
then finally this this motivation of
market makers to acquire stake that they
don't own is going to mean they'll have
to pay an income stream to
to 0x holders okay so I time so I should
stop there
you