bZx is built on Ethereum and integrated with the 0x protocol. It is the first fully decentralized, peer-to-peer margin funding and trading protocol. bZx is not itself an exchange, but a protocol that can be integrated into the current exchange infrastructure. Exchanges and relays are incentivized by fees denominated in the BZX protocol token (BZX) to offer decentralized margin lending and margin trading services. Assets are valued and liquidated via competing oracle providers. By decoupling the valuation and liquidation of assets from the protocol, the oracle marketplace approach allows competition to drive the oracle provider fee to its marginal cost while encouraging experimentation and flexibility.
One of the persistent contradictions of the cryptocurrency space has been the theme of decentralized assets traded on centralized exchanges.
In the wake of the 0x revolution, a new generation of decentralized exchanges (DEXs) are taking root. These decentralized exchanges address some of the existing problems with older DEXs, while still lacking the capabilities of many of the leading centralized exchanges. Individuals looking to engage in margin lending or margin trading are still forced to funnel their liquidity to centralized token and coin exchanges, exposing them to an additional form of counterparty risk.
Counterparty risk is encountered when the risk of a third party defaulting jeopardizes the assets of an investor. Margin lending exposes the lender to counterparty risk both from the exchanges and the borrower. The specific type of avoidable counterparty risk incurred by lenders and borrowers using centralized exchanges is called custodial risk; allowing individuals to maintain control of the private keys to their wallets at all times obviates this risk. Lenders face additional counterparty risk from underwater borrowers who fail to be liquidated in time.
Decentralized margin comes with significant technical challenges. The most significan challenge is the design of a reliable oracle that can match the settlement security of centralized exchanges. In the context of margin lending, the oracle problem is caused because Ethereum contracts are not natively aware of asset prices on or off the blockchain. If smart contracts can’t stay aware of asset prices on the open market, they can’t consistently force-liquidate borrowers on that market to protect lenders from adverse movements. The most serious obstacle to decentralized margin lending is being able to reliably and securely liquidate troubled positions. The bZx protocol serves as an on-chain solution to these challenges.
The BZX Token
The BZX token is a utility token with two main functions:
The incentivization of order book aggregation by relays
Governance of the bZx protocol
The BZX token functions for the bZx protocol much like the ZRX token functions for the
0x protocol. Both tokens coordinate networks of rational economic agents around a protocol. Both are used to facilitate continuous, decentralized updates to the protocol.
Token Governance
The most common directions for governance in the space are Aragon and multi-signature wallet arrangements leading to a DAO. It has become clear that multi-signature wallets represent an unnecessary attack surface.