What is ZKX Protocol (ZKX)?

Introduction

Derivative trading in the crypto market involves the buying and selling of financial contracts whose value is derived from underlying cryptocurrencies, such as Bitcoin or Ethereum. These derivative contracts can be used for various purposes, including speculation, hedging, and risk management.

ZKX Protocol promises optimized scalability and improved user experience for derivatives trading on a decentralized platform. This article explores the unique features and value propositions of the ZKX Protocol — an innovation-driven decentralized exchange.

What is ZKX Protocol (ZKX)?

Source: Zkx.Fi

ZKX Protocol is a decentralized perpetual futures exchange operating on StarkNet, built by the community, and prioritizes users’ satisfaction. ZKX Protocol offers the competing edge CEXs have over other DEXs by leveraging its zk-STARK technology that offers unparalleled scalability and on-chain trading benefits like account abstraction and low-cost transactions. zk-STARK, (Zero-Knowledge Scalable Transparent Arguments of Knowledge), are cryptographic proofs that promise faster and more scalable results, relying on minimal but robust cryptographic foundations.

Unlike other DEXs, ZKX Protocol introduces a unique risk mitigation tool called ‘deleveraging’ to shield users from sudden market swings. And in extreme cases, the platform triggers liquidation to prevent even more significant losses.

The Growing Importance of Layer 2 Network

Layer 2 networks are secondary protocols or solutions built on top of a primary blockchain (Layer 1) to enhance scalability and functionality. These Layer 2 solutions aim to address some scalability issues that can arise on Layer 1 blockchains like Bitcoin and Ethereum.

StarkNet by Starkware™ is an advanced Layer 2 blockchain solution, a permissionless and decentralized layer based on zk-rollups. It is a scaling technology that efficiently processes transactions and syncs the data back to the Ethereum mainnet in compact batches. StarkNet thus benefits from the security and composability of Ethereum but can scale transactions on Ethereum thanks to its EVM compatibility. Further, the platform offers users low trading fees, instant settlements, and fast withdrawals. This allows for a seamless trading experience that is both efficient and cost-effective.

Brief History of ZKX Protocol

It was founded in 2021 by Eduard Jubany Tur, Naman Sehgal, and Vitaly Yakovlev. The idea of a decentralized exchange was inspired by Eduard and Naman’s study on the potential of emerging markets.

Eduard and Naman previously held leadership positions at SOSV, one of the world’s top Venture Capital firms with over $1.2 billion in assets under management.

ZKX Protocol’s main team boasts experienced personnel from companies like PayTM, Flipkart, and Byju’s with technical knowledge in venture building, scaling technology startups, and financial derivatives structuring in over eight countries.

How Does ZKX Protocol Work?

Source: ZKX Protocol

The decentralized ZKX node network is positioned atop StarkNet smart contract written in Cairo with Ethereum smart contracts as a foundational layer written in Cairo. This node network encompasses data accessibility, network forecasting, computation methodologies, and network consensus.

Source: ZKX Protocol

ZKX solves the issue of scalability for DEXs by developing a novel order book architecture with a decentralized node network optimized for high-speed and high-throughput scalability. It implements a unique consensus algorithm. While decentralized exchanges (DEXs) typically lag behind their centralized (CEXs) counterparts in speed due to the latter’s access to powerful cloud computing. ZKX Protocol’s node network cross-checks its operations with Starknet before finalizing them on the Ethereum network. This feature allows ZKX Protocol to scale and compete with a centralized order book while being decentralized.

ZKX Model

This crypto derivatives ecosystem is in a constant state of evolution, and various models have emerged, each with its unique set of strengths and weaknesses. Models include virtual Automated Market Makers (AMMs), Synthetic Models, and Centralized Limit Order Books (CLOB).

ZKX Protocol has masterfully engineered a node network that amalgamates the finest qualities of Virtual AMMs and CLOB and avoids limitations. Impressively, recent tests have demonstrated that the current network can efficiently manage over 9000 transactions per second (TPS).

Features of ZKX Protocol

The ZKX Decentralized Node Network not only supports the DLOB but also oversees data provision, pricing algorithms, and the intricate trade matching process. By introducing a specially designed consensus algorithm and an upcoming permissionless node client, the network bolsters the DLOB’s security, marking one of ZKX’s pioneering advancements.

Decentralized Limit Order Book (DLOB)

Source: ZKX Protocol

DEX users can now have the option to transition from automated market makers (AMMs) to a more versatile decentralized limit order book (DLOB), eliminating the need for middlemen. This DLOB is designed to foster direct communication between users, smart contracts, and the ZKX node, placing a premium on security and reliability.

Data Provider Service (DPS)

Source: ZKX Protocol

The Data Provider Service (DPS) serves as a bridge between external data reservoirs to ZKX’s pricing mechanism allowing enhanced flexibility in asset acquisition, sourcing data, and pricing but also scales up the system’s efficiency. All order book pairings occur off-chain, directly within the node network.

Still with no compromises on security or integrity. Every transaction and every detail undergoes rigorous scrutiny within Starknet’s Layer 2. Using the robust ZK-rollups and ZK-proofs framework, the order book’s authenticity is always validated, ensuring unparalleled security and privacy for its users.

Improved UI/UX

ZKX Protocol goes the extra mile to make trading seamless for its users by introducing account abstraction and a gamified experience.

Account abstraction removes the distinction between user wallets and smart contract accounts. This makes transactions more flexible and allows radically improved user experiences.

Traders can directly integrate from Layer 1, conveniently depositing and withdrawing their funds on Layer 2.

Furthermore, ZKX’s advanced smart contracts handling derivatives, liquidity, trading fees, and risk management are strategically placed on Layer 2.

Source: ZKX Protocol

Recognizing that traders come with varying degrees of expertise and preference, they incorporate a gamified experience by offering three user interfaces tailored to different experience levels: Standard, Advanced, and Professional.

Adaptive Balancing Rate (ABR)

Decentralized Exchanges (DEXs), especially those that offer perpetual contracts, often use the “funding rate” to ensure the market price of the contract remains close to the underlying asset’s spot price. The funding rate is a fee, either paid or received, by traders who hold perpetual contracts.

ZKX Protocol’s funding rate is called the Adaptive Balancing Rate. The ABR is calculated using Bollinger Bands, which are price envelopes drawn above and below the simple moving average of the price at a standard deviation level. The ABR provides a premium to assets with higher implied volatility thus reducing risk exposure for the overall market.

Testnet

The ZKX testnet is a 3-phased process with 2 phases already completed. The main objectives of the testnet were to evaluate the performance of ZKX as a product and technology. Also, to provide valuable feedback to the community for improving the product.

Testnet Phases

Phase 1 was a closed testnet held from the 28th of March to the 31st of March, 2023 to test the Portfolio and Trading pages with limited functionality. Promised Rewards for the phase 1 Testnet included Yakuza NFTs (Level 1 — Shateigashira) Whitelist and Participation in the ZKX Community Token Launch.

Phase 2 was ZKX’s first public Testnet held after the end of phase 1 from 31st March to 14th April 2023 designed to test the limits of the protocol & gather a broad range of feedback. Rewards included Yakuza NFTs (depending on the user’s hierarchy in ZKX Yakuza) and Participation in ZKX Community Token Launch.

An improved version of Testnet 2.0, was announced as Polaris Trading Wars. The competition ran from April 27, 2023, to April 29, 2023.

The Product scope included a trading competition to test Portfolio and Trading pages with PnL tracking. Promised Rewards included USDC, NFT Whitelist, and Participate in ZKX Community Token Launch.

Phase 3 of the Testnet is scheduled as a trading competition, and it’s unclear if it was the same as the Polaris Trading Wars.

ZKX Proposed Tokenomics

ZKX introduces the innovative liquid governance model. Under this system, ZKX token holders can stake their tokens, allowing them to obtain digital shares of ZKX. These digital shares are tied to both governance rights and protocol rewards.

ZKX proposed tokenomics challenges the conventional model where typically, larger token holders (often referred to as whales) heavily influence a protocol’s direction without necessarily adding value or being active users.

Their governance mechanism separates the voting power and token holding. This way, the community isn’t just passive observers. They actively earn USDC revenue from the ZKX DAO by engaging in various activities like trading, staking, liquidity provision, or becoming node providers. The more involved a member is, the more digital shares of ZKX they earn. And with each digital share translating to a vote, it offers a fairer and more inclusive governance structure. Notably, these tokens remain non-transferable and non-tradeable to preserve the system’s integrity.

This governance structure is crafted to encourage beneficial contributions and foster long-term sustainable growth. Holding digital shares comes with its perks, such as a share in the protocol’s fee revenue, discounted trading fees, and access to exclusive features on the exchange.

Partnerships

DegenScore

Source: ZKX Protocol

To launch its first private testnet, ZKX Protocol partnered with DegenScore. DegenScore is a Web3 platform that allows users to check out and add context to their past transaction history in a super exciting and gamified way. It gave DegenScore Beacon holders exclusive access to a private Testnet that was held from March 28 to March 31, 2023.

Redstone

Source: ZKX Protocol

ZKX Protocol has partnered with RedStone to grant users access to reliable price data feeds. RedStone is a Web3 startup developing an innovative oracle, supplying data for over 1,100 assets across over 30 chains, with a 10-second update time.

RedStone Oracles presents a storage-less oracle that offers tailored data feeds to all EVM-compatible blockchains. ZKX will employ the price streams from RedStone Finance for its paired listings. This collaboration facilitates real-time price monitoring and the flexibility to personalize data feeds for trading perpetual pairs on the ZKX Platform.

Nethermind

Source: ZKX Protocol

Over a span of 7 weeks, Nethermind conducted a thorough evaluation of ZKX Protocol’s code and foundational architecture. The detailed findings from this audit were presented in a report dated September 28, 2022.

Source: ZKX Protocol

Nethermind is a team of world-class builders and researchers focusing on building blocks for a decentralized infrastructure. Their service spectrum encompasses EIP implementations, node management, code reviews in Cairo, and Solidity. The creation of the StarkNet block explorer (Voyager), and the notable launch of WARP in June, is a standout solution that translates Solidity into Cairo Code.

Highlights

ZKX Appchain

Source: ZKX Protocol

To improve performance and security for traders, ZKX Protocol unveiled the development of an Appchain to manage deleveraging, liquidations, and API integrations, while deposits and withdrawals are processed on L2.

The ZKX Appchain is a comprehensive layer, linking traders to its exchange over various L1s and rollups. This ensures a seamless stream of liquidity and interoperability, offering users an unparalleled trading journey free from chain restrictions. This division of logic between L2 and the Appchain ensures an accurate and agile trading environment.

Seed Funding

Source: ZKX Protocol

By July 2022, ZKX had raised $4.5m with participation from investors including your favorite exchange Gate.io, StarkWare, Amber Group, Hashkey Capital, Orange DAO, Angel DAO, Dweb3, Caballeros Capital, Cluster Capital, and many others.

In addition, notable individual investors, including Sandeep Nailwal, Co-Founder of Polygon, and Ashwin Ramachandran, General Partner of DragonFly Capital, participated in the round.

ZKX YAKUZA

ZKX Protocol launched a gamified Contributors Incentive Program to unite the community, based on the famous YAKUZA storyline, with 8 characters linked to specific initiatives.

The Contributors Incentive Program will have 3 Seasons from January 2023 to May 2023 followed by the NFT Collection and Token launch. Community members can navigate the ZKX Yakuza universe as a Contributor, Ambassador, or Testnet trader. Each journey has its leaderboard and will unlock NFTs and rewards in the future ZKX token.

Is ZKX Protocol a Good Investment?

ZKX Protocol has shown great innovation in developing quality products, frequently communicating with its community on its progress, showing reliability, and promising optimized scalability and improved user experience. It edges other DEXs and can compete with centralized exchanges.

In July 2022, ZKX raised $4.5m in seed funding from backers that included reputable Venture Capitals and DAOs. It completed its smart contracts audit with Nethermind. In considering the ZKX Protocol as an investment option, it is important to ‘do your own research’ (DYOR), consult a financial expert, and perform proper risk management before investing.

Remember, crypto investments carry risk, it’s possible to lose more than your initial investment, especially with leveraged products and in a volatile cryptocurrency market. So, do not invest what you are not willing to lose.

Take Action on ZKX

The project is still at Testnet, hence its utility token hasn’t been launched on crypto exchanges.