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Exchange Tokens in Zero are used to facilitate the direct exchange of two Tokens, without the need for an intermediary exchange or counterparty. Zero Networks are required to launch their own Exchange Token and associated DAO that is responsible for the economic design and governance of the Network. Exchange Tokens utilize a modified version of the Bancor Protocol.
Generating a new Exchange Token in Zero requires the initialization of five parameters:
- Token Name: A name, such as 'Infinity'.
- Token Symbol: A ticker, such as 'III.
- Initial Supply: The Token's initial number of tokens in circulation, such as 1,000.
- Token Reserve Currency: A reference to the Token's Reserve contract address on the Ethereum blockchain.
- Reserve Ratio: The initial ratio between the Exchange Token's Reserve balance and price, denominated in the Reserve Currency.
Zero refers to this mechanism as 'Autonomous Liquidity'. This feature enables tokenization for a long-tail of digital communities. Similar to the prohibitive cost of creating and distributing video content prior to the advent of YouTube, Exchange Tokens lower the barrier of entry for the creation of functional digital currencies for communities of any size. Autonomous Liquidity is particularly useful for open-source projects, remote or digital organizations, and DAOs, where a shared token can be used to capture and coordinate value between participants, without the need for an intermediary corporation, physical office, or jurisdiction.
Autonomous liquidity is achieved through the use of both an internal bonding curve (also referred to as a continuous token) and Token Reserve, which enables an Exchange Token's price to dynamically adjust based on supply and demand.
The following definitions are useful to comprehend the Zero Token System:
- Price: The price at which a single Exchange Token can be purchased or sold. This price dynamically adjusts with each purchase and sale.
- Supply: The current total number of Exchange Tokens that have been issued and are in circulation.
- Reserve: The total amount of Reserve Tokens used to 'back' the value of the Exchange Token. This is achieved by holding a balance one or more Tokens inside an Exchange Token's smart contract.
- Reserve Token: A specific cryptographic asset that is stored within a Reserve. Common reserve assets include ETH, DAI, wBTC.
- Reserve Value: The total value of the assets that make up a Token's Reserve.
- Market Cap.: The total market capitalization (total market value) of an Exchange Token.
- Liquidity Pool: A type of Reserve with a built-in fee structure to incentivize the buying and holding of Tokens in order to provide liquidity for a token. Liquidity Pools must hold two or more tokens in its reserve.
Exchange Tokens can be purchased by sending any amount of Reserve Tokens to the Exchange Token contract, where newly minted Exchange Tokens are then automatically issued into circulation and transferred to the sender. Conversely, when Exchange Tokens are sold, Reserve Tokens are automatically sent from the Reserve to settle the exchange. This mechanism enables Token Price and Token Supply to be dynamically recalculated based on supply and demand, with no need for an intermediary to facilitate the transaction.
Exchange Token and Bonding Curve
Currently Exchange Tokens can hold any ERC20-compliant Token as its Reserve. This enables the onchain exchange of a growing number of blockchain-based tokens. Exchange Tokens require a statically defined Reserve Ratio at initialization, which serves as a fixed ratio between the Exchange Token's Reserve balance and market price. This ratio remains static with the purchase and sale of each Token. This Reserve Ratio is a primary factor in establishing an Exchange Token's long-term price sensitivity. Price sensitivity refers to the degree of change in price that occurs from each purchase of sale of an Exchange Token. A higher Reserve Ratio will result in lower price sensitivity, whereas a lower Reserve Ratio will result in a higher price sensitivity. The following diagram illustrates how different Reserve Ratios impact a token’s price as it grows.
Demand Curves for Reserve Ratios of 10% (left) and 90% (right)
The following formulas outlines how to calculate an Exchange Token's price:
- Calculating a Reserve Ratio:
- Reserve Ratio = Reserve Balance / Market Capitalization
- Calculating Market Capitalization:
- Market Capitalization = Price x Supply
- Calculating Price:
- Price = Reserve Balance / (Supply x Reserve Ratio)