0x Smart Order Routing
An overview of 0x's Smart Order Routing.
More liquidity means better pricing for the end-user. With Swap API, we prioritize liquidity to maximize returns on quotes, even if it means having to venture outside of the 0x ecosystem. With the advent of the 0x Protocol’s ERC-20 bridge asset proxies, we now have the ability to fill against other on-chain decentralized exchanges (DEXes) through the 0x Exchange contract. Requesting a quote from Swap API will not only scan limit orders from the protocol’s networked liquidity, but will also check on-chain DEXes such as Uniswap, Curve, Oasis, and Kyber. The API’s order routing algorithm will then use this information to split your fills up across the different sources to maximize the overall return on your swap.
There’s a lot of diversity among existing DEX models, so liquidity can look very different between them. Some exchanges offer better rates but at high slippage while others offer worse rates for lower slippage. Below are real-world quotes taken from 2 DEXes to illustrate this common scenario.
What’s more, these markets continue to evolve with trading activity, making it difficult for a typical user to know where to get the best rate at any given moment. So simply providing the overall best source for a swap would be valuable, but Swap API goes a step further by also splitting your swap across different DEXes.
Because slippage often increases non-linearly with fill size, this approach allows us to keep the overall rate of a swap near optimum by incurring less slippage. The generated quote can then be passed into the 0x Exchange contract, which will perform all the trades in a single, atomic transaction.
Echoing the principles of the 0x Protocol, we rely on a mix of on-chain and off-chain components when generating swap quotes. Quotes are generated off-chain (via Swap API), to be consumed on-chain. In a high level overview of this process, we have three distinct phases: Sampling, Optimization, and Settlement.
We start by pulling relevant native orders from the 0x Mesh network and our exclusive market maker partners. We then use a custom contract to collect many quotes from each DEX for increasing fill sizes, up to the taker’s desired token amount. Critically, this contract also allows us to batch operations into a single RPC call. This keeps the API highly responsive.
Both native orders and DEX samples are then converted to “fill paths,” which are just directed acyclic graphs where each node represents a small fill on a DEX. The optimal solution is the (valid) combination of these fills that results in the greatest output token amount for a given input token amount. Swap API will intelligently merge each successive path with the next until we end up with a single, unified path with the highest overall return rate, accounting for fees/gas.
The final optimized path is then converted into individual 0x orders. DEX fills are wrapped in “bridge orders,” which are orders we generate just-in-time to instruct the 0x Exchange contract to perform a trade against a DEX during settlement. Swap API encodes the entire call to the Exchange contract (which includes the orders to fill) as a hex blob which the taker can simply sign and submit to the blockchain. The Exchange contract then will fill each order sequentially until the required number of tokens have been bought or sold. During this process, gas tokens will also be burned to reduce the final transaction cost to the taker.
We’re continuously working on ways to improve the performance of the quote service to provide the best pricing for users. Here are a few, related things on our immediate roadmap.
- Last-minute, on-chain routing to adjust, and potentially improve, quotes for market movements that can occur between submission and when the transaction has actually been mined.
- A new, custom settlement contract, tailored specifically for efficiently filling these quotes. This should lead to more accurate fills and ultimately reduce fees.
- Composable transformations on tokens. This would, for example, allow a user to perform a swap from cUSDC → ETH, and vice versa, where cUSDC is automatically wrapped/unwrapped before the trade.
- Expanded RFQ program, which gives takers direct access to market makers so they can provide better-priced orders prior to filling them.
- Meta-transaction support, to remove or defer the requirement that the taker must pay for gas with ETH.