What is Loopring (LRC) and how does it work? Exploring the decentralized exchange protocol

What is Loopring (LRC)?

The introduction of decentralized exchanges (DEXs) allows users to trade without needing a custodian or intermediary. However, liquidity can be problematic if DEXs do not interoperate and share orders across a wide network. Additionally, since trades are executed on-chain, DEXs are limited by the scalability and efficiency of the underlying blockchain.

Loopring (LRC) is an Ethereum Layer-2 scaling protocol that enables the creation of decentralized exchanges that match the performance of centralized exchanges. The network can process up to 1,000 times more trades per second than Ethereum, with each trade costing just a fraction of a cent.

Loopring also leverages the security of Ethereum’s blockchain, ensuring users always have access to their assets, while exchange operators are limited to actions permitted by the protocol.

How does Loopring work?

zkRollups

Loopring (LRC) outperforms traditional decentralized exchanges by using a "fast lane" where transactions are aggregated and executed off-chain to avoid Ethereum's network congestion. This is achieved through a Layer-2 scaling solution called zkRollups, which bundle many transactions together off-chain before submitting them to the Ethereum blockchain as a single transaction.

This method significantly reduces the number of transactions Loopring submits to the Ethereum network for settlement, making trades on Loopring much faster and cheaper. It is highly efficient and places far less strain on the Ethereum network.

The "zk" in zkRollup stands for "zero knowledge," referring to the type of proof Loopring provides to verify that the off-chain transactions are accurate. A zero-knowledge proof is like showing someone the answer to a calculation without revealing the equations used to reach it.

Order rings

On other exchanges, an order to buy a particular token in a trading pair must be matched with an order to sell that token within the same trading pair. Loopring, however, mixes and matches multiple orders in a circular trading system known as an order ring. Each order ring contains up to 16 orders and creates a loop where each order can exchange the desired tokens without needing an opposing order for its pair.

Who founded Loopring? (Exploring Loopring's origins)

Loopring (LRC) was established in 2017 by Daniel Wang, a software engineer. Wang earned a Master's degree in Computer Science from Arizona State University and worked as a Lead Software Engineer at Boston Scientific, a medical manufacturing company, before joining Google as a Tech Lead and Senior Software Engineer.

The ICO for Loopring was held in August 2017, raising $45 million. However, due to stricter regulations in China, most of the funds were returned to ICO participants. The remainder was utilized by the Loopring Foundation, a non-profit based in Shanghai, for protocol development.

In December 2019, the protocol upgraded from Loopring 2.0 to Loopring 3.0, significantly improving efficiency by almost 1000x. It also partnered with SwissBorg to integrate oracles.

Facing challenges in attracting third parties to build decentralized exchanges (DEXs) on the protocol, Loopring launched its own DEX in February 2020. The non-custodial Loopring Exchange combines orderbook and automated market maker (AMM) trading and doubles as a payment app.

What makes Loopring unique?

Loopring combines the advantages of centralized and decentralized cryptocurrency exchanges. By leveraging zkRollups, it achieves higher throughput and lower costs than other decentralized exchanges on the Ethereum blockchain. Its non-custodial technology enhances the security of centralized exchanges.

This high-performance capability enables algorithmic traders to utilize high-frequency trading strategies on DEXs for the first time. Loopring also employs cryptographic solutions to prevent frontrunning, ensuring fairer trading environments.

The protocol is open-source, audited, and does not rely on external validators, ensuring that no entity can interfere between users and their cryptocurrencies. Additionally, users receive digital receipts for all deposits and withdrawals, ensuring funds can always be recovered, even in the event of issues with the decentralized exchange.

What gives Loopring value?

The Loopring (LRC) cryptocurrency serves as the utility token for the Loopring network. It incentivizes positive actions from liquidity providers, insurers, and DAO (decentralized autonomous organization) governors, granting them a voice in the protocol's governance.

To operate a decentralized exchange on Loopring using the protocol's on-chain data availability, an operator must lock up a minimum of 250,000 LRC. Operating a DEX without this feature requires staking 1 million LRC.

LRC is deflationary, as tokens are burned from some fees and from operators whose stake is slashed for misconduct. This results in a decreasing total LRC supply over time, which can impact Loopring's token price and market capitalization.

What is the circulating supply of Loopring (LRC) coins?

Loopring (LRC) has a circulating supply of 1,245,991,469 and a maximum supply of 1,374,513,896 LRC. Since the launch of the Loopring protocol, over 20 million LRC have been burned, and any LRC locked up for operating exchanges is currently not available on the market.

10% of all fees generated by Loopring go to the Loopring DAO, which decides how to use these funds. Options include grants, protection against impermanent loss, additional liquidity incentives, and buying back LRC for burning. Any LRC that the DAO votes to burn, along with any LRC confiscated from exchange operators acting in bad faith, reduces the circulating supply of LRC.

Other technical data

The Loopring protocol can process up to 2,025 trades per second, with each trade costing approximately 450 to 800 GAS on the Layer-1 blockchain. These performance metrics are expected to improve over time as the Loopring Foundation further enhances the core Loopring Protocol.

The latest version of Loopring is referred to as Loopring 3.0.

How to use Loopring?

Apart from staking LRC to operate an exchange, individuals with fewer LRC can also participate in the network. 80% of the protocol fees are allocated to liquidity providers in AMM pools and makers on orderbook pairs, with a minimum of half of this amount directed to LRC-related trading pools and pairs.

To mitigate the risk of unforeseen bugs, the Loopring insurance fund was established. Individuals can deposit LRC into this fund and earn a proportional share of 10% of fees.

With the introduction of the Loopring DAO, users will have the ability to stake their LRC using the token voting tool Snapshot to govern parameters such as the fee percentage, fee distribution proportions, and insurance fund covered event triggers.

How to choose a Loopring wallet?

Loopring released a beta version of their mobile smart contract wallet for Android, with an iOS version anticipated in the near future. The wallet is self-custodial and offers the capability to swap on the automated market maker (AMM).

There are various options available for storing your Loopring, and the choice of wallet will depend on your specific needs and the amount you wish to store.

Hardware wallets, such as Ledger or Trezor, offer the most secure option for storing cryptocurrencies, with offline storage and backup. However, they can be more complex to use and are generally more expensive. Therefore, they are often preferred for storing larger amounts of LRC by experienced users.

Software wallets are another option, which are free and easy to use. These wallets can be downloaded as smartphone or desktop apps and can be custodial or non-custodial. Custodial wallets manage and back up your private keys on your behalf, while non-custodial wallets use secure elements on your device to store the private keys. While convenient, software wallets are considered less secure than hardware wallets and may be better suited for smaller amounts of LRC or less experienced users.

Online wallets, or web wallets, are also free and easy to use, accessible from multiple devices using a web browser. However, they are considered hot wallets and may be less secure than hardware or software wallets. It's important to choose a reputable service with a strong security track record. Online wallets are suitable for holding smaller amounts of cryptocurrencies or for users who make frequent trades.

Loopring staking

Operating a decentralized exchange (DEX) on Loopring requires a stake of at least 250,000 LRC, which can be penalized for submitting faulty or delayed transaction histories to the Ethereum blockchain, or for not processing user withdrawals promptly. If any outstanding user funds are not returned before the DEX is shut down, the entire stake can be lost.

DEX operators, as well as others interested, can stake Loopring to reduce fees on that particular decentralized exchange. To lower the taker fee from 0.05% to 0.025%, a stake of 2.5 million LRC is required, and an additional 1 million LRC is necessary to reduce the maker fee from 0.025% to 0%.

With the introduction of Loopring 3.0, users were able to stake any amount of LRC to earn a share of 70% of all protocol fees. However, this arrangement ended at the beginning of 2021, and the fees are now distributed to liquidity providers (80%), insurance fund depositors (10%), and the DAO (10%).

Choosing Loopring

Loopring facilitates the independent operation of decentralized, autonomous cryptocurrency exchanges, offering the performance of centralized exchanges with the advantages of decentralization. It enhances efficiency and liquidity through innovative cryptographic techniques like zkRollup and the order ring mechanism.

Loopring achieves throughput 1,000 times faster than Ethereum at 1/100th of the cost, enabling high-speed trading strategies on DEXs for the first time. It is beneficial for businesses seeking to establish cryptocurrency exchanges without the regulatory obligations associated with controlling user assets.

The non-custodial technology ensures users always have control over their funds, with additional security provided by economic incentives for DEX operators to act appropriately to avoid losing their stake.

These features position Loopring DEXs to potentially replace centralized exchanges, fostering a new digital economy that is efficient and secure.