Established in 2017, Loopring was one of the first Ethereum Layer-2 scaling protocols launched. Loopring is a solution that has multiple facets, acting as a protocol (Loopring Protocol), a decentralized exchange (Loopring Exchange), and a token (LRC). The network can handle up to 1,000 times more trades per second than Ethereum with each one costing far less than mainnet transactions. At the time of writing, Loopring is tied as the cheapest Layer 2 solution with Metis ($.02) in terms of costs of sending Ether from wallet to wallet. Loopring also inherits the security of Ethereum’s blockchain, with users having access to their assets in all circumstances and exchange operators being constrained to behavior allowed by the protocol.
Founded by ex-Google software engineer Daniel Wang, Loopring is, more specifically, a protocol for building non-custodial, orderbook-based decentralized exchanges (DEX) on Ethereum. It routes and processes trades, matching sellers and buyers at a market price without ever requiring custody of the buyers’ or sellers’ funds. This is distinct from centralized exchanges, which require traders deposit funds with the exchange so that it can execute trades on users' behalf within their internal network.
Because of its more traditional ordebook based experience, trading on a Loopring-powered DEX feels like trading on your favorite CEX, which are almost exclusively orderbook-based, like binance or bybit. Contrast this with most DEXes, which use automated market maker (AMM) technology that heavily relies upon user-generated liquidity.
Lets Dive In
As mentioned above, there are many facets to what Loopring aims to deliver for its users:
Protocol:
I dont think I am able to describe the protocol any better than the team itself did on their website.
Loopring solves scalability without compromising Ethereum security. Our zkRollup throughput reaches approximately 1000x of Ethereum, or as high as 2,025 trades per second. The cost per transaction is reduced to as little as 1/100th the cost of Ethereum, with trades and transfers costing fractions of a cent. With Loopring, we expect non-custodial exchanges and payment apps to continue outcompeting and displacing centralized ones.
Ethereum has become so popular and heavily used, that it exists in a near-permanent state of congestion, where users face absurdly high fees and long delays. Layer 2 presents a less congested fast lane, where users transact gas-free and without delay, yet completely coupled to Ethereum security. From a user's POV, it just works, with blockchain UX problems abstracted. Loopring's performance is sufficient for algorithmic traders and market makers to deploy legacy-style, HFT strategies on DEXes for the first time.
[Thinking from a project’s perspective] Control is a liability. For centralized crypto exchanges, the stress and fear of being hacked is immense. So is the regulatory burden. Loopring protocol ensures that an exchange or payment application simply cannot access or lose user assets. And without control over user assets, exchanges may also shed some regulatory burden. Using an open-sourced, audited, cryptographically sound Ethereum protocol means less time & money spent on security & compliance, and more on growing your business.
If you don't use the Loopring protocol to power your exchange, you can still use it for its payment functionality - as a fast, gas-free lane for users to deposit and withdraw Ethereum-based assets. Augment the experience for users, while dramatically reducing your network (gas) costs. No extra tooling required.
It is easy to see why Loopring has had success based on what they aim to deliver. With Alt-L1s often compromising on Security to achieve Scalability, the Layer 2 solution to Ethereum’s scaling concerns presents, in this writer’s opinion, the perfect solution to this problem. Decentralization and Security should always be paramount, especially when scaling can be offloaded to an ecosystem of mutually beneficial layers.
What seems to be particularly appealing with Loopring’s protocol (even though this statement is coming from a completely non-technical perspective) is the ability to implement bits and pieces of the protocol rather than the whole suite if that makes sense for your product.
Relayer
A relayer is a backend system that hosts, manages, and matches orders before passing them through smart contracts for settlement. Rather than your typical CEX, your wallet serves as the frontend and, together with the relayer, combines to form what we know as a decentralized exchange (DEX).
The Loopring relayer is a backend system that enables a zk-Rollup to operate. It hosts and updates the off-chain Merkle tree, creates rollup blocks, generates zk-SNARK proofs of their validity, publishes data + proofs to Ethereum, and more. The Loopring relayer has been highly optimized for its use case: from orderbook matching to proof generation. A key note in understanding this system is that the relayer can never, ever, access or freeze user funds.
While Loopring protocol is relayer agnostic (meaning anyone can build & use their own relayer(s) to run their zk-Rollup/products), Loopring L2 (and the products atop) are serviced by the Loopring native relayer. Loopring relayer API is used by builders, users, and other applications that want to perform gas-free, high-speed trading and transfers on Ethereum, or otherwise read or write to Loopring. In other words, anyone can use the Loopring relayer to create gas-free decentralized applications
DEX? dAMM!
The original version of Loopring Exchange is a clone of the popular Ethereum DEX, Uniswap. However, the latest version of the exchange boasts multiple trading types and liquidity farming. Loopring Exchange is an orderbook and automated market maker (AMM)-based decentralized exchange (DEX) on Loopring’s Layer 2. Using Loopring Exchange, traders benefit from low congestion, minimal fees, and high performance. It also acts as a payments application allowing anyone to send ETH or ERC-20 tokens to any Ethereum wallet address via Loopring the Layer 2 solution with minimal costs.
The problem with AMMs, often times, is liquidity fragmentation. The more fragmented liquidity is, the more expensive it becomes. However, Loopring is working in partnership with StarkWare to create the “distributed AMM (dAMM)”. dAMM shares liquidity across the different layers of an ecosystem to address this issue using asynchronous liquidity sharing to expose liquidity providers to more trading opportunities. The dAMM is a Layer 2 AMM that aggregates liquidity in a sole layer 1 pool and enforces logic using a layer 1 smart contract. This results in higher levels of capital efficiency and flexible development options while benefiting from layer 1 security.
Furthermore, dAMM liquidity pools can operate across multiple Layer 2 AMMs at the same time, enabling scalability while continuing to avoid liquidity fragmentation. Plus, the technology allows dAMM transactions to process on multiple AMMs without the need for mandatory communications. This works by separating the liquidity pool and the pricing state. When user funds and state decouple, several states can sit on top of the same liquidity pool.
Moreover, because dAMM is available on several markets, it processes more trades than it would on a single market. Resultantly, dAMM generates more fees for the same amount of liquidity and is, therefore, more capital efficient. The rates and consistency of token swap prices also reflects this, as more liquidity generally allows for better price
Not financial, legal or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. All opinions expressed are solely those of the individual author. This newsletter is not legal advice and does not create an attorney-client relationship. This newsletter does not constitute tax advice. Talk to your independent attorney and/or accountant for any questions specific to you. Always do your own research and use caution when interacting with smart contracts or the blockchain. At the time of writing, @AdamETH_ does not hold any LRC.