Technical AnalysisTechnology

The New Trading Economy of Loopring

Loopring is a protocol that binds individual parties together to form a highly liquid network to facilitate OTC transactions. Trading fees are handled in the form of a network token (ZRX for Ox, and LRC for Loopring). Where Loopring differs from the other approaches: The protocol is not utilizing reserves or marketplaces built on the protocol to source its assets and build its liquidity.

Loopring’s network is comprised of exchanges. And the main demographic for participants at the moment? The common, boring, regular ol’ centralized exchanges (AKA The Enemy). Unlike Kyber or Ox, Loopring’s primary concern appears not to be with making its satellites compliant with one another, but rather with developing the best method to decouple their order books from the markets behind them as much as programmatically possible. The only condition required of the protocol for a market’s inclusion: That it accepts LRC tokens for trading fees on the trades facilitated by the network.
That’s it. So that means that possible markets that could lend their order books and assets to Loopring’s relay service is, basically… all of them.
Naturally, this results in a far more eclectic, and — let’s face it — downright messy assortment of data and asset resources than those utilized by Ox or Kyber. Whereas Ox and Kyber pull and compare data from satellites meticulously designed to play nice together, Loopring needs to reconcile wildly different sources with one another. We’re talking about a relay network on which both Yunbi and Shapeshift could exist. To handle the complexity of this task, LRC is developing a mining software pack that exists as a project entirely separate from the one housing the smart contracts (four of them!) which handle the trading logic performed with the data that’s aggregated via the mining software. In addition to bringing order book and reserve details to Loopring’s wallet users, this software pack will also deliver the info from the wallet users and back to the exchangers to tell them that an order has been filled (or partially filled — because, yup, this protocol is capable of partial fills!), at which point the miner delivering this info collects a portion of the order’s trading fee as a reward for their services.

The “miners” are Loopring’s version of Ox’s “relays,” in that they gather data for the network to evaluate, and report back the results of those evaluations. The main difference between miners and relays, though: Miners don’t need to build and maintain entire marketplaces in order perform a service for the network in exchange for a reward. The barrier to perform a service for the network is significantly lower with Loopring.

Also a significant result of Ox’s third party marketplace mechanism: It significantly impedes the rate at which the network can grow when you need to create new reserves and marketplaces as you grow. A huge advantage for Loopring is that, right out of the gate, it has a massive supply of order books and liquidity that it can potentially partner with. All it takes is an agreement to accept LRC tokens, and to take a cut on their usual rate in order to bring the miners’ payment into the fold.
What… exchanges have to take a cut? Why would they be interested in something like that?
Yes, this might seem like a lousy deal for the exchanges at first glance, but consider it in this way: Trading fees are 100% profit. What eats into an exchange’s profits? Operating costs — which are not increased by partnering with Loopring. So, basically: By allowing Loopring to access their assets, exchanges can bring in a nice chunk of additional income without having to do anything.
Now that sounds like a deal that will pique some interests, right?

Let’s quickly review the incentives for each player in Loopring’s economic model:

Traders can trade any token for any token from the safety of their own wallets via Loopring’s ring-matching mechanism, which comparison shops to provide them with the best prices possible (here’s a work-in-progress look at the Loopr wallet, which is currently sporting a UX that’s a bit rough and incomplete, and is using mock data rather than actual relay data, but provides a nice glimpse at the user experience, nonetheless). The process looks like this, which is the successful ring-matching of a transfer involving three different tokens. Miners use their computers to send data between exchanges and the protocol’s smart contracts in exchange for LRC tokens (details on how to boost the data you send and LRC you receive are coming soon, but the general consensus seems to be that relay mining loves to devour bandwidth and RAM).

Exchanges can agree to be paid LRC tokens in exchange for access to their asset reserves, effectively opening up entirely new revenue streams without changing anything that they currently do. These are very good deals for everybody involved, and the reason that each of these three components seem so enticing might relate to that factor I that mentioned earlier: Modularity. By creating three different code repositories and assigning different devs to tackle and focus on each one, every piece of the Loopring machine has been thought through, torn down, re-thought through, optimized, re-optimized, and so on. Each of the three components is painstakingly crafted to ensure that every player in the protocol enjoys participating, and continues to do so.

Loopring is doing a lot more than just removing the centralization from an existing institution — it’s creating a trading ecosystem that we’ve never quite seen before. It’s creating an entirely new paradigm for retailers to function and relate to one another under, and it’s a paradigm that’s very much unique to the sort of functionality made possible by the advent of the blockchain.

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