Loopring Research Report: Advantages, Development Achievements, and Economic Model

Author: Yuanshan@Web3CN.Pro

1. Project Overview and Vision

The Loopring protocol is a zkRollup protocol specifically designed for application development, a relayer, a non-custodial L2 exchange, and a smart wallet. Users can use, trade, and store assets within it while allowing their assets to grow.

The specific details of the above Loopring titles are as follows:

As a protocol, Loopring is an open-source Ethereum zkRollup protocol—used for secure Layer 2 trading and payments.

As a relayer, Loopring is a closed-source zkRollup relayer—the backend (operator) executes all off-chain tasks for zkRollup roll.

As a non-custodial Ethereum exchange, Loopring exchange is a high-performance (super-fast, gas-free) AMM (automated market maker) and order book-based exchange, with 100% Ethereum security guarantees, while also serving as a payment platform.

As an Ethereum smart contract wallet, Loopring is a mobile wallet application with social recovery and other security features, built on Loopring L2 (it is both an application and an open-source smart contract that constitutes the wallet).

Loopring aims to become the world's leading user-oriented financial services application, achieving "banking" for trading, investing, and payments, and becoming the preferred first stop for users to experience the Ethereum financial system.

2. Features and Advantages

As the most widely adopted technology currently, zk-Rollups provide continuous momentum for Loopring. Loopring's On-Chain Data Availability (OCDA) switch (which can significantly accelerate transaction speeds when data is available for off-chain computation), and high-throughput arbitrage mechanisms (which use order rings, order miners, and order sharing systems to achieve near-instant internet-scale liquidity) further distinguish Loopring from other projects.

On-Chain Data Availability (OCDA)

The Loopring cryptographic protocol utilizes a feature called On-Chain Data Availability (OCDA). This hybrid data storage method allows users to choose whether their data is stored on-chain or off-chain. When OCDA is turned off, data is stored on-chain, allowing the network to achieve 2025 transactions per second (TPS). However, if OCDA is enabled and data is stored off-chain—using the so-called Validium mode—throughput can reach 16,400 TPS. This mode gives users the freedom of choice while allowing non-custodial exchanges to match the performance of their centralized custodial competitors through innovations like OCDA in Loopring 3.0.

Order Miners

Bypassing traditional order books and managing liquidity pools, the Loopring protocol employs a unique consensus protocol. In the so-called order miner mechanism, network participants are responsible for quickly filling orders before they are executed or canceled. Those who operate as order miners (similar to miners) receive service fees in the form of LRC tokens (the native token of the Loopring protocol) or share in the margin of the order amounts.

Order Rings

When order miners complete an order ring, Loopring smart contracts decide how to fill it. If it can execute the order on either side of the transaction, the smart contract will perform an atomic swap—transferring directly from the smart contract to the user's wallet. Order rings also assist in ring matching by stringing orders together and settling multiple transactions through several users. Order rings differentiate the Loopring protocol from other DEXs like Waves, IDEX, and Bancor.

Order Sharing

The order sharing feature is implemented through order rings on the Loopring protocol. When the Loopring protocol DEX smart contracts cannot execute an order in a single transaction, order sharing is used to break the order into partial components until the original order amount is fulfilled. The ring matching technology aggregates multiple individual orders into one order ring. Once the Loopring protocol smart contract verifies the orders, each party receives assets in exchange. Orders run as part of subsequent order rings through the order sharing system until these partial orders are fully executed.

3. Development History

Loopring was founded in 2017 and is headquartered in mainland China.

• In August 2017, Loopring was founded by Daniel Wang, a blockchain technology expert who previously worked at Microsoft and JD.com.
• In September 2017, Loopring issued its token LRC. The LRC token is designed for paying protocol fees, rewards, and voting rights.
• In April 2018, Loopring released its first version, called Loopring Protocol 1.0. This protocol is an Ethereum-based smart contract that allows anyone to build a DEX.
• In August 2019, Loopring released its second version, called Loopring Protocol 2.0. This version introduced zero-knowledge proof (ZKP) technology, enhancing the protocol's security and privacy.
• In December 2019, the Loopring protocol transitioned from Loopring 2.0 to Loopring 3.0, improving efficiency by nearly 1000 times. It also collaborated with Bitcoin and integrated oracles in the same month.
• On February 27, 2020, Loopring DEX went live.
• In March 2020, Loopring launched Loopring.io, a cryptocurrency trading platform built on its zkRollup technology.
• In May 2020, Loopring released its third version, called Loopring Protocol 3.0. This version introduced the AMM (automated market maker) model, making the DEX more liquid.
• On June 6, 2020, the Loopring protocol supported ERC20 transfers.
• On December 2, 2020, Loopring's zkRollup AMM went live, improving implementation to allow for exchanges and liquidity changes without gas fees.
• In January 2021, Loopring launched the L2 scaling protocol Loopring Pay, implemented on Ethereum L1 and ZK Rollups, significantly improving transaction processing speed and throughput.
• On August 24, 2021, Loopring supported NFT minting, trading, and transfers.
• On September 27, 2022, the DeFi portal went live on Loopring, allowing Dutch auctions, lending, and other DeFi functionalities to be executed on the Loopring protocol.
• As of May 2023, Loopring has been deployed on blockchains such as Ethereum, Polkadot, and Binance Smart Chain.

4. Team Background

The Loopring team is primarily composed of Chinese members. Below are introductions to the main team members.

Daniel Wang is the founder and CEO of Loopring, chairman of the Loopring Foundation, and a former senior engineer and tech lead at Google, having worked at Google's headquarters in California and JD.com. He is also a co-founder of Jin Online and Yunrang (Beijing) Information Technology Co., Ltd., and previously founded the BitFengGang virtual currency exchange. He now focuses on research and development of cutting-edge technologies such as blockchain technology, virtual currency wallets, and virtual currency payment processing systems.

Daniel Wang completed his Bachelor's degree in Computer Science at the University of Science and Technology of China (USTC) from 1996 to 2001, and obtained a Master's degree in Computer Science from Arizona State University from 2001 to 2003. He earned an MBA from the University of Minnesota from 2005 to 2006.

Steve Guo is the first Chief Technology Officer of Loopring, leading the matching engine and relayer engineering, optimizing zkSNARK verification computations, and designing and developing DEX products. Steve Guo entered the University of Science and Technology of China at the age of 15 and obtained a Ph.D. in Computer Science in 2006. With extensive industry experience at renowned brands like Intel and Cheetah Mobile, he has an outstanding academic background. Steve Guo also founded the blockchain startup Dora Network, possessing deep expertise in sidechain and cross-chain technology, and was the first to launch Cheetah Mobile's blockchain project, Contentos—a project focused on video content sharing and publishing.

Mr. Lin Zurong is a senior advisor to Loopring and serves as the Vice President of Loopring, leading the technology strategy and business development of Loopring, as well as related corporate development work. Mr. Lin Zurong has extensive professional experience and a broad academic background. He is a visiting associate professor at the Chinese Business School of the University of Hong Kong SPACE and is an entrepreneur focused on blockchain, mobile internet, and financial technology. He has accumulated over twenty years of experience in several Fortune 500 companies and, in the later stages of his career, co-founded several joint ventures in mobile internet, financial technology, wearable devices, and artificial intelligence, some of which have received international awards and government innovation fund support.

5. Financing Information

• In August 2017, Loopring completed a $45 million angel investment, receiving funding support from well-known Chinese investors and blockchain project incubator NEO Global Capital, with other investors including Kosmos Ventures, G2H2, Neo EcoFund, Fundamental Labs, and Obsidian.
• In January 2018, Loopring announced the completion of a $5 million private placement, led by Chinese venture capital firm BTCC Pool.
• In July 2019, Loopring announced the completion of a $3 million financing round, led by NEO Global Capital, with participation from world-class venture capital firms Pantera Capital, DHVC, HypeVC, and others.
• In June 2021, Loopring completed a $10 million financing round, led by Bitmain, with other participants including NEO Global Capital, DHVC, Morningstar Ventures, and others.

6. Development Achievements

Loopring Protocol

The Loopring protocol is an open smart contract protocol, defined by Loopring as a decentralized token trading matching protocol. The protocol allows decentralized exchanges (DEX) to trade on Ethereum and other blockchains. It provides functionalities such as order management, matching, settlement, as well as trading privacy protection and flexible trading pair access methods. As of May 2023, Loopring has been implemented on blockchains such as Ethereum, Polkadot, and Binance Smart Chain, and has become an important decentralized exchange ecosystem.

Loopring Smart Contract Architecture Diagram

The matching transaction process of the Loopring protocol is as follows:

1. Users A, B, and C authorize the Loopring matching smart contract (Loopring Matching Contract), allowing the contract to perform transfer operations on the users' designated token accounts up to a certain limit. In the above example, the contract can transfer a maximum of 1000 A tokens from User A's account, 9 B tokens from User B's account, and 100 C tokens from User C's account;

2. Users A, B, and C generate their own orders and digitally sign them with their private keys. Orders are no longer distinguished as buy or sell orders; all orders are treated as exchange orders. User A's order states: User A is willing to sell no more than 1000 A tokens and buy as many B tokens as possible, but no less than 10 B tokens; if partially filled, the exchange rate from A to B must not be lower than 1000/10 = 100.0 (the number of tokens sold divided by the number of tokens bought). Other parameters can also be included in the order;

3. Users A, B, and C send their orders to one or more exchanges in an appropriate manner;

4. The exchange receives the three orders and places them into three corresponding order books, updating the status of each order in real-time through blockchain data while continuously trying to find a set of orders that can be matched—referred to as a trading loop or matching loop. Once it is determined that the current status of the three orders can be successfully matched and the profits meet expectations, the matching is executed.

In simple terms, the Loopring protocol is a next-generation blockchain asset trading protocol. It employs decentralized technology, providing a zero-risk token exchange model and allowing multiple exchanges, wallets, or platforms to compete for off-chain matching and on-chain settlement of the same orders. Loopring will fundamentally resolve some inherent risks of the existing centralized exchange model.

Loopring Pay

Loopring Pay is Loopring's Layer 2 scaling solution based on ZK Rollup technology, which can significantly enhance Ethereum's transaction processing speed and throughput, and supports various asset transactions including ERC20 tokens and NFTs. Currently, Loopring Pay has gone live and has been implemented on Ethereum L1 and ZK Rollups.

All transfers in Loopring Pay occur on the Loopring zkRollup, meaning users must be on the zkRollup to send or receive these fast and free payments.

Loopring Exchange

The first step in Loopring's overall strategy was to develop the Loopring Layer 2 decentralized exchange (DEX) based on the zkRollup architecture, known as Loopring Exchange. Loopring Exchange serves as the application layer of Loopring, connecting millions of users with decentralized finance and the entire cryptocurrency world.

The Loopring DEX is characterized by providing almost instant transaction speeds without sacrificing security, along with transaction fees only a fraction of Ethereum's (high speed, low cost). Other features include: free instant exchange, order book trading, liquidity mining, and allowing users to earn various rewards (completely gas-free). Users can access Loopring Exchange via a web interface by connecting any wallet they own (Loopring smart wallet, Ledger hardware wallet, MetaMask wallet, etc.).

Based on Loopring's own security guarantees, users can achieve trustless management of third-party assets. The same applies to Loopring DEX, which provides services that do not involve users' private keys, ensuring that any unexpected situations do not threaten users' fund security. In any case, users can always choose to withdraw their funds to Ethereum Layer 1.

Loopring Smart Wallet

The Loopring smart wallet is a Layer 2 wallet application that emphasizes social recovery features and is regarded as the flagship product of the Loopring project. The team states that the development of this wallet aims for the highest security and forward-thinking, allowing anyone to safely manage their assets through a decentralized approach.

For ordinary people, trustless asset self-custody often means high and cumbersome operational costs. However, if cryptocurrencies are to reach the public, the current construction models of most wallets are not secure, convenient, or sustainable enough, as they are overly complicated and unfriendly to those with no background. "Many people will completely store their funds in centralized exchanges for convenience, but it is well known that centralized exchanges have long been notorious for various malpractices," the team stated. Undoubtedly, it is crucial that ordinary people need a user-friendly, decentralized, self-custody asset storage method to securely store their assets in their wallets, just like in a bank.

How can Web3 wallets be more secure? Ethereum founder Vitalik Buterin has stated that ensuring asset security, compared to hardware wallets and mnemonic phrases, is better guaranteed with social recovery features!

The Loopring social smart wallet is essentially a smart contract, and its social recovery feature (also known as programmable recovery or social recovery) is a major highlight. As a smart contract, the wallet is controlled by code, allowing for more complex business logic, with assets residing in the smart contract rather than on an individual's address, featuring multi-signature for enhanced security and stability, programmable access control, batch transaction processing, strong scalability, and programmable recovery (social recovery).

Typically, EOA wallets (like the well-known MetaMask) have addresses controlled by the user's private key; if the private key is lost, the address is lost as well. However, smart contract wallets can separate accounts from keys. When a key is lost, users can change addresses by verifying their identity, providing a lower-threshold and more fault-tolerant solution. Additionally, users have more autonomy in their choices.

How does the Loopring smart wallet differ from other types of wallets? Here is a comparison.

• EOA wallets (such as MetaMask) cannot fully guarantee fund security (regardless of the amount). If the password is lost, or if it is stolen, phished, or hacked, the assets in the account will forever be disconnected from the user. Such unexpected situations are very common for EOA wallets.
• Hardware wallets (like Ledger) offer slightly higher security than EOA wallets, but still have their blind spots. Although the private keys of hardware wallets are stored offline, they can still be easily lost or stolen. If an accident occurs, users will have no means to trace their assets.
• The Loopring social smart wallet is essentially a smart contract, and any operation that can be performed by the Loopring smart wallet is based on smart contracts, ensuring the decentralization and security of the wallet itself. The Loopring social smart wallet integrates all functionalities of the Loopring Layer 2 decentralized exchange. If a user's device (wallet) is lost, stolen, phished, or hacked, the user will have various protective measures through the Loopring social smart wallet to safeguard their funds. If the wallet is accidentally lost, the user's guardian can lock the user's wallet to protect their assets. If the wallet cannot be found, the user can recover funds to a new wallet through the guardian. Additionally, the Loopring smart wallet can customize various details, such as setting whitelists or transfer limits to prevent hackers from easily transferring assets.

7. Economic Model

The token of the Loopring protocol is LRC, which is used to incentivize behaviors beneficial to the Loopring protocol ecosystem, granting voting rights within the system, and further promoting the transition to Ethereum L2.

The Loopring token depends on the transaction volume (economic activity) on Loopring Layer-2 (L2) and is distributed on L2. The initial token parameters will be set to 20% of L2 transaction fees. According to the current relayer settings, this means AMM swaps are 2 basis points (0.02%), order book trading ranges from 0.8 to 4.6 basis points (0.008% to 0.046%), and transfers are $0.01.

Tokens are distributed to three types of participants in an 80/10/10 ratio: a) liquidity providers, b) insurers, c) Loopring DAO.

The token distribution of the Loopring project will be configured by the upcoming Loopring DAO, allocated as follows:

80% will be allocated to liquidity providers (LP) on the Loopring order book and AMM. At least 50% of this portion will be used for LRC-related liquidity.

10% will be allocated to insurers. They are users who contribute funds to the security insurance fund.

10% will belong to the Loopring DAO. The DAO decides how to use these funds: buybacks and burns, preventing temporary losses, further enhancing liquidity incentives, grants, etc.

Based on market speculation about the LRC price, it is expected that the minimum price of LRC in 2023 should be around $14, with a maximum price of $17 and an average price of $15.

The possible evolution for 2024 is that the minimum price should be around $197, with a maximum price of $240 and an average price of $200.

The forecast for 2025 suggests a minimum price of around $27, a maximum price of $340, and an average price of $280.

The forecast for 2030 suggests a minimum price of around $1860, a maximum price of $2272, and an average price of $1923.

Future changes to parameters will be made through the upcoming Loopring DAO.

Compared to previous protocol versions (v3.1), tokens belong to LRC holders who lock their tokens for at least 90 days. The new token model rewards LRC holders who contribute to the platform and effectively utilize their assets, and LRC is also used to incentivize behaviors necessary for the overall development of the protocol.

8. Fundamental Analysis

The Loopring network, as a Layer 2 solution built on Ethereum, binds its security to Ethereum while using zero-knowledge proof technology to solve low-cost, high-speed transactions. The team states that zkRollup is very secure, relying solely on mathematics (rather than game theory like other Rollup solutions) and combining Ethereum validators to ensure underlying security. "zkRollups are currently the most forward-looking technology, which is why we chose it as our infrastructure; it empowers any subsequent functionality."

From the current development results, according to defillama data, Loopring's TVL is $111 million, with a market cap of $371.86 million. The latest development achievements of the Loopring project, according to the official Loopring blog, include milestones reached in the first quarter of 2023:

• Over $5.8 billion in total transaction volume achieved
• Nearly 200,000 L2 accounts created

In terms of TVL and market cap, Loopring's TVL is relatively low compared to StareWare's TVL ($552 million).

As a major solution to DeFi trading issues, Loopring's trading design, such as ring pushing, shared liquidity, and open-source features, are its advantages and fundamental aspects.

Regarding the liquidity sharing mechanism, users can join the relayer network by running a Loopring relayer and share traffic with other relayers. This is very important; unlike 0x and other protocols, the network connected through relayer interconnections builds an alliance chain.

The Loopring protocol is the first solution to combine alliance chains and public chains.

Finally, the Loopring protocol is a protocol independent of blockchain systems, allowing it to be deployed on multiple different blockchains, maximizing profit opportunities for Loopring protocol token holders.

9. Risks and Opportunities

Opportunities

The investment opportunities in Loopring are reflected in its advantages.

The first advantage is: Loopring combines the strengths of centralized and decentralized cryptocurrency exchanges. The innovations made by the team in terms of technology and mechanisms enable it to achieve higher throughput and lower costs than decentralized exchanges, while its non-custodial technology improves the security of centralized exchanges.

The second advantage is: The high-level performance provided by Loopring means that algorithmic traders can finally use high-frequency trading strategies on DEXs. Loopring also employs a cryptographic solution to prevent front-running (when someone executes their trade before a pending transaction to profit from the price change caused by that transaction).

The third advantage is: The open-source, audited Loopring protocol does not rely on any external validators, meaning that no individual, company, or government can interfere with users and their cryptocurrencies. Additionally, users automatically receive digital receipts for all deposits and withdrawals, preventing centralized exchanges from experiencing "blow-up" events, which means funds can always be recovered, representing another layer of user-driven design mechanism.

In summary, investors should consider Loopring's high scalability, strong privacy protection, lower transaction costs, open protocol ecosystem (as an open Loopring protocol that allows developers to build various decentralized applications (DApps) based on the Loopring protocol, facilitating more innovation and growth), flexible asset trading (Loopring supports trading of various asset types, including cryptocurrencies, tokens, stablecoins, etc.), and multi-chain interoperability (Loopring has expanded to multiple blockchain ecosystems, including Ethereum, Polkadot, and Binance Smart Chain, enabling it to provide users with broader digital asset trading and liquidity) as factors to reference for investing in Loopring.

Risks

One aspect of Loopring's risk lies in technology.

In the current early technological period, Loopring employs zk-STARK technology, which means it can provide high scalability and transparency without the need for one-time keys or signatures. This makes Loopring an efficient, secure, and private decentralized trading protocol. Although it is a very promising zero-knowledge proof technology, it also has shortcomings (which are common challenges faced by other projects using zk-STARK technology).

1. High computational costs: Compared to other zero-knowledge proof technologies, zk-STARK requires higher computational costs and longer proof times. This may render it unsuitable for real-time applications in certain cases.

2. Requires substantial storage space: To achieve high scalability, zk-STARK proofs require a large amount of storage space. This may make it difficult to store proofs on certain devices, thereby reducing user experience.

3. Requires trusted setup: The correctness of zk-STARK depends on a set of predefined parameters that need to be set by a trusted setup party. If the setup party is compromised or attacked, it may affect the security of the entire system.

4. Requires a higher learning curve: Compared to other zero-knowledge proof technologies, zk-STARK has a higher technical threshold and learning curve. This may make it more challenging to use and implement, thereby limiting its application scope.

Additionally, competition from other competitors like Uniswap poses pressure on Loopring, and there are inherent security vulnerabilities and attack risks within the protocol itself, risks arising from the practical application of technology, and legal regulatory risks (if certain countries or regions impose restrictions or bans on cryptocurrencies, it could negatively impact Loopring's development and token prices), all of which are factors that investors need to consider comprehensively.