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Loopring is a layer-2 technology that allows for faster and cheaper transactions on Ethereum. It supports the Loopring Decentralised Exchange (DEX) and the native LRC token. This guide will teach you how to move funds onto Loopring, use the DEX as well as earn money by providing liquidity.
The number of investors utilising decentralised finance (DeFi) protocols has exponentially increased over the last few years. Many DeFi protocols are built on the Ethereum blockchain and utilise the Ethereum network for transactions.
While promoting the decentralisation of traditional financial services, the increasing number of users has led to problems of congestion on the Ethereum network, which has resulted in higher transaction (gas) fees. To tackle this scaling problem, layer-2 (L2) solutions were developed.
A layer-2 solution is a secondary blockchain that lies on top of the underlying blockchain and completes the majority of the work. The L2 processes the transactions of the protocol before posting them to the Ethereum blockchain. This provides the same level of security as the Ethereum blockchain and means the network can handle a much larger volume of transactions, often referred to as throughput.
Loopring is a layer-2 scaling provider. Established in 2017, it allows for the production of highly scalable decentralised exchanges (DEXs), centralised exchanges (CEXs) and payment applications without a trade-off in security. The Loopring protocol achieves this by using zkRollup technology. Throughput on a Loopring application can reach 1,000x that of Ethereum, with transactions that are 1/100th the cost.
Any exchange can integrate with the Loopring network and take advantage of the scaling capabilities and potentially increased liquidity. This includes exchanges that are already established.
From the development of the Loopring protocol, the Loopring Exchange was born.
The exchange was born out of the layer-2 scaling solution and was the first DEX to be launched on the system in February 2020. Allowing users to trade via an automated market maker (AMM) and order book trading system, the layer-2 exchange provides extremely low gas fees and increased speed without a trade-off in security. Thanks to the application of zkRollup protocols, users can enjoy low fees while maintaining custody of their digital assets at all times.
Loopring's order book exchange utilises an innovative order ring system. An order ring occurs when multiple orders from different token pairings are linked together (ring-matched). Ring matching allows all desired exchange rates to be matched or even bettered. The system aims to greatly improve liquidity in comparison to only matching orders from the same token pairing. Ring matching is completed by relayers.
Relayers, sometimes referred to as "ring miners", match orders in the background of the system, maintain the trade history and broadcast new orders. Relayers are rewarded for their efforts with the native LRC token.
While focusing primarily on exchanges, the Loopring Exchange also doubles as a payment application, allowing users to cheaply and securely transfer ERC-20 tokens or ETH to any Ethereum address via the layer-2 network.
Zero-Knowledge Rollups, or zkRollups, are integral to the Loopring protocol and are the foundation of the layer-2 scaling solution. zkRollups bundle multiple transactions together and store them in an off-chain database. Each zkRollup can be thought of as a block on the Loopring protocol.
zkRollups efficiency comes from an ability to demonstrate transactions without revealing what the transactions exactly were. This is completed using validity proofs that attest to what happened off-chain (off the Ethereum blockchain). The Ethereum blockchain verifies the proofs and allows the transactions to occur. As much work as possible is completed off-chain with only verification completed on-chain.
zkRollups allow for the same non-custodial transfer of assets, meaning users remain in control of their private keys but can complete transactions much faster compared with the Ethereum blockchain. 4,000 transactions can be added to a single rollup or "block", which is then processed as a single transaction on Ethereum.
Merkle trees allow decentralised blockchains to share data and verify it, a process required by layer-2 scaling solution like Loopring.
On Loopring, Merkle trees are a snapshot of a user's account, token balance and transaction history. This is stored on-chain (on the Ethereum blockchain). Loopring Merkle trees allow transactions completed off-chain (on the Loopring network) to be verified on-chain. Data within Merkle trees are organised in a power-efficient manner, meaning less processing power is required for verification on Ethereum.
The use of Merkle trees means that if the Loopring Exchange disappears, or goes rogue, a user can still gain access to deposited funds. The last Merkle tree snapshot can be used in conjunction with the Ethereum blockchain as proof to recover funds if anything on the DEX goes wrong.
Before trading on the Loopring Exchange, you must onboard the layer-2 network. Onboarding to layer-2 requires a web 3.0 digital wallet such as MetaMask. MetaMask is an online Ethereum digital wallet that acts as a bridge between your cryptocurrency assets and decentralised applications and comes in the form of a browser extension.
Although gas fees are almost non-existent on layer-2 systems, depositing digital assets from outside a layer-2 network does require a gas fee. However, the gas fees are standard and comparable to a simple token transfer on an exchange like Uniswap. Once this initial gas fee for your deposit is paid, your digital assets will then be within the gas-free layer-2 network until you wish to withdraw.
Once you have funds deposited into your Loopring layer-2 wallet, you are ready to begin exchanging.
The digital assets you deposit in the layer-2 network are mapped to the Loopring Merkle tree. This means that the assets can be recovered if anything were to happen to the Loopring Exchange.
The Loopring Exchange supports both AMMs and order book exchanges. Here we'll go through the steps of swapping cryptocurrencies via the AMM.
Once the exchange is completed, the balance will be updated in your layer-2 wallet. Exchange history can be evaluated in the "Orders" tab.
The Loopring Exchange also provides users with the option of trading via a traditional order book, similar to a centralised exchange.
The advantage of the order book exchange is that a user can place limit orders. Limit orders are created when a user defines a price that they wish to buy or sell at. The order remains open on the order book until another trader comes along to complete it.
The order book exchange offers market makers a 0.02% rebate. Makers are those that leave open orders on the exchange which provides liquidity. When that order is filled by another trader, the maker receives 0.02% of the traded amount – effectively a negative fee for trading.
The Loopring Exchange AMM utilises liquidity pools to offer smart contract exchange of cryptocurrencies. Liquidity can be provided to the liquidity pools, which are subsequently used by traders.
For risking assets, liquidity providers earn 0.20% from all trades completed via the AMM, with the awarded amount being proportional to the user's share of the liquidity pool. The accrued fees are added to the liquidity pool and then claimed when an investor withdraws funds.
To become a liquidity provider, a user needs to deposit equal amounts of both assets in the liquidity pool.
In return for the liquidity deposited, a user will receive liquidity provider tokens minted by the Loopring Exchange. This represents the user's share of the liquidity pool.
When depositing liquidity into a liquidity pool, there is always a risk of impermanent loss.
Cryptocurrencies must be deposited in equal proportion to a liquidity pool. However, large movements in price can result in an imbalance of tokens. Arbitrage traders take advantage of this imbalance, trading with the pool until the pool is rebalanced and in line with new asset prices. After rebalancing, a liquidity provider may have lost or gained cryptocurrency tokens.
When withdrawing funds, a liquidity provider may leave with a slightly different ratio of tokens compared with the equal proportion they entered with. At the current market value, those assets may not be worth as much in comparison with assets that had stayed in a digital wallet or exchange.
Impermanent loss is only realised when an investor withdraws funds from a liquidity pool.
Liquidity provider tokens represent a user's share of a liquidity pool and are received once liquidity has been provided. They allow users to remain in complete control of their digital assets and help to create multiple levels of liquidity in the DeFi ecosystem.
For depositing cryptocurrency with a liquidity pool in Loopring, you will receive liquidity provider tokens in your layer-2 wallet. LP tokens can be viewed on the "Pool" page and in your "Balance".
If a user deposited equal proportions of ETH and DAI in the ETH-DAI liquidity pool, they would receive LP-ETH-DAI tokens in their layer-2 wallet.
For certain liquidity pools on the Loopring Exchange, users can stake their liquidity provider tokens to receive further rewards. The AMM liquidity mining initiative was launched at the start of 2021 to encourage users to move from the layer-1 Ethereum network to layer-2. Liquidity mining opportunities change every 14 days and can be found on the "AMM Info" tab and filtering by "Rewards".
To withdraw funds from a liquidity pool on the Loopring Exchange, follow these steps:
Note. Removing liquidity from a liquidity pool does incur a small transaction. Although the operation is completed on layer-2, a small layer-1 transaction is required.
LRC is the native ERC-20 token to the Loopring protocol and was launched in August 2017 as part of an initial coin offering. The token has primarily stayed the same for 3 years and was used to reward relayers that operated the system. However, in 2021, the LRC token utility will be advancing to fall alongside the evolving Loopring platform.
LRC token holders will be rewarded if they use their assets for the good of the Loopring system, which includes liquidity providers, relayers (operators of the system) and those offering governance. The protocol fee, which is 5-20% of all layer-2 transaction fees, is collected and distributed by the relayers to all LRC token holders that benefit the system.
Starting from Q2 2021, users can provide LRC to an insurance fund that is kept on the layer-1 Ethereum network. Although highly secure, Loopring acknowledges that bugs in smart contracts can occur and therefore will be implementing an insurance fund. 10% of all protocol fees will go to liquidity providers of the insurance fund.
In Q3 2021, Loopring aims to launch a decentralised autonomous organisation (DAO) for the governance of the Loopring protocol. Holders of the LRC token will be able to vote and govern developments of the system such as the distribution of protocol fees, the protocol fee percentage and what triggers the use of the insurance fund. Decision-makers will receive 10% of all protocol fees.
The LRC token remains crucial in the Loopring reputation system. To create a DEX on the Loopring protocol, DEX owners must stake 250,000 LRC. The staked LRC provides security for users and can be burned by the Loopring protocol if there is any malicious activity by a DEX. This is referred to as "slashing". A benefit for DEXs is that by staking LRC, DEXs can reduce the fees associated with using the protocol.
The LRC token is ultimately deflationary due to the burning processes associated with the deterrence of malicious activity. Some tokens are also burned through transactional processes.
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