What happened to decentralisation? Loopring founder Daniel Wang weighs in
Loopring looks set to save decentralisation by allowing users to trade directly from their wallets.
Cryptocurrency was born out of a philosophical and technological movement that in part was interested in decentralising an individual's store of wealth to ensure economic freedom. As cryptocurrency has progressed and gained mainstream acceptance, its user base has gradually distanced itself from this founding principle. In that time, many users who have chosen to place their trust in centralised services like exchanges have completely lost their wealth through a never-ending string of hacks, exploits and scams, threatening cryptocurrency's mainstream adoption in the process. Since 2011, over 30 centralised exchanges have been hacked and had funds stolen.
Daniel Wang, former exchange operator and founder of the Loopring protocol, recognises just how pivotal this issue is, and has decided to do something about it. The Loopring protocol allows users to trade directly from their wallets, removing the need for an exchange and ensuring control and security in the process.
We were lucky enough to sit down and speak with Wang to discuss the project’s origins, how it is uniquely different to an exchange, the technological challenges, how they plan on providing a familiar user experience and the future of decentralisation.
Wang's history with cryptocurrency begins with a centralised exchange that he ran back in 2014, which revealed to him many of the issues associated with centralisation. Wang reflected that no matter how well you secure a wallet or exchange, there is always the risk that a hacker will find a way to exploit it. This emotional burden led to Wang shutting down the exchange in 2015, just a year later.
Instead of giving up on being a facilitator of trade, Wang was motivated to do something about the issue of centralisation and security, thinking that the technology that coins were built on could also be their saving grace. Blockchain technology could be used to help secure and facilitate the trade of cryptocurrencies, solving the problem of centralised trade. He notes how ironic the whole centralised exchange system is, commenting that "cryptocurrency is said to be absolutely secure, but trading them is absolutely not secure".
An alternative to exchanges
Loopring offers an alternative to the centralised exchange by allowing users to trade directly from their own wallets. Having already run an exchange, Wang understands that the user experience is critical, and knows that any alternative must not alienate users with an unfamiliar interface or process. He says that using Loopring will be just like using an exchange, even though the backend process will be totally different. Users will still have access to order books, trade history, balances and many of the features they are used to from a centralised exchange.
Furthermore, an order isn't just sent to a single exchange or source of liquidity. Instead, it can be broadcast to as many network participants as the user likes, vastly increasing liquidity, reducing spread and helping users get better prices.
One of Loopring's most attractive features is the idea that private keys and account security is maintained by the user at all times. "Most importantly... your money is still in your own wallet, you just authorise the protocol to move your money around once the order criteria has been met," says Wang. Again, the user experience mimics that of a traditional exchange but with one exception: private keys and recovery seeds are much harder to navigate than just an email-password combo and customer support team.
Wallets, unlike exchanges, often rely on users keeping track of complex and elaborate private keys instead of passwords, as well as equally lengthy public keys instead of account names. In the event of loss, recovery options are extremely limited. Wang notes that these technical details present another hurdle for the adoption of Loopring, one they hope to again solve with good user experience.
Is Loopring a decentralised exchange (DEX)?
We aren't really calling our product an exchange, we're calling it a wallet.
While Loopring can be used by DEXs, the protocol itself is not a DEX, nor does it need DEXs to exist to achieve its goals. In fact, this may be one of the rare cases where the white paper summarises it best:
"We disassemble the component parts of a traditional exchange and offer a set of public smart contracts and decentralized actors in its place. The roles in the network include wallets, relays, liquidity-sharing consortium blockchains, order book browsers, Ring-Miners, and asset tokenization services."
So while Loopring may not be a DEX per se, it is still a highly desirable feature of the next generation of DEXs, which will come to rely on protocols like Loopring, Kyber, 0x and atomic swaps to facilitate many of their goals. Loopring looks set to become the first of these protocols to be deployed on top of NEO, which has led to collaboration between Loopring and the Neon Decentralised Exchange (NEX).
Loopring is an on-chain protocol, but why not cross-chain?
While cross-chain protocols such as atomic swaps exist, they are too clunky to be integrated with Loopring's order matching system, which thus prevents integration into Loopring. Wang is nothing if not determined, and has begun a partnership with a professor at UC Berkeley to solve the problem, although Wang admits that they do not have anything to show off yet: "It's hard, really hard."
Decentralisation: Have we lost our way?
Following the Mt. Gox hack several years ago, many cryptocurrencies were reminded of the importance of decentralisation and changed their attitudes accordingly. The wider community maintained sovereignty over its wealth by adopting the strict use of wallets, private keys and cold storage.
Several years on in 2018, it appears as though many new users are unaware of the importance of this, and continue to hold their wealth on exchanges, trusting them as de facto banks. Banks, however, are built on a foundation of strict rules, consumer protection, insurance and safety measures to ensure individual wealth is guaranteed. Cryptocurrency exchanges, for the large part, are unregulated and free to do as they please, only going so far as suits them.
We asked Wang about his thoughts on decentralisation, or lack thereof, in the current cryptocurrency climate. He has an interesting view, explaining that because of the steep learning curve involved with managing security, most people will actually opt for centralisation because it is the easiest and most user-friendly method. Wang notes that "this sucks" because so many people believe they "own" cryptocurrency, even though they've never once had their own private keys for them.
While Loopring may change this experience for the better by marrying good user experience with the high level of security offered by decentralisation, Wang is still being realistic, noting that "blockchain technologies are still in a very early stage, not mature at all", and that there is a lot more work to be done to drive mass adoption.
Disclosure: At the time of writing the author holds BTC, AION, WAN, LINK, QASH, NEO, XMR, ETH, XLM
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