Smart contract platforms like Ethereum face competing interests in security, decentralization, and scalability, known as the blockchain trilemma. Ethereum has historically prioritized security and decentralization, which, at times, comes at the expense of throughput, speed, and cost of transacting on the network.
Layer 2 scaling solutions (L2s) are networks built on top of a main blockchain, such as Ethereum, often with the purpose of improving scalability to make transactions faster and cheaper. L2s rely on the security of the underlying main blockchain and use it to settle L2 transactions and store other information critical to the L2 network’s operations.
Loopring is built using ZK technology which enables entities to authenticate and confirm data without having direct knowledge of the information itself. Loopring was one of the first-ever ZK rollups and can theoretically operate at 1000x the speed of Ethereum, supporting over 2000 transactions per second.
Loopring’s native LRC token provides the means of paying fees for using the protocol. The platform also hosts an exchange through its own Loopring L2 app that allows for asset swaps, trades, and payments. LRC is used to provide liquidity to these markets, earn rewards for liquidity provision, and vote in Loopring’s decentralized autonomous organization (DAO).
How was Loopring developed?
Loopring was launched in 2017 by Wang, Jay Zhou, Alex Wang, and Matthew Finestone. Wang, who formerly worked for Google, first served as Loopring’s CEO before being replaced by computer scientist (and then-Loopring CTO) Steve Guo in 2022. Jay worked at PayPal before becoming COO of Loopring. Finestone was the head of business development at Loopring until 2021, and has since moved on to other positions, including a brief stint as GameStop’s head of blockchain.
In 2018, Loopring focused primarily on decentralized exchange (DEX) solutions, and offered the Loopr web wallet (which connected with Loopring’s DEX) and a web-based DEX called Circulr. Loopring eventually focused on ZK rollup technology to improve the efficiency of its decentralized finance (DeFi) initiatives.
Loopring raised more than $80 million through multiple funding rounds, with much of this backing coming from China-based ventures. The project gained further attention in 2022 when it was announced that GameStop would build an NFT marketplace on Loopring’s L2.
How does Loopring work?
Loopring is best known for its Ethereum L2 solution, where it hosts the LRC token. However, Loopring is built to support any blockchain, where it uses the “LRx” convention to name tokens native to other blockchains (for example, LRN is the token for its L2 solution built on the NEO blockchain).
The name “Loopring” may also refer to other products developed by the development corps, including:
- Loopring exchange: a DEX that offers both the functionality of an automated market maker (AMM) and an order book to facilitate digital asset trading. The Loopring exchange can also help users create and transfer non-fungible tokens (NFTs).
- Loopring wallet: an app that allows users to control, transfer, and trade their crypto, and is integrated with DeFi tools.
Loopring’s ZK rollup
Loopring protocol uses zero-knowledge proofs (ZKPs), more specifically zk-SNARKs, to prove that the data it processes is valid without revealing the information itself.
ZKPs are complex mathematical operations that bundle multiple transactions together, verify them, and communicate them to the L1 as a single transaction by the ZK rollup. With much of the computation on ZK rollups (like Loopring) being performed on the L2 (off-chain), this minimizes the amount of data stored on the L1 chain (on-chain) which minimizes incurred fees and improves transaction speed.
The Loopring Relayer is the back-end system that performs cryptographic validations of data, generates ZKPs, allows for trading functionality on Loopring’s exchange, and communicates with Ethereum.
DeFi and NFTs on Loopring
The purpose of an L2 is to improve the usability of a network like Ethereum. For many, the rich infrastructure of DeFi drives the demand for smooth, cheap, and fast transactions. Accordingly, Loopring has focused on applying its ZK rollup technology and broader platform in the context of DeFi.
The Loopring L2 app hosts two primary types of digital asset exchange: AMM-based and order book-based trading. Liquidity providers (LPs) who supply the assets to these exchanges are rewarded with LRC generated from protocol fees.
Loopring announced NFT minting and trading on its L2 in August 2021 following the NFT boom that saw many Ethereum users frustrated with network congestion. At the time, transactions involving NFTs caused high gas prices and slow transaction times, a problem Loopring aimed to solve with its L2.
Further, NFTs minted on Loopring’s L2 can be transferred to L1, and vice versa, for minimal fees. Thanks to its role in solving congestion issues, Loopring garnered the attention of GameStop when the company was looking for a partner to build its own NFT marketplace.
How is the LRC token used?
LRC is a digital asset on Ethereum that follows the ERC-20 token standard and can be used across dapps built using the Ethereum Virtual Machine. The project introduced new tokenomics for LRC in January 2021, intending to incentivize further use of the L2.
Transaction fees—paid in LRC—are distributed to ecosystem participants to incentivize good behavior and continued growth. In addition to the payment of transaction fees, LRC is used for staking and collecting rewards (see above).
When a user pays a transaction fee to a Loopring Relayer, 20% of that fee goes to a protocol fee, which is further divided among: liquidity providers in AMM pools and makers on the orderbooks (80% of the protocol fee), insurers of the protocol (10%), and the Loopring DAO (10%).
Finally, committing LRC in community votes allows users to participate in the project’s governance. The decentralized autonomous organization (DAO), made up of LRC holders, directs aspects of project development and decisions like how to allocate protocol fees.
Loopring essentials
- Loopring is a layer 2 scaling solution that is most well-known for building on the Ethereum blockchain.
- Loopring’s primary focus is two-fold: Ethereum-based decentralized finance (DeFi) solutions and non-fungible tokens (NFTs)—the latter has allowed it to partner with GameStop as the basis for an NFT marketplace.
- The LRC token is used to pay for protocol fees and incentivize participation on the platform by rewarding players like liquidity providers.