The world of cryptocurrencies has been expanding at a dizzying pace. Ethereum, the second-largest crypto by market cap, for example, has already started work on an upgrade to cut transaction fees and scale-up processing speed. But with the upgrade some time away, investors have been worried about the costs and speed of transactions. This is where the Loopring project comes in handy.

Founded by Daniel Wang, an ex-Google software engineer, the Loopring Project aims to overhaul the Ethereum blockchain by multiplying the speed at which the existing smart contracts system operates. It facilitates anonymous and trustless transactions by using Zero-Knowledge (ZK) Proofs—a way of authenticating information without exchanging exact details.

Developers have claimed that the Loopring protocol can help layer 1 blockchains scale up by 1,000x and achieve remarkable speeds of 2,025 transactions per second (TPS). Even the fees charged by the Ethereum network are sky-high, which the Loopring reduces to less than a percent. Currently, the transaction fees on the Ethereum blockchain can go as high as $200 and the blockchain has a limit of about 14 transactions per second, per a Coindesk report.

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What exactly does the Loopring project do?

The Loopring project adds a layer 2 upgrade. Simply put, it decongests the main chain by moving all the processing to another layer. It unlocks blistering speeds by using ZK Rollups that allow transactions to be verified without accessing the attached personal data.

The Loopring protocol also incorporates ‘near-instant finality’, making transactions unalterable, tamper-proof, and irreversible when the validation is complete. This improves the throughput of the entire blockchain.

The protocol is also a ‘blockchain agnostic’ open protocol (as termed by the developers in their whitepaper). This means it is not limited to Ethereum and can be deployed on top of any blockchain at no cost for enhanced functionality.

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How does the Loopring protocol work?

All the above features are powered by architectural design overhauls that make blockchain processing a seamless operation.

ZK Proofs: The commonest example involving ZK Proofs is that of age verification by government agencies. One can convey their age without revealing the exact birth date and only mentioning their birth year (which is also encrypted on a blockchain). Such Zero-Knowledge Proofs on Loopring are known as SNARK (Succinct Non-Interactive Argument of Knowledge).

The SNARK is maintained as a validation proof on the main chain (layer 1). Smart contracts can update the state of all transactions on layer 2 only after proof of validation is received, thus making ZK rollups very critical in maintaining user privacy.

Benefits of using ZK Rollups: Implementation of ZK proofs mean lesser data needs to be accessed, thus reducing the size of transaction data as well. ZK rollups are hence able to bundle up more transfer data into a single set, allowing for cheaper transacting. This significantly improves the processing speed of the network.

Ring Mining: According to the Loopring whitepaper, “An important improvement over current decentralised exchange protocols is the ability for orders to be mixed-and-matched with other, dissimilar orders, obviating the constraints of two-token trading pairs and drastically improving liquidity.” Let’s delve into how that happens.

The Loopring protocol relies on ‘ring miners’ to execute all these tasks necessary to continue uninterrupted operation. Ring Miners are enablers on the network who fill up orders before they are placed or completed. What does this mean? Let us understand with an example.

Let us say A wants to sell 100 AAVE (a decentralised application programmed on ethereum) and buy 5 ETH (ethereum's native currency ether), B wants to sell 10 ETH and buy 80 BNB (Binance Coin), C wants to sell 100 BNB and buy 350 SOL (Solana), and D wants to sell 450 SOL and buy 2 BTC (Bitcoin). In this case, the ‘order ring’ of four orders will be settled as follows:

A will get ETH from B

B will get BNB from C

C will get SOL from D

D’s order remains unfulfilled

Not all order rings will always be complete and few orders will be left out. Such pending orders will be matched with other order rings by select ‘ring miners’ such that they can still be executed. These unmatched orders may even be consolidated into one new order ring that balances every transaction involved.

Ring Miners earn a service fee for devoting their computing power to Loopring for matching unmatched transactions with other order rings on the network. This mining fee is paid in the form of LRC, the Loopring token. This fee may also originate from a margin gained out of unbalanced orders. The miner is free to choose whether the fee should come in as LRC or margins in other cryptocurrencies.

Such a structure eliminates the need for transacting to occur in pairs, i.e. a buyer and a seller. There can be a plethora of orders with one order balancing the other and so on until all transactions are matched against another and settled.

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Benefits: This mixing-and-matching facility means that the Loopring Project allows the use of multiple cryptocurrencies over one decentralised exchange that runs the protocol.

This order processing is done ‘off-chain’ outside the main net (layer 1 blockchain), thus freeing it up for maintaining records and robust security.

What is the value of LRC?

LRC was launched in August 2017 and incorporated into the ethereum main net in December 2019. LRC is currently trading at $2.2 and has a market capitalisation of $2.9 billion, per CoinMarketCap data. In 2021 alone, the price of LRC has risen nearly 120 percent to $2.2 from $0.17.

However, 10 percent of the LRC fees are burned, thus creating a system of reducing supply. This is by design and intends to pressure the price into an uptrend over time.

Loopring combines the best of both worlds – centralised as well as decentralised exchanges, thus creating a hybrid product that can be incorporated into any blockchain network. Being a unique yet easily deployable solution that improves speed as well as scalability, the Loopring Protocol has unlocked a whole lot of possibilities in the decentralised finance space.

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