Previously, we took a look at EOS (price at time of writing EOS 14.28 USD) as an alternative solution to centralized exchanges like Coinbase or Binance. In this article, we take a closer look at another decentralized platform, LoopRing (price at time of writing LRC 1.36 USD).
LRC is a not just a decentralized exchange, but a protocol. Just like a decentralized exchange, it allows for users to buy and sell currencies without being reliant on a single central authority. However, it goes above and beyond that with their ‘ring-matching’ protocol, which ensures that users get a fair price, and that miners are motivated to find the best rates.
By now most readers should be familiar with what it means to be decentralized. In summary, it means that there is no central authority that has to be trusted as in intermediary during exchanges. In contrast to banks, where users rely solely on the bank to accurately reflect their account balance and transact the accurate amounts, decentralized platforms allow for transactions between parties without a middleman.
In LoopRing, tokens do not have to be placed on the exchange before they can be traded. Centralized exchanges such as Binance or Kraken require the user to transfer their tokens into the exchange before they can be traded. This means that any downtime the server experiences will have a major impact on users: the tokens held in the exchange are frozen until it is running again.
In LoopRing, the tokens are always held in the user’s wallet until they are transacted. This way, in the worst-case scenario where all LoopRing nodes are compromised at the same time (almost impossible), users are still able to access their funds. As cryptocurrency gains traction, centralized exchanges have been shown to be bottlenecks at times; having a decentralized exchange with funds retained by users is quickly becoming a much-needed addition to the crypto-sphere.
A centralized exchange will face issues of liquidity. For example, they might be hard-pressed if multiple users withdraw large amounts of a currency in a short span of time: there might not be enough supply for them to allow for a quick transaction. While the market may have enough volume, a centralized exchange can only tap on the resources that it contains within its own ecosystem.
KyberNetwork (price at time of writing KNC 4.29 USD), as a decentralized exchange, solves this issue by having a reserve of all tokens. These are contributed by KyberNetwork, as well as other members of the network, who place their tokens in reserve for passive income each time their tokens are used within the reserve. You can find out more about KyberNetwork here.
LoopRing has taken a different approach to maintain high liquidity. Rather than maintaining a reserve, which can be capital intensive, it uses ‘ring matching’ to break orders up into smaller orders, and trading them on multiple exchanges at the desired price or better. Using this method, it removes the boundaries of exchanges. Rather than having to keep tokens on multiple exchanges, LoopRing allows for users to tap into the full market when trading cryptocurrencies.
The rings consist of “multiple orders linked together in a way that allows them all to be matched at their desired exchange rate or better". (Retrieved from LoopRing Whitepaper: https://loopring.org/resources.html)
Image Taken From LoopRing Whitepaper
In this way, the token sold in the first order is followed by second order to buy the same token, and so on. By chaining them together, it creates a loop that allows for effective buying and selling without LoopRing having to maintain a fixed reserve of tokens. The main criteria for the loop to be validated is that the exchange rate for the orders has to be equal to, or greater than, 1. This would indicate that every order within the loop has met the minimum desired requirements of the users.
LoopRing encourages fair treatment for both the miners and the traders with its ‘order ring’ system. Users receive fair prices for their tokens, as their trades are only conducted when the price matches their request, or is even better than their request. To incentivize miners to find the best rates, there are 2 ways for a miner to receive payment. Whenever an order is created, the user has to indicate how much LRC tokens will be paid as a fee, as well as the percentage of the margin made that can be claimed by the miner.
1. LRC Tokens
If a miner wants to be paid in LRC tokens, he/she can choose to take the LRC as a payment for transacting the order.
2. Margin Split
In the case that the margin split percentage is more attractive than the LRC fee, the miner can choose to take the margin split. This is illustrated in the image below.
Image Taken From LoopRing Whitepaper
As can be seen, if the miner is able to find a margin that is attractive enough, they can opt for this method of payment. The downside is that the miner will have to pay a transaction fee to the user, equivalent of what the user would have paid the miner.
LoopRing’s method of paying the miners is in anticipation of the cryptocurrency market stabilizing. For now, there is profit to be made from arbitrage trading, and large margin trades can be accomplished. As the market stabilizes, LRC token payment will be a way for miners to get consistent and steady income from creating order rings for user’s transactions. To find out more about LoopRing’s fee model, you can look at their equations here.
LoopRing is a protocol, not an exchange. For now, it runs on ERC20, which makes it compatible with Ethereum’s public blockchain. However, as a protocol, it is not bound to Ethereum’s smart contract platform. LoopRing has included in their roadmap plans to be integrated with NEO, Qtum, and EOS; all promising smart contract platforms who have gained significant traction over 2017.
LoopRing is not just a decentralized exchange platform: it has taken the benefits of a decentralized exchange, implemented a way to increase liquidity, incentivized fair trade, and created a protocol that can operate across all the major smart contract platforms. This is a project to keep an eye on this coming 2018, as the cryptocurrency community looks for solutions to bottlenecks when trading.