The New Trading Economy of Loopring
When trading in a space that is famous for its delirium-inducing volatility, a failure to heavily diversity your assets is a textbook example of stupidity in action.
If you’re not diversified, and you’re wiped out by a bad beat in the price action, you have nobody to blame but yourself. With all your tokens in a single basket, you’re practically trying to create a cautionary tale. It boggles, simply boggles my mind that anybody could be careless enough to not diversify.
So you can save me the preaching, okay? Obviously, I’m already fully aware of how stupid I am for making my portfolio consist entirely of Loopring.
It’s a stupid portfolio to have, and I’m stupid for having it, and it’s not the sort of portfolio that I could recommend to anybody else with a clean conscious. But, the thing is: After a significantly lengthy analysis of enough tokens to melt a small portion of my brain, I simply couldn't find anything else in crypto that appeared to have risks as low, and a potential as high, as Loopring, One by one, I dropped each of the other tokens I was holding to buy more LRC, and, while it is always a stupid decision to put all of your eggs into one basket in crypto, with zero exceptions, I’m going to defend my decision to do so, anyway.
If you’ve been in crypto for the past month, odds are that you’ve heard some stuff about DEX’s, or decentralized exchanges. It’s possible that you’ve even heard so much about them that you’ve become sick and tired of the subject. Much like September seemed to adopt a specific theme and become Privacy Coin Month, October shaped up to be DEX Token Month (I believe the theme become official on 10/9, when The CryptoSyndicate published their suspicions of Bittrex).
My freshly rebooted portfolio, near the start of October, included Kyber, 0x, OmiseGo, Neo, and the Loopring that would eventually devour them all.
I dropped Neo because I felt that we’d simply spent too much time together. Things had gotten stale between us, and I no longer had the feeling that I could lose all my money in it. It just wasn’t giving me the buzz that I need from holding a crypto asset, anymore.
I only owned OmiseGo for about a week, at which point I came to the conclusion that it was an ideal longterm hold… just not for me. Not now, anyway.
As for Kyber and Ox: I think they’re both fantastic projects, and certainly not shitcoins by any stretch of the imagination. Their whitepapers are fantastic reads, and it was probably the fact that I’d just finished reading them that Loopring’s hit me so hard that I was forced to sell them both to buy more LRC tokens.
I can’t code, and I’m far from a computer scientist — to be honest, I can barely read and write at all — but I saw a small but very significant difference in the philosophies of Ox/Kyber, and Loopring: Modularity. Loopring keeps wallets, the smart contracts responsible for buying/selling (which it separates into four different contracts!), and the mining software pack all very, very separate.
And it absolutely nails each of them.
But in order for this point to make sense, instead of just coming off like the ramblings that might follow a head injry, we’ll need to compare how Kyber, Ox, and Loopring operate. I will be explaining each one on a plebeian level, both to make the explanations easily digestible, and because that’s as in-depth as I can get because I’m stupid.
In the film Robocop, the body of Delta City police officer Alex J. Murphy is blown apart by the shotgun shells of heartless, whooping thugs. In a ruined state and hopeless to save in any conventional manner, his body meat is given to a crime prevention corporation — Omni Consumer Products — for the purpose of testing their new Robocop program. No longer is Murphy an officer of the law concerned with things like bullets, fires, or falling down several stories in parking garages. He is so badass that he is almost entirely unrecognizable as his former existence of Alex J. Murphy.
What I’m getting at is: The Kyber Network is what happened when EtherDelta was shotgunned to pieces by thugs and then given a titanium body.
Like EtherDelta, Kyber is technically an exchange. Unlike EtherDelta, Kyber offers the stuff expected of a high-end exchange, like derivatives, basic liquidity, and trades that execute. The liquidity is provided by “reserves,” which are simply individual token owners who offer up a large amount of tokens — after completing KYC checks — and set buy and sell prices for them. When a trader places an order on the network, the going rates at the reserves are compared and a purchase is made that gives the trader the best deal in accordance to the prices they’ve designated. The speed is extremely fast: The trade is either instantly filled, or instantly fails.
As a bonus to being an exchange platform, Kyber will also build a payment network that will support paying for goods and services with any token, thanks to the network’s atomic swap capabilities (which allow buy and sell orders on the exchange to be made with any pairings, as well).
The Ox Protocol receives some heavy praise in Loopring’s whitepaper, with the authors acknowledging it as being very influential in how they approached the design of their own protocol. Unlike Kyber, Ox is technically specified as an OTC market. I could lie and tell you that understand why that’s the case, but I’ll just be honest about it: That’s what I saw several times when I googled the matter.
The Ox Protocol functions by assembling a sort of hive mind of crypto asset retailers which are all wired into each other; when somebody places an order with one retailer, they’re placing an order with all of them. These retailers are called “relays” on Ox. Anybody can act as a relay by creating their own marketplace with components required by the protocol. As a relay, you can set your own prices, as well as specify the trading fee (in the form of ZRX tokens) that you wish to accept. These can be set to whatever you want, but the protocol will favor the best deals when picking which relay to execute an order with, so if you’re greedy with your prices you won’t be seeing any business.
Perhaps the most exciting aspect of Ox: From the very beginning, the devs have looked at ways to expand the protocol beyond the crypto asset market. Examples given of potential applications in the future include decentralized loans, and fund management system that could utilize smart contracts to ensure funds are being used properly by the executives in charge of them.
Like Ox, Loopring is a protocol that binds individual parties together to form a highly liquid network to facilitate OTC transactions. Also like Ox: trading fees are handled in the form of a network token (ZRX for Ox, and LRC for Loopring).
Where Loopring differs from the other approaches: The protocol is not utilizing reserves or marketplaces built on the protocol to source its assets and build its liquidity.
Loopring’s network is comprised of exchanges. And the main demographic for participants at the moment? The common, boring, regular ol’ centralized exchanges (AKA The Enemy). Unlike Kyber or Ox, Loopring’s primary concern appears not to be with making its satellites compliant with one another, but rather with developing the best method to decouple their order books from the markets behind them as much as programmatically possible. The only condition required of the protocol for a market’s inclusion: That it accepts LRC tokens for trading fees on the trades facilitated by the network.
That’s it. So that means that possible markets that could lend their order books and assets to Loopring’s relay service is, basically… all of them.
Naturally, this results in a far more eclectic, and — let’s face it — downright messy assortment of data and asset resources than those utilized by Ox or Kyber. Whereas Ox and Kyber pull and compare data from satellites meticulously designed to play nice together, Loopring needs to reconcile wildly different sources with one another. We’re talking about a relay network on which both Yunbi and Shapeshift could exist.
To handle the complexity of this task, LRC is developing a mining software pack that exists as a project entirely separate from the one housing the smart contracts (four of them!) which handle the trading logic performed with the data that’s aggregated via the mining software. In addition to bringing order book and reserve details to Loopring’s wallet users, this software pack will also deliver the info from the wallet users and back to the exchangers to tell them that an order has been filled (or partially filled — because, yup, this protocol is capable of partial fills!), at which point the miner delivering this info collects a portion of the order’s trading fee as a reward for their services.
The “miners” are Loopring’s version of Ox’s “relays,” in that they gather data for the network to evaluate, and report back the results of those evaluations. The main difference between miners and relays, though: Miners don’t need to build and maintain entire marketplaces in order perform a service for the network in exchange for a reward. The barrier to perform a service for the network is significantly lower with Loopring.
Also a significant result of Ox’s third party marketplace mechanism: It significantly impedes the rate at which the network can grow when you need to create new reserves and marketplaces as you grow. A huge advantage for Loopring is that, right out of the gate, it has a massive supply of order books and liquidity that it can potentially partner with. All it takes is an agreement to accept LRC tokens, and to take a cut on their usual rate in order to bring the miners’ payment into the fold.
What… exchanges have to take a cut? Why would they be interested in something like that?
Yes, this might seem like a lousy deal for the exchanges at first glance, but consider it in this way: Trading fees are 100% profit. What eats into an exchange’s profits? Operating costs — which are not increased by partnering with Loopring. So, basically: By allowing Loopring to access their assets, exchanges can bring in a nice chunk of additional income without having to do anything.
Now that sounds like a deal that will pique some interests, right?
Let’s quickly review the incentives for each player in Loopring’s economic model:
- Traders can trade any token for any token from the safety of their own wallets via Loopring’s ring-matching mechanism, which comparison shops to provide them with the best prices possible (here’s a work-in-progress look at the Loopr wallet, which is currently sporting a UX that’s a bit rough and incomplete, and is using mock data rather than actual relay data, but provides a nice glimpse at the user experience, nonetheless). The process looks like this, which is the successful ring-matching of a transfer involving three different tokens.
- Miners use their computers to send data between exchanges and the protocol’s smart contracts in exchange for LRC tokens (details on how to boost the data you send and LRC you receive are coming soon, but the general consensus seems to be that relay mining loves to devour bandwidth and RAM).
- Exchanges can agree to be paid LRC tokens in exchange for access to their asset reserves, effectively opening up entirely new revenue streams without changing anything that they currently do.
These are very good deals for everybody involved, and the reason that each of these three components seem so enticing might relate to that factor I that mentioned earlier: Modularity. By creating three different code repositories and assigning different devs to tackle and focus on each one, every piece of the Loopring machine has been thought through, torn down, re-thought through, optimized, re-optimized, and so on. Each of the three components is painstakingly crafted to ensure that every player in the protocol enjoys participating, and continues to do so.
Loopring is doing a lot more than just removing the centralization from an existing institution — it’s creating a trading ecosystem that we’ve never quite seen before. It’s creating an entirely new paradigm for retailers to function and relate to one another under, and it’s a paradigm that’s very much unique to the sort of functionality made possible by the advent of the blockchain.
And, so… that’s why I’m all-in on an altcoin.