Comin’ Up Around The Bend — Loopring Fundamental Analysis

Imagine you’re a magician attending a magic competition. The challenge is to teleport a particular object from backstage to a designated spot on stage without anyone seeing how it’s done.

Before the competition, you visit a reputable magic shop and purchase a special enchanted box. Everyone knows this box can perform illusions, but no one knows exactly how it works.

Backstage, you place your object inside the box along with a description of the teleportation destination. The box whirs and smokes, then spits out a shimmering token. This token doesn’t reveal the object itself, but it holds the magic needed to convince the judges.

Onstage, you confidently present the shimmering token to the judges. They have a magical device that can analyze the token’s properties. If the token is genuine, the judges will be amazed to see your object appear at the designated spot!

Loopring’s Zero Knowledge (ZK) SNARK’s technology acts like the enchanted box. It takes your private information (crypto holdings) and the trade requirements (teleportation destination). It generates a mathematical proof (shimmering token) that convinces the exchange (judges) you have sufficient funds without revealing the exact amount (keeping your balance private). This allows you to participate in secure trades while maintaining your financial confidentiality.

Loopring is a Layer 2 scaling solution tailored for Ethereum. It emphasizes secure, rapid, and economical trading and payment functionalities. By harnessing zkRollup technology, it amplifies transaction throughput while upholding asset security through the Ethereum blockchain. Loopring is crafted to empower decentralized exchanges and payment systems, streamlining crypto transactions with efficiency and scalability.

On the surface, those with a 1000-foot-high view of Loopring may only see a decentralized exchange with a history of limited composability. However, Loopring surviving two bear markets and their recent pivot toward shaping the layer-3 narrative warrants a deep dive. To that end, this fundamental analysis will revisit ZK Snark technology, hypothesize the implications of Loopring’s recent quest to simplify the user experience (UX) through account abstraction and discuss the suitability of $LRC as a viable investment in a bull market that is likely just starting to heat up.

This fundamental analysis was published March 2024, and is part of a weekly paid newsletter from the Crypto Consulting Institute as such trade insights are likely outdated. Crypto Consulting Institute provides exclusive market insights, actionable trade signals, and monthly fundamental analyses. For more information on receiving FAs as they are released, visit: https://www.cryptoconsultinginstitute.com/newsletter

Your TLDR summary, D.I.S.R.U.P.T. key takeaways.

There’s a place up ahead, and I’m goin’

Loopring’s primary goals encompass diminishing user dependency on centralized exchanges or other trusted intermediaries while fostering the development of global liquid markets. The Loopring protocol endeavors to achieve this by motivating ecosystem participants to engage in exchange activities in a decentralized manner, facilitated by non-custodial smart contracts.

While blockchain technology inherently facilitates trustless trading, constructing exchanges solely on-chain presents challenges, notably regarding processing speed, throughput, and computation costs.

Conducting all exchange processes on-chain can prove excessively costly or incapable of replicating the speed and performance of centralized exchanges. Consequently, Loopring has transitioned nearly all data and computation off-chain, yet it harnesses zero-knowledge proofs to uphold trust-minimized characteristics.

Loopring’s unique value proposition lies in incorporating cutting-edge cryptography within its platform.

It’s essential to recognize that zkRollups represent just one of several methods to enhance the Ethereum blockchain’s suitability for DeFi (Decentralized Finance) applications. Competing cryptographic proposals include xDai, Matic, Optimistic Rollups, and Plasma.

Advocates of zkRollups view them as promising due to their utilization of zero-knowledge proofs, a well-established cryptographic technique. This method enables a computer program to assert claims about data without divulging the data itself.

To commence trading on a Loopring exchange, users are required to initially transfer their funds to a smart contract overseen by the Loopring protocol.

Following this step, Loopring exchanges migrate the computational processes necessary for executing trades away from the primary Ethereum blockchain. This encompasses data such as user account balances and order histories.

These off-chain transactions are recorded in a Merkle Tree, which many readers would be familiar with Directed Acyclic Graph (DAG) design, and their accompanying efficiencies, from previous FAs into Fantom, Avalanche, and Sui.

Subsequently, Loopring settles transactions on the Ethereum blockchain to formalize trades between users that were initially matched off-chain. These trades are consolidated into batches to decrease costs and enhance transaction speeds. Loopring asserts its capability to execute over 2,000 trades per second utilizing this method.

Each batch of transactions is then appended to the Ethereum blockchain alongside zero-knowledge proofs, enabling anyone with a Loopring relayer to reconstruct the transactions conducted off-chain.

For a TLDR process at the highest possible level, ZK proofs operate as follows:

1. ZK rollup users authorize transactions, which are forwarded to the L2 ZK rollup relayer for sequencing and grouping into batches.
2. The current state root is merged with highly compressed transaction batches.
3. This amalgamation is transmitted to an off-chain Prover.
4. The Prover processes the transactions, producing proof of their validity.
5. The Prover submits this proof to an on-chain Verifier (Ethereum nodes).
6. The Verifier validates the proof’s authenticity.
7. A smart contract on Ethereum’s L1, responsible for managing the rollup’s state, is updated to reflect the new state.

Hitch a ride to the end of the highway

Account abstraction (AA) is a concept that should gradually become familiar to the avid CCI newsletter reader. The bulk of the SUI Fundamental Analysis covered AA and Ethereum Improvement Plan 4337 on a technical level, as mentioned in the FA, we are at the forefront of pioneering in this space and, as an evolution of the web3 user experience as a whole, cannot have its importance understated.

Here, we will provide a refresher by reviewing how Loopring is putting the concept into practice.

As a reminder, AA isn’t about sharing a portion of your seed phrase with others. This capability already exists, and for years, we have encouraged CCI members to consider storing parts of their seed phrases in secure locations or giving some of the phrases to a trusted custodian.

In practice, we refer to Social Recovery, AA’s core function that enables an account to be created without requiring seed phrases.

However, it doesn’t involve sharing your seed phrases.

Instead, it utilizes Guardians — individual entities you trust — to approve the recovery of your account.

These Guardians do not require any portion of your seed; they only need their own wallets to be whitelisted to approve account recovery upon your request. Guardians can also be other wallets you own, like MetaMask or a hardware wallet, which is fundamentally how a multi-sig operates by having an agreed majority of signatures from different private keys authorizing a transaction. Multi-sigs are by far the most secure form of asset storage.

But AA goes one step further than a multi-sig vault by transforming every account into a smart contract capable of executing logic, enabling functionalities like social recovery, fraud monitoring, multi-calls, and more. It renders blockchain accounts programmable, enhancing their flexibility.

With AA, the transaction signing logic is detached from the account, facilitating the implementation of features such as multi-signature authentication, two-factor authentication, withdrawal limits, and key expiration. The potential applications of AA extend far beyond Social Recovery, promising to revolutionize our interaction with wallets and DApp interfaces significantly.

Loopring currently has a functioning AA product accessible through Google Play and the Apple Store on Android and Apple devices. Once downloaded, you can link your Google account or create an email address to create an account. To activate your account, you are required to deposit funds on either the L1 or Loopring L2.

From there, you can access a range of services in the phone app, such as Loopring PRO and Loopring Earn, which allows you to access spot, swap, block trade, on-ramp/off-ramp functions, supply LP, and dual-investment products.

Currently, work is being conducted on expanding multi-network accessibility that will be integrated into the Loopring Wallet, enabling unified access to multiple networks and DApps.

Moreover, Loopring seeks to position itself in the loosely defined Layer-3 narrative as discussed in previous FAs such as LayerZero and Quant, which are perhaps more accurately considered middleware. This unified user interface interacts with a front-end that initiates a range of backend processes processed on the host blockchain.

$LRC Tokenomics (As of 13.03.2024)

Price: $0.4289

Market capitalization: $531,726,373

Circulating Supply: 1,366,649,056

Maximum Supply: 1,374,513,896

All-time high market capitalization: $4,161,913,617

The distribution of protocol fees will be adjustable through the Loopring DAO, but initially, it was allocated to participants as follows:

80% to liquidity providers (LPs) on Loopring order books and Automated Market Makers (AMM), with at least 50% of this segment directed towards liquidity associated with LRC.

10% to insurers, representing users who contribute capital to a safety insurance fund.

10% to the Loopring DAO, empowering the DAO to determine the utilization of these funds, which may include options like buyback and burn initiatives, impermanent loss protection, additional liquidity incentives, grants, etc.

Ponder perpetual motion — Discussion

Those that have been around in the last two bull markets would recall Loopring as not only a pioneering ZK-rollup DEX with zero gas fees on its network but as one of the first EVM products launched and accessible by blockchain. By extension, you may also wonder why it warrants a mention in CCI FAs since to say it has been ‘flying under the radar’ is putting it lightly.

Thinking back to the previous bull market, you would not be faulted for thinking it had effectively hit a dead end for a laundry list of reasons. Most notably, limited composability, or the flexibility for developers to permissionlessly launch DApps that users can interact with in a virtual machine environment through an EOA (such as Metamask), had dwarfed its competitiveness as a serious contender in not only the layer-2 narrative but also the DeFi narrative.

While Loopring had beaten everyone else to the punch by implementing zero-knowledge proofs to verify transactions off-chain to send to layer-1, it appeared to be stuck in a holding pattern where by design, it continued to be plagued by bridging times that often took days for assets to be returned to Ethereum Layer-1. While Loopring traded several tokens that were not readily available elsewhere and unburdened by gas fees, it was often not worth the effort to bridge purchased assets back to the L1 if it were stuck in limbo while transaction batching occurred.

Moreover, Loopring had previously faced serious competition. Aave, Uniswap, Curve, and Balancer offered significantly more sophisticated financial products to users; and EVM-compatible blockchains such as BNB Chain, Avalanche, Polygon, and Fantom offered a far better user experience at the time. While Loopring offered staking to receive $LRC tokens, the process of participating was tedious at best in an environment where shiny new DeFi toys were being released every day.

Loopring’s saving grace in the previous bull market was a surprise partnership with GameStop to launch an NFT Marketplace, which initiated a march to its all-time high of $3.75. On the surface, it appeared that Loopring had somewhat “meme’d” its way into relevance.

However, that time has long since passed, and Loopring has spent the better part of the bear market doing some soul-searching while flip-flopping on development directions. A rebrand was needed, and it has found its niche in AA and Layer-3 narratives.

As we understand how AA works in action, we consider shaping the nascent concept of Layer-3 (L3). One conceptualization of L3 is forming a user layer that offers the convenience and ease of use akin to the Web 2 user experience (UX) but with the security of the host blockchain.

AA is an unavoidable feature for L3s to fully manifest in any conceptual model. As the name alludes, the objective is to abstract complexity away from the user. Those who have taken the time to learn how to operate Externally Operated Accounts (EOAs, like Metamask) understand intimately that learning to do so safely is challenging. An L3 with AA as a central pillar will eliminate the complexity of onboarding new users while giving them free rein to access sophisticated financial products.

Just as scalability has long been a problem looking for a solution, AA addresses the bottleneck that would otherwise be a barrier to onboarding new users, which at a high level, is the logical next step in the evolution of Web3 as a whole.

While this all sounds great, what is yet to be seen from Loopring is whether they can fulfill the objectives laid out on the new path they have set for themselves. Limited composability is a serious ongoing issue, given the difficulties developers face in integrating Loopring across multiple networks. Many ZK Rollups that have followed in Loopring’s footsteps have similarly struggled with composability, with a handful of exceptions like ZKSync achieving flexible composability in an EVM environment to enable DApps to integrate and users to migrate over easily. The team themselves have admitted that it is difficult to integrate DApps into Loopring compared to other EVM networks.

Moreover, the competition has only heated up since the previous bull market, with Loopring having to compete not only with emerging ZK Rollup and L2s but also with wallet providers. It is a moot point on the latter for as long as Metamask and Phantom do not release a token; however, Trust Wallet does have a token and a wallet with multi-chain functionality. As many readers may know from experience, their wallet is incredibly composable across various disparate networks, from EVM-compatible networks to Solana, to Ripple, that can be accessed with one set of seed phrases. What Loopring is seeking to accomplish is what Trust Wallet appears to have already but with one significant difference being eliminating the need for seed phrases and utilizing social recovery as the method by which accounts are protected. As AA picks up steam, it is not inconceivable that Trust Wallet could similarly implement AA mechanics.

From a fundamental perspective, we want to see increased user activity on the Loopring network and wallet creation. Their mobile app, which is downloadable through Google Play and Apple Stores, is quite intuitive and eliminates the need to enter seed phrases into your mobile device. Without putting the cart before the horse, it is unlikely even with AA that this can be achieved if Loopring is unable to utilize some of the popular DApps like Aave, Curve, Uniswap, Sushi, etc.

As far as competition as an L2 goes in terms of offering a dedicated decentralized trading platform with order-book-like functionality, projects that we have previously touched on, such as DyDX and Injective Protocol, have kept retained a lead against Loopring in many respects, having also released their own dedicated L2 and Cosmos Zone. The latter has sufficient composability to enable third-party developers to launch DApps with ease which has been a significant headache for Loopring since its initial launch.

The last nit to pick is that Loopring’s marketing does not appear to have caught on. While they have a decent size community, they had previously been plagued by having to flip-flop on development pathways; however, it appears after some soul-searching, they have landed on a narrative that they can run with. Whether this translates into new users is yet to be seen.

In light of the above, we are brought full circle to beg the question — why would we consider Loopring a potential investment while new ‘sexier’ projects can spring out of the gate with a shiny investment narrative to run with?

Firstly, Loopring has demonstrated durability through two bull and bear markets, respectively. We should consider the long-term viability of a project that has survived through more than one bear market, particularly one with pioneering features of being the first to launch a ZK rollup well before the market caught up to appreciate the narrative.

Secondly, it aligns with primary narratives in L2s, L3s, user wallets (AA), and DeFi. It addresses bottlenecks in CEXs, such as ensuring users have control over their assets while maintaining the quality UX of a CEX that most of the market has become accustomed to. Loopring advancing their products in any of these domains will likely bode well for their performance in any given narrative. In addition, there may be one unrealized gambit in the Gaming narrative since off-chain computation using ZK technology is arguably one of the more efficient routes to maintaining the quality of the user experience and eliminating costs for in-game transactions to be later batched to the L1.

Thirdly, and most importantly, when considering all of the above from an investment perspective — their market cap to FDV ratio is 0.91, and their previous all-time high market cap reached $4,161,913,617. Almost all $LRC tokens have made the rounds in circulation, and while their market cap sits at $531,726,373, to retest all-time highs would be approximately 7.8x seeing the current price of $0.42 return to $3.27. With that thesis in mind, let’s look at the charts.

On the higher time frames, $LRC is still in a bear market accumulation, we want to see it break out of this accumulation zone and then retest for support around $0.50c to continue to retest the $1.40 range.

On the daily, having recently broken through the 1D demand zone, $LRC is seeking to test the resistance of its bear market accumulation zone. For an entry at these levels, we would likely consider 4-hour price action.

For a continuation, we want to see a break out of the bear market resistance zone to retest the 50% 1D supply zone around $0.60. A breakout from there, we would likely see a sharp retest of the $1.40 levels. In terms of entry levels, in lieu of a DCA strategy, executing support buys in the 1D demand zone around $0.38 — $0.40 would be a solid initial entry. Should that fail to hold, we want to be support buyers in the 4H demand zones between $0.30 — $0.35, losing these zones could see a sharp retest of the 4H demand zone at $0.27 — $0.28 that must hold if we want to maintain priority to the upside.

On smaller time frames, we can see 1H wick buys that have shown a solid reaction to demand zones being tested, most recently having found buyer support 50% into the 1H demand zone, provided we get a break out to test the 1D supply zone in the coming days, we currently maintain priority to the upside.

Note that recent price action to the upside is likely supported by fundamentals based on the recent Dencan upgrade on the Ethereum mainnet. The upgrade, which is anchored by proto-dank sharding, aims to drastically reduce gas fees on L2 networks by introducing a new transaction type called “blobs.” Blobs are basically a “compressed” data structure, like a .zip file. This enables more efficient data storage on the Ethereum mainnet, reducing gas for L2s that batch transactions back to Ethereum, like Loopring, Arbitrum, and Optimism.

Overall, while Loopring has no shortage of competitive headwinds to deal with, it has survived bear markets and delivered functioning products that, at the time, were ahead of the rest of the space but frequently underappreciated as their complexity exceeded the capabilities of market participants at the time. Should it deliver on AA and Layer-3 features to simplify onboarding new users and improve its composability across a broader range of networks, we expect $LRC to be a relatively safer investment based on where it sits within its bear market accumulation zone. While we may not see much more than a 10x, it is definitely one that is flying under the radar based on products to market and what it seeks to build in the coming year — warranting further consideration on our parts as to whether $LRC earns a place as a medium risk asset in our DeFi/DEX and L2/L3 allocations.

References

L2Beat, https://l2beat.com/scaling/projects/loopring?selectedChart=detailedTvl

Loopring Whitepaper 3.6, https://github.com/Loopring/protocols/blob/master/packages/loopring_v3/DESIGN.md

Loopring Guardian, https://loopring.io/#/document/walletdesign_en.md

Medium, ‘Loopring Quarterly Update’, January 15th 2024 https://medium.com/loopring-protocol/loopring-quarterly-update-q4-2023-e545f76bc0a7

Medium, ‘LRC Tokenomics V2’, January 27th 2021, https://medium.com/loopring-protocol/lrc-tokenomics-v2-1e6fd99e9e9c

Medium, ‘Pioneering Account Abstraction on Ethereum: Loopring’s new AA Wallet’, March 5th 2024, https://medium.com/loopring-protocol/pioneering-account-abstraction-on-ethereum-looprings-new-aa-wallet-9fb875ab689f

Cryptoeq, ‘Enhancing Ethereum Scaling with Loopring’s Zk-Rollup and Validium: A Look into Layer-2 Solutions’, 17th January 2023, https://www.cryptoeq.io/articles/loopring

WCCTech, ‘Loopring (LRC) Records Sizable Gains as Its Partnership With GameStop’s NFT Marketplace Goes Live’, March 23rd 2022, https://wccftech.com/loopring-lrc-records-sizable-gains-as-its-partnership-with-gamestops-nft-marketplace-goes-live/