Daniel Wang talks about Loopring Protocol and the future of decentralized exchanges.
Hello! What’s your background, and what are you working on?
Hello. I am Daniel Wang, the creator of the Loopring Protocol, founder and chairman of the Loopring Foundation. I used to work for Google as a Senior Engineer, and other large internet companies such as JD.com. In 2014, I founded a startup that offered a centralized exchange service to help people buy and sell BTC/LTC/XRP, etc. The business wasn’t super successful, so I closed it. I later joined an insurance company and built a similar product, still focusing on digital asset trading.
Loopring is an open-source protocol for building non-custodial (decentralized) exchanges. It uses innovative technology to solve the largest problems of centralized cryptocurrency exchanges, and alleviate the problems many decentralized exchanges are currently facing. The biggest risk with centralized exchanges are loss/theft of user assets - be it hackers, an inside job, regulatory reasons, etc. With Loopring, tokens remain in a user’s control throughout the trading process, unlike centralized services that place tokens in a centralized wallet - which eventually becomes a big honeypot for hackers. Non-custodial trading has a large part to play in the future of finance, and that is what we’re working on. We currently focus on the Ethereum blockchain and ecosystem.
Loopring v1 and v2 can be described as a ‘hybrid DEX protocol’, which worked by managing and matching orders off-chain and settling trades on-chain. This allowed us to not rely on the blockchain for all actions, which is slow and costly, but only for ‘mission critical’ elements such as settlement. The on-chain part is the protocol smart contracts, and the off-chain part is the relayer/matching engine.
With our latest version, Loopring 3.0, we employ zero-knowledge proofs (ZKPs) to do even more computation off-chain (including settlement), without sacrificing the security of the Ethereum base layer. This allows us to scale an incredible amount: to a throughput of 660 trades/second, vs 2 trades/second in our previous versions. We expect even more optimization. With this throughput level - and corresponding gas cost decreases - we can begin to truly compete with our custodial counterparts!
What’s Loopring backstory?
The idea of Loopring came to me while at my previous employer. I was obsessed with it, so I quit and started designing and developing Loopring. We did an ICO in August 2017, which was very successful, but we ended up refunding most of the Ether raised (close to 100k out of 120k total) to participants due to regulations in China. However, we continued development with what we had left, and built a team of seasoned engineers.
What went into building the Loopring?
The Loopring team spends a lot of time on R&D, and exploring the most promising (and sometimes experimental) methods available to accomplish our goals. This has centred around two main buckets: Ethereum work, and the off-chain matching engine (relayer) work. Of course, more recently, ZKPs (specifically zkSNARKs) have taken a huge share of our attention and focus, and how this cryptographic tool can specifically be used on (or above) Ethereum. Finally, you also have the front-end team, because although we are a protocol which allows anyone else to build a non-custodial exchange, we also provide some reference implementation UIs, etc.
Over the past 2 years, we have developed and invented a few very cool pieces of technology that have distinguished our efforts from others in the DEX protocol space.
One such advancement, and where our name was derived from, is the ability for orders to be mixed-and-matched with orders across disparate trading pairs, settling in a combinatorial fashion that we call a ‘ring’. This theoretically obviates the constraints of two-token trading pairs and can improve liquidity.
Loopring also employs a unique and robust solution to prevent front-running, Dual Authoring. Front-running is the unfair attempt by miners or others to submit transactions into a block quicker than the original order or trade - after learning about that order’s intention.
Because Loopring is not a DEX, but a modular protocol for building DEXs, we’ve also arrived at an approach that disassembles the parts of a traditional exchange and offers a set of public smart contracts and different actors in its place. Basically, we don’t necessarily view DEXs as one monolithic project, but a combination of a frontend (aka wallet), a backend (aka order-matcher), and now, with v3, a new actor, the operator, who is responsible for generating the proofs. An exchange may choose to perform all 3 roles, or they can focus on providing 1 or 2 of these services which is their strength, and team up with a specialist in the other functions. Fees can be shared on a custom basis, decided by the respective actors.
What’s your business model?
Loopring Foundation is a non-profit blockchain research organization focused on decentralized trading protocols. The open-source Loopring Protocol provides a fundamental building block for non-custodial exchanges and other applications that incorporate trustless token trading. We do not charge for this: the smart contracts are open source, as are versions of our off-chain relay matching software.
As mentioned, we initially funded this through an ICO in 2017, by selling Loopring’s utility token, LRC. LRC has always had a use within the Loopring protocol, and within the Loopring network of exchanges. The utility has been adapted as the protocol itself has changed. Now, with Loopring v3, LRC lends itself to even further utility, which is very exciting. The current fee model spec is essentially complete and can be followed here. Basically, Loopring enforces a very small protocol fee that exchanges will pay out from the trading fees they earn from their users. This protocol fee will be distributed to LRC stakers, to a ecosystem development fund, and burned. Thus network activity is distilled into a deflationary token model, and rewards for stakers. Besides participants staking LRC to earn a piece of this protocol fee, exchanges must stake LRC to begin operation on the protocol - this is to ensure ‘good behaviour’, and prevent any malicious behaviour from taking place. Exchanges are also incentivized to stake more LRC for further benefits, such as reduced protocol fees.
Further, Loopring v3’s introduction of the ‘operator’ role may allow the Foundation to operate a separate, for-profit, adjacent service. The operator runs complex calculations to generate the proofs and requires optimized machines. With our tailored skill set, we can operate the prover-as-a-service, allowing DEXs to focus on the frontend, backend, or both, and outsource the specialized service to us (or someone else).
The Loopring project is currently supported by 13 full-time staff members, which includes nine engineers.
What’s your position on the regulatory landscape today?
The world is slowly beginning to understand that blockchain has the potential to benefit many different industries. Some authorities are cautious about emerging technology and are reluctant to adopt supportive laws. Others recognize the advantages of blockchain and continue to issue favorable legislation. Still, there are numerous legal challenges that need to be resolved before we can further the expansion of blockchain technology.
Of course, in certain industries and functions, notably finance - and especially for cryptocurrencies that approximate being a global money - governments may be fearful that their power could be infringed upon. While borderless money and open financial system could pose a threat, the censorship resistant blockchains are meant to withstand exactly this sort of pushback. At a corporate level, incumbents could ride the wave, as we have seen especially in recent months, or be uprooted.
What may be very possible and slightly ironic is that, eventually, certain governments and regulatory agencies may mandate that blockchain technologies are used in certain circumstances - not oppose it! With their potential to improve the transparency, efficiency, and reliability of transactions, they could be a regulators best friend. Examples of this can be for securities (security tokens), which can have the relevant legal logic baked into the token itself (such as who can own it), and thus compliance is achieved by design, instead of reactively followed. Similar sentiment may arise in the heavily regulated pharmaceutical industry.
At the protocol level, Loopring is unopinionated, and those building exchanges with our technology can choose to pursue whichever regulatory path they desire: work closely with regulators and enforce KYC, AML, etc., or operate detached from any legislation or jurisdiction, and perhaps be pseudonymous.
What are your goals for the future?
With our full Loopring v3 design and code currently released to the world, we will launch our v3 deployment on Ethereum mainnet at the end of August 2019. Our aim is to see DEXs built atop Loopring Protocol 3.0 handle more than 1,000 trades per second by the end of 2019. Already, at 660/sec, we believe we will start to see DEXs out-compete the low-mid tier of centralized exchanges. With scalability, security, and liquidity, there will be little reason to hand over your private keys to some sketchy exchanges. We look forward to the day when hacks are a lot less frequent, and a lot less lucrative.
Loopring also designed and developed an auction protocol called Oedax (Open-Ended Dutch Auction Exchange). Oedax actually has an internal use within the Loopring Protocol itself (converting non-LRC fees into LRC via auction), but may also become the basis of some standalone products as well towards the end of the year.
What are your future thoughts for the DeFi market?
We are all super enthusiastic by the progress of DeFi. In such a short time, it has become an absolutely dominant narrative, and has helped focus developer and user attention. Narratives can not be understated in this space because they allow for the transfer of ideas and emotion in a more simple and digestible way. The initial group of projects within DeFi are almost exclusively based on Ethereum, which has been a driver of the phenomenon, and beneficiary. It has really showcased Ethereum’s power. However, this doesn’t mean that a decentralized finance ecosystem can’t flourish across other blockchains as well, such as Bitcoin in a more limited fashion, and beyond. It’s incredible to see open, permissionless systems start soaking up so many assets and value without trusted third parties.
It shows that the crypto world is flourishing on its own, without the need for legacy validation or regulation. DeFi is creating new channels for crypto adoption, and is encouraging a new wave of financial entrepreneurship which would be stifled or impossible in the world of traditional finance.
One thing I’d like to see is for the use cases to start expanding, as right now, despite broader ambitions, it is mostly being used for speculation (margin trading, shorting), and for the productive use of cryptoassets (lending, borrowing). These are important, and actually fundamental to well-functioning economy. However, I really look forward to the day when this advances to allow for some use cases to the unbanked - those where an overcollateralized loan is not exciting because they have no assets to collateralize at all. Of course, this unsecured lending requires some type of reputation system or identity solution, which is a difficult problem. Either way, I am optimistic as I believe we have only just begun to explore the design space.