We know that the concept behind Loopring can be a bit confusing, so here’s a guide that will help you understand the main points of our white paper.
What is the Loopring Protocol?
We developed the Loopring open-source protocol as a response to the limitations of traditional exchanges that led, in part, to scandals such as that of Mt.Gox in 2014. Though Loopring is not an exchange platform, it is a code to be used by exchanges that better fits the decentralized environment. The current exchange market for decentralized currencies, such as cryptocurrencies, abides by the rules of traditional centralized exchanges, which does not make much sense. The protocol will serve to make exchanges as compatible as possible with decentralized currencies.
Though the current protocol only supports ERC-20 tokens, our goal with Loopring is to create a network of exchanges that will ensure the best prices for all traders. Eventually, the Loopring ecosystem will allow for trades to be conducted between exchanges built across different blockchains.
Always keep in mind that Loopring is not a physical exchange; it is simply the code that will run behind the exchange. Loopring is not here to compete with exchanges, but to enhance them so that they can better serve all traders by reducing risk while increasing liquidity and fairness between all parties involved in trades.
The lifecycle of an Order
Trade cycles will be carried out by parts of the ecosystem which consists of wallets, (ring) miners, smart contracts, relays (which broadcast trades and maintain trade histories), and asset tokenization services (on which traders can trade their assets that cannot be traded on Loopring for ERC-20 tokens, for example).
Trades will be conducted as follows:
- A user uses his wallet to submit the order for a trade. The user also attaches LRC tokens as a reward for miners once the order is processed.
- The wallet authorizes Loopring Smart Contracts to access the amount and type of tokens determined in Step 1. The tokens remain in the user’s wallet while the order is being processed and the user maintains complete control over the funds.
- The order is then sent out to the network with a unique digital signature. The wallet then relays the order to nodes across the network.
- Relays update their public order book and broadcasts it to other relays and ring-miners so as to initiate the order processing.
- Ring-miners then try to fulfill either a part or a whole order at the given exchange rate, or at a better one, by ring-matching the order with multiple other orders.
- Finally, smart contracts make multiple checks of the data supplied by the miner, and settle the trade either completely or partially (depending on the number of tokens in the user’s wallet) by self-executing simultaneously. Once the order is completed, the ring-miner either takes a margin or the LRC fee as compensation.
Order Sharing: Filling Orders in Smaller Pieces
Order sharing is a mechanism that allows orders to be broken down into smaller pieces and traded as such. This ensures that the protocol provides the best prices for orders, regardless of levels of liquidity, since trades will be made across exchanges in amounts that are adequate on that exchange.
Ring Matching: Multi-token Transactions
In order to ensure the best prices for orders, the Loopring protocol allows miners to make multi-token transactions. Here is an example to illustrate the concept behind these trades:
“Investor A puts an order out to sell XRP tokens for USD. Investor B wants to buy XRP and is selling BAT. Investor C is buying BAT, and selling MIOTA, and so on and so forth until it gets back to Investor A in the desired currency.
Ring miners can take this information and create a trade loop that promises the best prices to all of the participants of this trade. This feature combined with order sharing generates greater levels of liquidity because small amounts can be traded this way across platforms, meaning that exchanges will always be solvent.
Smart contracts operate on the platform in order to carry out various actions that need to be fulfilled. These are crucial because they self-execute, meaning that once the conditions are written in, the chance of human error or default is nearly zero. In addition, they work to complete actions such as calculating exchange volumes and prices between two tokens, interacting with other smart contracts and Loopring API, and updating order databases.
LRC Tokens & Fees
Our LRC tokens have two applications within the platform. The first is as a gas fee, or transaction fee, that powers smart contracts. The second is for users to put into their smart contracts as a reward for miners.
Once a miner has created a match, he has one of two options. The first is to claim the LRC tokens that are included when the order is placed by the user. The second is to claim a margin of the profit that was specified by the user.
We developed our protocol with the aim of providing a safer platform for all traders in a few ways that have been summarized below.
- No centralized point of failure: the decentralized nature of the platform, and the fact that money stays in user’s wallets, mean that there is no single point of failure that can easily be hacked into.
- Denial of Service: Nodes in the network can deny service according to their own criteria, meaning that they can protect themselves as they see fit.
- Insufficient Balance: Nodes can monitor accounts that seem suspicious based on the balance and can then react accordingly.
That pretty much outlines the most important parts that you need to remember about the Loopring protocol. If you want to check out any of this in greater detail, feel free to jump onto our website and check out our white paper!
If you have questions, join us on social media and direct your questions to our CMO Jay Zhou.
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