The Loopring protocol token, LRC, has been part of the protocol since our inception over 3 years ago. Its design and usage have remained largely the same over this time, while the protocol and products have made profoundly important progress. It is time the LRC model pulls itself up to keep pace with — and enhance — the Loopring protocol and product suite.
LRC will be used to incentivize behavior that is beneficial for the Loopring ecosystem, have a say in said system, and further ignite the transition to Ethereum L2.
- Loopring protocol fees come from transaction volume (economic activities) on Loopring Layer-2 (L2) and are also distributed on L2.
- The initial protocol fee parameter will be set to 20% of the L2 transaction fee. With the current relayer settings, this means 2 bps (0.02%) for AMM swaps, between 0.8 bps to 4.6 bps (0.008% to 0.046%) for orderbook trades, and $0.01 for transfers.
- Protocol fees are paid to 3 types of participants: a) liquidity providers, b) insurers, c) Loopring DAO, in an 80/10/10 proportion, respectively.
- Protocol fees accrued in tokens other than LRC and ETH will be sold on our L2 for LRC and/or ETH; all protocol fees are distributed in LRC and/or ETH.
- Protocol fees will be paid on a monthly basis.
- Changes to parameters in the future will go through a forthcoming Loopring DAO.
Whereas in the prior protocol version (v3.1) protocol fees went to LRC stakers who locked up tokens for a minimum of 90 days, the new token model rewards LRC holders who use their assets productively for the good of the platform. LRC will be used to incentivize behavior that helps the entire protocol.
Protocol fee distribution is configurable by the forthcoming Loopring DAO, but will initially be distributed to participants in the following manner:
- 80% to liquidity providers (LPs) on Loopring orderbooks and AMM. At least 50% of this portion goes to LRC related liquidity.
- 10% to insurers — users who put capital into a safety insurance fund.
- 10% to Loopring DAO — the DAO decides how to spend these funds: buyback and burn, impermanent loss protection, further liquidity incentives, grants, etc.
These Loopring ecosystem participants collectively act to support and strengthen the Layer-2 network, and for their work, they are rewarded.
For the first time on Ethereum, protocol fees are earned and distributed on Layer-2. This represents a significant UX improvement, as it means no wasting money (gas) and time entering staking contracts on L1, nor claiming your rewards. They will be sent to their rightful recipients’ Loopring L2 accounts automatically at the end of every month. [All sub-dollar amounts will not be paid nor accumulated.]
A word on Loopring L2 fees in general
Loopring is a zkRollup protocol — a type of secure Layer-2 scaling solution for Ethereum. On a zkRollup, there are no gas fees that can swing wildly. There are ‘normal’ style fees: i.e., a small percentage fee to do a trade or swap, or a small flat fee to do a transfer or withdrawal. These are less dependent on gas prices, so users have a smoother experience, never paying massive surges, and never waiting for confirmations when the network is congested — settlement is instant on the L2.
We call these L2 transaction fees.
These fees are paid to the operator of the zkRollup, something we often refer to as the Loopring relayer. The relayer is the entity that makes a zkRollup run — it hosts the Merkle tree, creates roll-up blocks, generates the zkSNARK proofs to publish to Ethereum, etc. The relayer must earn fees, as it has significant, ‘legacy world’ and ‘Ethereum world’ costs: compute power for generating the proofs, and gas costs for publishing the blocks to Ethereum, respectively.
The L2 fee settings referenced in this article are the current settings, but should not be considered permanent. Loopring relayer must decide the fees based on various factors (activity on the zkRollup, compute cost, gas prices on Ethereum, etc.) and adjust them when necessary.
From the L2 transaction fees comes the protocol fee. The protocol fee is described as 20% of the L2 transaction fee. That is, 20% of the fee that the relayer charges on every trade and transfer go to LRC liquidity providers, insurers, and voters who participate in the success of the Loopring L2.
There is a 0.25% fee for swaps done on Loopring’s L2 AMM as it stands. Again, please note this is ‘all-in’; there is no gas fee.
- 0.15% of this fee goes to liquidity providers (LPs) for the relevant pool. These are the people who provide the assets in the pool, for users to swap against.
- 0.1% is the L2 transaction fee, paid to the Loopring relayer so the zkRollup can run.
It is from this L2 fee of 0.1% that the protocol fee is paid. So, 0.1%*20% protocol percentage = 0.02% (2 bps) protocol fee from AMM swaps.
Since LPs earn the 0.15% liquidity fee, plus a portion of the protocol fees, you can see that LPs actually earn >0.15% of their pools’ L2 volume.
Trading fees on the orderbook follow a maker-taker model.
- Taker fees are 0.25% (or lower for VIP tiers). Takers are users who take liquidity from the orderbook (they are filled immediately).
- Maker fees are -0.02% (negative 2 bps). Makers are users who add liquidity to the orderbook (their orders rest on the book for some time). Makers earn rebates to pay them for their service of providing liquidity, just like LPs earn in the AMM pools. Makers earn 2 bps (0.02%) on all of their filled orders.
- On stablecoin vs stablecoin pairs, taker fee is 0.04%, and maker fee is still -0.02%.
Protocol fees are once again 20% of the L2 fee (removing the liquidity incentive for makers first). So, (0.25%-0.02%)*20% protocol percentage = 0.046% (4.6bps) protocol fee from orderbook trading [and 0.004% (0.4bps) on stablecoin-stablecoin orderbook trading].
Once again, since makers, like AMM LPs, earn a portion of the protocol fees, you can see that makers effectively earn more than the 4.6bps rebates of their L2 volume.
Note: in both AMM and orderbook trading, there are users who have VIP level status. This means they have a lower trading fee (<0.1% to relayer in AMM, and <0.25% to relayer in orderbook). Since VIPs pay less in L2 fees, that means protocol fees (calculated as L2 fees * 20%) would be commensurately lower on those trades. In other words, protocol fee is always calculated from the ‘final figure’, the amount flowing to the relayer.
There are small fixed fees for L2 transfers for users, currently $0.05. The protocol fee is once again 20% of the amount charged by the relayer, so 1 cent.
Summary — the current fees earned by the protocol are 0.02% on AMM swaps, 0.046% on orderbook trades, 0.004% on stablecoin-stablecoin trades, and $0.01 on transfers.
The image below depicts the protocol fees from L2 transaction types:
If traders on the AMM or Normal Orderbooks had a VIP tier (stablecoin pairs have no VIP, always 0.04% fee), the absolute figures above would be reduced, but the proportions remain the same. For a look at the overall fee structures on Loopring Exchange & Wallet, please see here, but recognize this is not final, and may change.
Just recall that the protocol fee is always 20% of the amount flowing to the relayer. The first thing we do in any fee scenario is remove the piece that goes to liquidity providers (the orange piece of the pies). Of the remaining fees — what we called the L2 fees — 20% goes to protocol fee, 20% to affiliates (referrers or applications that send users & volume to Loopring L2), and the remaining 60% to the relayer. Stay tuned in another post for the coming affiliate program.
Note: the protocol fee percentage can be between 5% to 20% of the L2 transaction fee. We have set it at its upper limit of 20% to start. The Loopring DAO will manage this going forward.
Recipients of the Loopring protocol fee
As mentioned, protocol fees are earned by liquidity providers, insurers, and the DAO. Let’s learn a bit more about each.
80% of the protocol fee goes to LPs in AMM pools and makers on orderbook pairs.
At least half of this amount goes to LRC related trading pools and pairs. i.e., LPs/makers of LRC-ETH, LRC-USDT, etc., earn 1/2 of the 80% slotted for LPs, effectively 40% of all protocol fees.
That means Loopring will be incentivizing LPs of certain pools with funds from the foundation’s treasury, as well as from protocol fees that are generated. The rewards you see in the articles linked above are from Loopring incentive treasury itself, while in the future, they will come from both treasury and fees. You can think of this as one bucket, since all these incentives go to LPs/makers. But in the long term, it is only sustainable that liquidity incentives will be coming from fees generated by protocol activity.
The Loopring zkRollup, like all zkRollups, are secured by Ethereum and Zero-Knowledge cryptography (validity proofs). There is no need for novel consensus mechanisms, and no new validators to trust. Ethereum simply existing and the cryptographic techniques being sound is all you need to rely on. You don’t need to trust Loopring or anyone else at all for the security of your assets. A zkRollup is 100% non-custodial.
All that said, unforeseen bugs are a possibility in any software. In a zkRollup, this would mean some bug in the Loopring smart contracts. While our v3.6 smart contracts have been audited and currently hold approximately 130 million USD worth of assets, that does not mean the risk is non-existent. And given we expect a Loopring L2 economy hosting several billions of dollars worth of assets, a security fund is important.
For this reason, we are creating a Loopring insurance fund. Users can deposit LRC into the insurance fund and earn a return on their assets for providing this security backstop. 10% of all protocol fees will go to reward insurers.
The insurance fund will exist on L1, since it would not make sense to provide the insurance fund on the L2 that the insurance is set to protect. Rewards accrue to the insurance fund directly, with each insurer’s claim of the pie growing. Thus, insurance is a case where protocol fees are earned on L1, not L2.
Our insurance fund will be based on Aave’s safety module, since those contracts are battle-tested, and serve the purpose perfectly. The insurance coverage period will be 14 days. That means the insurer’s LRC will be locked for 14 days in order to earn the corresponding return. Voting of whether a covered incident took place or not will be 3 days (by the DAO, see next section).
Stay tuned for more details on the insurance fund, which is set to go live in Q2.
As Loopring has made tremendous technical progress throughout the years, it has also cultivated an amazing community. And while the Loopring foundation engineers are the ones who predominantly built the protocol and products, it will become more powerful if guided by the Loopring community.
The Loopring DAO is set to launch in Q3, and it will be receiving 10% of all protocol fees. What it does with those funds is up to the DAO members (LRC holders) to decide via voting. It can buyback LRC and burn it, use for impermanent loss protection to draw more LPs, distribute to DAO voters, distribute more incentives to LPs/makers, fund grants, etc.
LRC token voting will be using Snapshot, a token voting tool that suits the purposes perfectly.
It will be interesting to watch the first DAO for a zkRollup protocol take shape. L2 presents many possibilities for DAOs, but also some challenges. The DAO will control and govern several parameters, such as:
- The distribution proportions of protocol fees to different participants
- What it does with its own proportion of the funds
- The protocol fee percentage (between 5% to 20% of relayer fee)
- Insurance fund covered event triggers
Still, of course, much of a zkRollup is by definition off-chain, and this means is outside the purview of a DAO (or at least outside the purview in a controlling manner, but can be used to verifiably signal). The relayer is controlled by Loopring, not executable by a DAO. [Note: the relayer can never harm or mishandle user assets, that’s the vital property of a zkRollup].
We want to be completely forthcoming about the following facts.
- Since protocol fees are collected by the relayer on L2 and then paid out according to the methods described in this post (and ultimately by the methods decided by the DAO), there is a level of faith involved in how the relayer will reward these protocol fees. Note: distributions are 100% verifiable on-chain — a crucial property of a rollup — so there is zero possibility of any tricks.
- Certain parameters are simply unable to be controlled by the DAO for practical reasons. For instance, the L2 transaction fee itself must be set by Loopring, which has a handle on the legacy and Ethereum-based costs of running the relayer.
It will be a great endeavor of collaboration between LRC holders/Loopring DAO, and the Loopring relayer that does the off-chain work, and ultimately execute the DAO’s wishes. This is like a legislative and executive branch. In the end, they must work together for a thriving system.
This new LRC model and the corresponding protocol fees will begin immediately, and will actually have accrued retroactively since the launch of Loopring protocol 3.6 (on which Loopring Exchange v2 and the Loopring wallet are based). That date is November 27th. The calculations will take into account all fees since then, but please note that some transaction types didn’t have any fees at instantiation (such as transfers). While the protocol fees and the relative proportions to LPs, Insurers, and DAO will contain all fees since late November, we won’t begin the first distribution of these fees until March 31st. Until then, they will just accumulate for their respective buckets. After then, protocol fees will be distributed on a monthly basis to all participants. If are still in the ‘old’ LRC staking contract (v1) and have questions, please read this post about its sunsetting.
We are extremely excited about this LRC model and what it means for Loopring. We have focused on research and development in engineering for so long, and now that our L2 (and L2 at large) is picking up steam, and our products are in the hands of thousands of users, it is time for the LRC economics to play its part. Ethereum L2s are largely regarded to be the environments where users will ‘live’ and transact. They are economies secured by Ethereum. Loopring was the first rollup, is currently the most voluminous and populated, and now LRC will take its rightful position in the centre of the economy and governance structure.
We very much welcome your feedback, and for you to join the community in our Discord.
Loopring is an Ethereum zkRollup protocol for scalable, secure exchanges & payments. Loopring builds non-custodial, high-performance products atop our Layer-2 protocol, including the Loopring Wallet — a mobile Ethereum smart wallet, and the Loopring Exchange — orderbook and AMM with no gas-fees. To learn more, you can sign up for our Monthly Update or see Loopring.org.