One of the greatest pain points in digital currency investing and ownership today is exchanging one coin for another. Trading, especially between a non-BTC or ETH pair, is wrought with friction, challenges and risks. Loopring hopes to solve this challenge.
Navigating through different centralized exchanges to find liquidity is the norm right now. Unfortunately, this means investors potentially expose themselves to more fraud risk or loss of profits.
Trading decentralized currencies on centralized exchanges doesn’t make much sense from a theoretical perspective. Loopring, a protocol for decentralized token exchange, agrees; the team seeks to make trading as ‘trustless’ as the blockchain technology on which its built.
Although this may herald a new paradigm in trading, centralized exchanges will still be an integral part of the Loopring protocol.
SIMPLICITY AND SECURITY IN TRADING
Loopring’s protocol allows users to trade from their own private wallets, while accessing deep liquidity from disparate markets. Loopring does this through a market structure that aggregates different centralized exchanges, fully utilizing ‘trustless’ blockchain networks.
Loopring (LRC) is a protocol for decentralized token exchange, meaning it is not a singular consumer facing platform, but code that any number of other decentralized applications can run and be part of. Specifically, Loopring plans on unifying many different sources of digital currency liquidity such as centralized exchanges or traders using a Loopring-enabled wallet.
Not only will this connectivity allow for faster counterparty matching, and at better ‘exchange rates’, but the protocol increases security by bypassing exchange registration, asset withholding, and more, by allowing in-wallet exchange. As one of the most promising domains in digital currencies, decentralized exchange protocols have the potential to relieve us of the cumbersome legacy processes of today.
A TYPICAL TRADE, THE OLD WAY
To illustrate Loopring’s potential, we need only think of the prototypical process required to trade a digital asset, especially less liquid tokens.
If you want to trade Token A, for Token B; they must go to an exchange which supports both tokens. But if the exchange doesn’t currently support one token, investors must register for a new account at a different exchange. This requires not only more time but more disclosure of personal information. Investors may also have to wait the prescribed amount of time for a know your customer (KYC) review.
Once registered, you may need to do a few preliminary trades and transfers, usually with BTC or ETH, until you’re ready to execute the desired trade. This adds fees for withdrawing and transferring tokens, in addition to the bid-ask spreads.
Finally, once you’re ready to trade, hopefully the order books for Token A / Token B on the exchange are deep and liquid enough to complete your trade in the size you want, without moving the price too much. For less liquid tokens, this can be difficult.
You can then withdraw your new tokens to your wallet — from where you started.
LOOPRING TRADE PATHWAY
Loopring solves most, if not all, of the aforementioned problems digital currency traders and investors face. By being able to execute trades from your wallet, you are avoiding exchange hacking or trust risk. Furthermore, you’re able to access more counter-parties than you’d be able to within a single centralized exchange.
The requirement to trade through BTC or ETH will become a thing of the past, as any token will be able to trade against any other. Time and fees spent sending tokens to different exchanges won’t be a mandatory pain anymore.
BETTER TRADE EXECUTION
Solving these problems and hindrances is great, but Loopring doesn’t stop there.
In terms of order execution, Loopring actually enables you to transact at the exchange rate you specified, or better. For example, if you wanted to sell 2 ETH for 10 ‘XYZ’, (roughly the market rate), your order may be filled at that rate, with the possibility for improvement, such as receiving 11 ‘XYZ’, for the same 2 ETH. This improvement would occur if there is some combination of other counter-parties’ trades that can be mix and matched at better rates.
The possibility for better execution of your order comes from an intelligent algorithm and deep liquidity pool fulfilling your trade.
This price improvement is possible because the Loopring protocol has participants known as Ring-Miners, who receive and broadcast order information, searching the network of exchanges for orders to match. The innovative thinking Loopring brings is the ability for up to 10 orders at once. The platform trades in mix-and-match pairs, stitched together in a ring, satisfying all orders.
Thus, getting a better rate filled on your order may be the economic consequence of search costs and other inefficiencies being wringed out from the market and trade process. That ‘waste’ is captured by you — for being a liquidity member — and the miner for having put in the work to match and execute.
Decentralized exchange is a popular and promising area of the digital currency environment. Optimism rests upon the fact that it seeks to solve a real problem. Further, the idea is an intuitive use case for the blockchain.
To ensure this protocol runs smoothly, the Loopring token (LRC) is used as a fee for orders, to incentivize and reward miners and exchanges for matching your trades. Although the LRC token is the native currency, Loopring remains open-source, allowing any actor (wallets, exchanges) in the ecosystem to use its code.
Many digital asset investors look to Loopring in 2018 in hopes of facilitating more efficient and effective trades. Loopring’s strong potential lies in their attempt to align the incentives of all parties in the trading ecosystem; the protocol doesn’t seek to take market share from any participant, but rather expand the entire pie.
As of now, LRC sits on top of the Ethereum network. Its support for other blockchains such as QTUM and NEO is on the roadmap. If they succeed in their lofty goals, low liquidity may be a thing of the past for digital currencies. It’s even possible that this technology may impact all tokenized assets.
This article was originally published at Coinsquare Discover