Loopring is an open-source protocol for supporting decentralized exchanges (DEX). By powering decentralized exchanges, Loopring aims to subvert use of centralized cryptocurrency exchanges in order to create a more secure and trustless trading environment.
Most conversions between two different cryptocurrencies occur on an exchange such as Coinbase or Poloniex, in which a central database stores all coins and executes orders. This provides a simple yet effective method to exchange funds. However, to use such an exchange, a user must trust the exchange to keep the funds safe and absent from security breaches or fraud. This exchange’s repository can be a huge target for hackers looking to steal massive amounts of funds. Although this does sound simple enough to accomplish, many have trouble trusting centralized exchanges after some major security breaches in recent years. Companies as large as Mt. Gox, Bitfinex, and Nicehash have all been hacked and have lost massive amounts of funds. In all of these cases, these losses were passed onto the consumer.
A decentralized exchange provides a framework to facilitate peer-to-peer exchanges. This means no middle-man, and no third party that controls coins in the time before and after an exchange. This eliminates a single point of control over a particular exchange.
Following the philosophy of cryptocurrencies, decentralized exchanges exist on a distributed network, meaning that funds cannot be frozen, stolen, or removed from the platform. This model provides significant advantages over traditional exchanges, but is much newer and lesser known as a result.
Loopring moves to connect decentralized exchanges with one another by executing order-rings, which is a sequence of orders that forms a complete cycle. Although this can be accomplished with just 2 parties, a high amount of people can become part of a single ring order, filling everyone’s order at once. Here’s an example from the Loopring whitepaper with 3 orders:
If we were to replace these parties with cryptocurrency exchanges, it’s easy to see the advantage that each exchange can reap. By becoming part of the Loopring network, an exchange is connected to a global network of possible trades and can allow an exchange to scale quickly.
If there a large amount of participants in a single order-ring, the process of computing a suitable order can get very computationally expensive. So how are these orders computed? They’re computed with Ring Miners, which are miners on the Loopring network. For each ring-order that they execute, the Ring Miner is rewarded with either Loopring or the associated coin that was made in this transaction. By finding potential order-rings easily, Ring Miners help provide ease of use and coin liquidity to the order experience. This process allows parties to trade between cryptocurrencies with ease, without the use of a third party.
It’s important to note that Loopring isn’t a decentralized exchange itself, nor does it intend to compete with any given exchange. It means to enhance exchanges by providing uniformity, liquidity, and security in order to make trading your coins easier and more secure.