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Loopring (LRC), an Ethereum-based protocol that offers a new type of cryptography for Decentralized Finance (DeFi) applications, certainly has all of the requisite elements to stake out a new all-time high.
Much of the narrative around Loopring in recent days has been centered on the possibility of a partnership with GameStop (NYSE:GME). First, as we noted in a dedicated post, certain snippets of the source code from Loopring’s GitHub profile reference “gamestopmeta” in the “NFT-DEV” amended code branch, suggesting a high likelihood of integration with GameStop’s upcoming NFT-focused platform. Then, GameStop’s new job posting for a “Product Owner - Head of Web3 Gaming [REMOTE] In Seattle” caught our roving eyes. The job requires not only familiarity with “all new NFT/crypto projects” but also a working knowledge of “integrations with different blockchains and Ethereum Layer 2 environments”. Bear in mind that the LRC is a Layer 2 protocol on Ethereum. Taken together, these developments bolster the probability of some type of partnership between GameStop and Loopring.
L2 Chains and Rollups
However, Loopring constitutes a compelling investment thesis even without the added attractiveness of a partnership with GameStop. Let’s delve deeper. As stated earlier, LRC is a Layer 2 (L2) solution built on Ethereum. Basically, the L2 is an entire protocol that is built on top of the Ethereum blockchain. The protocol interacts with the main blockchain via smart contracts – programs that automatically execute actions when certain conditions are met. Why is there a need for Layer 2? Well, Ethereum’s main blockchain can’t process that many transactions simultaneously. Moreover, the transaction processing fee – also known as the gas fee – is quite prohibitive in many cases. Layer 2 solutions are an efficient compromise in this case. Before going further, let’s define Rollups. These are solutions that aggregate and process transactions outside of Ethereum’s main blockchain. These processed transactions are then bundled and posted on the main chain, thereby increasing Ethereum’s transaction processing power or scalability by orders of magnitude. Finally, Rollups use validity proofs that are as secure as the L1 main blockchain. This is because Rollups post all transaction data, state differences, and proofs on the Ethereum L1 in a highly compressed form. Given that the entire state of a Rollup can be reconstituted from the L1, we can also have shorter duration validity proof, thereby increasing the transaction processing rate.
Loopring’s Defining Feature: zkRollups
This brings us to the crux of the matter. Loopring uses a new type of Rollup, dubbed the zkRollup (zero-knowledge Rollups). A zero-knowledge proof makes a claim regarding the accuracy of a particular data set without actually sharing that data. This is done by generating proofs based on cryptographic computations for each batch of transactions. These validity proofs are then submitted to the L1. This varies significantly from Optimistic Rollups, where all transactions are assumed to be valid and posted in batches on the L1 without any computation. Since zkRollups do not require a challenge period, as the validity proofs have already verified the legitimacy of the underlying transaction data, transactions can be processed very quickly. However, one drawback associated with zkRollups is their general inability to run smart contracts. Nonetheless, this drawback is currently being tackled. For instance, ZKSync already offers zkRollups with the ability to run smart contracts, while Hermez is currently working toward this feature.
Of course, the true potential of zkRollups – and, by extension, that of Loopring – would be unleashed once the Ethereum shards go live. Sharding will divide the Ethereum 2.0 network into distinct portions, where each shard would correspond to an independent state consisting of a set number of account balances and smart contracts. Since zkRollups would eventually be able to run directly over a shard, their transaction processing ability is expected to grow by orders of magnitude.
As is evident, zkRollups are ideal for Decentralized Exchanges or DEXs. In order to utilize the services of the Loopring DEX, users first send their funds to a smart contract managed by the Loopring protocol. From there, the user-identifying information is moved off-chain, and the associated trades are batched together and matched for efficiency gains. Each batch of transactions is then added to the Ethereum blockchain using zero-knowledge proofs that allow for a complete reconstruction of those off-chain transactions. Loopring claims that it can process over 2,000 trades per second by using this method. The LRC is the native cryptocurrency of the Loopring DEX. Users who stake LRC win the right to 70 percent of the exchange fees, while 10 percent of these fees – paid in the form of LRC – are burnt, thereby ensuring an overall deflationary environment. The total supply of LRC is capped at 1.395 billion tokens.
There is a growing consensus now that zkRollups might constitute the future of blockchain scalability and privacy. Consequently, it is not unreasonable to expect continued uptake for Loopring, paving the way for a new all-time high for the LRC token. Currently, LRC’s zenith lies at $3.83, while the coin is trading at $1.95 at present.