At the start of September, Loopring released an update that has a very strong potential to put an end to the biggest problem that DeFi faces today - ASTRONOMICAL Transaction Fees.
Let's start with a mini-story that sparked this article:
Yesterday I wanted to swap $93.33 in ETH to USDC....
Seriously? Almost $50 in gas fees alone?
As a result, I had to resort to sending my cryptocurrency back onto a centralized exchange to sell eth on the market.
We are now at the point where DEXs are no longer feasible for regular users as they will be overpaying on fees. This is likely to lead to an exodus from DEXs back to CEXs for small fish, such as yourself and me.
This is not an ideal scenario for the entire DeFi movement, and it has a strong potential to bring it down before it has even started to lift off.
Luckily for us...
Here comes Loopring into the game
Loopring has been working on a layer-2 scaling solution for quite some time now. The technology they use is known as zK-Rollups, and it has allowed the Loopring.io DEX (their own product atop of their protocol) to handle around 2000 trades per second while guaranteeing the security of the Ethereum blockchain;
The idea initially stemmed from Vitalik Buterin, co-founder of Ethereum. He spoke about Layer-2 scaling solutions on his blog back in August 2019 in a post titled “The Dawn of Hybrid Layer 2 Protocols”.
In his post, he explores the difficulties regarding prior Layer-2 scaling solutions such as Plasma and State Chains. In both cases, it seemed that they were ideal for payments between familiar parties. However, they lacked any further integration while trying to interact with smart contracts.
He continued to elaborate that zK-Rollups, proposed by himself on this post in September 2018, seems like a promising option to further explore scalability for Etheruem.
From this, the Loopring team took the notes started to get to work on zK-Rollups. They function by taking most of the computations off the actual blockchain while broadcasting the “new state root” with proofs alongside for verification. Through this method, less stress enters the Ethereum blockchain itself, but the Etheruem blockchain’s underlying security is still guaranteed on all transactions conducted.
After a few months of development, the Loopring team announced their first decentralized exchange in February 2020, built on top of their own Loopring 3.0 protocol, dubbed Loopring.io.
The release of Loopring.io alone didnt make headlines right away, until they implemented a new feature called PAY that allowed everyone to send erc-20 transactions with the following ;
With Loopring promising such an epic platform, it is no surprise that some users thought that it was possibly too good to be true;
The launch of the Loopring.io DEX had quite a substantial effect on the Loopring ecosystem itself. Before the DEX launched in February 2020, there were practically zero transactions going through the protocol itself. After it launched, the following chart shows the impact that Loopring.io had on monthly transactions;
You can see that there were literally no transactions going through the Loopring protocol in January and February. After the launch toward the end of February, volume started to pick up and continuously increased. I mean, we shouldn't be surprised as prior Loopring.io there were only a few experiment DEX running atop of Loopring Protocol.
In fact, taking a closer look at the growth over the past month, we can see that their latest announcement has caused further spikes in protocol activity;
Loopring REALLY does have the tools already in place to help bring down the astronomical transaction fees on the Ethereum blockchain. The biggest problem we face today is getting people (and projects) to use the zK-Rollups.
This exact same opinion was voiced by Buterin himself in early September 2020;
Vtialik certainly does know best, and he realizes that the technology to bring the transaction fees down is already here - we just need to start using it.
The Day Loopring Announced It Will Save DeFi
It was September 1st when Loopring made an announcement regarding its upcoming upgrade known as Loopring 3.6.
Before I get into the details of how Loopring plan to safe DeFi, let me show you what has been happening with Ethereum transaction fees;
Looking at the transaction fees for Ethereum over the course of its lifespan, you can instantly see what kind of problem we are facing. During the 2017/18 boom for Ethereum, transaction fees reached as high as $4 on average. At the time, this was considered appalling for the network as people feared that TX fees were becoming far too expensive for users to handle.
Fast forward to today, and we can instantly see the astronomical rise. Now you know why I have been using the term “Astronomical” because the fees are currently sitting amongst the stars. It surged well past the previous all-time high cost at $5 and has continued off the scale to rise above an average of $15 per ETH transaction.
This is just for ETH transfer fees. Interacting with DeFi contracts costs much more than this. For example, here is a screenshot of me trying to add liquidity to the ETH/AMPL liquidity pool on UNISWAP;
DO you think that anybody would want to pay nearly $40 to add $100 into a liquidity pool? It is getting out of hand, in my opinion.
Well, this is all about to change when Loopring 3.6 hits the mainnet.
The upgrade has undergone an internal audit and external audits will be coming this month as per the announcement. The upgrade is slated to improve the Loopring smart contract efficiency with a significant reduction in transaction costs.
However, that is not the best part.
The most exciting aspect of Loopring 3.6 is that it will support both order book-based AND AMM-Based trading on the layer-2 protocol.
Did you read that correctly? Automated Market Maker based trading is coming to the Loopring protocol!
What does this mean?
Well, to put it simply, UNISWAP is an AMM. It is the biggest DEX our there with hundreds of millions in daily trading volume. As I’ve already explained, conducting swaps on UNISWAP is unfeasible due to the high transaction fees.
However, suppose the trades executed on UNISWAP are funneled through the zK-Rollup technology Loopring proposes. In that case, this should reduce the trading costs involved quite substantially - making it a perfect fit for small fish traders again.
We are speaking here about taking fees from $15 down to a few cents. All thanks to Loopring.
As a result, this should save DeFi as it removes entry barriers for the small fish within the market.
In addition to AMM-based trading, it will also allow settlement between regular orders and AMM pools directly.
When Loopring 3.6 launches, this technology can quickly become a vital component of the entire Ecosystem - at least until ETH 2.0 launches. In fact, if it reaches its potential, I can imagine seeing every single DeFi platform scrambling to integrate Loopring 3.6 into their protocol in a similar fashion to how they all integrated the Chainlink Oracle service - and we all know what happened with LINK these past few months!
With the ever-growing fees to conduct transactions on the Ethereum blockchain - a solution had to be created. Of course, we can easily wait for ETH 2.0 in which the blockchain will shift from PoW to PoS. However, if we wait around for this - DeFi growth will suffer a lot in the meantime.
DeFi is unsustainable with the average Ethereum transaction fees climbing above $15 (and higher for DeFi contract interactions). The zK-Rollup solution for AMMs (Uniswap, 1inch, kyber swap, sushi swap and more) that will integrate with Loopring 3.6 has the potential to change this scenario instantly.
The only thing that has to happen is that protocols must start using it themselves...
Who's else excited for what Loopring is about to bring on DeFi table?