The deployment of new technology is often fraught with problems. It is possible to anticipate some of them but not all. A great example of this is Ethereum, the largest platform for smart contracts that aims to revolutionize the banking sector in a decentralized, digital space. Sadly, as Ethereum gained in popularity, its blockchain network could not handle all traffic without a drastic increase in transaction fees (ETH gas).
Loopring is one of the most promising solutions for Ethereum’s congestion and the return of affordable transaction fees, at least until Ethereum’s much-anticipated ETH 2.0 upgrade arrives in the second half of 2022. Loopring accomplishes this in the following way.
Reasons For Ethereum(ETH) High Gas Fees Explained
On a good day, a simple transaction where you would send ETH from one wallet to another would cost 16% of the total transaction.
At other times, depending on the network’s load, the gas fee for transferring money may even exceed 50%. In this regard, Ethereum fails to achieve its stated goal of recreating traditional finance on the blockchain. In fact, a company like Western Union would blush in embarrassment if it charged such a fee. The reasons for this can be traced back to Ethereum’s legacy as a Proof-of-Work chain that consumes tremendous energy and has low scalability.
In other words, the network doesn’t scale up sufficiently as more users join it. In response, this leads to a rise in the cost of transactions to counter the imbalance. On the other hand, Proof-of-Stake blockchains have a better scalability, as demonstrated by Solana’s significantly lower gas fee of $0.00025 per transaction.
For the uninitiated, here are the main differences between Proof-of-Work (PoW) and Proof-of-Stake (PoS) blockchains. Suffice to say, Ethereum is in a transitory upgrade phase between the two types of consensus mechanisms to secure the network.
Even though there are other smart contract platforms available, Ethereum has a significant lead over Solana, which provides a better blockchain experience. From the chart below, you can see that Ethereum has more combined crypto wealth inside smart contracts than all its competitors combined.
For this reason, Ethereum has to resort to scalability solutions like Loopring.
Layer 2 Zero Knowledge Proof Scalability Solution For Ethereum
In any network, data throughput is the primary reason for congestion. If you picture Ethereum as a Los Angeles highway with traffic congestion, then Loopring is the high-speed train that runs above it. In other words, Ethereum’s blockchain is an L1 network, while Loopring is an L2 network, where the L stands for layer.
Scalability solutions like Loopring and Arbitrum are called Layer 2 solutions because of this. In addition, Loopring is also a zero-knowledge rollup—zkRollup. The encryption algorithm minimizes the amount of data that is flowing through the network.
Imagine wanting to verify your identity without revealing it. As a Layer 2 scalability solution, Loopring speeds up Ethereum transactions by bundling them into batches, which is what zero-knowledge rollup is all about. The batches are then fed into Layer 1, the Ethereum main chain.
Developers of Loopring have made a tutorial on how to use it and how much you can save on gas fees.
Of course, making Ethereum affordable is not the sole purpose of Loopring. After all, it is a network of its own, just like Polygon (MATIC) with its ecosystem of DApps—decentralized applications.
Benefit of Using Loopring – AMM, dApps and LPs
One of the most important Loopring DApps is its Loopring decentralized exchange (DEX) for swapping cryptocurrencies affordably. The first order of business is to install the MetaMask wallet into your browser. Then, when you visit the Loopring protocol, simply connect it to the wallet. As you can see, you can swap pretty much any cryptocurrency/token you have ever heard of, including stablecoins like USDC.
Loopring uses an automated market maker (AMM) to set the exchange rate between tokens. Although the platform’s fees are not zero, they are very close. Compared to Ethereum’s 16%, the current swap fee on Loopring is 0.3%. As you would expect, the fee funds the protocol: 0.2% goes to liquidity providers (LPs), and 0.1% goes to the Loopring developers.
Liquidity providers (LPs) make decentralized finance (DeFi) happen. Because DeFi, powered by smart contracts, doesn’t rely on any institution, users themselves fulfill its role. In the case of market makers, LPs supplant them by staking tokens into liquidity pools. This way, whenever someone wants to swap a token, they tap into those pools, with LPs taking 0.2% of the cut for providing this service.
You can become a liquidity provider on Loopring via the pools tab. You would then have to pick a token pair for swapping and the number of tokens placed into the liquidity pool. Both tokens would have to be of equal value to make a trading pair. For example, to enter the LRC/USDC pool, you would have to place (stake) $50 worth of LRC and $50 worth of USDC.
The APR value, annual percentage yield, is your interest rate just as you would get one from depositing money in a traditional bank, however minuscule it would be. Presently, the highest-earning liquidity pool is MOVD/ETH token pair at 76% APR. Comparatively, this is 1,266 times higher than the average interest rate for savings accounts in the U.S. at 0.06%.
Loopring Network : LRC Tokenomics and Liquidity Pool Yield
Just like every other DeFi protocol, Loopring has its own token, called LRC. This token is how LPs and developers receive their cuts when people use the Loopring network. There is a maximum supply of 1.37 billion LRC tokens, of which 1.33 billion is in circulation.
Besides buying them directly via MetaMask wallet or on crypto exchanges like Coinbase or Binance, you can also earn LRC tokens by staking them. Staking just means that you provide liquidity to the protocol, just like with liquidity pools. Therefore, if someone wants to swap LRC tokens, they would tap into the staked ones.
In other words, all the liquidity pools with LRC as one part of the token pair would yield 70% of the protocol fees. This will go for all future DEXs built on top of the Loopring L2 network. As far as LRC price goes, it achieved an all-time-high (ATH) price on November 10, 2021, at $3.83 per LRC token.
On December 29, 2021, the LRC price was at $2.01, with the further expectation of its rise as more DApps enter Loopring’s ecosystem. Specifically, in anticipation of NFT marketplace launch from a partnership with GameStop, the world’s largest retail video gaming chain. Of course, there is absolutely no guarantee that LRC’s price will rise, and it’s the price could easily tumble despite what we’ve said. As with all investments, always research before parting with your money, and never invest more than you can afford to lose.
Loopring Ethereum’s Layer 2 Scaling Solution?
The best way to view the LRC token is as an infrastructural coin. Unlike meme coins, like DOGE or SHIB, such coins rely on long-term usability value. Ethereum certainly needs Loopring to scale up its operations and remain affordable. Therefore, the future of the largest smart contract platform is tied with this project.
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