‘The Best Functioning Token Exchange Mechanism in the World’ — Exclusive Interview With Loopring’s Matthew Finestone
July 24, 2018 by Ian Edwards
Bitsonline had an exclusive interview with Matthew Finestone, the Director of Business Development at Loopring, a decentralized exchange (DEX) protocol. In it, he discusses the open source project that allows third parties to build their own DEXs on Ethereum, QTUM, and soon, NEO.
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Loopring, a Protocol on Which to Build DEXs
Loopring isn’t a DEX itself but allows for others to build DEXs using its protocol. There are currently DEXs built on Loopring that allow for the trading of ERC20 tokens, and the firm has also integrated the system for QTUM’s mainnet and NEO’s testnet.
In some ways, it is similar to 0x, another DEX protocol that can be used for ERC20 token trading, as well as other DEXs like Airswap, the Kyber Network, or Ether Delta.
The firm was founded by Daniel Wang, a former Google engineer who once worked for Chinese insurance company ZhongAn, as well as founding the cryptocurrency payment company Coinport. Loopring currently has a team of around 20 people working out of China, though the Loopring Foundation, which oversees the project, is based in the British Virgin Islands. It is being supported by Hongfei Da, the founder of NEO and Ontology.
The Benefits of DEXs
Since most crypto trades on centralized exchanges, DEXs have been seen as a way to further decentralize crypto markets. Essentially, DEXs work by connecting those who want to exchange tokens directly, instead of going through a trusted intermediate party.
They promise several benefits over traditional centralized exchanges. First, they are more secure, as traders’ tokens are held in non-custodial wallets with their private keys never held by a third party.
As DEXs are primarily automated via smart contracts, they are also censorship resistant, meaning governments would have a difficult time forcing a DEX to close down, like the Chinese government did with the OkCoin and Huobi exchanges in 2017. They potentially offer enhanced privacy, as they don’t necessarily require AML/KYC checks.
On the negative side of the ledger for DEXs is their general lack of liquidity, lack of interoperability, and reliance on the underlying blockchain for the execution of trades. There are also issues around public order books, allowing unethical miners to front-run orders.
Loopring has been busy since raising $45 million USD in an ICO in August of 2017. The following December, it deployed its 1.0 protocol to the Ethereum mainnet, followed by QTUM in January. At the beginning of 2018, it announced it was funding a research initiative with Professor Alessandro Chiesa at UC Berkeley, the co-founder of Zcash and co-inventor of Zerocash. Currently, Loopring is working on its Protocol 2.0, which is scheduled to launch in September of this year.
Bitsonline’s Interview With Matthew Finestone
Ian Edwards: Loopring is a decentralized exchange (DEX) protocol, not a DEX itself. Could you please explain the difference?
Matthew Finestone: Loopring builds open source infrastructure for others to be able to build actual DEXs upon. This infrastructure is basically a bunch of smart contracts, and a bunch of “off-chain” software. The smart contracts are all public and handle many different things, but the main thing users are concerned with is the smart contract that trustlessly swaps and settles tokens from one user wallet to another. This is done without ever taking control of funds away from the user. The “off-chain” software is concerned with a few things, but mainly, it describes how messages — or more precisely — orders, are communicated and transmitted between participants in the network. This is simplified, but combined, this is the protocol, or the “standardized rules”, if you will.
DEXs on the other hand, is the output of actually using these tools to build a business or product. It is our goal for anyone — a person, a team, a company — to take these pieces and build their own DEX with it. They can do this for free, and design it, market it, improve upon it, whatever they’d like — but all with the Loopring Protocol “pipes” in the background.
Note: people don’t necessarily need to a build a full DEX per se. They can use Loopring Protocol to power anything that involves exchange functionality within their dApp. For example, a payment app, that is using Loopring to swap tokens in the background as it makes a payment.
IE: Loopring currently only works for trading ERC20 tokens on Ethereum, correct? Are there plans to bring Loopring to other blockchains, such as QTUM and NEO? What is the timeline/roadmap for those projects?
MF: Correct. Loopring was deployed on Ethereum in December 2017. So, trading of ERC20 tokens can happen right now, and has indeed been happening. What’s relatively unique about us is our blockchain agnosticism. While we view Ethereum as the current undisputed leader in terms of smart contract public blockchains, we are cognizant that there are other platforms that may have thriving token ecosystems on top in the future. So, we modify the Loopring Protocol to have a bespoke version on top of each public blockchain we want to service. We have already done so for QTUM (although there is not necessarily a massive token landscape on top, yet), and we have deployed on top of the NEO testnet, so users will soon be able to trade NEP5 tokens (ERC20 equivalent) through Loopring on the NEO blockchain as well.
IE: There are several ways to access Loopring to make trades, such as Circulr, Loopring.io, and Loopr.io. What is the best way for traders today to use Loopring?
MF: As mentioned, our plan is to really provide the infrastructure for others to build on top of us. To help show other teams how to build their DEX and other projects on the Loopring Protocol, we have built reference implementations to show what is possible, and get the ball rolling. Loopr and Circulr are these reference implementations that we built — kind of like showcases. Users can go on to either platform right now and start trading.
Admittedly, volume is lacking right now, because it is still early days, and users are unfamiliar with using DEXs in general. But the good news is that both of these trading destinations allow users to trade in a risk-free environment, directly from their wallet. Their assets (private keys) are never controlled by us, or anyone else. This is quite different than the case with centralized exchanges (such as Binance, Coinbase), that can be hacked, etc.
IE: Do traders using Loopring on Ethereum have to pay gas fees?
MF: Ethereum gas fees are covered by the LRC trading fees. When a user submits an order, there is no gas fee, as orders are held off chain. However, the user does attach some LRC as a trading fee — to incentivize “ring-miners” to match their order. This LRC fee is only taken if the order gets matched, and is thus submitted to the Ethereum blockchain to settle. The ETH gas cost is then taken out of this fee.
IE: Loopring recently announced a DEX alliance initiative, which third-parties can begin applying for on August 1st. What type of companies do you think will be interested in participating in this?
MF: We imagine a diverse set of companies will get involved and apply. We already have about 12 projects building on top of Loopring that we will announce imminently. The focus is realistically any team that wants to build this new generation of exchange business. Whereas today we see a proliferation of centralized exchanges, and a new one popping up every few days, we view this will be the case in the future, but in decentralized versions.
More specifically, however, we are first focusing on wallets. Wallets are a user’s gateway into blockchains and their safehouse for their assets. Yet, most of these wallets don’t make money, or don’t have an obvious means to make money. By integrating Loopring into a wallet, all of a sudden these wallets becomes DEXs, or as we say, Wallexes. Then, they have a way to make money and provide value to users: by allowing users to generate orders and trade!
Besides that, other participants that will be getting involved are relays/ring-miners (the backend of the protocol that does the matching), professional market makers (who provide liquidity and earn the spread/other fees), and more.
IE: Loopring is currently working on its Protocol 2.0 for release in September 2018, correct? What will be the main benefits it will bring compared to the current version?
MF: Loopring Protocol 2.0 will be a more generalized and powerful version of the protocol. It will improve upon certain existing features, such as compressing order-ring size to be more gas efficient, and also introduce new features such as allowing “callbacks” inside other smart contracts, and more ways to authorize orders. We’d love to give more detail, but right now, it is still closed-source as we are developing it. We’ve decided to develop it in this fashion as we are applying for certain patents in China (and open-sourcing it now would render our patent applications invalid in China). We’re aiming to have it completed by this September, and we will open-source it, just like all of our other code.
IE: Could you explain what the Lightcone relay is, and how the partnership with UpBlockchain works?
MF: Lightcone relay is a new relay implementation with the design objective to support 100K trading pairs (not tokens), and 2K to 5K matches per second per trading pair. It is a high-performance relay cluster and matching engine. Lightcone will be open-sourced to the community in stages as development progresses. UpBlockchain, who we’ve formed a partnership with, will invest and assist in the development of the Lightcone relay.
IE: Loopring recently announced a partnership with SECBIT Labs. Will Loopring be publicly releasing the findings of SECBIT’s security audits?
MF: Yes, we will. SECBIT is a smart contract security specialist. We have a three-pronged partnership with them: 1. They will audit our future smart contracts in V2 and beyond (we’ve already been fully audited up until this point); 2. They will audit the contracts of the tokens listed on the Loopring Protocol; and 3. We help them maintain a repository that chronicles and categorizes ERC20 smart contract bugs.
IE: Loopring has joined a research initiative with UC Berkeley to explore integrating zero-knowledge proofs into the Loopring Protocol. What is the current state of this research?
MF: We are very excited by the possibility of integrating zk-proofs into the protocol for extra privacy-preserving features. That said, this has not been a top priority for us because we want to make sure the protocol is the best functioning token exchange mechanism in the world before we start looking elsewhere. Our protocol and the DEXs on top have some pseudonymity and privacy-preservation by nature, which is a bonus for some users to begin with.
IE: Is it correct to say that Loopring has built a network of relays/ring-miners which is currently running the Ethereum part of the network?
MF: Just like our front-end implementations, Loopr and Circulr, (a Wallex and DEX, respectively), Loopring has an official relay reference implementation as well. This relay is what transmits and hosts orders and can also perform ring-mining — the crucial step which actually matches orders and inserts them as a transaction to the Ethereum blockchain. The Wallexs/DEXs speak to this relay, and combined, they are the exchange system.
Technically, both components have an Ethereum side — interacting with a node, and an off-chain side — “speaking” to each other and doing other calculations. Ultimately, though, yes, the relays/ring-miners are the ones “writing” — submitting the transaction to the Ethereum blockchain. Our relay is open-source, of course.
IE: Is Loopring using Amazon Web Services servers for this? Are there any other key pieces of network infrastructure?
MF: Currently yes, we use AWS, but in the future, we will distribute our Ethereum nodes to more data centers. With other teams starting to run their own relays, we believe in the future there will be Loopring relays running in many different cloud servers.
IE: When will third parties be able to begin setting up their nodes on the Loopring network?
MF: Third-parties can already begin setting up their own relay, and become part of the back-end of the protocol. Our code is up there, and they can begin relaying/ring-mining right now, without our permission. However, in practice, we are focusing on nurturing third parties on the front-end, as it is simpler, less resource intensive, and frankly, the lower hanging fruit that will improve the user experience and increase liquidity.
IE: How are private keys of non-custodial wallets that interface with Loopring protected?
MF: Our smart contracts have been professionally audited and have been deployed “in the wild” for six months bug-free. The Loopring Protocol is completely non-custodial. It is impossible for the protocol — and us — to access a user’s private keys. Like much else in blockchain, security is user-dependent. Protect your keys! For example, users can trade via their MetaMask or hardware wallet with our DEXs.
IE: Do you think that DEXs could one day control a substantial share of the market for all kinds of value trading, such as stocks, options, or tokenized physical assets?
MF: If you believe in a decentralized future, and a decentralized economy, then decentralized exchange must be a component of that vision. If these assets are going to be tokenized, then they will be traded on the underlying blockchains. We really believe that. However, centralized exchanges aren’t going extinct in the near-term, and there may always be certain use cases for them, such as speed. It is easier to operate a centralized system, keep in mind. But it involves lots of trust, and thus risk. It’s a trade-off, but one we think will continue to slide the decentralized way.
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