In The Week

Loopring, OMG Network, Ren, xTokens, Nexus Mutual

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Spotlight 🔎


Details of the Loopring 3.6 protocol upgrade have been released.

Loopring is an open protocol used for building scalable order book based DEXs on Ethereum using zk-Rollup constructions. Some major upgrade’s key features include allowing senders to transfer Ether/tokens to any Ethereum address without the need for the recipient to register as well as introducing ‘universal blocks’ that are not dedicated for specific types of transaction, minimising deposit and withdrawal times. Additionally, custom deposit contracts can be written by exchanges to put user funds to work in a wide range of DeFi dApps. The upgrade is anticipated to launch in Q4 2020.

The Formally Verified Take

There are too many features in the pipeline to cover but they all essentially try and to one of three things: (1) minimise costs/wait times for users (2) increase the flexibility in how deposits, withdrawals, transfers are processed (3) eliminate friction between L1 and L2. What’s important is that the combination of all of these features improves the usability of Loopring as a protocol.

Taking a step back, the value proposition of Loopring has already become clearer due to the significant rise in gas costs. New users can only spend two on-chain transactions (account registration + asset deposits) to unlock Loopring’s L2 ‘fast lane’.

As an example, a user could use ~265,000 gas to create an account, and use a further 100k gas to deposit assets on the zkRollup (note further deposits require further costs). Alternatively, a user could use ~185k gas with the same GWEI to perform one swap on Uniswap but if they execute two trades there they are better off using Loopring simply from a gas cost perspective. For more gas intensive executions like Kyber swaps, this might even be a singe trade. Note however, this doesn’t take into account trading fees on Loopring exchanges. Even still, makers on currently get 0.016% rebates on all trades!

Interestingly, Loopring’s value proposition for frequent traders has not translated into activity on Loopring over the months both in terms of the transactions processed and the number of transactions processed per account. Interestingly, both metrics have dropped during times of high L1 congestion when we might have expected them to increase. Bear in mind that one of the main mechanisms that drive value to the LRC token are the protocol fees that are collected for each trade and partially distributed out to staking participants.

More positively, a higher number of transactions are being batched in blocks more regularly. This is important to recognise as exchanges built on Loopring have real world prover costs with incentives to batch as many transactions as possible - Loopring exchange increase their cost efficiency with increased usage. Clearly there is still room for improvement.

So what is happening? Well, one of the challenges of Layer 2 solutions like Loopring is their ability to have on-chain composability with Layer 1s. Right now though, users want to have the ability to interact with (interconnecting) DeFi protocols at the base layer even if this may mean taking on further gas costs. Of course, this is where the large pools of liquidity are found. Loopring needs composability.

To bring this full circle, the 3.6 upgrade tackles this very issue. With more L1 integrations, the narrative surrounding Loopring perhaps changes. Eventually, it may no longer serve as an isolated environment for high frequency traders. Instead, Loopring might be able to cater for a wider set of participants that could benefit from lower trading fees while also being able to participate in the wider DeFi ecosystem. All that Loopring has to do now is prove that it can do just that.

Quick Takes ⚡️

OMG Network

Tether (USDt) is now live on the OMG network.

The OMG Network uses Plasma to increase the processing capacity of Ethereum by enabling high throughput, low cost transactions. Transferring USDt allows economic throughput to be take off the Ethereum chain (and therefore congestion). Using OMG Network, transactions are instead batched in a single validated Merkle proof that is then submitted to Ethereum as a root chain. OMG’s plasma-based architecture will result in 1/3 of the transaction costs that Ethereum users are currently experiencing. By acting as a child chain to Ethereum, users can still preserve the high security aspects of the Ethereum root chain.

The Formally Verified Take

While the integration of USDt on the OMG Network has been public for some months, it is only now that we can start to see whether users will actually transact USDt on a plasma chain that uses fraud proofs. The opportunity is certainly large - in the last 30 days, Tether is the second largest contributor to transactions fees ($6.4m) after Uniswap ($7m). Beyond USDt transactors, who benefits from this integration? OMG holders.

As a refresher, OMG Network operates semi-centralised with a single operator creating blocks in the Plasma blockchain. The network is made more ‘decentralised’ by allowing watchers (OMG stakers) to oversee this process, receiving a portion of the transaction fees paid on the network (eventually set dynamically at 1/3 of ETH gas fees). Therefore, OMG’s value can be modelled as the NPV of future profits to watchers.

We’re still very early - right now staking isn’t yet live but if a significant portion of Tether’s transactional activity is moved to OMG’s layer we should expect proportional value flows to the token-owning supply side participants - the OMG stakers.


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