When using exchanges, what is the first thing a trader looks for? For me, it’s the ability to make a trade with ease with the assurance that my money will be used for its intended purpose. This may seem obvious, but as we’ve seen in the past few years both in the crypto and the financial sector more broadly, this is not always the case. Just think about the 2008 GFC and the 2014 Mt. Gox scandal, where investors saw their money disappear from one day to the next.
Though reliable exchanges still exist, it is time that we start looking for ways to improve crypto exchange markets. Since its early days, crypto has adopted trading guidelines similar to those used in stock trading. But with such different inherent properties of cryptocurrencies and stocks, isn’t it curious that we are modeling crypto trading on stock trading?
Cryptocurrencies were developed to render systems more effective and more flexible, so shouldn’t the way that we trade them also follow the same standards? For example, have you ever asked yourself why can’t we trade portions of orders?
The founders of Loopring, an Ethereum blockchain startup, have been asking themselves these exact questions. And better yet, they have presented their answers in the form of an open source protocol to be used by centralized and decentralized exchanges for cryptocurrencies.
The best part is that where to exchange coins doesn’t have to change. Loopring is not a competing exchange platform; instead, it has developed the backend code for a platform that can be used by all existing exchanges.
So, why should exchanges use Loopring?
Loopring offers to facilitate trade by improving liquidity and flexibility of online crypto exchanges and traditional exchanges like the NYSE. Currently, in order to complete a trade, exchange platforms must be liquid enough in that currency. But, in reality, certain platforms hold the bulk of certain coins. For example, if Bitfinex holds the bulk of Bitcoins but you want to make a trade on a different platform, the exchange may not have enough Bitcoins to support the trade.
Loopring has developed order sharing into its protocol to avoid this limitation. Order sharing implies that you can split up orders into smaller pieces to obtain the best prices across exchange platforms. So, users of platforms running the Loopring code will never have to worry about liquidity because the protocol will allow for trades to be conducted in pieces across participating exchanges.
Also, Loopring will significantly improve the efficiency of trade by acting as an aggregator of crypto prices and through their signature ‘ring matching’ feature. When you want to make a trade, platforms using Loopring will search across exchanges and blockchains to find the best price for your trade.
Though this aggregator feature, combined with order sharing will greatly increase the efficiency of trading, ring-matching is really the most exciting part of the platform. This idea of ring-matching can be a bit difficult to understand, so here is an example of this feature operates:
“Trader A wants to sell ETH for USD, Trader B is buying ETH but is selling BAT,
Trader C is buying BAT but is selling XRP, and Trader D is buying XRP but is selling USD.”
The Loopring protocol is able to complete this ‘circular’ trade in which you can have multiple traders, but everyone is getting what they are looking for. This is powerful because it means that traders will be able to put out an order and they will no longer have to wait for one person to be buying Coin A for Currency B. Trades will be more flexible and more multifaceted, allowing trades to be conducted faster and more effectively than ever before.
Since the Loopring protocol is built on the blockchain, it will benefit all of the advantages of this platform. For example, the platform will use self-executing smart contracts to complete transactions. Though there will be a small gas fee for transactions, the crypto to be exchanged will remain in the trader’s wallet, rather than in escrow, until the amount is transferred via the smart contract. Since the assets will be dispersed, hacker’s will not be able to exploit a single point of weakness.
As an added benefit, all transactions will be recorded on blockchain’s immutable ledger which is updated in real-time. This reduces the need for intermediaries such as transfer agents, leading to lower costs and higher profits.
Exchanges, both online and otherwise, will have to adopt Loopring’s code in order to provide the liberty that cryptocurrency trading requires. The value of cryptocurrencies fluctuate so rapidly and we are stuck in a system in which the platforms on which we trade cannot quite support the flexibility and efficiency needed for this era.
The Loopring protocol has brought in ways to greatly improve the experience of users of exchanges, whether brokers or individuals. It does not stand to compete with other exchanges but rather enhance them in a way that can bring more life to the crypto market. The features that the startup has worked into its code will make it easier and more secure to trade cryptocurrency than ever before. If you want to stay updated on Loopring’s progress, join their slack and subscribe to their Reddit channel.