Decentralized exchanges are, without a doubt, becoming an integral part of the crypto world with even prominent firms such as Binance launching their own DEXes.
Blockchainreporter spoke with Matthew Finestone, the Director of Business Development at Loopring, an open-source protocol for building decentralized exchanges, which not long ago announced the technical design of its Loopring 3.0 protocol.
The design promises to dramatically increase throughput of Loopring and other decentralized exchanges (DEXes), making the technology required to usher in the era of commercially-ready DEXes a reality.
Decentralized exchanges have gained much prominence in the industry in the last year or so. What do you think caused this?
DEXes have gained a lot of prominence for a few reasons. Firstly, trading and speculation has, thus far, been one of the main interests or uses for cryptocurrencies. This is normal because it is so early, some tokens don’t have their use-cases up and running, and of course, people simply love to trade and chase profits.
Secondly, and tied to the first reason, with all the trading and assets housed on centralized exchanges, they have become huge ‘honey pots’ or targets for hackers to steal assets from. In the past decade, there have been several billion dollars worth of crypto stolen on exchanges. Of course, sometimes this ‘theft’ can come from inside an organization as well! DEXes solve this problem by being non-custodial, meaning that there’s no need to trust anyone.
Finally, the real crypto believers understand very well that, in a tokenized future, value and assets will, of course, be exchanged on the blockchain itself, not some legacy infrastructure. That’s what DEXes allow for. It simply doesn’t make sense to trade blockchain-based assets on anything other than the blockchain.
How does the 3.0 protocol differ from what you’ve done in the past?
3.0 differs quite substantially from our past versions. Specifically, it uses some advanced and exciting cryptography in the form of zero-knowledge proofs (ZKPs) to allow us to tackle scalability. Scalability has been a huge issue for DEXs, because, as we know, decentralized, secure blockchains such as Ethereum aren’t that fast. There’s a tradeoff of trustlessness versus throughput. It’s been our desire to help alleviate this, pertaining specifically to trading, so our protocol has always involved doing a whole bunch of activities off-chain, such as sending orders, matching orders, and so on, and only submitting the end result – a matched trade – to the blockchain. Even that, however, can only get you so far. In our case, that was only 2 trades per second!
However, with Loopring Protocol 3.0, using ZKPs, specifically a form called zkSNARKs, enables us to pack even more punch into all the off-chain activity, which gets compressed into a much smaller format called a ‘proof’. DEX operators then submit this small proof to the Ethereum blockchain, allowing them to leave all the heavy baggage off-chain. This allows for DEXs built on 3.0 to process 450 trades per second. That can likely improve to 1,000 trades per second very shortly. Miraculously, this amazing cryptography doesn’t compromise on security; that proof can be verified for correctness in a smart contract, meaning no funny-business off-chain. This provides the same security guarantees as trading on Ethereum itself, and means there’s no need to trust anyone with your assets.
What do you think a crypto market with commercially-ready DEXes as the norm will look like?
I think ideally it will look much the same as what we have today, just without hackers or malicious operators stealing assets. It would be amazing if we didn’t even have to say the word DEX anymore – it would just be known and implied that of course, people trade crypto using the underlying blockchain itself — why wouldn’t we!? Giving our cherished tokens to trusted intermediaries would seem outdated and outlandish. Trading crypto using cryptography seems nice and natural, right? It also would allow for some pretty amazing new decentralized financial infrastructure. With all assets remaining on (or near) the blockchain, all of a sudden you can do things like lend these assets, use them as collateral, all in permissionless, global, and potentially private ways.
On the business side, it, of course, means DEXes can become real businesses, and as profitable and large as the biggest centralized exchanges of today. With higher throughput (and correspondingly lower costs) DEXes can become incredible products and companies. In fact, even bigger than any exchange we see today because they can serve a global audience without bulky scaling and security costs.
The Loopring Foundation is working with PwC China to research stablecoins. Could you tell us what made you interested and what to expect from this?
Our research effort with PwC China started because, naturally, they had many corporate clients that were interested in blockchain and cryptocurrencies and how the associated technologies might contribute to changing their companies and industries. One glaring problem for these large companies was the volatility inherent to many cryptocurrencies. An easier on-ramp or educational area for them to get acquainted with was stablecoins – a token pegged to some reference asset such as USD or an ounce of gold.
We collaborated with them because of our blockchain research expertise, but also because stablecoins are very important for exchanges. When users trade, they like having a stable reference on one side of the trading pair, such as a fiat currency. For example, when we trade stocks, it’s nice to price them in USD, etc. It allows us to more easily measure performance, and also create complex financial contracts. It’s hard to engage in trading or commerce of any kind without some semblance of stability in a medium of exchange.
Various platforms are actively working towards greater scalability, to varying degrees of success. How does the 3.0 protocol help?
Scalability is certainly an important topic right now. Generally, you can think of it in two buckets: layer one scaling – how do we get the underlying blockchain such as Ethereum to handle more throughput? And layer two – what can we do ‘above or beside’ the blockchain to handle more throughput? Layer one is, of course, best left to the Ethereum devs who are using scalability schemes such as sharding in Ethereum in 2.0. Other projects, including Loopring, have pivoted to see how we can scale up throughput on layer two. This is crucial because we view Ethereum as a base settlement layer, it may never – and likely should never – scale up to accommodate the fast pace of, for example, trading on exchanges.
Zero-knowledge proofs are a tremendous solution to scaling. We haven’t invented it, we are building on the shoulders of giants here. It’s actually been a sector of cryptography since the 1980s. We’ve just applied it in a novel way with a specific intention. While typically mentioned in relation to privacy, they are equally impressive and important for scaling. ZKPs are a cryptographic tool that allows someone or some business, a prover, to prove they’ve done some computation or know some ‘secret’ — without actually peeling back the curtain to give a verifier a look at said computation or secret. This means the ‘correctness’ of a state – such as asking, are these trades matched and what is this user’s balance? – can be proven with a small proof submitted on-chain, and not all the tiny details that take up space.
Now that the technical design phase is completed, what comes next?
With the full design released to the world, we look forward to feedback from some of the brightest minds in Ethereum, other blockchains, zero knowledge cryptographers, traders, and of course, DEX owners or would-be owners. The code base is actually pretty much complete as well; we will open source that next week. Then, within the next month or two, we will have a testnet implementation. In six months, we hope to have a mainnet implementation deployed. Our aim is that you will see DEXs built atop Loopring Protocol 3.0 handling more than 1,000 trades per second by the end of 2019!