Loopring Emerging as Leading Ethereum Layer 2 Solution

“Red packets” are traditional Chinese gifts of cash stuffed in red envelopes, given on special occasions and holidays. To celebrate the Chinese New Year, Loopring introduced a red packet feature, enabling users to send digital, Ethereum-based red envelopes.

Users choose the type and amount of token to send, the number of recipients, and the type of token distribution. Launched at the beginning of the month, the feature became so widely used that Loopring’s relayer got overwhelmed, forcing all of the requests offline. The issue was fixed in a matter of hours, thanks to the centralized manner in which red packet amounts are accounted for by the relayer.

Loopring’s relayer is the entity that runs its zkRollups, the layer 2 technology that makes the protocol work. It hosts the Merkle tree, creates rollup blocks, generates zkSNARK proofs, etc. The relayer earns fees in the form of LRC, Loopring’s protocol token. The relayer and its dependence on LRC have been criticized for being too centralized. Many have warned that LRC accounts for more than 40% of the total value locked (TVL) on Loopring, which exposes the network to a single point of failure.

However, criticism of centralization doesn’t seem to have affected Loopring’s 2021 success. The exchange launched the second version of its protocol at the end of last year and has completely shut down Loopring Exchange V1 and the corresponding relayer service this month.

Around the time the new version of Loopring was launched, Ethereum began experiencing increasing gas fees. This pushed traders to various layer 2 networks in a bid to avoid mounting fees, with Loopring quickly becoming a popular option. According to data from CoinGecko, Loopring recorded a 24-hour trading volume of over $21 million on 25 February — almost four times higher than the trading volume recorded on ZKSwap that same day.

According to data from DeFi Pulse, Loopring is the 6th largest decentralized exchange with $185.7 million in total value locked (TVL). In mid-February, the DEX recorded over $245 million in TVL, a 64% percent increase since the beginning of the month, and a 600% increase since the beginning of the year.

The Loopring protocol token, LRC, has increased in price by almost 400% since the beginning of the year. Used to incentivize LRC stakers, the token has received a much wider application with the arrival of V2. The new token model, the company explained, now also awards LRC token holders who use their assets “productively and for the good of the platform.” Approximately 10% of the protocol fees will be distributed to the Loopring DAO, enabling its users to decide how to spend the funds.