With cryptocurrencies moving far away from their initial purpose as a decentralized peer-to-peer (P2P) transactional ecosystem to one that offers myriad applications, Loopring (CCC:LRC-USD) represents another evolution in the underlying blockchain technology. However, despite the serious discount that LRC tokens present on paper, prospective investors should be cautious about their decision-making process.
Before we get into the reservations about Loopring, we should discuss its many positives. As described in the developers’ whitepaper, Loopring is an open protocol for building a decentralized exchange protocol (DEX) on the Ethereum blockchain.
As you may know, centralized exchanges have plenty of inefficiencies and vulnerabilities. With equities, one of the glaring obstacles is that retail traders can’t easily buy and sell shares after hours.
But even in the crypto space, centralized crypto exchanges have their challenges. Primarily, mainstream exchanges often feature a custodial service or hot wallets using the community’s parlance. Long story short, if hackers decide to compromise a centralized exchange, individual account holders’ funds are at risk.
On the other hand, decentralized crypto exchanges are not without problems, either. The main ones, according to Coinmarketcap.com, are “lower efficiency (when compared to centralized alternatives) associated with the limited capabilities of the underlying blockchains and fragmented liquidity.”
Loopring aims to solve these inefficiencies from both sides of the aisle by facilitating buy-and-sell orders directly between the negotiating parties while settling the eventual trades on the blockchain. In contrast, centralized exchanges settle orders within their internal records, opening the door for price manipulation.
Finally, with a large focus of the Loopring team devoted to development of its best-in-class zkRollup exchange and payment protocol, its blockchain network may very well help solidify decentralized finance (DeFi) applications. A zkRollup, or zero-knowledge rollup, as a protocol are a “way of interacting with the Ethereum main chain that sidesteps common issues with transaction cost and speed, as well as providing a solution to scalability,” per blockchain developer Numio.
Indeed, with so many options to choose from today, some consolidation (and elimination of weaker offerings) would be welcome.
Loopring Isn’t Without Flaws
When InvestorPlace contributor Mark Hake mentioned the total value locked (TVL) metric for Loopring, I must admit that initially, I didn’t know what he was getting at. Generally, I tend to look at narratives and then parse the numbers, whereas sometimes, I get the impression — and it could be wrong, I’m speculating — that Hake extracts the narrative from the numbers.
Still, that’s what makes this platform a wonderful place: you get a variety of color commentary and you can decide what works best for you.
Anyway, Hake states that TVL is “a sum of all the deposits that people have made in decentralized finance (DeFi) apps that are based on that cryptocurrency.” His concern is that the TVL for Loopring has declined conspicuously from its Nov. 25 peak. As of now, the metric hasn’t changed much since Hake looked at it on Dec. 5.
Having gained a basic understanding of Loopring, I can better appreciate what Hake is worried about. You can have the most secure and efficient decentralized crypto exchange ever: it don’t mean you-know-what if it doesn’t command liquidity.
It’s the same principle behind zombie exchange-traded funds. Without liquidity (as in ‘without participation’), these ETFs linger then eventually die off. Thus, Loopring presumably has to get its TVL to higher ground, or at least not lose any ground. That’s not guaranteed during the crypto fallout of the morning of Dec. 17.
On a more fundamental basis, centralized exchanges aren’t completely irrelevant. For instance, the reason why some people prefer equities is that in most cases, your funds are secured if the underlying brokerage suffers a data breach. In a decentralized ecosystem, it’s really the Wild West.
So no, Loopring isn’t an ideal hybrid of decentralized and centralized protocols as it may seem.
Time to Hit the Sidelines
As I write this on a Friday morning, I’m watching the three major indexes flash red, with each one losing more than 1%. Maybe the circumstance will improve by the closing hour, who knows? But it appears that risk-on appetite has faded based on the Federal Reserve’s decision to basically switch off the monetary spigot.
If that’s the case, I would be worried about jumping onboard Loopring or any other crypto with anything other than loose change you picked up at the parking lot. I’m not suggesting that LRC is going to implode. However, I think common sense should be your north star at this hour.
Let the carnage subside, then see what your options are. From the looks of things, if you thought LRC was cheap today, it should be even cheaper if you wait.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.