[LRC] Collateral Onboarding Risk Evaluation

Legal Disclaimer: This communication is provided for information purposes only. The views expressed here are those of the individual Maker Foundation (“Maker”) personnel quoted or who present said materials and are not the views of Maker or its affiliates. This communication has been prepared based upon information, including market prices, data and other information, from sources believed to be reliable, but Maker has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any digital assets and the use of finance-related terminology are for illustrative purposes only, and do not constitute any recommendation for any action or an offer to provide investment advisory services. This content is not directed at nor intended for use by the MakerDAO community (“MakerDAO”), and may not under any circumstances be relied upon when making a decision to purchase any other digital asset referenced herein. The digital assets referenced herein currently face an uncertain regulatory landscape in not only the United States but also in many foreign jurisdictions, including but not limited to the UK, European Union, Singapore, Korea, Japan and China. The legal and regulatory risks inherent in referenced digital assets are not the subject of this content. For guidance regarding the possibility of said risks, one should consult with his or her own appropriate legal and/or regulatory counsel. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any decision. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

  1. Summary Proposed Risk Parameters
  2. Overview
  3. Metrics and Analysis
  4. Risk Parameters

Summary Proposed Risk Parameters

Risk Premium: 3%
Liquidation Ratio: 175%
Debt Ceiling: 3 million
Auction Lot Size: 200,000
Minimum Bid Increment: 3%
Bid Duration: 6 hours
Max Auction Duration: 6 hours
Liquidation Penalty: 13%
Dust: 20 Dai

Overview

Protocol Summary

From the documentation:

“Loopring is a decentralized token exchange protocol. It is implemented as an ethereum smart-contract at the core of the loopring decentralized exchange system. Its design allows for several improvements over traditional centralized exchanges:

  • Reduced Counterparty & Exchange Risk: Removing the risk of depositing and storing digital assets on a third party exchange and tokens are never locked by orders.
  • High liquidity: Orders are ring-matched allowing for high liquidity on any trading pair.
  • Fairness: The fee & discount model allows for fairness between all parties involved (Makers, Takers and Miners).
  • Weak Supervision: The whole system is completely decentralised”

From Formal Verification:

“Loopring is an open protocol used for building scalable order book based DEXs on Ethereum using zk-Rollup constructions. The DEXs themselves are non-custodial but are each maintained by a single (or set of) operator(s) that batch several transactions together. zk-SNARK proofs are created to prove that all transactions are legitimate which are verified off-chain and then uploaded to the Ethereum mainnet. The goal is to provide a scalable but secure DEX infrastructure on using layer 2 that can lower the on-chain costs requirements.”

LRC Token Value Accrual

From the blog:

LRC Staking for Protocol Fees (Type 1)

  • 70% will be rewarded to LRC stakers
  • 20% will go to the Loopring DAO (to be built)
  • 10% will be burned.

"Until our DAO is live, the 20% allotted for it will either go to LRC stakers or be burned.”

The team’s expectation is to burn 10 to 25 million LRC by the end of 2020, which represents 0.7% to 1.8% of LRC supply. Until the DAO is live, the 20% fees will be allocated to either LRC stakers or be burned.

LRC Staking by DEXes for Economic Security (Type 2)

“In addition to staking for the protocol fee distribution, LRC is also used by DEX owners as a bond for economic security. The locked LRC is partially or completely slashed when a DEX violates protocol rules, such as failing to submit a proof for a committed block on time, or having a reversion. Note, this economic security is only ‘in play’ until the zkSNARKs are submitted, which provides final, cryptographic proof. (See here for a list of protocol parameters / slashing costs.)

The amount of staked LRC thus reflects a DEX’s likelihood or disincentive to violating protocol rules. The more LRC locked, the more reliable a DEX should be. Of course, this reliability relates to service performance / execution guarantees — user funds are 100% Ethereum-level secured by the protocol.

It is hard to estimate at this time how much LRC will be slashed from this mechanism.”

There are currently two exchanges (that we are aware of) built using Loopring smart contracts: Loopring.io and WeDEX. Exchanges need to stake 500k LRC for economic security. Note that this stake doesn’t reflect user funds at risk, but rather reliability of service.

LRC Staking for Protocol Fee Reductions (Type 3)

“The final type of LRC staking is for lowering the protocol fees on a specific DEX. This LRC would be staked by exchange owners, market makers and high-frequency traders, to realize reduced protocol fees on said venue. While it is exchange owners who need to pay protocol fees for all orders to settle, other stakeholders/users of a DEX would be incentivized to stake there if it meant protocol fee reduction was passed through via lower trading fees.

We envision that via staking types 2 & 3, exchanges and market makers will lock in no less than 50 million LRC by the end of 2020.”

Loopring Exchange

From Formal Verification Research:

“The Loopring exchange was launched in February with the goal of being an established DEX built on the Loopring protocol. Specifically, it is a non-custodial exchange that uses a centralised relayer who is responsible in batching transactions, producing a verifiable zk-SNARK proof which can be verified off-chain and then put on the Ethereum mainnet. Maker and taker fees are 0% and 0.10% respectively.

The bottom line is operators can censor trades if they choose to but it is not in their economic interest to: all exchanges have to stake LRC and this stake can be burned if the operator doesn’t play by the rules. The Loopring exchange doesn’t behave like a ‘pure’ DEX for end users - deposits and withdrawals are maintained by the DEX operator too which can sometimes take ~20 minutes to complete. While leaving a lot to be desired, these deposit and withdrawal times are dependent on prover optimisations which should improve in time.”

Metrics and Analysis

LRC Token Metrics

Daily Active Addresses

Active address count began to rise in April this year after the Loopring Exchange was introduced in March. Currently there are around 300 daily active addresses, an uptick likely caused by the recent price performance of the token.

Source: Saniment

Daily Onchain Transaction Volume (denominated in LRC)

Again, higher transaction volumes in recent months correspond to the price increase. There is between 5m LRC ($500k) transacted daily, which is about 0.4% of total LRC supply.

Source: Santiment

Holders distribution

There is a steady growth in addresses that hold between 10k and 100k coins ($1k - $10k) which suggests retail adoption is occurring. The largest non-contract wallet holds only 1.15% of LRC supply.

Source: Santiment

Token distribution, return & inflation metrics

The LRC token contract has a fixed supply of 1,374,512,896 tokens. According to Coingecko data, the team still holds 13% of the total supply. Note that this token has been in existence since August 2017.

token supply 1,374,513,896
circulating supply 1,188,503,756 86.47%
LRC burnt 20,562,157 1.50%
price USD 0.105
market cap 125,009,202
implied market cap 144,574,121
returns LRC usd price tokens circulating inflation since
3m 211.32% 0.033786 1,165,252,488 2.00%
6m 262.70% 0.029 1,130,375,587 5.14%
1y 122.97% 0.047174 1,095,498,685 8.49%
2y -58.91% 0.256 1,095,498,685 8.49%
since listed (aug 2017) -4.38% 0.11 1,095,498,685 8.49%
since ICO 75.30% 0.06
all time low (dec 2019) 400.87% 0.021
all time high (jan 2018) -94.28% 1.84

Source: Etherscan & Coinmarketcap

Source: Etherscan

Treasury funds

The Loopring team held an ICO in August 2017 and managed to reach a hard cap of 120,000 ETH, raising $45 million. It is hard to estimate what percentage of the ETH has been retained or sold, but we located a wallet potentially belonging to the Loopring team that holds 72,000 ETH. This represents $25 million at the current ETH price.

Source: Etherscan

Tokens on Exchanges

Compared to recent token analyses we did for ZRX, LEND and KNC, this project doesn’t have as many tokens supplied on exchanges (only 20% of total supply).

Exchange Balance
Binance 150,122,014
Gate.io 52,592,913
OKEx 50,796,410
Uniswap 4,250,295
Bittrex 3,623,162
Bithumb 3,424,823
Balancer 2,721,365
Bitfinex 631,476
HitBTC 420,810
Poloniex 331,052
OTCBTC 287,852
Upbit 60,597
Kraken 29,086
MXC 28,124
IDAX 22,891
Huobi 19,084
Yunbi 13,185
KuCoin 9,547
Bilaxy 2,793
Total 269,387,479
Total of Supply % 19.60%

Source: Nansen

Trading data - CEX Volume

CEX volume analyzed includes Binance, Okex pairs (with 90% haircut applied) and Gate.io pairs. We are assuming there is significant wash trading on Okex since their volume does not correspond with token balances on their exchange. There is between $3-$5m traded daily on those three exchanges after applying the Okex haircut. There has been an increase in volume over the last few months corresponding with the broader DeFi rally.

Source: Cryptocompare

Source: Cryptocompare

Trading Data - DEX Volume

The median daily DEX volumes have been trending upwards, reaching new highs in July. The largest LRC DEX by volume happens to be Loopring Exchange. It is critical to note that this creates some composability issues. For example, it is impossible to receive collateral from a liquidation of LRC vaults at and instantly arbitrage it against the Loopring Exchange. An intermediate transaction is required since Loopring operates on a Layer 2 protocol.

DEX LRC Daily Volume 30d median USD Volume
Uniswap v2 $111.829
Kyber $42.934
0x $125
Loopring Exchange $352.220

Source: Protocol trackers

Source: Uniswap v2 volumes for LRC

Downside risk

Drawdowns for LRC are much more frequent than for ETH, which makes sense given the large price increase observed over the last year. During Black Thursday LRC fell by almost 60%.

Source: Cryptocompare

Volatility

Interestingly, hourly volatility of LRCUSD seems on the low end compared to other assets we analyzed in the past.

volatility scaled yearly
90d 1.59% 149.26%
1y 1.38% 128.98%
2y 1.45% 135.96%

DeFi Presence (LRC used for lending, integration with other protocols)

  • $460k liquidity on Uniswap v2, $5.8m on Loopring exchange, $250k on Balancer
  • No lending markets for LRC available yet
  • Lack of integrations with DeFi due to composability issues

Loopring Protocol metrics

Exchange Balance

Exchange balances, an important metric since users need to be willing to take on layer 2 smart contract risk, have been growing steadily. However a large share of deposited tokens deposited are LRC that may belong to the team.

Source: Dune Analytics

Volume per day

Daily volume is increasing at a slow but steady pace and currently sits at $400k. This could be because only 22 pairs are currently supported. Most of the daily volume is represented by LRC pairs and ETH/USDT pair.

Source: Dune Analytics

New Accounts

About 20 accounts are added daily and in total 4,171 accounts have been created since March. Most of the accounts, however, were created during rollout of the exchange in March.

Source: Formatic Verification & Dune Analytics

DEX market share

The market share of Loopring Exchange measures only 0.5% compared against Uniswap, Kyber and 0x.

Source: Dune Analytics

Protocol Fees

Protocol fees are very low due to low volume and 0 / 0.1% maker / taker fees. At current volume levels the protocol can likely earn no more than $100-$300k of fees per year (estimation by Token Terminal). Up until now, 1,174,356 LRC in fees have been generated.

Source: Dune Analytics

Source: Token Terminal

Loopring Pay

Loopring’s zkRollup supports transfers by introducing Loopring Pay. Users can send ETH and ERC20 tokens instantly on second layer. If this service gains traction we could see increased usage of Loopring Exchange.

Staking

As mentioned above, the token has 3 main functions:

  • Economic security and reputation for DEXes built on top of the Loopring protocol
  • Value accrual that gives stakers 70% of protocol fees (0.06% of trading volume) from all exchanges
  • Fee discount for exchanges owners. Importantly, protocols fees are abstracted away from traders, and exchange operators normally take on this cost.

Currently, there are 160m LRC staked in the staking pool contract which represents 12% of the total token supply. According to Formal Verification: “The bulk of this supply that is locked has come from the Loopring team themselves who staked the team supply allocation (34.8m) as well as the developer funds (24.5m) which totalled to more than 108m LRC being staked. They also plan to stake the 20% team supply (1/24th vested monthly starting October 2019). While this means the team is aligned to developing the protocol and the Loopring exchange, other stakers in the pool have been effectively pushed out.”

Source: Formal Verification

Importantly, the staking figures of LRC are well above 0x project, where only 2% of ZRX tokens are staked. Also note that stakers aren’t able to withdraw their LRC for 90 days.

Source: Formal Verification

Liquidity Mining

The Loopring team is offering a liquidity mining program to earn LRC, but rewards measure only about 6,000 USDT for providing liquidity for LRC-USDT and ETH-USDT. This is not competitive with liquidity mining incentives offered at other protocols in the space.

Miscellaneous

  • Security: Audits from November 2019
  • Governance: There are plans for a LoopringDAO where token holders will control all on-chain configurable parameters. Currently the team has admin keys, with a delay contract in force.
  • Oracles: LRC price data on Loopring Exchange is sourced from Chainlink, but DEX owners must stake LRC as a form of “service level guarantee”.

Summary of Notable Risks:

  • The majority of CEX volume is on Binance since Okex volumes are likely inflated due to wash trading. Gate.io also doesn’t have significant volume.
  • AMM-style DEXes are currently the most utilized in the space due to smoother user experience and passive fees for liquidity providers. Order book DEXes are likely used more by advanced traders, but network fees diminish their utility. It remains to be seen if second layer solutions such as Loopring can attract enough volume to remain viable.
  • DEX volume of LRC tokens is improving, but still lags behind CEX. Critically, most of the DEX volume occurs on Loopring Exchange, which creates composability issues for Maker keepers.
  • Admin keys are held by the team, and it is not known when the DAO will be established.
  • Low generated protocol fees compared to competitors such as Uniswap, Kyber and 0x. This is due to low Loopring Exchange volumes. New APIs and trading bots released by the team may address these issues.
  • zkRollups are still in their infancy. There are technological/code risks associated with the protocol that are unknown at this stage.

Proposed Risk Parameters

Risk Premium: 3%
Liquidation Ratio: 175%
Debt Ceiling: 3 million
Auction Lot Size: 200,000
Minimum Bid Increment: 3%
Bid Duration: 6 hours
Max Auction Duration: 6 hours
Liquidation Penalty: 13%
Dust: 20 Dai

We use the model described from the governance call here: a credit risk model that estimates the loss distribution of a portfolio of LRC Vaults. Risk parameters are estimated from this hypothetical loss distribution. Inputs to the model are derived from trading data along with stressed input parameters. A link to our model specification with inputs and outputs can be found here. Auction parameters have been selected to mirror those for ETH, with the exception of the lot size that has been normalized to a ~$25,000 amount

Lead Researcher: Primoz Kordez

Sources:
Docs: https://loopring.readthedocs.io/en/latest/English/overview/
Whitepaper: https://loopring.org/resources/en_whitepaper.pdf
Collateral application: [LRC] MIP6 Collateral Onboarding Application
Binance research: https://research.binance.com/en/projects/loopring
2019 roadmap: https://medium.com/loopring-protocol/loopring-2019-development-roadmap-40122c149155
Brave new coin: https://bravenewcoin.com/insights/loopring-price-analysis-version-3-0-releases
2020 roadmap: https://medium.com/loopring-protocol/loopring-2020-development-roadmap-d660b93563e3
New fee model: https://medium.com/loopring-protocol/explaining-looprings-new-fee-model-b48b89a58858
Audit: https://medium.com/loopring-protocol/secbit-delivers-a-security-audit-report-for-loopring-protocol-3-0-a768c2bd061a
Staking: https://staking.loopring.org/login
Staking and fees distribution: https://medium.com/loopring-protocol/lrc-opens-golden-staking-window-64e707dd8cfa
Liquidity mining: https://medium.com/loopring-protocol/loopring-exchange-liquidity-mining-competition-748917b277e6
Loopring pay: https://loopring.io/account/transfers
Debank stats: https://debank.com/ranking/dex
Locked USD: https://defipulse.com/
Complete analysis: https://formalverification.substack.com/p/in-the-network-loopring
Loopring api: https://medium.com/loopring-protocol/loopring-exchange-launches-api-ea7dba7f8718
Tokenterminal: https://www.tokenterminal.xyz/protocol/Loopring
Dune stats: https://explore.duneanalytics.com/dashboard/loopring

15 Likes

added tags

1 Like

They’ve announced version 3.6:

It looks like they target end of year mainnet.
I guess every protocol change/update introduces some additional risk, but could also reduce risk if more liquidity/volume.