LayerZero is still in the early stages of development, with few native projects available for participation. It is backed by many well-known investment institutions, with abundant industry resources, and its coin issuance expectations have attracted the attention of the entire cryptocurrency market.
1. What is Cross-Chain Interoperability
The current trend in blockchain development is multi-chain parallelism. However, blockchain itself does not have the ability to communicate with external systems or APIs. Data and value cannot be transferred seamlessly across networks, resulting in isolation and the inability to exchange information within the ecosystem.
From a developer’s perspective, each deployment constitutes an isolated and independent entity, resulting in no connection between backend contracts and no knowledge of each other’s existence. For example, a decentralized exchange (DEX) DApp may need to be deployed on Ethereum, BNB Chain, and Polygon networks separately, making each version of the DApp independent of each other.
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- LD Capital The Future Road and Star Projects of LayerZero Cross-Chain Innovation
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Source: Chainlink
For users, this multi-deployment approach also increases the difficulty of adoption:
1) Users are unable to seamlessly transfer tokens from one blockchain to another.
2) The transfer process is time-consuming and provides a poor user experience, as assets are typically destroyed on the source blockchain and then re-minted on the target blockchain using a third-party bridge.
3) There is also a high security risk in holding assets on multiple blockchains, as they are susceptible to hacking, resulting in loss of funds.
Given the diverse blockchain ecosystem, the ability for different chains to interact and communicate with each other is crucial. The key part of exchanging data and assets between different blockchains is the Cross-Chain Interoperability Protocol. Cross-chain interoperability allows developers to build a unified cross-chain application, where the same dApp can be deployed on multiple different blockchains, without the need to deploy multiple independent versions on different chains, unleashing higher capital efficiency and better liquidity conditions.
2. Cross-Chain Solutions
Cross-chain solutions typically involve verifying the state of the source blockchain and relaying subsequent transactions to the target blockchain. A key part of the infrastructure is the cross-chain bridge, which allows assets to be transferred from the source blockchain to the target blockchain. Cross-chain bridges often involve locking or destroying assets on the source chain through smart contracts, and unlocking or minting them through another smart contract on the target chain. In practice, the use case of cross-chain bridges is very narrow, with their role being to transfer assets between different blockchains. Therefore, cross-chain bridges are often application-specific services between two blockchains.
Currently, developers have built various cross-chain solutions, such as:
– Chainlink is developing the Cross-Chain Interoperability Protocol (CCIP), which is an open-source standard that supports cross-chain communication, including sending messages and transferring tokens. The goal of CCIP is to achieve universal connectivity between hundreds of blockchain networks using standardized interfaces, with the hope of reducing the complexity of building cross-chain applications and services.
The Wormhole protocol is a universal interoperability protocol that enables the transfer of tokens and messages across different blockchain networks. Network guardians monitor information on the source chain and validate it to facilitate its transfer to the target chain. Developers using Wormhole can build cross-chain decentralized applications called XDApps.
The Inter-Blockchain Communication (IBC) protocol is a standard protocol for blockchain interaction in the Cosmos network, aiming to achieve interoperability between different blockchains. IBC defines a set of minimal functions specified in the Inter-Chain Standard (ICS), which define how blockchains communicate and exchange data with each other.
LayerZero is a full-chain interoperability protocol for lightweight information transfer between blockchains, providing secure, reliable, and trustless message transmission.
This article mainly introduces the LayerZero full-chain interoperability protocol, which focuses only on information transfer between chains. It can send messages to any smart contract on any supported chain, responsible for communication between smart contracts on different blockchains. It is not responsible for cross-chain asset transfer, which is handled by Stargate developed by LayerZero Labs.
III. LayerZero Technical Features and Advantages
1. Technical Features
The most prominent feature of LayerZero is its ultra-lightweight nodes. Using ultra-light nodes, messages are transmitted between endpoints on different chains through relayers and oracles, reducing costs while ensuring security.
1) Ultra-Light Nodes
First, every node in a blockchain network is essentially a computer or server terminal that stores data. A light node is just one operational mode of a node. Unlike full nodes, light nodes only store a small part of blockchain data, such as block headers and some other information, but not the specific transaction information within blocks. Compared to light nodes, ultra-light nodes have the same validation method. However, due to the high cost of blockchain write-in and the expensive continuous transmission of block headers, ultra-light nodes do not retain all block headers. Instead, they use oracles to stream block headers on demand, achieving more efficient synchronization with off-chain entities. This changes the original continuous streaming method.
The benefit of this approach is that it does not rely on a continuous flow of block header data from light nodes. However, the drawback is the lack of a historical sequential data flow. If both oracles and relayers act maliciously and pass verification, it may result in the execution of malicious information. Therefore, LayerZero strikes a balance between significant cost reduction in validation and a certain degree of security loss. Whether this trade-off is worth it depends on how it is weighed based on its own scenario.
2) Core Components
In the official LayerZero whitepaper, the core components responsible for information transfer between two chains are endpoints, oracles, and relayers.
Endpoints are facilities that interact directly with users or applications and are responsible for message transmission, validation, and reception. Their purpose is to ensure effective delivery when users use the protocol to send messages. In the LayerZero protocol, each chain needs to deploy endpoints, which can also be called by other apps on the same chain to send information to external chains.
Oracle is a third-party service that provides a mechanism component independent of other LayerZero components. It can read a block header from one chain and send it to another chain, thereby verifying the validity of transactions on the source chain on the target chain. Chainlink is currently used as the oracle for LayerZero.
Relayer is an off-chain service that functions similarly to an oracle, but instead of obtaining block headers, it obtains proofs for specific transactions. To ensure effective delivery, the only requirement is that the oracle and relayer must be independent of each other for any given message sent using the LayerZero protocol. Any entity can assume the roles of oracle and relayer, and LayerZero can even implement its own relayer service.
An important trust assumption in LayerZero is that the oracle and relayer operate independently of each other. The block headers submitted by the oracle are cross-validated with the transaction proofs submitted by the relayer. They do not form any consensus and only transmit messages. In simple terms, the oracle acts as a notary in LayerZero cross-chain operations, informing the target chain of the verification results, while the relayer is responsible for providing the proof process required for verifying transactions and the specific content of cross-chain information. To ensure the effective delivery of information, if any disputes arise in the information transmission between the relayer and the oracle, the smart contract will pause and not submit the information to the target chain.
Refer to “Detailed Explanation of LayerZero Interoperability Protocol Technology and Features”
If a transaction is crossed from Chain A to Chain B, the overall process is roughly as follows:
The transaction starts from the user’s application, and then with the assistance of the oracle and relayer at the LayerZero endpoint, the transaction is decomposed into multiple parts (proof and block header). Once the oracle and relayer send their respective information (signing the transaction on the target chain), and the LayerZero Endpoint (contract) verifies the correctness of the information, the message will be transformed and executed on the target chain.
2. Advantages
1) Security
As a underlying protocol, the security of LayerZero is independent of external protocols, ensuring the stability of the entire protocol consensus. In addition, thanks to the unique design of the oracle and relayer, they are independent of each other, and a transaction will only be completed when both are considered to be genuine, ensuring the security of information transmission.
2) Scalability
LayerZero, as a universal messaging layer, means that any contract can be transferred from Chain A to Chain B to achieve cross-chain interoperability with a Layer 1 network. With innovative endpoint design, LayerZero can easily scale to support any chain, bringing a wider range of applications to the blockchain ecosystem.
3) Efficiency
Firstly, LayerZero’s super light node technology achieves higher transmission efficiency and reduces verification costs while ensuring security. Secondly, the relayer or oracle of LayerZero does not form any consensus, only simple message transmission. All verification is done on their own target chain, so the speed and throughput limitations are entirely dependent on the attributes of the two transaction chains.
4. Financing
LayerZero has undergone three rounds of financing, with a total disclosed amount of $293 million. Participating investors include well-known crypto investment institutions such as Multicoin, Binance Labs, a16z, and Sequoia Capital. The latest round of financing took place on April 4, 2023, with a valuation of $3 billion and raised $120 million.
FTX participated as the lead investor in the Series A financing on March 30, 2022. Due to the impact of FTX’s collapse, on November 11, 2022, LayerZero’s official statement announced that it has repurchased 100% of the shares, coin rights, and other agreements from FTX.
Source: Crunchbase
5. Ecosystem
So far, LayerZero has supported a total of more than 20 chains, including Ethereum, BNB Chain, Avalanche, Polygon, and Base. The number of independent users has reached 3 million, and the total number of transactions has reached 56 million. However, 35% of users only have one interaction record, and there are only about 730,000 users with more than two interaction records.
Source: Dune Analytics
User interaction activities mainly occur on BNB Chain, Arbitrum, and Polygon. Especially since the launch of Arbitrum, the community has been excited about airdrops, which has significantly increased user activity on LayerZero.
Source: Dune Analytics
Using Arbitrum interaction data as an example, the number of transactions reached about 12 million. April 2023 was the peak period of user activity, but with the decline in the overall market situation, user activity has also slightly decreased.
Source: Dune Analytics
LayerZero’s minimalist architecture gives the protocol unlimited possibilities. Its low developer integration complexity has led to more than 50+ dApps currently integrating or using its technology.
Source: Twitter
Star Projects
1. Stargate Finance
The first dApp based on the LayerZero protocol developed by LayerZero Labs. It has built the first fully composability native asset bridge, with the vision of making cross-chain liquidity transfer a seamless and single process. The product highlights the use of a unique “Delta algorithm” to solve the “impossible triangle” problem of cross-chain bridges without having to make trade-offs.
The Stargate team believes that the “impossible triangle” exists in cross-chain asset bridges:
1) Instant verification and confirmation: Assets can successfully cross to the target chain when the transaction is confirmed, ensuring timeliness;
2) Unified liquidity: A single liquidity pool is shared among multiple chains;
3) Native assets: Users directly obtain native assets through cross-chain bridges, rather than synthetic or wrapped assets.
Of course, while ensuring instant verification and asset originality, if there is no involvement of more complex liquidity dynamic allocation algorithms, it is only possible to build a liquidity pool between each two chains, which will reduce capital efficiency.
According to Defillama data, Stargate ranks first among a group of cross-chain bridge protocols in terms of trading volume in the past month, with 96,000 transactions in 24 hours.
Source: Defillama
Protocol Revenue
Stargate is the first dApp launched on LayerZero. Its protocol fees and revenue have been steadily increasing since March 2023, when on-chain transaction activity increased significantly due to the expectation of airdrops. The protocol’s monthly revenue currently exceeds $1 million.
Source: Token Terminal
Economic Model
STG token has a total supply of 1 billion, with a circulation of 200 million. The token has the following functions:
1) Asset cross-chain transfer fees. Non-STG token transfers will incur a fee of 0.06%, of which 0.045% will be distributed to liquidity providers and 0.015% will be allocated to the protocol’s treasury;
2) Governance. By staking and locking STG tokens for 3 to 156 weeks, governance tokens veSTG can be obtained. The longer the STG lock-up period, the greater the voting weight;
3) Protocol rewards, stablecoin liquidity pool rewards, and liquidity mining rewards.
The token was issued on March 17, 2022, with the initial distribution details as follows:
Source: tokenunlocks
A total of 478 million tokens were directly unlocked for early DEX liquidity, Bonding Curve, initial release plan, and the community at the initial token issuance.
Part of the allocation for protocol launch, 5% (50 million tokens) were directly released, and the remaining 10% have a 1-year lock-up period, followed by linear release within 6 months. Currently, 145 million tokens have been released.
Part of the allocation for investors and the team has a 1-year lock-up period and a 2-year linear release period.
According to the above token distribution, the nominal emission of STG has reached 729 million. Based on the distribution of STG holding addresses, it is clear that there are still 297 million tokens from the community allocation that have not been circulated, and 320 million tokens from the allocation to investors and the team that have not been circulated. These two parts together account for about 6.7% of the circulation, with approximately 67 million tokens in circulation.
Looking at the distribution of holding addresses, the top 20 addresses account for 94% of the holdings, with the top two addresses owned by the official team and not yet in circulation, accounting for 62%. Excluding these two parts, the remaining addresses hold 32% of the tokens, with Alameda holding 9.42% and individual whale addresses holding only 0.6% of the tokens, indicating that whales hold relatively few chips.
Alameda’s co-CEO Sam Trabucco recently posted on social media that Alameda Research participated in the public issuance of the cross-chain bridge project Stargate on March 18 and purchased all the shares of STG (100 million coins, which is 10% of the protocol mentioned above). However, Sam Trabucco stated that Alameda will not sell STG within 3 years and will make long-term investments in the project and team. At the same time, Alameda will not intervene in the project’s governance and will give up its voting rights for aSTG in order to distribute voting rights more equally among early community members. Currently, 9.42% has been released.
2. Radiant Capital
Radiant is a cross-chain DeFi lending protocol that implements full-chain leverage lending and composability by using LayerZero as the cross-chain infrastructure. This allows users to obtain leverage in the DeFi protocols it supports and simplifies cross-chain lending operations for assets between different chains.
Radiant operates similar to current lending protocols like Aave and Compound, with the difference being that it aims to be a full-chain lending protocol. This means that users can deposit collateral on Chain A and borrow on Chain B. However, when users need to use cross-chain lending services, they need to first deposit a certain amount of assets on the supported chain and become a dynamic liquidity provider (dLP) before being able to borrow the desired assets on the target chain.
Radiant has already been deployed on Arbitrum and BSC chains, with a TVL of $220 million, ranking relatively high among lending protocols and capturing a certain market share. It is the leading lending protocol on Arbitrum.
Protocol Revenue
In Radiant, protocol revenue = fees paid for borrowing – interest earned on deposits (supply-side fees). Since February this year, the fees earned by the protocol have stabilized at around $2 million, with monthly revenue reaching around $1 million.
Source: Token Terminal
Economic Model
The total supply of RDNT tokens is 1 billion, with a circulating supply of 300 million. The main purpose of the token is governance and liquidity incentives.
According to Token Unlock data, the portion allocated to 2 Pool liquidity providers, Treasury, and the Radiant DAO reserve has been fully unlocked. The portions allocated to the team, core contributors, and borrowers’ incentives are still unlocking, with 4.85 RDNT released per second for borrowers. At this rate, nearly 210,000 coins will be released per month.
Looking at the token holding distribution, the top 20 token addresses account for 92.3% of the total, with the official contract address ranking first and still having 23.4% undistributed. Tokens distributed in DEX account for 27.6%, while the top 20 addresses of large holders account for only 3.8% of the total.
Roadmap
The Radiant official team has disclosed a simplified roadmap in its document, with the current version at 2.0 stage. The primary task is to deploy Radiant cross-chain and increase the scale of collateral within the application. In the V3 version, they plan to eliminate dependence on the third-party cross-chain bridge Stargate and fully integrate LayerZero. The V4 version plans to fully realize full-chain liquidity lending.
Summary
Multi-chain is the development trend of blockchain, and cross-chain interoperability protocols are key components of blockchain communication, with broad development prospects. LayerZero is still in the early stages of development, with few native projects that can participate. It has the support of numerous well-known investment institutions and abundant industry resources, and its coin issuance expectations are attracting attention from the entire crypto market.
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