LayerZero’s future road to cross-chain innovation and star projects

Author: LD Capital

1. What is cross-chain interoperability

The current development trend of blockchain is multi-chain parallelism, but blockchain itself does not have the ability to communicate with external systems or APIs, and data and value cannot be transmitted barrier-free across the network, resulting in an isolated ecosystem that cannot communicate with each other. Exchange information.

From a developer's perspective, each deployment constitutes an isolated and independent entity, resulting in back-end contracts that have no connection with each other and are not aware of each other's existence. For example, a decentralized exchange (DEX) DApp may need to be deployed on Ethereum, BNB Chain, and Polygon networks respectively, so that each version of the DApp is independent of each other.

Source: Chainlink

For users, this multiple deployment method also increases the difficulty of adoption:

1. Users cannot seamlessly transfer tokens from one blockchain to another.

2. The transfer process is time-consuming and has a poor experience, as assets are typically destroyed on the source blockchain and then re-minted on the target blockchain using a third-party bridge.

3. The security risk of holding assets on multiple blockchains is also high, and they are easily attacked by hackers, resulting in the loss of funds.

Since there are so many blockchain ecosystems, it is crucial that these different on-chain environments can operate and communicate with each other. A key part of the infrastructure for exchanging data and assets between different blockchains is the cross-chain interoperability protocol. Cross-chain interoperability enables developers to build a unified cross-chain application, that is, the same dApp can be deployed on multiple different blockchains without having to deploy multiple independent versions on different chains, releasing 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 their infrastructure is the cross-chain bridge, which enables the transfer of assets from the source blockchain to the target blockchain. Blockchain. Cross-chain bridges typically involve locking or destroying assets via a smart contract on the source chain, and unlocking or minting them via another smart contract on the target chain. In fact, the use case of cross-chain bridges is very narrow, and its role is to transfer assets between different blockchains. Therefore, a cross-chain bridge is usually an application-specific service between two blockchains.

Developers currently build a variety of cross-chain solutions, such as:

l Chainlink is developing the Cross-Chain Interoperability Protocol (CCIP), an open source standard that supports cross-chain communication, including sending messages and token transfers. The goal of CCIP is to enable universal connectivity between hundreds of blockchain networks using standardized interfaces, hopefully reducing the complexity of building cross-chain applications and services.

l The Wormhole protocol is a universal interoperability protocol that enables the transmission of tokens and messages on different blockchain networks. Network Guardians monitor information on the source chain, verify it, and facilitate its transmission to the target chain. Developers using Wormhole can build cross-chain decentralized applications called XDApp.

l The Inter-chain Information Transfer Protocol (IBC) is a standard protocol for blockchain interaction in the Cosmos network, aiming to achieve interoperability between different blockchains. IBC defines a minimal set of functions specified in the Inter-Chain Standard (ICS) that define how blockchains communicate with each other and exchange data.

l LayerZero is a full-chain interoperability protocol used for lightweight information transfer between blockchains, providing safe, reliable, and trustless information transfer.

This article mainly introduces the full-chain interoperability protocol LayerZero. It only focuses on the transmission of information between chains and can send messages to any smart contract on any supported chain. It is also responsible for the smart contracts between blockchains. Communication, it is not responsible for the cross-chain of assets. The cross-chain of assets is completed by Stargate developed by LayerZero Labs.

3. LayerZero technical features and advantages

1. Technical features

The most prominent feature of LayerZero is its ultra-lightweight node. It uses ultra-light node technology to transmit messages between endpoints of different chains through relays and oracles, reducing costs while ensuring security.

1. Ultra-light node

First of all, each node in the blockchain network is actually every computer or server terminal that stores data. Light nodes are just an operating mode of the node. Different from full nodes, light nodes only store blockchain data. A small part of the block, such as the block header and some other information, does not store the specific transaction information within the block. Compared with light nodes, ultra-light nodes have the same verification method, but because the cost of writing to the blockchain is high and the continuous transmission of block headers is expensive, ultra-light nodes do not retain all block headers, but use oracles Streaming these block headers on demand enables more efficient synchronization of off-chain entities to achieve the required state, changing the original continuous streaming method.

The advantage of this is that it does not rely on the block header data flow from the beginning of the light node, but the disadvantage is the lack of historical sequential data flow. Once the oracle and the relayer do evil at the same time, they can pass the verification, which will lead to malicious information. be executed. Therefore, LayerZero has made a trade-off between a great reduction in verification costs and a certain degree of security loss. Whether this trade-off is worth it may depend on how it weighs it based on its own scenarios.

2. Core components

As can be seen in the official white paper of LayerZero, the core components responsible for information transmission between the two chains are endpoint, oracle and relay.

Endpoints are facilities that interact directly with users or applications and are responsible for handling message transmission, verification, and reception. Their purpose is to ensure effective delivery when users send messages using the protocol. In the LayerZero protocol, each chain needs to deploy endpoints. These endpoints can also be called by other apps on the same chain and are responsible for sending information to external links.

The oracle is a third-party service that provides a mechanism component independent of other LayerZero. It can read a block header from one chain and send it to another chain, so that the validity of the transaction on the source chain can be verified on the target chain. sex. LayerZero currently uses Chainlink as its oracle.

A relay is an off-chain service that is functionally similar to an oracle, but instead of getting block headers, it gets proofs of specified transactions. To ensure efficient delivery, the only requirement is that the oracle and relay must be independent of each other for any given message sent using the LayerZero protocol. Any subject can assume the role of oracle and relay, and LayerZero can even implement its own relay service.

An important trust assumption in LayerZero is that oracles and relayers operate independently of each other. The block header submitted by the oracle will be cross-verified with the transaction proof submitted by the relay. The two do not form any consensus and only transmit messages. To put it simply, the oracle acts as a notary in LayerZero's cross-chain, letting the target chain know the results of the verification, while the relay is responsible for providing the certification process required to verify the transaction and the specific content of the cross-chain information. In order to ensure the effective transmission of information, once there is any dispute in the transmission of information between relays or oracles, the smart contract will be suspended and the information will not be submitted to the target chain.

Refer to "Detailed Explanation of Interoperability Protocol LayerZero Technology and Features"

If you cross a transaction from chain A to chain B, the overall process is roughly as follows:

The transaction starts when the user launches the application, and is broken down into its parts (proofs and block headers) through oracles and relays with the help of LayerZero endpoints. Once the oracle and relayer send their respective messages on the target chain (sign the transaction on the 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 the underlying protocol, LayerZero's security is independent of external protocols, thus ensuring the stability of the entire protocol consensus. In addition, thanks to the unique oracle and relay design, the two are independent of each other. The transaction will only be completed when both are considered true, ensuring the security of information transmission.

2. Scalability

LayerZero acts as a universal messaging layer, which means that any contract can be transferred from chain A to chain B to achieve cross-chain interoperability with the layer one network. Through innovative endpoint design, LayerZero can be easily expanded to support any chain, bringing a wider range of application scenarios to the blockchain ecosystem.

3. High efficiency

First, LayerZero’s ultra-light node technology can achieve higher transmission efficiency and reduce verification costs while ensuring security; secondly, LayerZero’s repeaters or oracles do not form any consensus and only simply transmit messages. The verification is completed on its own target chain, so the speed and throughput limitations depend entirely on the properties of the two transaction chains.

4. Financing

LayerZero has conducted a total of three rounds of financing, with the disclosed amount totaling US$293 million. Participating investors include well-known crypto investment institutions such as Multicoin, Binance Labs, a16z, and Sequoia Capital. The latest round of financing was on April 4, 2023, raising 120 million at a valuation of US$3 billion.

FTX participated as the lead investor in the Series A financing on March 30, 2022. Affected by the thunderstorm, on November 11, 2022, LayerZero officially issued a statement stating that it had repurchased 100% of the equity and currency rights from FTX. and other agreements.

Source: Crunchbase

5. Ecology

So far, LayerZero has supported more than 20 chains, including Ethereum, BNB Chain, Aavalanche, Polygon, Base, etc. The number of independent users has reached 3 million, and the cumulative number of transactions has reached 56 million. However, 35% of users have only one interaction record, and only about 730,000 users have more than two interaction records.

Source: Dune Analytics

User interaction activities mainly occur on BNB Chain, Arbitrum and Polygon. Especially after Arbitrum issued the currency, the community has a strong sentiment towards airdrops, and the anticipation of airdrops has also led to a significant increase in user activity on LayerZero.

Source: Dune Analytics

Taking Arbitrum interactive data as an example, the number of transactions reached about 12 million. April 2023 was the peak period of user activity. As the market conditions cooled down, user activity also declined slightly.

Source: Dune Analytics

LayerZero's minimalist architecture gives the protocol unlimited possibilities, and its low developer access complexity allows LayerZero to currently integrate or use its technology with more than 50 dApps.

Source: Twitter

Star Project

1. Stargate Finance

The first dApp based on the LayerZero protocol developed by LayerZero Labs, which builds the first fully composable native asset bridge. The vision is to make cross-chain liquidity transfer a seamless and single process. The product highlight is adoption The unique "Delta algorithm" solves the "impossible triangle" problem existing in cross-chain bridges without having to make trade-offs.

The Stargate team believes that there is an “impossible triangle” in cross-chain asset bridges:

1. Instant verification and confirmation: assets can be successfully transferred to the target chain when the transaction is confirmed, and timeliness can be guaranteed;

2. Unified liquidity: a single liquidity pool is shared among multiple chains;

3. Asset nativeness: users directly obtain native assets through cross-chain bridges, rather than synthetic or encapsulated assets.

Of course, when ensuring instant verification and asset nativeness, if a more complex dynamic liquidity allocation algorithm is not involved, only one liquidity pool can be built between each two chains, which will reduce capital efficiency.

According to defillama data, Stargate ranks first among the cross-chain bridge protocols in terms of transaction volume in the past month, with 96,000 transactions in 24 hours.

Source: defillama

Agreement Revenue

Stargate is the first dApp to be launched on LayerZero. Its protocol fees and revenue have begun to grow steadily since March 2023. It was also during this period that on-chain transaction activity began to increase significantly in anticipation of airdrops. The current agreement’s monthly revenue exceeds US$1 million.

Source: Token Terminal

Economic Model

The total supply of STG tokens is 1 billion, and the circulation volume reaches 200 million. The functions of the tokens are:

1. Asset cross-chain transfer fees and non-STG token transfers will generate a 0.06% fee, of which 0.045% will be allocated to the liquidity provider and 0.015% to the protocol’s treasury;

2. Governance, you can obtain the governance token veSTG by staking and locking STG tokens for 3 to 156 weeks. The longer the STG locking time, the greater the voting weight;

3. Protocol rewards, stablecoin liquidity pool and liquidity mining rewards.

The token issuance time is March 17, 2022, and the initial distribution details are as follows:

Source: tokenunlocks

Those allocated to early DEX liquidity, Bonding Curve, initial release plan, and the community will be directly unlocked when the token is initially issued, totaling 478 million.

Of the portion allocated to the launch of the protocol, 5% (50 million) will be released directly, and the remaining 10% will have a 1-year lock-up period and will be released linearly within 6 months. Currently, 145 million have been released.

The portion allocated to investors and teams has a 1-year lock-in period and a 2-year linear release.

Based on the above token allocation, nominal STG emissions have reached 729 million. According to the distribution of STG holding addresses, it can be clearly seen that the 304 million allocated to the community currently has 297 million remaining uncirculated, and the remaining 320 million allocated to investors and teams have not been circulated. The two parts have a total circulation of about 67 million, accounting for About 6.7%.

Judging from the distribution of holding addresses, the top 20 holdings account for 94%. Among them, the top two addresses are officially owned and have not yet been circulated, accounting for 62%. Excluding these two parts, the remaining addresses account for 32%. , of which Alameda holds 9.42% of the positions, and individual large account addresses hold only 0.6%. The accumulated chips in the hands of large investors are relatively small.

Alameda co-CEO Sam Trabucco once posted on social media that Alameda Research participated in the public offering of the cross-chain bridge project Stargate on March 18 and purchased all shares of STG (100 million pieces, which was launched by the protocol mentioned above. 10%). 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, it will not interfere with the governance of the project and will give up its aSTG voting rights so that the voting rights are more distributed among early community members. Distributed equally, 9.42% has been released so far.

2. Radiant Capital

Radiant is a cross-chain DeFi lending protocol that implements full-chain leveraged lending and composability by using LayerZero as a cross-chain infrastructure, allowing users to obtain leverage in the DeFi protocols it supports and simplifying the cross-asset transfer between different chains. Chain lending operations.

Radiant is essentially similar to the operating mechanism of current lending protocols such as Aave and Compound. The difference is that it is a full-chain lending protocol, that is, users can deposit collateral on chain A and then borrow on chain B. However, when users need to use cross-chain lending services, they need to deposit certain assets on the supported chain first and become a dynamic liquidity provider (dLP) before they can lend the assets required by the target chain.

Radiant has been deployed on Arbitrum and BSC chains, with a TVL scale of US$220 million. It ranks high among the lending protocols. It currently has a certain market share and is the leader in lending on Arbitrum.

Agreement Revenue

In Radiant, protocol income (Revenue) = fees paid for borrowing (Fees) - deposit interest (Supply-side fees). Since February this year, the fees obtained from the agreement have stabilized at around US$2 million, and the monthly income from the agreement has reached approximately US$1 million.

Source: Token Terminal

Economic Model

The total number of RDNT tokens is 1 billion, with a circulation of 300 million. The main functions of its tokens are governance and liquidity incentives.

According to Token Unlock data, the portion allocated to the 2-pool liquidity provider, Treasury and Radiant DAO reserves has been fully unlocked. What is still being unlocked is the incentives for the team, core contributors, and depositors and borrowers. The portion allocated to depositors and borrowers is released at 4.85 RDNT per second. If calculated at this rate, nearly 210,000 coins will be released every month.

Judging from the distribution of token holdings, the top 20 token addresses account for 92.3%, of which the official contract address ranks first, with 23.4% remaining undistributed. The tokens distributed in DEX account for 27.6%, ranking first The holdings of 20 large addresses accounted for only 3.8%.

route map

The Radiant official team has disclosed a simple roadmap in its documentation. Its version is currently in the 2.0 stage. The first task is to deploy Radiant cross-chain and increase the scale of in-application collateral. In the V3 version, it plans to get rid of dependence on the third-party cross-chain bridge Stargate and fully integrate LayerZero. In the V4 version, it plans to fully realize full-chain liquidity lending.

Summarize

Multi-chain is the development trend of blockchain. Cross-chain interoperability protocol is a key component of inter-blockchain communication, and its development prospects are quite broad. LayerZero is still in the early stages of development, and there are still few native projects to participate in. It has the support of many well-known investment institutions, rich industry resources, and is expected to attract the attention of the entire crypto market.