[LD Capital] LayerZero: The Future Path of Cross-chain Innovations and Star Projects
I. What is Cross-chain Interoperability
The current development trend of blockchain is multi-chain parallelism. However, the blockchain itself does not possess the ability to communicate with external systems or APIs, preventing data and value from being transmitted seamlessly across networks. This results in isolated ecosystems where they cannot exchange information with each other.
From a developer’s perspective, each deployment acts as an isolated independent entity. Backend contracts among them are not interconnected and are unaware of each other’s existence. For instance, a decentralized exchange (DEX) DApp might need separate deployments on Ethereum, BNB Chain, and Polygon networks. Each version of the DApp then exists independently of the others.
For users, this multi-deployment approach increases adoption challenges:
1) Users cannot seamlessly transfer tokens from one blockchain to another.
2) The transfer process is time-consuming with subpar experience since assets are usually destroyed on the source blockchain and then re-minted on the target blockchain via third-party bridges.
3) Holding assets on multiple blockchains presents high security risks, making them vulnerable to hacker attacks, leading to potential fund losses.
Given the vast number of blockchain ecosystems, it’s crucial for these different chain environments to interoperate and communicate. A key component of the infrastructure for exchanging data and assets between various blockchains is the cross-chain interoperability protocol. This interoperability allows developers to create a unified cross-chain application, meaning a single dApp can be deployed across multiple blockchains without having to deploy separate independent versions on each chain, unlocking greater capital efficiency and improved liquidity conditions.
II. Cross-chain Solutions
Cross-chain solutions typically involve verifying the state of the source blockchain and relaying subsequent transactions to the target blockchain. A vital part of this infrastructure is the cross-chain bridge, facilitating the transfer of assets from the source to the target blockchain. Typically, these bridges work by locking or destroying assets on the source chain via smart contracts and then unlocking or minting them on the target chain through another smart contract. In essence, the use cases for cross-chain bridges are quite narrow, focusing solely on asset transfer between different blockchains. Hence, cross-chain bridges usually serve as application-specific services between two blockchains.
Developers have crafted various cross-chain solutions, such as:
• Chainlink is developing the Cross-chain Interoperability Protocol (CCIP), an open-source standard supporting cross-chain communication, including message and token transfers. CCIP aims to achieve universal connectivity between hundreds of blockchain networks using standardized interfaces, hoping to simplify the creation of cross-chain applications and services.
• Wormhole is a universal interoperability protocol enabling the transfer of tokens and messages across different blockchain networks. Network guardians monitor information on the source chain, validate it, and facilitate its transfer to the target chain. Developers using Wormhole can create cross-chain decentralized applications known as XDApps.
• The Inter-Blockchain Communication (IBC) protocol is a standard for blockchain interaction within the Cosmos network, aiming to enable interoperability between different blockchains. IBC defines a set of minimal functions specified in the Cross-chain Standards (ICS), laying out how blockchains can communicate and exchange data.
• LayerZero is an all-chain interoperability protocol designed for lightweight messaging between blockchains, offering secure, reliable, and trustless information transfer.
This article introduces the interoperability protocol, LayerZero. LayerZero primarily focuses on communication between chains. It is responsible for sending messages to any smart contract on any supported chain, essentially managing inter-blockchain smart contract communication. Notably, LayerZero does not handle cross-chain asset transfers; this function is accomplished by Stargate, developed by LayerZero Labs.
III. Technical Characteristics and Advantages of LayerZero
1. Technical Features:
LayerZero’s most prominent feature is its ultra-lightweight node. By leveraging this ultra-light node technology, messages are transmitted between endpoints on different chains via relayers and oracles, ensuring security while reducing costs.
1) Ultra-lightweight Node
In a blockchain network, each node represents a computer or server terminal that stores data. A light node is a mode of operation for these nodes. Unlike full nodes, light nodes only store a small portion of the blockchain data, such as block headers and some other information, without storing the specific transaction details within blocks. Ultra-lightweight nodes, compared to light nodes, employ the same verification method. However, since writing to the blockchain is costly and the continuous transmission of block headers is expensive, ultra-light nodes do not retain all block headers. Instead, they stream these headers on-demand through oracles, allowing more efficient synchronization with off-chain entities to achieve the desired state, deviating from the original continuous streaming method.
The benefit of this approach is the absence of a continuous block header data stream, which starts from light nodes. However, a drawback is the lack of historical sequential data streams. If both the oracle and the relayer act maliciously, they can bypass the verification, leading to the execution of malicious information. Therefore, LayerZero has made a trade-off between significantly reduced verification costs and a certain degree of security compromise. Whether this trade-off is justified will depend on how it balances based on its own use case scenarios.
2) Core Components
The LayerZero official white paper outlines the core components responsible for message transmission between two chains: Endpoint, Oracle, and Relayer.
Endpoints directly interact with users or applications, handling message transmission, verification, and receipt. Their goal is to ensure effective transmission when users send messages using the protocol. In the LayerZero protocol, every chain needs to deploy endpoints. These endpoints can also be invoked by other on-chain apps to send information to off-chain entities.
Oracles are third-party services, offering a mechanism independent of other LayerZero components. They can read a block header from one chain and send it to another, enabling the destination chain to verify the validity of transactions on the source chain. Currently, LayerZero uses Chainlink as its oracle.
Relayers are off-chain services functionally similar to oracles. Instead of fetching block headers, they retrieve proofs of specific transactions. To ensure effective transmission, the only requirement is that for any given message sent using the LayerZero protocol, the oracle and relayer must operate independently. Any entity can take on the roles of both the oracle and relayer, and LayerZero can even establish its own relaying service.
A critical trust assumption in LayerZero is that oracles and relayers operate independently of each other. Block headers submitted by the oracle are cross-verified with transaction proofs submitted by the relayer. They don’t form any consensus and only transmit messages. In simple terms, the oracle acts as a notary in the LayerZero cross-chain, informing the destination chain about how to verify results, while the relayer provides the proof process required for transaction verification and the specific content of cross-chain information. To ensure the effective transmission of information, if there’s any dispute in the information transmitted between the relayer and oracle, the smart contract will pause and will not submit the information to the destination chain.
The entire Cross-Chain Transaction Process from Chain A to Chain B can be described as follows:
A transaction starts when a user initiates an application. With the help of oracles and relays at the LayerZero endpoint, the transaction is broken down into various components (proofs and block headers). Once the oracles and relays send their respective information (signing the transaction on-chain) on the target chain, and the LayerZero Endpoint (contract) verifies the accuracy of the information, the message is transformed and executed on the target chain.
2. Advantages
1) Security
As an underlying protocol, LayerZero’s security is independent of external protocols, ensuring stability in protocol consensus. Additionally, thanks to the unique design of oracles and relays which operate independently, a transaction is only completed when both are deemed genuine, safeguarding the transmission of information.
2) Scalability
LayerZero serves as a universal messaging layer. This implies that any contract can be transferred from Chain A to Chain B for cross-chain interoperability with a first-layer network. With its innovative endpoint design, LayerZero can be easily scaled to support any chain, providing broader application scenarios for the blockchain ecosystem.
3) Efficiency
Firstly, LayerZero’s ultra-light node technology ensures higher transmission efficiency while reducing verification costs. Secondly, neither the relays nor the oracles of LayerZero form any consensus and only transmit messages. All verification is completed on their target chain. Therefore, speed and throughput limits depend entirely on the properties of the two transaction chains.
IV. Financing
LayerZero has undergone three rounds of financing, with disclosed amounts totaling 293 million USD. Notable crypto investment firms participating include Multicoin, Binance Labs, a16z, and Sequoia Capital. The latest financing round was on April 4, 2023, raising 120 million at a valuation of 3 billion USD.
FTX had previously led an investment round on March 30, 2022. However, following a significant event concerning FTX on November 11, 2022, LayerZero officially announced the repurchase of 100% of the equity, token rights, and other agreements from FTX.
V. Ecosystem
As of now, LayerZero supports over 20 chains, including Ethereum, BNB Chain, Avalanche, Polygon, Base, etc. The platform has 3 million independent users with a cumulative transaction count of 56 million. However, 35% of users have only one interaction record, and only about 730,000 users have more than two interaction records.
Most user interactions occur on BNB Chain, Arbitrum, and Polygon. Especially after the Arbitrum token launch, there’s a strong community sentiment for airdrops. Anticipation of these airdrops has also significantly boosted user activity on LayerZero.
Using Arbitrum interaction data as an example, the transaction count is around 12 million. April 2023 was the peak of user activity. However, with the general market trend cooling off, user activity has slightly decreased.
LayerZero’s minimalist architecture offers infinite possibilities. Its relatively low complexity for developer integration has resulted in over 50+ dApps currently integrated or using its technology.
Star Project
1. Stargate Finance
Developed by LayerZero Labs, Stargate Finance is the first dApp based on the LayerZero protocol. It has constructed the first fully composable native asset bridge. The vision is to make cross-chain liquidity transfer a seamless, unified process. A product highlight is the use of the unique “Delta Algorithm” to solve the “Impossible Triangle” problem inherent in cross-chain bridges, without having to compromise on any of its vertices.
The Stargate team believes that cross-chain asset bridges face an “Impossible Triangle” of:
1) Instant Verification: Assets can successfully cross to the target chain upon transaction confirmation, ensuring timeliness.
2) Unified Liquidity: A single liquidity pool is shared across multiple chains.
3) Asset Native Nature: Users obtain native assets directly through the bridge, rather than synthetic or wrapped assets.
However, to ensure instant verification and the native nature of assets, without a more sophisticated liquidity dynamic allocation algorithm, one can only set up a liquidity pool between every two chains, which reduces capital efficiency.
According to data from defillama, in terms of transaction volume over the past month, Stargate ranks first among cross-chain bridge protocols, with up to 96,000 transactions in 24 hours.
Protocol Revenue
Stargate, the first dApp to launch on LayerZero, has seen steady growth in protocol fees and income since March 2023. This period also saw a significant increase in on-chain trading activity due to airdrop expectations. The current monthly income of the protocol exceeds $1 million.
Economic Model
The total supply of STG tokens is 1 billion, with a circulation of 200 million. The token functions are:
1) Asset Cross-Chain Transfer Fee: Non-STG token transfers will incur a 0.06% fee, of which 0.045% will be distributed to liquidity providers and 0.015% to the protocol treasury.
2) Governance: By staking and locking STG tokens from 3 to 156 weeks, one can obtain governance tokens, veSTG. The longer STG is locked, the greater the voting weight.
3) Protocol Rewards: Stablecoin liquidity pool and liquidity mining rewards.
The token was issued on March 17, 2022. The initial allocation details are as follows:
Upon initial token issuance, 478 million tokens were directly unlocked, allocated for early DEX liquidity, Bonding Curve, initial release plan, and community.
For the part allocated for protocol initiation, 5% (50 million) was directly released, while the remaining 10% has a one-year lock-in period, with linear release over the subsequent six months, currently 145 million have been released.
The portion allocated to investors and the team has a one-year lock-up, followed by a two-year linear release.
Based on the above token distribution, nominal STG emissions have reached 729 million. The token holding distribution clearly shows that of the 304 million allocated to the community, 297 million remain non-circulating. 320 million of the allocation to investors and the team remain non-circulating, with approximately 67 million (or about 6.7%) currently circulating.
Looking at the holding address distribution, the top 20 holders account for 94%. The two largest addresses, owned officially, have yet to circulate and account for 62%. Excluding these, the remaining address holdings account for 32%, with Alameda holding 9.42% and individual large holders accounting for only 0.6%, indicating fewer chips in the hands of the whales.
Alameda’s co-CEO, Sam Trabucco, mentioned on social media that Alameda Research participated in the public issue of the cross-chain bridge project, Stargate, on March 18 and purchased all shares of STG (100 million, which is the 10% mentioned above for protocol initiation). However, Sam Trabucco stated that Alameda will not sell STG for 3 years and will make a long-term investment in the project and team. They will also not intervene in the project’s governance and will relinquish their aSTG voting rights to ensure a more equal distribution of voting rights among early community members. 9.42% has currently been released.
2. Radiant Capital
Radiant is a cross-chain DeFi lending protocol. By utilizing LayerZero as the cross-chain infrastructure, it facilitates cross-chain leveraged lending and composability, enabling users to obtain leverage in its supported DeFi protocols. This simplifies the user’s cross-chain asset lending operations across different chains.
In essence, Radiant operates similarly to current lending protocols such as Aave and Compound. However, the distinct feature of Radiant is its implementation of a cross-chain lending protocol. That means users can deposit collateral on Chain A and then borrow on Chain B. But when users need to use the cross-chain lending service, they first have to deposit a certain amount of assets on the supported chain, becoming a dynamic liquidity provider (dLP), before they can borrow the desired assets on the target chain.
Radiant has been deployed on both the Arbitrum and BSC chains. With a total value locked (TVL) of 220 million USD, it ranks among the top in the lending protocol sector. It has already secured a certain market share, positioning itself as a leading lender on Arbitrum.
Protocol Revenue
In Radiant, protocol revenue (Revenue) = Borrowing fees (Fees) — Deposit interest (Supply-side fees). Since February this year, the fees obtained by the protocol have stabilized at around 2 million USD, with monthly protocol revenue reaching approximately 1 million USD.
Economic Model
The total amount of RDNT tokens is 1 billion, with a circulation of 300 million. The primary functions of its token are governance and liquidity incentives.
According to Token Unlock data, portions allocated to Pool 2 liquidity providers, Treasury, and Radiant DAO Reserves have all been unlocked. Currently, the only portions still unlocking are for the team, core contributors, and lending & borrowing incentives, with the part allocated to lenders and borrowers releasing at 4.85 RDNT per second. Calculating at this rate, nearly 210,000 tokens are released monthly.
Looking at the token holdings distribution, the top 20 token addresses account for 92.3%. Among them, the top-ranked address is the official contract address, with 23.4% still undistributed. Tokens distributed in DEXs account for 27.6%, while the holdings of large addresses within the top 20 represent only 3.8%.
Roadmap
The official Radiant team has disclosed a simple roadmap in their documentation. The project is currently at its 2.0 phase. The primary goal is the deployment of Radiant cross-chain and increasing the scale of collateral within the application. In the V3 version, the plan is to eliminate dependence on the third-party cross-chain bridge, Stargate, and to fully integrate with LayerZero. The V4 version aims to fully realize cross-chain liquidity lending.
Conclusion
Multichain is the trend in blockchain development. Cross-chain interoperability protocols are key components of communication between blockchains, and their developmental prospects are quite broad. LayerZero is still in its early stages of development, with only a few native projects available for participation. It is backed by many renowned investment institutions, boasting abundant industry resources. The expectation of its token issuance is drawing the attention of the entire crypto market.
References
1. Detailed Analysis of Interoperability Protocol LayerZero: Technology and Features.
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