Written by: Chain Tea House
LayerZero is an interoperability protocol that uses new technology to instantly verify cross-chain transactions connecting different blockchains, overcoming the challenges of liquidity fragmentation. It aims to create paths and platforms for communication between independent blockchain networks, enabling them to share assets, status, liquidity, etc.
LayerZero was founded in 2021 by a team of engineers led by Bryan Pellegrino (co-founder and CEO), along with Caleb Banister (co-founder) and Ryan Zarick (co-founder and CTO).
At the time, with numerous blockchains operating in isolation, users were forced to fragment their resources and liquidity, limiting their options for transferring liquidity and state between closed ecosystems.
Therefore, LayerZero Labs' mission is to solve the interoperability problem between blockchains and provide decentralized application (dApp) developers with the ability to pass messages on multiple blockchains without intermediaries. LayerZero uses an innovative architecture that includes ultra-light nodes, independent oracles, and relays to securely and efficiently transmit messages between chains.
How it works
LayerZero uses a set of smart contracts called LayerZero endpoints on each supported chain. In addition to connecting all chains supported by LayerZero, they can also be deployed on new chains to onboard them to the network. An example of this is cross-chain lending, where transaction details are sent from one blockchain (like Ethereum) to a LayerZero endpoint on another chain (like Avalanche), facilitated by independent off-chain entities, Oracles and Relayers.
Specifically, the main components of the LayerZero protocol operation include:
Relayer: Responsible for sending transaction proofs and transaction data from chain A to chain B, and matching the block header hashes of chain A and chain B.
Oracle: Work with decentralized oracles such as Chainlink to provide reliable data transmission for the LayerZero network.
Endpoints: A set of smart contracts divided into communicators, validators, networks, and library modules. The library module contains the code for each blockchain network. When a new network needs to be added, only the library module needs to be updated. It is a facility that interacts directly with users or applications, or it can also be regarded as a series of smart contracts that handle logic. These endpoints are responsible for handling message transmission, verification, and reception. Their purpose is to ensure effective delivery when users send messages using the protocol.
LayerZero's message passing process relies on two main entities: oracles and relayers. When a user agent (UA) sends a message from chain A to chain B, the message first passes through an endpoint on chain A. The endpoint then notifies the designated oracle and relayer about the details of the message and its destination chain. The oracle passes the block header to the endpoint on chain B, and the relayer submits the transaction proof. After the proof is verified on the receiving chain, the message is forwarded to the final destination address.
LayerZero's security is based on the idea that if two independent entities can confirm a transaction on one chain, then the other chain can trust and execute that transaction. Upon receiving the transaction details, the Oracle creates a block header and the Relayer independently generates a proof. If both parties agree, the transaction is considered valid and completed on the second chain.
Functions and their ecological use cases
bridging
Bridging is currently the most popular interoperability solution. Cross-chain bridging allows asset holders to transfer assets between different Layer 1 and Layer 2 platforms. There are many reasons why investors would bridge their assets to another network, such as taking advantage of the fee structure on the target chain, or benefiting from applications on the target chain. Thanks to cheaper Proof of Stake (PoS) chains such as Polygon, Fantom, and BNB Smart Chain (BSC), bridging is more important than ever. But in addition to the poor security already discussed, current bridging platforms have shortcomings.
The capital intensity of running a bridge is that new infrastructure needs to be developed for each bridging direction. For example, a bridging platform that supports 5 networks requires writing 5 different codes and running 5 intermediate chains or light nodes.
LayerZero claims to solve this problem; first, the requirements for ultralight nodes are low, and universal data exchange means that bridges can be created for multiple networks using the same infrastructure and code. Such bridges are more efficient and economical, without the need to use different code sets to bridge different chains.
Aptos Bridge
Aptos was launched in October 2022, with the Aptos Token (APT) as the network's native currency. Aptos' claim to fame is primarily due to the unique technology it uses and its connection to Facebook's failed Diem project, as Aptos' modified Move language was originally developed for the Diem blockchain.
As of now, Aptos has a market cap of over $3 billion, and DefiLlama reports a TVL of $330 million in assets on the network, making its ecosystem a significant one. However, Aptos is not EVM-compatible, which is where LayerZero comes in. The LayerZero Aptos bridge was launched shortly after the mainnet mined its genesis block, connecting Aptos with other EVM-compatible networks and even the Ethereum network.
Through the Aptos bridge, users can bridge Aptos-supported assets with other networks such as BNB Smart Chain (BSC), Avalanche, Polygon, Ethereum, and Ethereum layer 2 networks such as Optimism and Arbitrum. According to the platform information, the bridging process is expected to take 2-5 days.
Stargate Finance (STG)
Stargate is a building bridge platform developed using LayerZero interoperability technology. Stargate enables blockchain enthusiasts to transfer assets across chains in their original form with guaranteed finality.
This is achieved through Stargate’s use of a unified pool system to handle transfer requests across supported chains. Liquidity providers stake their assets in Stargate’s single asset pool and receive staking rewards in the form of stablecoins derived from fees paid by users to bridge assets on the platform.
The bridge currently supports about 8 networks, including Layer 2 vertical scaling solutions such as Arbitrum and Optimism. The full-chain technology provides a layer for supported tokens, allowing them to run seamlessly and move across other chains. Stargate Finance also provides cross-chain swaps, where users can send an asset from a source network and receive and receive another asset on the target chain.
Data from the project page shows that more than $200 million worth of assets have been locked on the platform. This reflects the liquidity of the pools that service bridge requests. Stargate Token (STG) is the native token of the Stargate ecosystem and is used for rewards and governance purposes. Liquidity providers can stake their LP tokens and receive additional rewards in STG tokens.
To contribute to the project governance, STG holders must stake their tokens on the governance portal to earn VeSTG. This is used to vote on improvement proposals. STG is actively traded on centralized and decentralized exchanges. You can view the active trading pairs of STG tokens here.
Cross-chain swaps and unified liquidity
Investors who wish to purchase crypto assets on different networks first need to bridge the unified asset to the target chain and then use a decentralized exchange on the target chain to make the purchase. LayerZero’s test bridge can directly exchange Ethereum from the mainnet and Layer 2 solutions such as Arbitrum and Optimism for Goerli ETH. Similar systems can be developed on a larger scale to support cross-chain swaps, eliminating the process of bridging and connecting to exchanges on the target platform.
The current bridge uses separate liquidity pools, for example, different liquidity pools serve bridge requests from Ethereum to the Polygon PoS chain and bridge requests from Fantom's Opera chain to Polygon. This may lead to efficiency differences. The liquidity on the Ethereum to Polygon bridge may be sufficient to handle all requests, while the assets of both chains on the Fantom to Polygon bridge are not enough to complete the bridge request immediately.
Ryan Zarick, co-founder of LayerZero, mentioned that LayerZero can use a unified liquidity pool to meet bridge requests from multiple target chains.
LayerZero achieves the ultimate goal of bridging: unified liquidity on all chains and guarantees finality on the source chain. This means that when a user transfers assets from chain A to chain B, the user is guaranteed the assets on chain B, and LP providers can earn fees from all incoming transactions to chain B, regardless of the source chain.
Base
Base is an Ethereum Layer 2 solution launched by Coinbase, using Optimism's OP Stack software. Base provides a simple integration path for decentralized applications, ensuring the security, stability and scalability of decentralized applications, while providing a convenient channel for users and assets from Ethereum L1, Coinbase and other interoperable chains.
The LayerZero protocol is launched on Coinbase's Base mainnet, facilitating cross-chain communication through full-chain interoperability solutions, including token swaps, transfers and other functions, improving the overall efficiency and accessibility of the decentralized ecosystem.
There are many practical applications released by the cooperation between LayerZero and Base. For example, the Parallel project has used the LayerZero protocol to smoothly move tokens between Base and Ethereum, demonstrating the practicality and efficiency of the protocol.
SushiSwap
SushiSwap is a multi-chain decentralized exchange powered by AMM. It claims to have over 400 crypto assets available for instant decentralized exchange. Over $200 million worth of crypto assets are locked in its liquidity pools. These statistics are from the project’s official website and are valid at the time of writing. Its governance and reward system is provided by the SUSHI token.
In July 2022, SushiSwap announced the launch of SushiXSwap. The new platform was developed using LayerZero's interoperability technology to address the pain points of using multi-chain DeFi applications. In the announcement, SushiSwap reflected on the main issues affecting cross-chain interaction facilities and how LayerZero's technology was deployed to solve this problem. At the time of release, SushiXSwap supports asset bridging across Ethereum, Fantom, and approximately 5 other networks.
LayerZero's technology enables SushiSwap to develop a unified liquidity system that pools resources on supported networks to meet asset transfers and ensure that these transactions are completed in the shortest possible time. As an existing liquidity pool project, SushiSwap uses its liquidity pool to power bridges between chains where the project is located, solving the problem of fragmented liquidity.
SushiSwap also solves the fee structure problem of asset bridges by providing users with the cheapest cross-chain transfer route. This cost-effective solution utilizes Stargate Finance's bridging infrastructure to find the cheapest route to transfer assets from a source chain to a target chain. SushixSwap will also use Stargate's facilities to scale its bridge and expand to other networks over time. Cross-chain swaps are also available on SushiXSwap.
Full-chain tokens and NFTs
By design, LayerZero's technology creates a true zero layer: an ecosystem that can interact with any other network, share resources, and operate freely without platform restrictions - a full chain. LayerZero can be the first to launch "non-native" crypto assets. Non-native means that they can be used on every chain without the need to transplant them to the target chain and back through a bridge that changes their original form. Full-chain tokens and NFTs will be unique and enjoy faster adoption because investors can easily buy and store them on their favorite blockchain.
TofuNFT
TofuNFT is a multi-chain NFT marketplace deployed on more than 20 blockchain networks. NFT enthusiasts can list their NFTs on supported networks and sell them on TofuNFT's marketplace, and can also collect works from other NFT creators. TofuNFT was selected by the LayerZero ecosystem to develop a full-chain NFTs market
Full-chain NFTs, like full-chain fungible tokens (OFTs), are non-native NFTs that can be easily transferred across different networks in their original form. TofuNFT’s full-chain marketplace has received a small number of full-chain NFT listings, such as the LayerZero Punk, which has a reserve price of 0.015ETH at the time of writing.
Oasys
Oasys is a gaming-optimized blockchain that uses Ethereum's layer 2 scaling solution to provide a highly scalable layer 1 hub and a dedicated layer 2. The ecosystem provides game developers with a secure and scalable blockchain infrastructure to create more efficient, secure, and interoperable games.
Oasys’ validators include leaders in gaming and Web3, such as SEGA, Ubisoft, and Yield Guild Games, who are initial validators for our Proof-of-Stake (PoS)-based blockchain. Oasys’ expert blockchain team combined with the biggest names in gaming are revolutionizing the gaming industry.
Oasys is committed to creating an ecosystem for gamers and developers to distribute and develop games, solving the challenges game developers face when building blockchain-based games. The company's trifecta approach includes a fast network powered by the gaming community, a scalable network powered by AAA game developers, and a blockchain that provides the best user experience through fast transactions and zero gas fees. This approach prepares participants to enter Oasys and play games.
After integrating with LayerZero, Oasys will leverage LayerZero’s interoperability technology to enhance cross-chain operations of games and NFTs, providing a richer and more inclusive gaming experience. LayerZero also enables the flow of homogenous tokens through the Omnichain homogenous token (OFT) standard. Bryan Pellegrino, co-founder and CEO of LayerZero Labs, added: "LayerZero's addition of an endpoint to Oasys is a major leap forward in the interoperability of in-game assets. LayerZero is committed to connecting communities and empowering players by making their favorite games more accessible and enjoyable on different networks."
In general, LayerZero is mainly used by decentralized application developers who need to communicate across multiple blockchain networks. The LayerZero ecosystem also includes multiple different categories of projects, covering NFT, payment, wallet, bridge, infrastructure, DeFi, DEX, GameFi and other aspects, and the ecology is relatively prosperous.
ZRO Token
The $ZRO token is the primary token in the LayerZero ecosystem and is used to facilitate various activities and incentives within the ecosystem.
The $ZRO token plays multiple roles in the LayerZero ecosystem, including:
Incentives and Rewards: Used to reward participants and contributors in the ecosystem.
Governance: Users holding $ZRO tokens can participate in the governance decisions of the protocol.
Payments and Transactions: Used to pay for cross-chain operations and other transaction fees within the ecosystem.
The initial distribution of $ZRO tokens is as follows:
Ecosystem Fund: 25% (2500)
Airdrop: 19% (1900): 5% for IDO
Core contributors: 19% (1900)
Investors: 17% (1,700)
RPGF（Retroactive Public Goods Funding）：20%（2000）
The circulating supply of $ZRO tokens is 110,000,000 ZRO, the total supply is 1,000,000,000 ZRO, and the maximum supply is 1,000,000,000 ZRO.
The release cycle of $ZRO tokens is shown in the figure below:
Team / Financing
Bryan Pellegrino, co-founder and CEO of LayerZero Labs, graduated from the University of New Hampshire with a degree in Computer Science. He has served as Entrepreneur in Residence, Lead Engineer of Machine Learning Architecture, and Co-founder of OpenToken.
Co-founder Caleb Banister specializes in writing and auditing smart contracts for blockchain-related projects. Caleb is a professional Solidity developer with a bachelor's degree in computer science from the University of New Hampshire. He is a skilled Java and Linux programmer who is building the future and the multi-chain metaverse.
Another co-founder, Ryan Zarick, is the CTO of LayerZero Labs and is an experienced software developer and entrepreneur with over 10 years of experience in the tech industry. He co-founded Minimal AI, Coder Den, and 80Trill, and served as CTO at Buzzdraft. He holds a Master’s degree in Computer Science from the University of New Hampshire.
Since its establishment, LayerZero has successfully completed multiple rounds of financing, with a total financing amount of US$263 million and its market valuation reaching US$3 billion.
In its most recent Series B funding round, LayerZero successfully raised $120 million on April 4, 2023, which valued it at $3 billion. The funding round attracted participation from several well-known investors, including Andreessen Horowitz (a16z), Sequoia Capital, and Circle.
Previously, LayerZero also completed a round of A1 financing on March 30, 2022, with a financing amount of US$135 million and a valuation of US$1 billion. The main investors in this round of financing include Andreessen Horowitz (a16z) and Sequoia Capital, which shows the market's confidence in LayerZero's technology and development.
Earlier on September 16, 2021, LayerZero completed a Series A financing, successfully raising $6 million at a valuation of $50 million. With these early financial support, LayerZero laid its foundation in the field of blockchain interoperability and promoted the initial development of the project.
Project Evaluation
LayerZero belongs to the cross-chain interoperability track in blockchain technology. The goal of this field is to solve the communication and asset transfer problems between different blockchain networks and enhance the interconnectivity of the blockchain ecosystem.
Another cross-chain interoperability project similar to LayerZero is Wormhole.
Created by Jump Crypto, Wormhole is a decentralized cross-chain protocol that aims to enable data and token transfers between different blockchains through a universal messaging protocol. Supported blockchains include Ethereum, Solana, Sui, Injective, etc.
Wormhole consists of 17 highly verified Guardian nodes that must confirm each transaction to ensure the security of the system. It also supports cross-chain token and NFT transfers, has processed more than 1 billion cross-chain messages, and interoperates with the message systems of Cosmos and Polkadot. In addition, wormhole also supports the transfer of NFT assets between multiple blockchain networks.
Wormhole is arguably the most mature protocol on the block and the only one that has been unconditionally approved for use by Uniswap. It also claims to handle over 1 billion cross-chain messages and is interoperable with Cosmos and Polkadot messaging systems. While Wormhole may not be as valuable as LayerZero, it has the most adopted protocol, and momentum doesn’t seem to be changing anytime soon.
However, there are still differences between LayerZero and Wormhole. Wormhole mainly relies on a fixed Guardian node network and has less flexibility. LayerZero can freely choose oracles and relays, which improves the flexibility and modularity of the system. Wormhole adopts a technical solution that relies on trust (packaged assets are stored on the bridge chain and controlled by a multi-signature account), while LayerZero uses light nodes to run on the target chain. These nodes can package and send all transactions at once, directly transferring native assets between chains, avoiding the complexity and risks of transferring assets between different chains.
Therefore, Wormhole was exploited by hackers in 2022, resulting in a loss of 120,000 ETH (approximately $325 million), but its security has been significantly enhanced since then, and LayerZero’s cross-chain system has not yet been successfully attacked by hackers.
In addition to security, LayerZero has the following advantages:
Scalability: LayerZero is designed with scalability in mind and is able to handle high transaction volumes without compromising performance, making it suitable for large-scale applications and enterprise integration.
Developer-friendly: It provides a powerful set of tools and APIs to facilitate developers to build and deploy cross-chain applications.
Cost-effectiveness: Through LayerZero’s architecture, users can achieve cross-chain functions without incurring high costs.
Ecosystem Support: LayerZero has received broad support from the blockchain community and industry stakeholders, forming a vibrant ecosystem of developers, users, and partners.
While LayerZero is designed to scale, performance may be sacrificed when handling extremely high transaction volumes or complex cross-chain operations. Ensuring optimal performance under all conditions remains a challenge that the protocol must continually address. Additionally, LayerZero's security model relies on external validators, such as oracles and relayers. While this enhances decentralization and security, it also introduces potential points of failure if these validators are compromised. Ensuring the reliability and trustworthiness of these external entities is critical to the long-term viability of the protocol.
However, since LayerZero is still in the early stages of the project and has only recently issued a coin, there is still potential for future development. As long as its solution continues to work as it claims, the LayerZero ecosystem will become larger as more and more projects adopt a complete interoperability solution.
