Author: Ishraq Alim, Mihai Grigore, Messari; Translated by: Deng Tong, Golden Finance

summary

• LayerZero expanded its full-chain interoperability protocol, adding support for 12 new networks and facilitating $5 billion in crypto asset transfers in Q2 2024. Average transfer value grew 78% to over $400 per message in Q2 2024.

• Ethereum transfer volume increased 26% quarter-over-quarter, from $725 million in Q1 2024 to $913 million in Q2 2024, thanks to lower gas fees due to the Dencun upgrade and the introduction of full-chain rehypothesising, which incentivized LayerZero usage.

• The ZRO token was launched on June 20, 2024, airdropped to 1.28 million eligible wallets, implementing anti-Sybil measures for token distribution and a claimable “proof of donation” mechanism.

• LayerZero surpassed 50,000 full-chain application (OApp) contract deployments in Q2 2024, with growing application adoption in gaming, DeFi, AI, bridging, and other areas that leverage its full-chain communications.

Preface

While blockchains are designed to be secure, facilitating secure communication between networks is challenging. LayerZero is an interoperability protocol that allows full-chain applications (such as tokens) to communicate securely across 80+ networks.

It sends and receives messages through a set of immutable endpoints, and is verified and executed by a set of permissionless decentralized validator networks (DVNs) and executors. The executors execute the instructions of the message in the target chain, while the DVN ensures the end-to-end validity of the message. Each independent application built on LayerZero can configure the security stack (including executors and DVNs) and block confirmations according to the security level required for sending and receiving messages.

LayerZero is a standardized communication protocol that allows full-chain applications to communicate across different networks. Its primary use case is transferring arbitrary data between these networks, with asset transfers being the most common type of data transfer. Other use cases include any application that may need to send messages between multiple chains, including games, cross-chain governance, identity solutions, re-staking, and enterprise products.

LayerZero V2, which will be launched in January 2024, features a universal messaging system and universal security properties to simplify cross-network communication and improve the developer experience.

LayerZero Labs is the initial developer and core contributor of the LayerZero protocol. In April 2023, it raised $120 million in Series B funding. LayerZero launched its native token ZRO in June 2024.

Key Metrics

Performance Analysis

Financial Overview

Market Cap and Tokens

On June 20, 2024, the LayerZero Foundation launched ZRO, the native token of the LayerZero protocol. As an all-chain fungible token (OFT), ZRO grants holders governance control over the protocol fee switch, a permissionless mechanism that charges fees for every message sent through LayerZero and destroys ZRO fee tokens.

ZRO launched with a market cap of over $1 billion and a price of $4.40 per token. ZRO ranks among the top three cross-chain messaging protocols by market cap in Q2 2024 with a market cap of over $860 million and a price of $3.30.

Messaging costs

Message delivery fees are charged in the native token of the source chain. These fees are used for three purposes:

• Assigned to DVN and executor for verification and execution respectively.

• Pay the gas fee on the target chain.

• If protocol fee accumulation is activated, it is destroyed on the source chain, which is a decision controlled by token holder governance and is currently turned off.

The revenue generated by the DVN and executors from these fees is used to pay for security costs. Each application chooses its own DVN configuration for verification. At the same time, executors are also selected to accurately deliver messages. If the fee switch is activated, the accumulation of protocol fees will reduce the circulating supply of ZRO through a destruction mechanism. This control over supply and market value incentivizes ZRO holders to participate in governance.

Total messaging fees paid by users fell 34% quarter-over-quarter to $12.7 million in Q2 2024. The top source chains for messaging fees were Arbitrum ($3.4 million), BNB Chain ($3.2 million), Optimism ($2.3 million), and Polygon ($1.4 million). This drop came in the wake of the Dencun upgrade, which reduced Ethereum gas fees via EIP-4844, making LayerZero transactions cheaper. Additionally, the drop in fees coincided with a 58% drop in message volume, from 29.6 million to 12.3 million, driven by a surge in activity in Q1 2024 in anticipation of the token launch.

The average fee metric calculates the fee charged for each message sent on the network. A large portion of these fees is used to pay for gas fees on various networks. High-fee chains like Ethereum can increase the average fees charged because they have higher transaction costs. The lowest average transaction cost among the networks measured is Polygon, which had an average fee of $1 per message sent in Q2 2024. Token issuance may have caused transaction fees on chains that support ZRO to surge (for example, average gas fees on Arbitrum rose from less than 1 cent to 87 cents). With the launch of the Dencun upgrade, average fees on Arbitrum and Ethereum fell 63% and 45% month-over-month, respectively.

Value Transfer

As of Q2 2024, LayerZero has over 54,000 contracts using its full-chain communication protocol and running on over 80 different networks, including Ethereum, Optimism, Arbitrum, Polygon, Solana, BNB Chain, TRON, and Base. These contracts use LayerZero messaging for a variety of use cases, supporting nearly 300 user-facing applications.

Transferring assets between different networks (bridging) is one of the most common use cases for LayerZero. Other use cases include gaming, cross-chain governance, and identity solutions.

Using a bridge built on LayerZero, assets can be transferred by exchanging native assets on the source chain for native assets on the target chain (such as Stargate) or through LayerZero's token standards, called All-Chain Fungible Tokens (OFT) and All-Chain Non-Fungible Tokens (ONFT). Standard OFT is burned on the source chain and minted on the target chain. Examples of native bridges using standard OFT include: Aptos Bridge, Core DAO, and Harmony Bridge. For existing native tokens, bridges can adopt the OFT standard by locking tokens on the native chain and minting equivalent tokens on the target chain. The target chain receives the tokens and issues new tokens, with a 1:1 ratio for each token locked or burned.

The value of assets transferred through LayerZero’s bridge applications across the top 10 networks totaled $5 billion in Q2 2024, down 26% from the previous quarter. This decline was primarily due to efforts to prevent Sybil mining ahead of the Token Generation Event (TGE), and the figure may indicate more legitimate use of the network. Despite the decline, the figure is still 42% higher than the yearly low in Q4 2023.

By preventing Sybil mining, on-chain data shows real users rather than inflated numbers of entities using multiple wallets (which the LayerZero Foundation defined before the TGE as a cluster of 20 addresses linked to the same person). While the total value of assets transferred decreased month-over-month, the average value per message increased by 78.2% to over $400 per message. This suggests that real users are leveraging the LayerZero protocol to secure higher value transactions than industrial Sybil miners.

Arbitrum ($1.2 billion), Ethereum ($913 million), and Optimism ($893 million) were the top three source networks for LayerZero bridged transaction volume in Q2 2024. Ethereum’s transfer volume increased 26% quarter-over-quarter, from $725 million in Q1 2024 to $913 million in Q2 2024. Several key factors incentivize users to use the Ethereum ecosystem, including: Ethereum’s gas fees have decreased due to the introduction of EIP-4844 and the introduction of full-chain native re-staking, which incentivizes users to use LayerZero.

Protocol Overview

Usage

Messages (packets) sent are a key metric for LayerZero’s total usage, as they are initiated by users and used across all use cases such as bridging (e.g. Stargate), token issuance (e.g. PancakeSwap and ether.fi), cross-chain liquidity (e.g. Orderly Network), governance (e.g. Angle), gaming (e.g. Nine Chronicles), cross-chain identity (e.g. Clusters), and fee/reward distribution (e.g. Pendle). By excluding Sybil holders from token issuance, LayerZero adjusts on-chain usage metrics to reflect persistent users, rather than inflated numbers for entities using multiple wallets. Data for Q2 2024 accurately represents true protocol usage.

In the second quarter of 2024, the number of messages sent on LayerZero exceeded 12.3 million, a decrease of 58% from the previous quarter. The data in the first quarter of 2024 may be due to the community's expectations for the release of the native token.

Application deployment

Applications that send and receive messages through LayerZero are called Omnichain Applications (OApps). These applications consist of smart contracts deployed on either the source or target network. OApps connect to LayerZero through endpoint contracts on their respective networks. These applications can have a variety of functions, including asset/token transfers, governance voting, fee/reward distribution, and game items.

In Q2 2024, the LayerZero protocol passed the 50,000 milestone, ultimately deploying nearly 55,000 OApps. As part of the ZRO TGE, teams were invited to submit proposals and deploy OApps for the token. Teams included: GMX, Solidly Labs, DeFi Kingdoms, and Merkly.

Qualitative analysis

Main progress

Token issuance

The LayerZero Foundation launched its native token, ZRO, on June 20, 2024, with a total supply of 1 billion. Of this, 23.8% was allocated to the community and builders, excluding the Foundation and Growth allocations, which received 14.5% alone. On the first day, 8.5% of the token supply was allocated: 5% to core contributors, 3% via a request for proposal (RFP), and 0.5% to a separate community pool for content creators, artists, and researchers, separate from the main community pool. Over 1.28 million wallets were eligible for this initial airdrop. The remaining tokens will be distributed over the next 36 months, with additional retroactive allocations every 12 months and further RFPs for future builders. The allocation breakdown is as follows:

• 38.3% allocated to the LayerZero community (383 million ZRO)

• 32.2% allocated to strategic partners (322 million ZRO)

• 25.5% allocated to core contributors (255 million ZRO)

• 4.0% Token Buyback (40 million ZRO)

To incentivize development on LayerZero, a Request for Proposals (RFP) was conducted prior to the token launch in May 2024. Developers must launch an OApp on the LayerZero protocol to be considered for allocation. As of May 31, 2024, over 200 development teams have submitted applications for ZRO allocations and deployed their own OApps. The number of developers in the RFP alone exceeds that of some major blockchains.

The launch of LayerZero’s ZRO token had a significant impact on the Arbitrum network, serving as the coordination chain for token claims. The event caused a surge in daily revenue to $3.4 million. The launch of the token likely caused a surge in Arbitrum’s transaction fees, with the average fee rising from less than 1 cent to 87 cents.

Protocol Fee Conversion

The primary function of the ZRO token is to allow holders to control the protocol fee switch through governance. Every six months, ZRO holders can activate or deactivate the protocol's fee switch through an immutable full-chain vote, where holders can vote on any chain where ZRO is deployed. If activated, the fees collected will be used by the Treasury Contract to destroy ZRO. This mechanism ensures that ZRO holders have a direct influence on the protocol's fee structure.

Proof of donation

To foster ecosystem growth during the ZRO distribution, LayerZero has developed a new mechanism called Proof of Donation. This method allows participants to claim ZRO tokens by donating to the Protocol Guild, a funding mechanism for Ethereum Layer 1 R&D. Donations are in the amount of $0.10 in stablecoins or ETH. The LayerZero Foundation matches all donations to the Protocol Guild, up to a maximum of $10 million.

Sybil Detection

To ensure a fair distribution of tokens, LayerZero implemented a three-step process to exclude Sybil users who exploit the system with multiple addresses. Sybil activity is targeted. Sybil users have the opportunity to self-report and receive 15% of their expected allocation. Those who do not report are publicly listed and others may report them for a bounty. The Sybil detection process was done in collaboration with LayerZero, Nansen, and Chaos Labs. This initiative successfully filtered out Sybil farming, revealing the true usage of the protocol, as shown in this report.

Ecosystem

Network Integration

In Q2 2024, LayerZero added support for over a dozen new networks, bringing the total to 83, including Solana, TRON, Sanko GameCorp, ebi.xyz, Sei Network, Taiko, Skale Network, Humanity Protocol, Merlin Chain, Camp, and Oasys. Support for Solana and TRON expands the number of supported non-Ethereum Virtual Machine (EVM) networks. Solana’s integration initially supported eight networks but expanded to a full mesh of networks supported by LayerZero. LayerZero V2 delivers on its vision of a full-chain protocol by expanding to networks with unique consensus and security models.

Application Integration

LayerZero surpassed 50,000 OApp deployments in the second quarter, with growth in applications in gaming, DeFi, AI, token issuance, and other areas that leverage its full-chain communications. Notable deployments include Woo Ecosystem, Soul Protocol, Phuture Finance, Anzen Finance, Myso Finance, Iskara, ether.fi, SatoshiSync, Ra1l, and Morpheus. Ether.fi is a liquid Ethereum re-staking platform that supports full-chain re-staking on multiple L2s including Blast, Base, and Linea. Ether.fi supports re-staking of over $500 million in ETH on L2. Deploying OApps has become more streamlined with tools like BCW Group’s LZ Genie, which features project creation, deployment, and DVN configuration setup.

On May 28, 2024, Stargate Finance launched Stargate V2, which features transaction batching to reduce costs, an Artificial Intelligence Planning Module (AIPM) for optimizing liquidity allocation, and Hydra Bridge-as-a-Service for bridging assets to newer chains. Stargate V2 supports 16 chains, including Ethereum, BNB Chain, Avalanche, Polygon, Arbitrum, and Optimism. The launch introduced Kaia as the first Hydra chain, enabling high-speed, low-fee asset transfers between Klaytn and other chains. After successful governance approval and audits, V2 pools and incentives went live on May 27, and full bridging functionality was enabled on May 28. Notably, Stargate was the first bridge launched on LayerZero, receiving over $500 million in assets on July 1, 2024.

Enterprise Integration

In May 2024, LayerZero Labs, in partnership with IntellectEU, facilitated the first Deposit vs. Payment (DvP) transaction using the LayerZero protocol. This transaction involved sending Swift MT messages between the Hyperledger Besu (private) and Polygon (public) blockchains. The DvP transaction was developed to seamlessly integrate existing financial institution infrastructure with blockchain technology. This collaboration adds to LayerZero’s existing partnerships with major financial institutions, including JPMorgan Chase and Apollo’s Onyx Digital Assets, as well as Avalanche’s Evergreen Subnet, Spruce.

Game developer Ubisoft has partnered with Oasys and used LayerZero as an interoperability provider to develop its first blockchain-based game, Champion Tactics Grimoria. The collaboration leverages LayerZero’s full-chain interoperability protocol to enhance cross-chain capabilities, enabling players to securely own and trade unique digital assets on different blockchain networks.

DVN Integration

There are over 35 DVNs available on LayerZero for application builders to use. This includes a diverse set of validator solutions, including zk-tech like Polyhedra and Lagrange, validator-based teams running DVNs like Nethermind, multi-party computations (MPCs) like Zenrock, enterprise validators like Google Cloud, and application-owned DVNs like Abracadabra and Tapioca. Symbiotic recently announced a DVN to facilitate L2 staking for Ethena Labs.

Additionally, teams can build DVN adapters as a feature in V2, which enables applications built on LayerZero to leverage third-party validators (such as bridges, oracles, and middlechains), Chainlink, and Axelar as DVNs. LayerZero Labs provided initial DVN adapters for CCIP and Axelar; however, this is a permissionless task, as shown by multi-bridging solution Hashi building its own DVN adapter. This provides a way to scale by integrating external validators in the LayerZero ecosystem.

Upcoming Events

Expanding into the Cosmos Ecosystem

Solana Tron and Aptos are among the first non-EVM Layer-1s supported by the LayerZero protocol. LayerZero Labs has partnered with Initia Labs to explore extending full-chain support to the Cosmos chain. These extensions demonstrate LayerZero’s commitment to standardizing interoperability between different blockchain ecosystems.

Summarize

LayerZero made significant progress in the second quarter of 2024, especially with the launch of its native token ZRO, which had a significant impact on the Arbitrum network, with daily revenue surging to $3.4 million and transaction fees increasing from under $0.01 to $0.87. The total value of assets transferred fell 26% month-on-month to prevent Sybil mining, but the average value per message increased 78.2% to over $400. LayerZero expanded its ecosystem, adding support for 12 new networks, and the number of OApp (full-chain application) deployments exceeded 54,000, with a total amount of money increasing by 10%. These advances in cross-chain interoperability, strategic partnerships, and innovative solutions continue to make LayerZero a key player in the full-chain messaging space.