The market is likely underestimating ZetaChain’s potential to become a general infrastructure in the field of chain abstraction.
Written by: Gou, Foresight News
At the end of last year and the beginning of this year, I wrote two articles to introduce ZetaChain. A few months later, I had some new ideas. Looking back at the two articles that were only theoretical, I actually felt that there were always some points that I didn’t fully explain, and I didn’t really understand the essence of ZetaChain.
In the past few months, ZetaChain has made a lot of remarkable progress: on the one hand, ZetaChain will gradually increase support for Solana, TON and Base in the future, and gradually complete the practice of its abstract concept of chain. As for the BTC it already supports, the recent discussion about WBTC being too centralized has become more and more intense. ZetaChain said it will insist on supporting the implementation of native Bitcoin applications in a decentralized way.
On the other hand, exchanges including OKX, Coinbase and Crypto.com have already or plan to add support for ZETA staking. Alchemy, Ledger, Tenderly, MintScan and Keplr are also gradually adding support for ZetaChain.
In terms of the protocol's own R&D iteration, ZetaChain has upgraded its universal L1 blockchain Gateway, UniversalKit, and new Localnet and Devnet networks. Gateway enables Universal Apps to connect natively to any blockchain, including Bitcoin, improving the user experience. UniversalKit provides ready-made React components for the Universal App interface, while Localnet and Devnet speed up development. According to ZetaScan data, ZetaChain has attracted more than 3.6 million independent wallets.
Especially after studying Delphi’s research report on ZetaChain, the author found that the current market is likely to underestimate ZetaChain’s potential to become a general infrastructure in the field of chain abstraction.
What is the real ZetaChain like?
In "How to add Omnichain interoperability to Bitcoin? ZetaChain provides a brand new answer", the author summarizes ZetaChain's cross-chain mechanism as "In simple terms, it can be understood as using the chain itself as a guarantee of the credibility of messages transmitted between chains. Blocks containing relevant messages can be confirmed after being packaged, and the large number of chains, widely distributed validators, and the assets pledged by the validators are the greatest guarantee of security."
At that time, I understood ZetaChain as using the chain as a relay for cross-chain message transmission. Now it seems that this statement is not completely wrong, but it does have a certain degree of inaccuracy. Interestingly, the actual mechanism of ZetaChain is more interesting than previously described.
Delphi also mentioned in the report that ZetaChain is actually more like an advanced version of THORChain. In Delphi’s own words, it is “THORChain with smart contract functionality”, but it is the smart contract functionality that has opened up the ceiling of imagination.
The implementation mechanism of THORChain is to use its token RUNE as the intermediary of the transaction, trade token A with RUNE on the THORChain chain, and then trade RUNE for token B. A and B come from two chains, which can be Bitcoin and Ethereum, but they are cross-chain tokens on THORChain. This model does not seem as convenient as most cross-chain solutions now, but it provides a good price support for the RUNE token. ZetaChain has borrowed this model. The transaction of the two tokens is not just using the chain to process cross-chain information, but actually minting ZRC-20 tokens for conversion on ZetaChain.
As to why this model has a lot of room for imagination, we will leave it aside for now and explain it later.
Data measurement: Compared with LayerZero and Wormhole, ZetaChain has lower cross-chain costs
In the full chain/chain abstraction track, it is natural to escape comparison with LayerZero and Wormhole. After the author's actual testing, it is found that ZetaChain's "seemingly more complicated process" mechanism actually makes the wear and tear of certain cross-chain transactions smaller.
First of all, LayerZero and Wormhole are essentially cross-chain bridges. They only support the transfer of a single token on different chains, such as the transfer of USDT on different chains, or the transfer of ETH between Ethereum and various L2s. However, ZetaChain relies on the chain as a hub and realizes the exchange of native assets on different L1s through its own liquidity pool, such as trading native ETH on Ethereum for native BNB on BNB Chain with one click, or trading native ETH for native SOL on Solana, etc. The intermediate process will be explained in detail later, but it does realize "one-click transaction" in terms of user experience.
If LayerZero and Wormhole want to realize transactions of different types of tokens, such as trading ETH on Ethereum for BNB on BNB Chain as just mentioned, they still need to rely on the DEX on the corresponding chain.
For now, if you want to simply cross-chain stablecoins or ETH between the EVM chain and L2, LayerZero is a good choice. Of course, this is also based on the fact that the chains supported by ZetaChain are still relatively limited. If it is a direct cross-chain transaction of different tokens, the advantage of ZetaChain is very obvious. Let's take the example of trading ETH on Ethereum for BNB on BNB Chain (ETH > BNB).
ZetaChain Transaction Fees
When using ZetaChain's cross-chain path (taking Eddy Finance as an example), the transaction fee for 1 Ethereum is only about US$0.3 (the ZetaChain on-chain gas fee shown in the figure below plus the gas fee required to execute the transaction on Ethereum).
LayerZero and Wormhole transaction fees
The same transaction, at the same time, using OmniSwap integrated with LayerZero, incurred fees including the cost of trading ETH for USDC on Ethereum through Uniswap of approximately $3.7;
I only have 0.03 ETH in my wallet, but it will not have much impact on the actual gas fee on Ethereum.
The cross-chain fee using LayerZero is about $1.5. Given that LayerZero currently supports converting some tokens to gas fees on the target chain, I tentatively assume that OmniSwap will include the transaction fees on PancakeSwap in the cross-chain fees, because the fees displayed on Stargate are slightly less than those displayed on OmniSwap:
Based on this, the same transaction, if it takes the path through LayerZero, the actual fee is about $5.2, which is much higher than the fee of executing the transaction through ZetaChain.
For Magpie integrated with Wormhole, the Gas fee is even higher, close to $10. When I took a screenshot of Magpie's transaction data, Ethereum's Gas was 2 GWei, which doubled compared to the 1 GWei Gas when comparing ZetaChain and LayerZero. The transaction fee on Uniswap also almost doubled. The transaction path is almost the same as the path of OmniSwap, except that the stablecoin cross-chain passes through LayerZero and Wormhole, so I will not go into details.
Cost differential analysis
Why is there such a huge difference in costs? Let me analyze the two paths in detail.
When explaining the path of transacting through ZetaChain, one thing that needs to be explained up front is how tokens are represented on Eddy Finance.
For native assets, Eddy directly uses their original names. For example, ETH and BNB refer to the native ETH on Ethereum and the native BNB on BNB Chain.
For ZRC-20 assets on ZetaChain, since they are cross-chain assets based on different paths, Eddy used the form of x.y to express them. For example, USDC.ETH means "USDC from Ethereum to ZetaChain", and USDC.BSC means "USDC from BNB Chain to ZetaChain".
When trading through ZetaChain, an ETH transaction for BNB goes through the following path:
ETH is cross-chained to ZetaChain through the ZetaChain cross-chain contract and is marked as ETH.ETH.
ETH.ETH is traded for BNB on ZetaChain through the liquidity pool on ZetaChain, and is represented as BNB.BSC in Eddy. The transaction path in between is ETH.ETH traded for ZETA, and ZETA traded for BNB.BSC.
Finally, BNB.BSC is cross-chained to BNB Chain through the ZetaChain cross-chain contract, and users receive native BNB on BNB Chain.
In the meantime, the fees are divided into 3 parts: ETH cross-chain from Ethereum to ZetaChain, transactions on ZetaChain, and BNB cross-chain from ZetaChain to BNB Chain. Since the cross-chain of ETH is only for generating ETH "wrapped tokens" on ZetaChain, the fees are very low, and the transaction fees on ZetaChain are so small that they are almost negligible, which is similar to most EVM-compatible Alt L1s. Therefore, the overall cost consumption is very low.
If the same transaction is executed through LayerZero, the path is:
ETH is traded for USDC via Uniswap on Ethereum.
USDC on Ethereum is converted to USDT on BNB Chain through Stargate cross-chain transactions.
USDT on BNB Chain is traded for BNB via PancakeSwap.
The process of generating fees includes transactions on Uniswap, Stargate cross-chain fees, and transaction fees on PancakeSwap.
There are two important points to note. First, if you simply cross-chain stablecoins, such as transferring USDT from Ethereum to BNB Chain, when using LayerZero-based Stargate, the amount of USDT you can get on BNB Chain needs to take into account the liquidity of the USDT pool to a certain extent, so the contract has relatively high computational requirements, which is also an important reason why the cost of cross-chain Stargate was abnormally high when it was first launched.
As for ZetaChain, it only needs to lock USDT in the Ethereum contract and then mint an equal amount of USDT on ZetaChain. The subsequent process, such as trading USDT.ETH on ZetaChain for USDT.BNB on the cross-chain to BNB Chain, also involves locking and releasing. Although there are more processes, the actual resources consumed are not many. Therefore, the author boldly speculates that if ZetaChain supports the corresponding tokens in the future, its cross-chain fee may be lower than, or at least not higher than, Stargate.
Perhaps the above example alone does not allow people to feel the huge gap, because the $5 cross-chain fee may still be within the acceptable range for most people. But this data is when Ethereum Gas is only in the single digit. If there is a situation similar to the extremely active on-chain activities in 2021, the difference in the handling fees of the two cross-chain transactions may be very exaggerated.
In addition, almost all cross-chain projects, including LayerZero, need to charge a certain amount of cross-chain fees to ensure the sustainable operation of the protocol, which makes projects including Axelar not support small cross-chain transactions because they may not be enough to pay the fees charged by the protocol. However, because ZetaChain has a chain, the protocol's income can come from Gas fees without charging fees for cross-chain transactions, which greatly reduces the fees that users need to bear.
The positive flywheel brought by token empowerment
Delphi’s report on ZetaChain is very detailed, and anyone interested can read it in depth. The author would like to point out a point that may have been barely noticed in the current market, which is the positive flywheel that can be brought about by empowering tokens.
I rarely like to use the term "positive flywheel" because in most cases the term is overstated, but ZetaChain does deserve this term. In most cross-chain and Omnichain projects, the emergence of tokens does not actually bring much benefit to the project itself. The only benefit for holders is to stake and then get a certain share of the cross-chain handling fees.
But ZetaChain’s token design completely breaks away from this inherent framework. As mentioned above, the mechanism of ZetaChain is similar to that of THORChain, so when you see the liquidity pool on ZetaChain, you will find that there are no two tokens other than ZETA that have established a separate liquidity pool.
This is the cleverness of ZetaChain's design. The actual cross-chain process is to first allow the token to cross the chain to ZetaChain, complete the transaction on ZetaChain, and then cross the chain to the target chain. The cross-chain process itself is "lossless" because it does not involve liquidity. It is just a process similar to "encapsulation". On ZetaChain, all tokens need to establish a liquidity pool with ZETA, which means that A token is traded for ZETA, and ZETA is traded for B token. ZETA tokens have become an indispensable part of the cross-chain link. Therefore, the more ZetaChain's cross-chain is used, the higher the demand for ZETA. The high demand for ZETA pushes up the price of ZETA, which can further increase the liquidity on ZetaChain and reduce cross-chain wear.
Therefore, its fee advantage will bring more cross-chain demand, and the demand will push up the price of ZETA. The increase in ZETA price will reduce wear and tear. This is a completely positive closed-loop model. Even if the market environment deteriorates, its fee advantage will still exist, and it can also reduce the degree of weakening of demand.
The wear and tear here actually goes back to what I said at the beginning: "underestimated by the market." Although the fee is low, it can be found that when trading 1 ETH for BNB, the amount of BNB that can be obtained through ZetaChain is much less than that using LayerZero. The reason is that the liquidity on ZetaChain is still low, and large cross-chain transactions may cause high slippage and wear and tear.
But it is precisely because of this that the liquidity on ZetaChain has become a gold mine to be mined. In addition, ZetaChain supports blockchains such as Bitcoin and DOGE that do not support smart contracts. Although the current market environment is not good and the power of the positive flywheel cannot be demonstrated, once the on-chain market has an application scenario with a very high wealth effect such as DeFi, ZetaChain may show its true value as the on-chain activities become active.
