What Is LayerZero? Omnichain Protocol
Tech Deep Dives

What Is LayerZero? Omnichain Protocol

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10 months ago

A deep dive into LayerZero, a protocol supporting and providing the infrastructure for an interoperable and omnichain crypto ecosystem.

What Is LayerZero? Omnichain Protocol

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Potential LayerZero Airdrop?

Although the team has not confirmed an official airdrop, many are speculating that there will be a potential ZRO airdrop in the near future. LayerZero's omnichain bridge — Stargate volume soared as airdrop farmers ramp up their efforts in hopes of being eligible. Airdrops have become a popular way for blockchain projects to build a loyal following and provide ROI for investors, as seen in the Arbitrum, Aptos and Blur airdrops.

Recently, on July 13, speculations of an imminent LayerZero (ZRO) token airdrop ran high, after on-chain sleuths noticed an alleged deployment of the LayerZero token on mainnet. However, it was soon discovered to be a spoofing scam, where the attacker effectively switched out the sender address to the official LayerZero Deployer, making it seem like the official team launched the token.

View post on Twitter

Despite this, many in the crypto space are still gearing up for the LayerZero airdrop, with transactions, or messages, in the LayerZero ecosystem hitting over 44M and growing exponentially. Most believe the airdrop will likely occur in Q4 of 2023 or Q1 of 2024.

Source: https://layerzeroscan.com/

Airdrop or not, the LayerZero team has been constantly shipping and growing its ecosystem. Let's dive into what LayerZero is, how it works and look at some of the use-cases and protocols!

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Introduction

Since the launch of Bitcoin in 2008, the crypto space has seen an explosion in the number of new blockchains launched since then, with hundreds of live blockchains today. In this multichain environment, it is no surprise that liquidity eventually became fragmented across the various chains, resulting in chains being siloed from one another.

Source: DeFiLlama

As such, bridges were designed as a key piece of infrastructure to link chains to each other, enabling liquidity to flow from one chain to another. However, bridges have also proven to be one of the hardest decentralized applications (DApps) to secure. In 2022, according to blockchain analytics firm, Chainalysis, out of the $3.1 billion stolen from DeFi protocols, 64% of these funds were lost to exploits of bridging protocols. In the pursuit for a better bridging solution, LayerZero was born.

What Is LayerZero?

LayerZero is an open-source omnichain interoperability protocol that enables multiple blockchains to communicate cross-chain and share information seamlessly. It is an interoperability protocol that uses a novel technique to make it easier for different blockchain networks to connect with each other.

Source: LayerZero Medium (link)

In simple terms, LayerZero enables all supported blockchains to communicate with each other easily, hence, enabling features such as swaps, transfers, borrowing, lending, and more across different blockchains.

But how does LayerZero work under the hood?

How Does LayerZero Work?

LayerZero Endpoints

LayerZero deploys a set of smart contracts on each supported chain, known as LayerZero Endpoints. These smart contracts link up all of LayerZero’s supported chains and can be easily deployed on new chains to include them into LayerZero’s network.
Take an example of cross-chain borrowing, where a user is attempting to borrow USDC on the Avalanche blockchain against their deposited WBTC balances on Ethereum. The user first initiates the action on Ethereum, where the transaction details are sent to the LayerZero Endpoint on the chain.
LayerZero works on the premise that if two independent entities can corroborate that a transaction on Chain A is valid, then Chain B can be sure that the transaction on Chain A is valid and hence fulfill the transaction on Chain B. In the above case, Chain A is Ethereum and Chain B is Avalanche. The two independent entities are known as the Oracle and the Relayer, which are both off-chain and independent. The Endpoint on Ethereum sends the details of the transaction to both of these entities.

Source: LayerZero Whitepaper (link)

The Oracle then produces the block header for the transaction based on the details received, while the Relayer independently generates the proof for the transaction. If both the block header and proof agree with each other, this means that the transaction is valid. Once this is proven, a message will be sent over to Avalanche to complete the transaction. In this scenario, the appropriate amount of USDC is deposited to the user’s wallet, thereby completing the cross-chain borrowing transaction.

However, the use of the Oracle and Relayer has been criticized by certain DeFi users as there is a risk to the security of the platform in the event that the Oracle and Relayer are not indeed independent and have colluded to deceive the other users.

Ultra Light Node

LayerZero uses an Ultra Light Node (ULN) and decentralized oracles to securely transfer messages between chains without requiring a middleman chain or expensive on-chain light nodes.

Modular and Scalable

LayerZero is modular and extensible, allowing for adding new chains and functionalities without requiring modifications to the core protocol. This makes it a more flexible and scalable solution compared to other approaches that may require significant changes to the protocol when it comes to adding new chains.

Use Cases of LayerZero

Bridging

The most direct application of LayerZero’s technology lies, of course, in bridging. In fact, the first DApp built on LayerZero was the bridging protocol, Stargate Finance. Stargate Finance is an omnichain bridging protocol, supporting transfers across eight L1 and L2 chains: Ethereum, BNB Chain, Avalanche, Polygon, Fantom, Arbitrum, Optimism and Metis.

Cross-chain Swaps

Beyond bridging, LayerZero also enables cross-chain swaps. Decentralized exchanges (DEXs) such as Sushi, Hashflow, WOO Network and more have already integrated LayerZero’s solutions to allow multichain swaps to their supported chains.

Source: Sushi

Cross-chain Borrowing

In a similar manner, money market protocols can implement LayerZero’s technologies to enable cross-chain borrowing. Radiant Capital, which is deployed on Arbitrum and the BNB Chain does just that, with users who deposit with them being able to borrow on any of LayerZero’s eight supported chains.

Source: Radiant Capital

Omnichain Fungible Tokens

Beyond the usual DeFi functions, certain multichain projects have taken it a step further, turning their own native tokens into omnichain fungible tokens (OFTs). Projects that have deployed across multiple chains such as Trader Joe have turned their token omnichain, leveraging LayerZero to enable smooth 1:1 native token transfers across the chains they are deployed on.

Cross-chain Governance

Cross-chain governance is also made possible with LayerZero, with yield tokenization protocol, Pendle, enabling cross-chain voting, reward accrual and reward boosting for users who locked the PENDLE token as vote-escrowed PENDLE (vePENDLE). Multichain governance support will likely become increasingly important too, in the coming years, to support the rising popularity of multichain protocols.

Omnichain NFTs

Finally, with OFTs deployed, it is no surprise that omnichain non-fungible tokens (ONFTs) have found adoption too. Most notably, the popular NFT collection, Pudgy Penguins, have opened a bridge with LayerZero, allowing one of their subcollections, Lil Pudgys, to be bridged to Arbitrum, Polygon or the BNB Chain. Projects like OmniX have also begun to develop ONFT infrastructure such as ONFT trading, bridging and launchpad features for the NFT space too.

Source: Pudgy Penguins website

Today, LayerZero has just surpassed four million messages sent on their protocol, securing over $7 billion in total value locked (TVL), and processing just over $6 billion in transactional volume across almost 80 DApps.

As LayerZero matures as a product, more innovative products will likely continue to be developed on their technology, further enabling new features for the space.

Source: LayerZeroCorner (link)

LayerZero Investors

LayerZero is backed by some of the largest names in the space, including Sequoia, a16z and Coinbase Ventures.

Source: LayerZero Twitter

They have closed a Series B funding round in early April 2023, raising $120 million at a $3 billion valuation, which is triple their valuation from the year prior. The raise included the support of several high-profile backers, including more traditional names like Franklin Templeton and Christie’s.

Conclusion

As protocols go increasingly multichain, the need for reliable bridging and interoperability between chains have never been higher. LayerZero continues to support and provide the infrastructure for an interoperable and omnichain crypto ecosystem.

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