Franklin

Stargate Finance

Radiant

Radiant Capital

<h2 class="wp-block-heading" id="header-0">Introduction</h2>



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 and in the pursuit for a better bridging solution, LayerZero was born.



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.



<figure class="wp-block-image"><img decoding="async" src="https://academy-public.coinmarketcap.com/optimized-uploads/972952f255534b96bc9ef365d9333b19.png" alt=""/></figure>



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. 



<h2 class="wp-block-heading" id="header-1">What is LayerZero?</h2>



<a href="https://coinmarketcap.com/alexandria/article/what-is-layerzero-omnichain-protocol">CoinMarketCap</a> explains LayerZero as an omnichain interoperability protocol, that is using a unique communication primitive to link blockchains seamlessly for a variety of purposes.



<figure class="wp-block-image"><img decoding="async" src="https://academy-public.coinmarketcap.com/optimized-uploads/4383c9b36fe0454b9b53225aad23a3ae.png" alt=""/></figure>



Source: LayerZero Medium (<a href="https://medium.com/layerzero-official" rel="noreferrer noopener" target="_blank">link</a>)



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?



<h2 class="wp-block-heading" id="header-2">How does LayerZero work?</h2>



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.



<figure class="wp-block-image"><img decoding="async" src="https://academy-public.coinmarketcap.com/optimized-uploads/1c83086f54b544538d40519c6d20d884.png" alt=""/></figure>



Source: LayerZero Whitepaper (<a href="https://layerzero.network/pdf/LayerZero_Whitepaper_Release.pdf" rel="noreferrer noopener" target="_blank">link</a>)



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.



<h2 class="wp-block-heading" id="header-3">Use cases of LayerZero</h2>



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.



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.



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Source: Sushi



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.



<figure class="wp-block-image"><img decoding="async" src="https://academy-public.coinmarketcap.com/optimized-uploads/73886d906e0046988d3eb1c7fd916460.png" alt=""/></figure>



Source: Radiant Capital



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 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.



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.



<figure class="wp-block-image"><img decoding="async" src="https://academy-public.coinmarketcap.com/optimized-uploads/54385199097f46f993db020195c8333b.png" alt=""/></figure>



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.



<figure class="wp-block-image"><img decoding="async" src="https://academy-public.coinmarketcap.com/optimized-uploads/10e12ac33d044414b9bc5185a3fc1f4c.png" alt=""/></figure>



Source: LayerZeroCorner (<a href="https://twitter.com/L0_Corner/status/1633573504523161602" rel="noreferrer noopener" target="_blank">link</a>)



<h2 class="wp-block-heading" id="header-4">LayerZero investors</h2>



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



<figure class="wp-block-image"><img decoding="async" src="https://academy-public.coinmarketcap.com/optimized-uploads/998670033d114ead9fff765aceba2b52.png" alt=""/></figure>



Source: LayerZero Twitter



In fact, they have just 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.



<h2 class="wp-block-heading" id="header-5">Conclusion</h2>



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.



As a CMC Media VIP, Micky will keep following the <a href="https://coinmarketcap.com/" target="_blank" rel="noreferrer noopener">CoinMarketCap</a>’s 2023 Crypto Playbook – so stay tuned! Read April W2 technical analysis of best performer coins <a href="https://micky.com.au/april-w2-analysis-btc-eth-near-ada-ftm-avax/" target="_blank" rel="noreferrer noopener">HERE</a>.
The post <a rel="nofollow" href="https://micky.com.au/what-is-layerzero-omnichain-protocol/">What Is LayerZero? Omnichain Protocol</a> appeared first on <a rel="nofollow" href="https://micky.com.au">Micky</a>.

What Is LayerZero? Omnichain Protocol

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