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Portfolio Insights: LayerZero

Validated Venture

Introduction

It’s been evident for a while that the future of web 3 belongs to a multi-chain world with a plethora of modular and monolithic blockchain ecosystems. However, the user experience interacting with multiple chains has been problematic to say the least. Think about it — your assets on Ethereum have to be bridged across before you can use applications on Arbitrum, your NFTs can only exist on whatever blockchain you minted it on, the process of bridging is a huge headache with wrapped assets, expensive gas fees & waiting time.

What if your assets can exist interoperably between multiple chains? What if you can use applications across multiple chains without the need for bridges? What if there is a way that is easy for developers to deploy applications that utilize multi-chain assets? Those possibilities share the same idea that assets will no longer live in isolation in their native chains is a crucial omnichain future that LayerZero is building towards.

We believe in a future whereby users are able to use applications without even knowing which blockchain they are on. This is akin to how people in web2 are using Instagram, Tiktok, Google without the need to know whether they are hosted on Amazon Web Services or Microsoft Azure. The infrastructure layer that LayerZero is developing hopes to achieve this true interoperability vision to connect all layer 1s regardless of whether they are EVMs, IBC or any other systems. Users will no longer need to bother about whether popular applications like Aave or Compound are supported by their chain or not.

TLDR: Multi-chain is just the first step, what’s next is a vision of omnichain interoperability that we strongly share with LayerZero.

Introducing LayerZero

LayerZero is a generalized data messaging primitive protocol that enables cross-chain communication between applications. The goal is essentially to move information across chains in a secure and easy manner. Using “LayerZero Endpoints” (light onchain user-facing clients made up of smart contracts that act as a communicator, validator and network) on both chains, users can communicate across chains in a single trustless and secure transaction.

LayerZero uses a combination of an Oracle (Chainlink) and a Relayer (LayerZero reference implementation) to convey messages between Layer Zero endpoints on connected chains. Note that anyone can take on the role of Oracle and Relayer — the idea is to be independent, open and permissionless. The Oracle posts block headers from the source chain onto the destination chain, while the Relayer posts transaction data and transaction proof. Ultimately, Oracle and relayers should stay independent and not collaborate with each other.

Infinite possibilities

The beauty of the LayerZero architecture is that it allows users and developers to execute anything they want via smart contracts across chains. Think swapping, bridging, moving NFTs, gaming, social and many more. Let’s take a look at a few use cases below.

Bridging & Swapping

The most common model of bridges would be the lock & mint mechanism probably due to the ease of implementation. The biggest shortcoming of these bridges is that they are unable to send native assets across different chains. Instead, most rely on an intermediate wrapped asset. There are also well-documented issues surrounding bridges such as lack of liquidity, high slippage, high fees, long waiting time etc. which makes the entire user experience very unpleasant.

Stargate is built atop of LayerZero that enables the transactions to seamlessly transfer across chains. It is the first protocol that solves the bridging trilemma. With Stargate, users & applications can transfer native assets cross-chain while accessing the protocol’s unified liquidity pools with instant guaranteed finality. This means you don’t have to deal with wrapped assets — for instance you can easily swap USDC on Ethereum for USDT on Arbitrum. Stargate has since surpassed 1 million transfers and over 4.5 billion in transaction volume since launch. Applications such as Sushiswap have also deployed on top of Stargate that allows users to natively swap assets without having to bridge assets across first. A notable impressive feature is also gas abstraction — users only need their source chain native gas token for transactions across multiple chains which solves a massive pain point for users when swapping assets.

Moving tokens across chains — Omni Fungible Tokens

Similar to bridging, moving tokens across different chains typically involve wrapped non-native tokens which affects the composability and also the fragmentation of liquidity. For instance, UNI tokens on Ethereum and UNI tokens on Avalanche are two different assets and can’t be used interoperably in applications. For long tail tokens, this might result in differing prices due to illiquidity.

LayerZero seeks to solve the above problems by pioneering Omnichain Fungible Tokens — a new type of token that is composable on all of LayerZero’s integrated blockchains. For instance, Trader Joe integrated with LayerZero to launch JOE as an omnichain token. JOE became a truly native, multichain token that can be bridged across Avalanche, Arbitrum, BNB and beyond.

Another interesting example is how Pendle used LayerZero to deploy omnichain veTokenomics. For instance, Pendle users can sync their vePENDLE balance from Ethereum across all the supported chains like Arbitrum. In such a manner, veTokenomics is not isolated across different chains anymore and users will be able to boost rewards on any Pendle pools easily no matter the chain

Moving NFTs across chains — Omni Non-Fungible Tokens

Similar to the above example, NFTs no longer have to exist in isolation to their native ecosystem — NFTs can move across chains such as Ethereum, Polygon and Solana. For instance, Pudgy Penguins announced that with LayerZero’s omnichain technology, Lil Pudgys can now travel seamlessly between multiple chains, starting off with Polygon, BNB Smart Chain, and Arbitrum. NFT projects can have access to the liquidity and users from other ecosystems without having to fragment their user base by launching an entirely new project on another chain.

Derivatives Trading

One of the main problems of DEXes is the lack of liquidity. Rage Trade seeks to solve this problem by building on top of LayerZero to bridge all ETH/USD yield generating pools like GMX, Sushiswap etc. to provide recycled liquidity on Rage Trade via LayerZero. In other words, Rage Trade is able to use LP tokens from other chains like Polygon, Avalanche, Solana etc. to serve as liquidity on Rage Trade’s Arbitrum chain. Using the 3CRV vault as an example, when 3CRV LP token is used as collateral on Chain A, we are able to mint virtual liquidity into Rage Trade on Chain B.

Money markets

In terms of lending and borrowing — users are able to deposit collateral on the first chain to borrow another asset on the second chain via cross chain messaging. Using LayerZero messaging and Stargate’s stable router interface, Radiant Capital allows users to deposit any assets on Arbitrum and BNB and instantly borrow any asset across LayerZero supported blockchains. For instance, you can collateralize ETH on Arbitrum and borrow USDT on Avalanche. Once again, this enables true omnichain asset interoperability as well as allowing more liquidity to be unlocked across chains.

The Future

As developers continue to explore new omnichain use cases, we are also anticipating new applications that can be built using LayerZero such as NFT financialization, yield aggregators, omnichain wallets that don’t require change of RPCs, gaming, social, DID and many more.

All in all, we are incredibly excited about LayerZero’s vision to enact better user experience for true interoperability in the web 3 ecosystem. LayerZero has exceeded a whopping 3 million plus messages sent and also executed the swift expansion to over 40 chains including non-EVM ones like Aptos and Solana. The traction that they have already achieved with Stargate and other top protocols and projects like Sushiswap, Trader Joe, Pudgy Penguins is testament to excellent product market fit and highly efficient implementation by the stellar team led by Bryan Pellegrino, Ryan Zarick, Caleb Banister, Ari Litan, Irene Wu and more.

Article Contributors: Henry Ang, Mustafa Yilham, Allen Zhao & Jermaine Wong

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