LD Capital: The Future Path and Star Projects of Layer Zero Cross-Chain Innovation

I. What is Cross-Chain Interoperability?

The current trend in blockchain development is multi-chain parallelism, but the blockchain itself does not have the ability to communicate with external systems or APIs, data and value cannot be transmitted across networks without obstacles, so it leads to the isolation of the ecosystem, where they cannot exchange information with each other.

From a developer’s perspective, each deployment constitutes an isolated independent entity, resulting in no connection between backend contracts, and they are not aware of each other’s existence. For example, a decentralized exchange (DEX) DApp may need to be deployed on Ethereum, BNB Chain, and Polygon networks separately, so each version of the DApp is independent of each other.

来源：Chainlink

For users, this multiple deployment method also increases the difficulty of adoption:

1. Users cannot seamlessly transfer tokens from one blockchain to another.
2. The transfer process is time-consuming and not user friendly, because assets are usually destroyed on the source blockchain, and then re-minted on the target blockchain using a third-party bridge.
3. The security risk of holding assets on multiple blockchains is also high, which is easily attacked by hackers, leading to the loss of assets.

Given the diversity of blockchain ecosystems, it is crucial that these different chain environments are able to interact and communicate with each other. The key part of the infrastructure for exchanging data and assets between different blockchains is the cross-chain interoperability protocol. Cross-chain interoperability allows developers to build a unified cross-chain application, i.e. the same dApp can be deployed on multiple different blockchains, without having to deploy multiple independent versions of code on different chains, releasing higher capital efficiency and better liquidity conditions.

II. Cross-Chain Solutions

Cross-chain solutions typically involve verifying the state of the source blockchain and relaying subsequent transactions to the target blockchain, a key part of its infrastructure is the cross-chain bridge, which allows assets to be transferred from the source blockchain to the target blockchain. Cross-chain bridges typically involve locking or destroying assets on the source chain through smart contracts, and unlocking or minting them through another smart contract on the target chain. In fact, the use case of cross-chain bridges is very narrow, and their role is to transfer assets between different blockchains. Therefore, cross-chain bridges are usually application-specific services between two blockchains.

Currently, developers have built a variety of cross-chain solutions, such as:

l Chainlink is developing a Cross-Chain Interoperability Protocol (CCIP), which is an open-source standard that supports cross-chain communication (including sending information and token transfers). The goal of CCIP is to achieve universal connectivity among hundreds of blockchain networks using standardized interfaces, with the hope of reducing the complexity of building cross-chain applications and services.

l The Wormhole protocol is a universal interoperability protocol that enables the transfer of tokens and messages across different blockchain networks. Network guardians monitor information on the source chain and validate it, facilitating its transfer to the target chain. Developers using Wormhole can build cross-chain decentralized applications known as XDApps.

l The Inter-Blockchain Communication (IBC) protocol is the standard protocol for blockchain interaction in the Cosmos network, aiming to achieve interoperability between different blockchains. IBC defines a set of minimal functions specified in the Inter-Chain Standards (ICS), which define how blockchains communicate and exchange data with each other.

l LayerZero is a full-chain interoperability protocol for lightweight information transfer between blockchains, providing secure, reliable, and trustless information transfer.

This article mainly introduces the full-chain interoperability protocol LayerZero, which only focuses on information transfer between chains. It can send messages to any smart contract on any supported chain, that is, it is responsible for smart contract communication between blockchains. It is not responsible for cross-chain assets, which are completed by Stargate developed by LayerZero Labs.

III. Features and Advantages of LayerZero Technology

1. Features

The most prominent feature of LayerZero is its ultra-lightweight nodes. Using ultra-light node technology, it transmits messages between endpoints of different chains through relayers and oracles, reducing costs while ensuring security.

1）Ultra-lightweight Nodes

First of all, every node in the blockchain network is actually a computer or server terminal that stores data. A light node is just one mode of operation of a node. Unlike a full node, a light node only stores a small part of the blockchain data, such as block headers and some other information, and does not store specific transaction information within the block. Ultra-light nodes are similar to light nodes in their verification methods, but because the cost of writing into the blockchain is high and the continuous transmission of block headers is expensive, ultra-light nodes do not retain all block headers. Instead, they stream (these block headers) on demand through oracles, thereby more efficiently synchronizing off-chain entities to achieve the required state, changing the original continuous streaming transmission method.

The advantage of this is that it does not depend on the block header data stream starting from scratch by the light node, but the disadvantage is the lack of historical sequential data stream. Once the oracle and the relayer act maliciously at the same time and pass the verification, it will lead to the execution of malicious information. Therefore, LayerZero has made a trade-off between a significant reduction in verification costs and a certain degree of security loss. Whether the trade-off is worth it may depend on how it balances based on the scenario.

2）Core Components

In LayerZero official whitepaper, the core components responsible for information transmission between two chains are the Endpoint, Oracle, and Relayer.

Endpoints are facilities that interact directly with users or applications, responsible for handling message transmission, verification, and reception. Their purpose is to ensure effective transmission when users send messages using the protocol. In the LayerZero protocol, each chain needs to deploy endpoints. These endpoints can also be called by other apps on the same chain to send information to external chains.

Oracle is a third-party service that provides a mechanism independent of other LayerZero components. It can read a block header from one chain and send it to another chain, so that the validity of transactions on the source chain can be verified on the target chain. LayerZero currently uses Chainlink as its oracle.

Relayer is a kind of off-chain service, similar in function to the oracle, but it does not fetch block headers, but fetches proofs of specific transactions. To ensure effective transmission, the only requirement is that for any given message sent using the LayerZero protocol, the oracle and the relayer must be independent of each other. Any entity can take on the role of the oracle and the relayer, and LayerZero can even implement its own relaying service.

An important trust assumption in LayerZero is that the oracle and the relayer operate independently of each other. The block header submitted by the oracle will be cross-verified with the transaction proof submitted by the relayer, and the two do not form any consensus but only transmit messages. Simply put, the oracle acts as a notary in LayerZero’s cross-chain, letting the target chain know the result of the verification, while the relayer is responsible for providing the proof process required for transaction verification and the specific content of cross-chain information. To ensure the effective transmission of information, if there is any dispute in the information transmission between the relayer or the oracle, then the smart contract will pause and will not submit the information to the target chain.

Refer to 《Detailed Explanation of Interoperability Protocol. LayerZero Technology and Features》

If a transaction is to be crossed from Chain A to Chain B, the overall process is probably as follows:

This transaction will start once the user launches the application, and then with the assistance of the oracle and the relayer at the LayerZero endpoint, the transaction will be broken down into multiple parts (proofs and block headers). Once the oracle and the relayer send their respective information (signing the transaction on-chain) on the target chain, and the LayerZero Endpoint (contract) verifies the correctness of the information, the message will be transformed and executed on the target chain.

2. Advantages

1）Security

As a base protocol, the security of LayerZero is independent of external protocols, ensuring the stability of the entire protocol consensus. In addition, thanks to the unique design of the oracle and the relayer, they are independent of each other and the transaction will only be completed when both are considered to be true, ensuring the security of information transmission.

2）Scalability

LayerZero, as a universal message-passing layer, means that any contract can be transferred from chain A to chain B to achieve cross-chain interoperability with the layer one network. Through innovative endpoint design, LayerZero can be easily expanded to support any chain, bringing a wider range of application scenarios to the blockchain ecosystem.

3）High efficiency

Firstly, LayerZero’s ultra-light node technology enhances transmission efficiency while simultaneously reducing the cost of validation, without compromising on security. Secondly, the relayers or oracles in LayerZero do not engage in any form of consensus; they merely facilitate message transmission. All validations are executed on the target chains themselves. As a result, the limitations on speed and throughput are entirely dictated by the attributes of the two interacting chains.

IV. Fundraising

LayerZero has completed three rounds of fund-raising, accumulating a disclosed total of $293 million. Prominent investors include well-known crypto investment institutions such as Multicoin, Binance Labs, a16z, and Sequoia Capital. The most recent funding round occurred on April 4, 2023, raising $120 million at a valuation of $3 billion.

FTX was the lead investor in a Series A funding round on March 30, 2022. Due to unforeseen disruptions associated with FTX, LayerZero officially announced on November 11, 2022, that it had fully repurchased all equity, token rights, and other agreements from FTX.

来源：Crunchbase

V. Ecosystem

As of now, LayerZero supports more than 20 different chains, including but not limited to Ethereum, BNB Chain, Avalanche, Polygon, and Base. The number of independent users has reached 3 million, and the cumulative number of transactions has reached 56 million. However, 35% of these users have only a single transaction record, and approximately 730,000 users have more than two interactions.

来源：Dune Analytics

Most user activity is concentrated on BNB Chain, Arbitrum, and Polygon. Notably, community interest in airdrops spiked after Arbitrum launched its native token, which in turn significantly elevated user activity on LayerZero.

来源：Dune Analytics

For example, Arbitrum’s transaction volume reached about 12 million in total. The peak of user activity was in April 2023, but it has since declined slightly as the overall market sentiment cooled.

来源：Dune Analytics

LayerZero’sLayerZero’s minimalist infrastructure offers boundless potential. Its user-friendly developer integration has led to more than 50 dApps either already integrating or in the process of adopting LayerZero’s technology.

来源：Twitter

Star Projects

1. Stargate Finance

Developed by LayerZero Labs, this is the first dApp based on the LayerZero protocol. It has built the first fully composable native asset bridge with the vision of making cross-chain liquidity transfer a seamless, unified process. The product features a unique “Delta Algorithm” to solve the “Impossible Triangle” inherent in cross-chain bridges, without any compromises.

According to the Stargate team, the “Impossible Triangle” for cross-chain asset bridges consists of:

1）Instant verification: assets can successfully move to the target chain upon transaction confirmation, ensuring timeliness.

2）Unified liquidity: a single liquidity pool shared across multiple chains.

3）Asset nativity: users obtain native assets directly through the cross-chain bridge, rather than synthetic or wrapped assets.

Of course, in order to guarantee immediate verification confirmation and asset nativeness, if we do not involve more complex liquidity dynamic allocation algorithms, we can only build a liquidity pool between every two chains. This will reduce capital efficiency.

According to Defilama data, Stargate ranks first among all cross-chain bridge protocols in terms of trading volume in the past month, with up to 96,000 transactions in 24 hours.

来源：defillama

Protocol Revenue

Stargate was the first dApp to launch on LayerZero. Its protocol fees and revenue have been steadily growing since March 2023, particularly as on-chain transaction activity has significantly increased due to airdrop expectations. The current monthly revenue of the protocol exceeds $1 million USD.

来源：Token Terminal

Economic Model

The STG token has a total supply of 1 billion, with 200 million in circulation. The token functions are:

1）Cross-chain transfer fees: Non-STG token transfers incur a 0.06% fee, of which 0.045% is distributed to liquidity providers and 0.015% to the protocol treasury.

2）Governance: By staking and locking STG tokens from 3 to 156 weeks, one can receive governance tokens veSTG. The longer the lock period, the greater the voting weight.

3）Protocol rewards: Stablecoin liquidity pools and liquidity mining rewards.

The token was launched on March 17, 2022. Initial allocation details are as follows:

来源：tokenunlocks

Tokens directly unlocked at launch for early DEX liquidity, Bonding Curve, initial release plans, and the community total 478 million.

For the part allocated to protocol initiation, 5% (50 million) are directly released, the remaining 10% has a one-year lock-up, followed by linear release over six months. 145 million have been released so far.

Investor and team allocations have a one-year lock-up and two years of linear release.

Based on the token allocation, the nominal issuance of STG has reached 729 million. According to the STG address distribution, it can be clearly seen that the 304 million allocated to the community currently has 297 million uncirculated, and the part allocated to investors and the team has 320 million uncirculated. These two parts have a total circulation of about 67 million, accounting for about 6.7%.

In terms of holding address distribution, the top 20 holders account for 94% of holdings. The two largest addresses are officially held and not yet in circulation, accounting for 62%. Excluding these, the remaining address holdings account for 32%, with Alameda holding 9.42% and individual large holders accounting for only 0.6%.

Alameda co-CEO Sam Trabucco has stated on social media that Alameda Research participated in the public issuance of the cross-chain bridge project Stargate on March 18 and purchased all available STG shares (100 million, which is the 10% mentioned for protocol initiation). However, he mentioned that Alameda will not sell STG within 3 years and will make long-term investments in the project and team, while abstaining from governance voting, allowing voting power to be more equally distributed among early community members. Currently, 9.42% has been released.

2. Radiant Capital

Radiant is a cross-chain DeFi lending protocol that uses LayerZero as its cross-chain infrastructure to implement cross-chain leverage lending and composability, allowing users to gain leverage in DeFi protocols it supports and simplify cross-chain lending of assets between different chains.

Radiant is essentially similar to the operating mechanisms of current lending protocols such as Aave and Compound, but the difference lies in its goal of being a cross-chain lending protocol, where users can deposit collateral on chain A and then borrow on chain B. However, when users need to use cross-chain lending services, they need to first deposit a certain amount of assets on the supported chain to become a dynamic liquidity provider (dLP), and then they can lend the required assets on the target chain.

Radiant is currently deployed on the Arbitrum and BSC chains, with a TVL of $2.2 billion. It ranks relatively high among other lending protocols and has already gained a certain market share, becoming the leading lending protocol on Arbitrum.

Protocol Revenue

In Radiant, protocol revenue (Revenue) = fees paid by borrowers (Fees) - interest on deposits (Supply-side fees). Since February this year, the protocol has been generating fees of around $2 million per month, and monthly protocol revenue has reached around $1 million.

来源：Token Terminal

Economic Model

The total supply of RDNT tokens is 1 billion, with 300 million currently in circulation. The primary utility of these tokens is governance and liquidity incentives.

According to Token Unlock data, the portions allocated to Pool 2 liquidity providers, the Treasury, and the Radiant DAO reserve have been fully unlocked. The ongoing unlocking involves the team, core contributors, and lending and borrowing incentives. Specifically, the portion designated for lending and borrowing is being released at a rate of 4.85 RDNT per second. Calculated at this rate, approximately 210,000 tokens are released monthly.

As for token distribution, the top 20 token addresses hold 92.3% of the total. The number one address is the official contract address, which still has 23.4% yet to be distributed. Tokens held in DEXs make up 27.6% of the total, and the holdings of the top 20 large addresses account for just 3.8%.

Roadmap

The Radiant team has disclosed a simplified roadmap in their documentation, currently at its version 2.0 stage. The primary focus is the deployment of Radiant’s cross-chain capabilities and the expansion of collateral scale within the application. In Version 3, the plan is to eliminate dependency on the third-party cross-chain bridge, Stargate, and to fully integrate LayerZero. Version 4 aims to achieve full-chain liquidity lending.

Summary

Multi-chain is the development trend of blockchain, and cross-chain interoperability protocol is a key component for communication between blockchains. It has a broad development prospect. LayerZero is still in its early development stage, and the number of native projects that can participate is relatively limited. However, it has the support of numerous well-known investment institutions, and abundant industry resources. The anticipated token issuance is expected to attract the attention of the entire crypto market.

Reference

1. 《详解互操作协议 LayerZero 技术与特性》(Detail Explanation of Interoperability Protocol. LayerZero Technology and Features)

LD Capital is a leading crypto fund who is active in primary and secondary markets, whose sub-funds include dedicated eco fund, FoF, hedge fund and Meta Fund.

LD Capital has a professional global team with deep industrial resources, and focus on delivering superior post-investment services to enhance project value growth, and specializes in long-term value and ecosystem investment.

LD Capital has successively discovered and invested more than 300 companies in Infra/Protocol/Dapp/Privacy/Metaverse/Layer2/DeFi/DAO/GameFi fields since 2016.

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