Original author: Jill, LD Capital

1. What is cross-chain interoperability

The current development trend of blockchain is multi-chain parallelism, but blockchain itself does not have the ability to communicate with external systems or APIs. Data and value cannot be smoothly transmitted across networks, resulting in the isolation of ecosystems and the inability to exchange information with each other.

From the perspective of developers, each deployment constitutes an isolated and independent entity, resulting in no connection between backend contracts and no knowledge 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.

Source: Chainlink

For users, this multi-deployment approach also increases the difficulty:

1) Users cannot seamlessly transfer tokens from one blockchain to another.

2) The transfer process is time-consuming and the experience is poor because assets are usually destroyed on the source blockchain and then re-minted on the target blockchain using a third-party bridge.

3) There is also a high security risk in holding assets on multiple blockchains, making them vulnerable to hacker attacks and causing financial loss.

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 component of this infrastructure is the cross-chain bridge, which enables assets to move from the source blockchain to the target blockchain. Cross-chain bridges often involve locking or destroying assets on the source chain through a smart contract, and unlocking or minting them through another smart contract on the target chain. In essence, the use cases of cross-chain bridges are very narrow, and their role is to transfer assets between different blockchains. Therefore, cross-chain bridges are often application-specific services between two blockchains.

Currently, developers have built various cross-chain solutions, such as:

• Chainlink is developing the Cross-chain Interoperability Protocol (CCIP), an open-source standard that supports cross-chain communication, including message sending 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.

• 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 transmission to the target chain. Developers using Wormhole can build cross-chain decentralized applications called XDApps.

• The Inter-Blockchain Communication (IBC) protocol is a 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.

• LayerZero is a protocol for full-chain interoperability, which is used for lightweight information transmission between blockchains and provides secure, reliable, and trustless message transfer.

This article primarily introduces the full-chain interoperability protocol LayerZero, which focuses only on information transmission between chains. It can send messages to any smart contract on any supported chain, and is responsible for smart contract communication between blockchains. It does not handle cross-chain asset transfers, which is done by Stargate, developed by LayerZero Labs.

3. LayerZero Technology Features and Advantages

1. Technology Features

The most prominent feature of LayerZero is its ultra-lightweight nodes. It uses the technology of ultra-light nodes to transmit messages between endpoints of different chains through relays and oracles, reducing costs while ensuring security.

1) Ultra-light Nodes

...

First, each node in the blockchain network is actually every computer or server terminal that stores data. A light node is just one mode of operation for a node. Unlike a full node, a light node only stores a small portion of the blockchain data, such as block headers and some other information, and does not store the specific transaction information within the blocks. Compared to light nodes, super light nodes have the same verification method, but because the cost of writing to the blockchain is high and continuous transmission of block headers is expensive, super light nodes do not retain all block headers. Instead, they use oracles to stream these block headers as needed, so as to more efficiently synchronize with external entities to achieve the desired state, changing the original continuous streaming transmission method. The advantage of this approach is that it does not rely on the block header data stream starting from the beginning of a light node. However, the drawback is the lack of a historical sequential data stream. If both the oracle and the relayer act maliciously at the same time and pass verification, it will lead to the execution of malicious information. Therefore, LayerZero has made a trade-off between greatly reducing verification costs and a certain degree of security loss, and whether this trade-off is worth it depends on how it weighs based on its own scenario. 2) Core Components In the LayerZero official whitepaper, you can see that the core components responsible for information transmission between the two chains are endpoints, oracles, and relayers.Endpoints are facilities that interact directly with users or applications, responsible for handling message transmission, validation, and reception. Their purpose is to ensure effective delivery when users send messages using the protocol. In the LayerZero protocol, each chain needs to deploy endpoints, which can also be called by other apps in the same chain and are responsible for sending information to external chains. Oracle is a third-party service that provides a mechanism component independent of other LayerZero services. It can read a block header from one chain and send it to another chain to verify the validity of transactions from the source chain on the target chain. LayerZero currently uses Chainlink as its oracle. Relays are off-chain services that function similarly to oracles, but instead of obtaining block headers, they retrieve proofs for specific transactions. To ensure efficient delivery, the only requirement is that oracles and relays must be independent of each other for any given message sent using the LayerZero protocol. Any entity can assume the roles of both oracle and relay, and LayerZero can even implement its own relay service. An important trust assumption in LayerZero is that oracles and relays operate independently of each other. The block headers submitted by oracles are cross-validated with the transaction proofs submitted by relays, with no consensus formed between them, only message transmission. In essence, oracles act as notaries in LayerZero's cross-chain context, informing the target chain of the verification results, while relays are responsible for providing the proof process and specific content of cross-chain information required for validating transactions. To ensure the effective transmission of information, if any disputes arise in the information transmission between relays and oracles,the smart contract will pause and not submit the information to the target chain. target chain.

Reference "Detailed Explanation of LayerZero Interoperability Protocol Technology and Features"



If a transaction crosses from Chain A to Chain B, the overall process is roughly as follows:

The transaction will start from the user's application, and then, with the assistance of the oracle and relay on the LayerZero endpoint, the transaction is broken down into multiple parts (proofs and block headers). Once the oracle and relay send their respective information on the target chain (sign the transaction on the chain), and the LayerZero Endpoint (contract) verifies the correctness of the information, the message is transformed and executed on the target chain.

2. Advantages

1) Security

As the underlying protocol, LayerZero's security is independent of external protocols, ensuring the stability of the entire protocol consensus. In addition, thanks to the unique design of the oracle and relay, they are independent of each other, and a transaction is only completed when both are deemed authentic, ensuring the security of information transmission.

LayerZero as a universal messaging layer means that any contract can be transferred from Chain A to Chain B to achieve cross-chain interoperability with a layer-one network. With innovative endpoint design, LayerZero can easily scale to support any chain, bringing a wider range of applications to the blockchain ecosystem.

Firstly, LayerZero's super-lightweight node technology enables higher transmission efficiency and reduces validation costs while ensuring security. Secondly, LayerZero's relayers or oracles do not form any consensus, but simply transmit messages. All validation is done on their respective target chains, so the speed and throughput limitations depend entirely on the properties of the two chains.

Four, Financing

LayerZero has completed three rounds of financing, with a total disclosed amount of $293 million. Participating investors include Multicoin, Binance Labs, a16z, and Sequoia Capital, well-known cryptocurrency investment institutions. The latest round of financing was conducted on April 4, 2023, at a valuation of $3 billion, raising $120 million. FTX was previously involved as the lead investor in the Series A financing on March 30, 2022. Due to its collapse, on November 11, 2022, LayerZero officially announced that it had repurchased 100% of the equity, currency rights, and other agreements from FTX.



Source: Crunchbase

5. Ecology

As of now, LayerZero has supported a total of more than 20 chains including 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 users have only 1 interaction record, and there are only about 730,000 users with more than 2 interaction records.



Source: Dune Analytics

User interaction activities mainly occur on BNB Chain, Arbitrum, and Polygon. Especially since the launch of Arbitrum, the community has been enthusiastic about airdrops, and the expectation of airdrops has greatly increased the user activity on LayerZero.



Source: Dune Analytics

In the case of Arbitrum, the number of transactions reached around 12 million. The peak period of user activity was in April 2023. However, with the downturn in the overall market situation, user engagement has slightly decreased.



Source: Dune Analytics

The minimalist architecture of LayerZero gives the protocol infinite possibilities. Its low developer onboarding complexity has resulted in over 50+ dApps integrating or currently using its technology.



Source：Twitter

Star Project

1. Stargate Finance

The first dApp developed by LayerZero Labs based on the LayerZero protocol, which constructs the first fully composable native asset bridge. The vision is to make cross-chain liquidity transfer a seamless, singular process. The product highlights the use of a unique "Delta algorithm" to solve the "impossible triangle" problem of cross-chain bridges without making trade-offs.

The Stargate team believes that cross-chain asset bridges face the "impossible triangle":

1) Instant verification confirmation: Assets can be successfully transferred to the target chain upon transaction confirmation, ensuring timely processing;

2) Unified liquidity: Individual liquidity pools can be shared across multiple chains;

3) Native assets: Users can directly obtain native assets through cross-chain bridges, rather than synthetic or wrapped assets.

Of course, while ensuring instant verification confirmation and asset nativity, if more complex liquidity dynamic allocation algorithms are not involved, a liquidity pool can only be built between each pair of chains, which may reduce capital efficiency.

According to defillama data, looking at the trading volume in the past month, Stargate ranks first among various cross-chain bridge protocols, with a transaction count of up to 96,000 in 24 hours.



Source: defillama

Protocol Revenue

Stargate is the first dApp launched on LayerZero. Its protocol fees and revenue have been steadily increasing since March 2023, which is also when on-chain transaction activity significantly increased due to airdrop expectations. Currently, the protocol's monthly revenue exceeds $1 million.



Source: Token Terminal

Economic Model

The total supply of STG tokens is 1 billion, with a circulating supply of 200 million. The token functions are as follows:

1) Asset cross-chain transfer fees: Non-STG token transfers will incur a 0.06% fee, with 0.045% allocated to liquidity providers and 0.015% allocated to the protocol's treasury.

2) Governance: By staking and locking STG tokens for 3 to 156 weeks, participants can earn governance tokens called veSTG. The longer the STG lock-in period, the higher the voting weight.

3) Protocol rewards, stablecoin liquidity pools, and liquidity mining rewards.

The token issuance date is March 17, 2022, and the initial allocation details are as follows:



Source: tokenunlocks

Allocated to early DEX liquidity, Bonding Curve, initial release plan, and community, a total of 478 million tokens were directly unlocked at the initial token issuance.

A portion allocated to protocol launch, with 5% (50 million tokens) released directly, and the remaining 10% with a 1-year lock-up period, followed by linear release within 6 months. Currently, 145 million tokens have been released.

A portion allocated to investors and the team has a 1-year lock-up period, followed by linear release over 2 years.



Based on the above token allocation, the nominal issuance of STG has reached 729 million. According to the distribution of STG holding addresses, it can be clearly seen that there are still 297 million remaining out of the 304 million allocated to the community, and there are still 320 million remaining out of the portion allocated to investors and the team. These two parts have a total of about 67 million in circulation, accounting for about 6.7%.

From the distribution of holding addresses, the top 20 holdings account for 94%, with the top two addresses owned by the officials and have not been circulated, accounting for 62%. Excluding these two parts, the remaining address holdings account for 32%, with Alameda holding 9.42%, and personal whale addresses holding only 0.6%, with relatively few accumulated chips.

Sam Trabucco, Co-CEO of Alameda, previously stated in a social media post that Alameda Research participated in the public offering of the cross-chain bridge project Stargate on March 18th and purchased all shares of STG (100 million tokens, which is the aforementioned 10% of the protocol launch). However, SamTrabucco states that Alameda will not sell STG within 3 years and will make long-term investments in the project and team. They will not interfere with the governance of the project and will give up their voting rights for aSTG to ensure a more equal distribution of votes among early community members. Currently, 9.42% has been released.



2. Radiant Capital

Radiant is a cross-chain DeFi lending protocol that implements full-chain leverage lending and composability by using LayerZero as the cross-chain infrastructure, allowing users to obtain leverage in the DeFi protocols it supports and simplifying cross-chain lending operations for assets across different chains.

Radiant is essentially similar to current lending protocols like Aave and Compound in terms of operational mechanisms, with the difference being its aim to be a full-chain lending protocol. This means that users can deposit collateral on Chain A and borrow on Chain B. However, when users need to use cross-chain lending services, they need to deposit a certain amount of assets on the supported chain to become a Dynamic Liquidity Provider (dLP) before being able to borrow the assets required on the target chain.

Radiant is currently deployed on Arbitrum and BSC chains with a TVL of 220 million US dollars.

Among the many loan agreements, it ranks at the forefront and currently holds a certain market share, and is a leading lender on Arbitrum.



Protocol Revenue

In Radiant, protocol revenue = fees paid for borrowing - interest earned from deposits (supply-side fees). Since February of this year, the fees obtained from the protocol have remained stable at around 2 million US dollars, with monthly revenue reaching around 1 million US dollars.



Economic Model

The total supply of RDNT tokens is 1 billion, with a circulation of 300 million. The main purpose of the token is governance and liquidity incentives.



According to Token Unlock data, the portions allocated to 2 liquidity providers, Treasury, and Radiant DAO reserves have all been unlocked. Currently, the portions still being unlocked are for the team, core contributors, and borrowers' incentives, with the portion allocated to borrowers being released at a rate of 4.85 RDNT per second. At this rate, nearly 210,000 tokens will be released per month.



Looking at the token distribution, the top 20 token addresses account for 92.3% of the total, with the official contract address ranking first and still holding 23.4% undistributed. Tokens held in DEX account for 27.6% of the distribution, while the holdings of large addresses in the top 20 account for only 3.8%.



Roadmap

Radiant's official team has disclosed a simplified roadmap in their documentation. The current version is in the 2.0 phase, with the primary focus being the deployment of Radiant cross-chain functionality and increasing the scale of collateral within the application. In the V3 version, they plan to eliminate dependence on the third-party cross-chain bridge Stargate and fully integrate LayerZero. The V4 version aims to achieve full-chain liquidity lending.



Summary

Multi-chain is the trend of blockchain development. Cross-chain interoperability protocol is the key component of communication between blockchains, and its development prospects are quite broad. LayerZero is still in the early stages of development, with relatively few native projects to participate in. It is supported by numerous well-known investment institutions, with abundant industry resources, and the issuance expectations are attracting the attention of the entire cryptocurrency market.

References

Explanation of LayerZero Interoperability Protocol: Technology and Features