LayerZero Explained: The Interoperability Solution for Blockchains

Introduction

The blockchain has brought about a revolutionary change, completely remodeling the way we trust and store data securely without the need for intermediaries. Among all of the blockchain platforms, Ethereum is the one that gained significant popularity by first introducing the usage of smart contracts on the network, enabling the development of a wide range of applications.

However, Ethereum faces challenges in terms of scalability, which result in slow transaction processing and expensive fees during moments of high activity. This has led users and developers to seek alternative platforms that offer better scalability and cost efficiency.

As more blockchain networks emerged, a new issue came into existence: they struggled to communicate with each other. The lack of interoperability made it hard for assets and data to move smoothly between different networks.

This limitation forces users and developers to split their time, resources, and liquidity across multiple chains, which limits the general adoption of the blockchain industry.

In this article, we will take a closer look at LayerZero, a project designed to solve the interoperability problems faced by the blockchain space. We will explore how it works, the advantages it brings, and why it's worth paying attention to!

What is LayerZero?

LayerZero is a protocol that enables secure communication and interaction between different blockchains, establishing trustless interoperability. It introduces a powerful and foundational communication framework that serves as the basis for developing a wide range of DeFi applications, such as cross-chain decentralized exchanges (DEXs) or multi-chain yield aggregators, enabling the possibility to concentrate all the liquidity in one place, instead of in multiple blockchain

How Does LayerZero Work?

To understand how LayerZero operates, let's first explore the two common approaches used in the industry for cross-chain bridging and messaging: Middle-Chain and On-chain light node.

Middle-Chain

In the middle-chain approach, an additional blockchain acts as an intermediary for transferring messages between different networks. However, this method comes with certain risks.

The middle chain holds full control over all messages, which means it becomes a single point of failure. If the middle chain is compromised, it could result in an exploit of liquidity across all connected chains. This raises security concerns, especially as the value secured by middle chains increases while their security measures may not keep the same pace.
 

On-Chain Light Node

On-Chain Light nodes represent a way to securely exchange messages between different chains. These nodes validate block headers and verify transaction proofs on the chain to ensure the messages are legitimate. It's a very secure method but also expensive, costing a significant amount of money each day to run on platforms like Ethereum.

For LayerZero, none of these approaches seemed right. Middle-Chains are inexpensive but lack security. On the other hand, Light Nodes are secure but very costly.

The LayerZero Solution: Ultra Light Node

As a result, LayerZero introduced a new approach, called “Ultra Light Node”, where instead of keeping all block headers sequentially, like regular light nodes, block headers are streamed on demand by decentralized oracles.

The image above might seem a bit confusing if you're not familiar with LayerZero. So, let's break it down into simpler terms to help you understand each part:

• LayerZero Endpoint: LayerZero Endpoints are user-friendly interfaces of LayerZero. Each blockchain has its own Endpoint, which is created using smart contracts. The Endpoint's main job is to let users send messages through the LayerZero protocol in a way that ensures the messages are delivered correctly to the other chain.
• Oracle: The Oracle is a service provided by a third party that can read a block header from one chain and send it to another chain. It works independently of other LayerZero components. 

As of now, LayerZero uses ChainLink and Band Protocol for this service.

• Relayer: The Relayer is a service that works off-chain and has a similar function to an Oracle. However, instead of retrieving block headers, the Relayer fetches the proof for a specific transaction.

To ensure that messages sent through the LayerZero protocol are delivered correctly, it is important to note that the Oracle and Relayer operate independently of each other.

LayerZero Use Cases and Advantages

In this section, we will explore some of the use cases that can be leveraged by LayerZero's promising technology. LayerZero opens up possibilities for various DeFi applications, allowing users to harness the benefits of cross-chain decentralized exchanges (DEXs), multi-chain yield aggregators, multi-chain lending, and much more.

Cross-Chain DEXs

A cross-chain decentralized exchange (DEX) is an important use case enabled by LayerZero. Unlike traditional DEXs designs that rely on wrapped tokens or intermediary sidechains, LayerZero allows for the creation of a DEX that operates exclusively with native assets. This means that users can directly trade their assets from one blockchain to another without the need for additional layers or conversions.

With LayerZero, a cross-chain DEX can establish liquidity pools on multiple chains. Users can deposit their native assets into one pool and withdraw native assets from another, facilitating seamless asset transfers between different blockchain networks. This approach eliminates the need for intermediary tokens or complex processes, making the trading experience more efficient and convenient for users.

Multi-Chain Yield Aggregator

A multi-chain yield aggregator is an exciting feature enabled by LayerZero's technology. Normally, yield aggregators operate within one blockchain ecosystem, which limits their ability to benefit from yield opportunities outside of that specific chain.

Projects like Yearn Finance focus on gathering yields in only a single chain, but this approach prevents them from exploring potentially better opportunities in other ecosystems. By using LayerZero for cross-chain transactions, they could overcome this issue and access the most lucrative yield opportunities across different blockchain ecosystems.

Multi-Chain Lending

Currently, users face challenges when it comes to taking advantage of opportunities on chains where they don't hold assets. Let's consider an example where a user has their assets primarily on Ethereum but wants to seize an opportunity on Polygon.

Traditionally, the user has two options. First, they can move their entire asset base to Polygon, converting their assets into the desired currency. However, this involves significant effort and potential costs. The second option is to lend their assets on Ethereum, borrow the desired asset, and then bridge it to Polygon. This process incurs intermediary costs such as bridge and swap fees.

With LayerZero, users can keep their entire asset base on Ethereum, lend out their assets, and directly borrow the desired currency like MATIC on Polygon. This eliminates the need for unnecessary intermediaries and costs, such as bridge and swap fees. As a result, users can efficiently capitalize on opportunities across different chains while keeping their assets in one place.

The LayerZero Ecosystem

Now that we’ve presented the interoperability problem, functionalities, and advantages that LayerZero has, let’s dive into the projects that are leveraging LayerZero’s technology to provide cross-chain services.

Stargate Finance

Stargate Finance is a decentralized application built on LayerZero that offers cross-chain features. It serves as a native asset bridge, allowing users to seamlessly swap tokens from one chain to another. For example, you can easily swap USDC on Ethereum to USDT on the BNB Chain. Additionally, Stargate enables users to provide liquidity to a unified pool and earn interest on every transaction made on the platform.

One of the key advantages of Stargate is its ability to facilitate cross-chain interactions for decentralized applications. Let's say you're using SushiSwap and want to swap your ETH on Ethereum for AVAX on Avalanche. Instead of going through the complex process of bridging assets and dealing with wrapped tokens, you can do it all within the SushiSwap interface. Stargate handles the cross-chain interaction behind the scenes, making it a seamless experience for the user.

Stargate was the first dApp built on LayerZero, which attracted plenty of people to the platform, reaching more than U$4 Billion of TVL in only a couple of days!

Radiant

Radiant is a cross-chain lending and borrowing platform that allows users to access multi-chain features through LayerZero's technology.

The platform's primary goal is to create a versatile money market where individuals can securely deposit major assets from different blockchains and borrow various supported assets across multiple chains. This eliminates the need for isolated liquidity pools and enables users to make the most of their assets across different chains.

Currently, Radiant is available on Arbitrum and BNB Chain, boasting a Total Value Locked of $680 million. This highlights the growing trust and adoption of the platform among users.

LayerZero Token

At the time of writing, LayerZero doesn't have its own token. However, many people are anticipating an airdrop after the LayerZero team raised a significant amount of money, reaching a valuation of $3 billion with $293 million raised across 5 funding rounds.

The number of daily transactions on LayerZero has skyrocketed in the past few months, especially after the Arbitrum airdrop. This indicates a highly active community that is trying to qualify for the airdrop.

If you're curious to learn more about airdrops and their importance, we have written an article that explains the topic in detail. Feel free to check it out!

Final Thoughts

In summary, LayerZero is a project that helps different blockchains communicate with each other. It enables efficient and secure trading, yield aggregation, and lending across multiple chains. Projects like Stargate Finance and Radiant are currently using LayerZero's technology to provide these services.

Although LayerZero currently does not have its own token, there is anticipation among people for a potential airdrop. It is important to note that you should not engage with any token claiming to be associated with LayerZero until the team makes an official announcement.

Also, do your own research when considering whether to invest or not in the token. If you want to understand more about how to evaluate crypto projects, please check our article explaining it, and also feel free to check our project analyses!