15.05.2024
How can a common understanding be established in a world where every country has its language, currency, form of government, and culture? While each country has its strengths and potential, the invisible barriers make the free and fluid communication and trade of ideas and goods a conundrum. In a certain way, it makes every country a centralized entity, embedded in itself and unable to establish a network where these diverse entities could benefit. This scenario is not far from being analogous to blockchain technology, where each network operates independently with its own rules, protocols, and native assets.
This fragmentation limits the potential of the blockchain ecosystem. Decentralized applications (dApps) are often confined to a single chain and cannot tap into the liquidity, user base, or specialized features other blockchains offer. This is where LayerZero comes in.
Like a universal translator for the blockchain world, LayerZero aims to break down these barriers, enabling seamless communication and interaction between different chains. It's not another blockchain challenging others’ dominance but rather a protocol that sits on top of existing blockchains, facilitating communication and interoperability.
What is LayerZero, and who's behind it?
LayerZero is an omnichain interoperability protocol that facilitates secure, scalable, and efficient cross-chain communication. It's designed to be the backbone of a truly interconnected blockchain ecosystem, allowing dApps to leverage the best of multiple chains without sacrificing security or decentralization. Co-founded by Bryan Pellegrino, Ryan Zarick, and Caleb Banister, LayerZero has attracted significant attention and support from major venture capital firms, including a16z Crypto, Sequoia Capital, and Coinbase Ventures. In multiple funding rounds, LayerZero has secured over $370 million and achieved a valuation of $3 billion, demonstrating investors' confidence in the project's potential.
Breaking down blockchain barriers.
Before the introduction of LayerZero, the world of blockchains was characterized by fragmentation, while bridges existed, they frequently relied on centralized entities, which introduced potential vulnerabilities and limitations regarding security and censorship resistance. The problem with bridges lies in their dependency on off-chain activities, which exposes them to potential attacks and compromises their security. LayerZero was developed as an innovative solution to address this issue, offering a decentralized and trust-minimized communication layer, effectively operating as a literal Layer-0.
According to Chainalysis, in 2022 alone, cross-chain bridge hacks surged, with $2 billion in cryptocurrency stolen across 13 separate incidents. This figure represents a significant portion of the total funds stolen in the cryptocurrency industry that year, with bridge attacks accounting for 69%.
By creating a unified framework for cross-chain messaging, LayerZero eliminates the need for complex, chain-specific integrations. This lowers the inherent risk of bridging assets, and developers can now focus on building innovative applications rather than grappling with the intricacies of cross-chain compatibility and risk exposure.
This simplification of cross-chain development is a game-changer, accelerating the growth of the omnichain ecosystem.
Applications of LayerZero: a new era of Omnichain dApps.
LayerZero's technology opens up new possibilities for developers and users alike.
Inter-blockchain communication involves deploying a smart contract (Endpoint) that enables two blockchains to interact with each other. The blockchain that initiates the interaction (Oracle) can trigger actions on the receiving blockchain (Relier) based on specific events that occur on the Oracle. This functionality allows the development of sophisticated, interconnected decentralized applications (dApps) that were previously restricted due to blockchain isolation and communication limitations.
LayerZero leverages a multi-layered security framework to safeguard the accuracy and validity of cross-chain communications. This framework incorporates on-chain ultra-light nodes, both decentralized oracle networks and relayer networks.
Rather than adhering to a strict sequential processing of messages like traditional bridges, LayerZero employs an unordered message delivery system. This approach enhances the swiftness and efficiency of cross-chain interactions, provided that the applications involved do not demand sequential execution.
Users can seamlessly transfer assets across different blockchains, such as fungible tokens (stablecoins, governance tokens) and non-fungible tokens (NFTs). This enables cross-chain trading, lending, and borrowing, enhancing the liquidity and utility of digital assets. The fundamental aspect, and what makes it different from traditional bridges, is that wrapping and unwrapping assets to make them transferable is unnecessary.
Omnichain Applications (OApps) are a fascinating aspect of LayerZero's capabilities. The Omnichain, an interconnected network of blockchains, allows for interoperability between them. Developers can now create applications that transcend individual blockchains, taking advantage of the strengths of multiple chains. Omnichain Fungible Tokens (OFTs) and Omnichain Non-Fungible Tokens (ONFTs), compatible with the EVM, enable the minting of assets compatible with other chains. For example, an OApp could utilize Ethereum's substantial liquidity while benefiting from Solana's high-speed transactions, at least in theory.
Core Concepts.
LayerZero's modular security model (Whitepaper 2.1 Security) is a key innovation that addresses the limitations of traditional monolithic security models in cross-chain messaging. It distinguishes between two types of security: intrinsic and extrinsic. It allows the protocol to manage its security duties, one of which is to guarantee message delivery (intrinsic security) and security customization and flexibility for other aspects (extrinsic security).
Monolithic security is a centralized structure in which the central entity ties the mechanisms together and manages them. The security structure is a strong entity against attacks and vulnerabilities. The disadvantage of this model is that any change or upgrade is complex because it requires downtime or action coordination in all the affected networks. A monolithic security model is not easily adaptable and inflexible, making it vulnerable to new engineered threats and attacks.
LayerZero's modular security is a decentralized structure divided into smaller, independent modules (verification algorithms, signature schemes). The protocol's core components (Endpoints, the smart contract working as an intermediary) are immutable, which means the essential security features cannot be altered. The modules can be stacked, upgraded, or replaced with the security structure without suspending the system's functioning. This level of configuration adaptability makes LayerZero's modular security like building with Lego blocks. Each block (module) is a security component, and the developer can easily swap or add blocks as needed, creating a more adaptable structure.
Library (Whitepaper 3.2 MessageLib) management and fisionomy are fundamental aspects of the security structure. The MessageLib Registry has an “append-only design.” It ensures the transmission and verification of messages across different networks, prioritizing immutability. The way it is managed is like a library; once a book is published and added to the library, the book content can’t be altered or changed. New books can be written and added, expanding the library’s collection and congregating new data and capabilities.
Another fundamental aspect is the function of the Ultra Light Nodes (ULNs) (Whitepaper 3.2.1 Ultra Light Node), which are the basis of the MessageLibs included in each LayerZero deployment. The ULNs allow the composition of up to 254 Decentralized Verifier Networks (DVNs), which makes the implementation of basic features needed for any verification algorithm and are compatible with all the blockchains.
For each Omnichain application (OApp) that requires using ULN, there is a set of mandatory DVNs, optional DVNs, and a threshold. All the DVNs and the threshold must be signed and aggregated to the ULN to transmit a message. Once this is committed, the correspondent message can be delivered to the Endpoint (the smart contract that serves as an intermediary).
By requiring the signatures of the most secure DVN in the set, the model ensures message verification and empowers the DVNs to enforce the security of both the verification layer and the modules.
The ULNs are responsible for verifying the integrity of the cross-chain messages. They delegate the UVNs to validate and authenticate the cross-chain messages without asking for the full blockchain history, which minimizes the computational burden. This approach enhances the protocol's scalability and efficiency.
Source: LayerZero_Whitepaper
A balanced perspective.
While LayerZero holds promise, it's important to acknowledge potential weaknesses:
FTX sued LayerZero Labs to recover $21 million in funds allegedly withdrawn without authorization before FTX's closure in November. Court documents show that FTX's sister company, Alameda Ventures, spent over $70 million to acquire a 4.92% stake in LayerZero and invested $25 million in 100 million STG (Stargate) tokens. LayerZero also extended a $45 million loan to Alameda Research. As FTX's financial troubles became evident, LayerZero sought to renegotiate its deals with Alameda. They reached an agreement for the return of LayerZero's stake, forgiveness of the loan, and a discounted buyback of STG tokens. However, this buyback deal was never finalized. FTX's lawsuit alleges that LayerZero profited from Alameda Research's liquidity crisis.
James Prestwich, founder of rival cross-chain bridge Nomad, accused LayerZero of having a hidden "backdoor" in its code (this alleged backdoor would allow LayerZero to bypass security measures and transfer data between blockchains without authorization). LayerZero co-founder Bryan Pellegrino confirmed that the platform can circumvent security controls but asserted it's a feature, not a flaw. Pellegrino emphasized that developers using LayerZero can customize parameters to deny LayerZero any special access privileges. It's up to the individual projects to configure their security settings.
Project launch and news: a glimpse into the future of LayerZero.
LayerZero is already live on several mainnet and testnet chains, gaining traction and adoption within the blockchain community. The recent launch of LayerZero V2 marks a significant milestone, introducing numerous upgrades to enhance security, scalability, and developer experience. The bridge protocol achieved a significant milestone in July 2023, surpassing 50 million messages exchanged between different blockchains. This achievement demonstrates the growing need for interoperability in the cryptocurrency space. At the moment of writing this, the count of total transactions has almost reached 100 million.
Source: LayerZero Dune Dashboard
The project has also taken a novel approach to its potential airdrop by implementing a Sybil resistance mechanism. This innovative approach, combined with a snapshot of potential recipients, has generated significant excitement and anticipation within the crypto community. As the initiative to curb Sybil activity on LayerZero Labs' airdrop concludes, up to 100,000 addresses have self-reported, according to the company's co-founder.
Final Thoughts: a multichain future?
LayerZero's vision of an interconnected blockchain ecosystem has passed the test of developer usability. Step by step, it has become an unfolding reality. The protocol's technology and robust security model have the potential to unlock new omnichain applications that transcend the limitations of individual blockchains. Just look at the impressive Ecosystem page, boasting names like AAVE, PancakeSwap, Ethena, and Balancer among many other dApps that benefit from LayerZero's technology today.
Suppose LayerZero enables the seamless transfer of assets and liquidity across blockchains. This remarkable milestone would create new possibilities for the user experience and the decentralized environment. The same can be said for the transfer of Non-Fungible Tokens (NFTs) across blockchains, expanding their utility and interoperability.
While challenges and uncertainties remain, LayerZero's potential to form a core part of the blockchain landscape is evident.