One of the greatest challenges in DeFi has a name. It’s interoperability.
It wouldn’t be a real problem, but in the Web3 world where more independently operating blockchains come to the surface, a transfer data and assets dilemma emerges. With so many networks on the plate, it’s necessary to find the best way to provide communication and transactions between them. This gap was patched by LayerZero.
What has been done? The LayerZero team built a messaging protocol instead of a bridge, and by doing so, eliminated the locking and wrapping tokens concept, disposed of a honeypot, shrank many steps into one message, and solved the gas issue.
Let’s find out more about the project to be on the edge of DeFi and its best practices.
What Exactly Wrong With Interoperability?
Typically, the way to deal with interoperability is to create exchange portals between separate blockchains, allowing resource sharing and the transferring of assets. Interoperability solutions enable communication bridges between different networks with an intermediary, which can be in the form of a middle chain or a node.
Middle chains represent intermediaries and receive messages from the source chain, processing them, and forwarding them to the destination chain.
The matter is that middle chains might have security issues, so any trouble can result in asset loss. Alternatively, on-chain Light Nodes provide boosted security. These protocols run nodes on the destination chain, validate messages from the source chain, and seamlessly add them to the destination chain. The main issue with Light Node is that greater security can be more costly.
LayerZero reimagined intercommunication between blockchains by solving security drawbacks of interoperability systems with its innovative Ultra Light Nodes smart contract. It reduces cost by batching transactions and decentralized oracles to securely transfer messages between chains.
LayerZero provides direct and secure cross-chain transactions between blockchains, eliminating third-party intermediaries. By aggregating liquidity and enabling seamless interaction across different chains, LayerZero offers a fully connected omnichain ecosystem. All this showcases the potential of future blockchain improvements and innovations.
In essence, LayerZero is designed to provide seamless communication between different blockchains without intermediaries or expensive on-chain light nodes. Instead, it has a so-called “Ultra Light Node” (ULN) and decentralized oracles to securely transfer messages between chains.
LayerZero Endpoint makes it possible to send transactions across various blockchains. Each blockchain in the LayerZero network has its own Endpoint.
Every Endpoint consists of four modules:
The Communicator, Validator, and Network modules work together to ensure the message is delivered correctly. As for the Libraries module, it extends the LayerZero network and includes new blockchains for interoperability.
To deliver the exchange of messages between blockchains, LayerZero has two external services: an Oracle and a Relayer. Let’s crack these two crucial services down.
Oracle is a third-party service that provides a mechanism for reading block headers from one chain and sending them to another one. The LayerZero uses Chainlink and Band Protocol as their official Oracles. Theoretically, any Oracle provider could be used for this mechanism.
The Relayer is an off-chain service and it works similarly to an Oracle, but its main aim is to catch the proof for a definite transaction. The Relayer and Oracle must be independent of each other to ensure the validity of the message delivery.
Example: Imagine you want to send a message from chain A to chain B using LayerZero. First, you will start with notifying an Oracle and Relayer on chain A that you want to send the message. Second, the Oracle will then send the relevant block header (a summary of the latest transactions on chain A) to chain B’s Ultra Light Node. Third, the Relayer on Chain A will submit proof of this transaction to Chain B. Finally if this proof is validated on Chain B, the message can be sent to its recipient on Chain B.
This approach is especially convenient because it is both secure and cost-effective as it combines the strengths of both middle-chain and on-chain light-node approaches while eliminating their weaknesses.
LayerZero: Key Features
Secure cross-chain communication
LayerZero brings in a trustless approach to cross-chain communication. It is achieved by removing centralized intermediaries. Instead, LayerZero introduces their independent Oracle and Relayer service that guarantees the transaction is valid without the need for a third party.
This makes LayerZero different from such alternatives as Cosmos, where centralized or semi-centralized intermediaries may have potential security vulnerabilities, undermining the trust of blockchain technology.
Modular and Scalable
LayerZero’s modular and extensible framework allows the addition of new chains and functionalities without modifying the core protocol. This flexibility and scalability set it apart from other approaches that may require significant protocol changes to support new chains or functionalities.
As an example, have a look at Polkadot which solves blockchain interoperability issues by introducing parachains. In the LayerZero case, interoperability concerns are solved without creating new chains or complex smart contracts. Their approach streamlines the process and enhances efficiency.
LayerZero simplifies and enhances the user experience for cross-chain transactions. With its architecture, users can seamlessly and efficiently perform single-transaction swaps without the complexity of intermediary tokens or additional transactions. This streamlined approach reduces costs and improves overall transaction efficiency for users.
LayerZero stands out from other solutions in the space due to its emphasis on trustlessness, modularity, and user-centric design. By prioritizing these factors, LayerZero ensures a secure and intuitive experience, providing users with a seamless and hassle-free way to engage in cross-chain transactions.
LayerZero’s Oracle and Relayer systems prioritize the highest level of security for users. When it comes to cross-chain transactions, other bridge designs that rely on middle chains can be vulnerable to censorship by malicious actors seeking to disrupt cross-chain activity. If a malicious actor gains control of the middle chain, they can manipulate or withhold specific messages exchanged between chains, seriously compromising the security of the entire omnichain functionality.
However, LayerZero’s unique Oracle-Relayer security model eliminates the appeal for message censorship by malicious actors. The design ensures that either all messages are censored or none at all, thanks to the strict sequential ordering of nonces on the receiving chain. Oracles and Relayers are unable to selectively censor messages without censoring all messages in the process. Therefore, even if an attacker gains control of the Oracle and Relayer and attempts to censor a message, all subsequent messages would also be censored, effectively halting the attack. The protocols can swiftly address this issue by selecting new Oracles or Relayers, allowing messaging to resume promptly.
This bifurcated model prevents effective collusion among potential malicious actors, guaranteeing the continuous operation of cross-chain transactions while maintaining security.
LayerZero: Use Cases
LayerZero finds its primary application in bridging different blockchain networks. LayerZero recently launched Stargate, a cross-chain liquidity transfer protocol built on LayerZero’s generic messaging. Stargate solves a holy grail problem called the Bridging Trilemma and enables cross-chain liquidity transfer in native assets, with unified liquidity and instant guarantee of finality.
Stargate Finance enables seamless transfers across multiple chains, including Ethereum, BNB Chain, Avalanche, Polygon, Fantom, Arbitrum, Optimism, and Metis, spanning both Layer 1 and Layer 2 chains.
Current bridges operate with separate liquidity pools, causing discrepancies in efficiency. For example, while the Ethereum to Polygon bridge may have sufficient liquidity to handle all requests, the bridges between Fantom and Polygon may lack the necessary assets on both chains to instantly fulfill a bridging request.
In contrast, LayerZero offers a unique advantage by utilizing a unified liquidity pool. This enables LayerZero to efficiently address bridging requests from multiple destination chains, ensuring smoother and more reliable transactions. Ryan Zarick, one of the co-founders of LayerZero, highlights this advantage, emphasizing the platform’s capability to leverage a unified liquidity pool for enhanced bridging functionality.
By integrating LayerZero’s cross-chain borrowing functionality, money market protocols, like Radiant Capital deployed on Arbitrum and BNB Chain, can leverage LayerZero’s infrastructure to facilitate cross-chain borrowing. Users who deposit their assets with Radiant Capital can access borrowing capabilities on any of the chains supported by LayerZero.
This offer users the flexibility to borrow assets from different chains, expanding their borrowing options and enabling them to access liquidity from a broader range of blockchain networks.
Omnichain Tokens & NFTs
One of the remarkable aspects of LayerZero is its ability to introduce “non-native” crypto assets. These assets can be utilized on any chain without the requirement of bridge conversions, preserving their original form. As a result, omnichain tokens and NFTs become distinct and experience accelerated adoption since users can conveniently purchase and store them on their preferred blockchains.
Hence, NFTs will no longer be limited to their native ecosystems. Users will have the ability to transfer their NFTs across different ecosystems like Ethereum, Polygon, and Solana. A notable example of this is Pudgy Penguins, which recently announced that its sub-series Lil Pudgys can now seamlessly move across Polygon, BNB Smart Chain, and Arbitrum using LayerZero’s comprehensive cross-chain technology.
This breakthrough allows many NFT projects to tap into the liquidity and user base of other ecosystems without the need to launch separate projects on different chains, thus avoiding fragmentation among their user community.
LayerZero has achieved significant milestones, with over 4 million messages sent on the protocol. The platform has seen the deployment of over 30,000 contracts on its testnet and 3,500 contracts on its mainnet, showcasing its growing adoption. These achievements have resulted in a total value locked (TVL) of over $7 billion and processing transactional volume exceeding $6 billion across nearly 80 DApps.
As LayerZero continues to evolve, we can anticipate the emergence of even more innovative products built on their technology. These developments will introduce exciting new features and possibilities to the blockchain space.
LayerZero V2 Overview
LayerZero is a messaging protocol, not a blockchain. Using smart contracts deployed on each chain, in combination with Decentralized Verifier Networks (DVNs) and Executors, LayerZero enables different blockchains to seamlessly interact with each other.
Source: LayerZero Docs
In LayerZero V2, message verification and execution have been separated into two distinct phases, providing developers with more control over their application's security configuration and independent execution. Combined with improved handling, message throughput, programmability, and other contract specific improvements, LayerZero V2 provides a more flexible, performant, and future-proof messaging protocol.
So, what was implemented by the team? Let's have a look at V2 version a bit closer.
- Decentralized Verification Networks (DVNs): Replacing the V1 Oracle, this permissionless role empowers any entity capable of verifying cross-chain data packets to join LayerZero as a DVN.
- Adapters: Axelar and CCIP DVN adapters will be available today on testnet and when mainnet launches. Other adapters planned for 2024 will allow developers to integrate any type of native bridge, third-party bridge, middle chain, oracle, or other verification methods into LayerZero, thereby avoiding vendor lock-in at the security level.
- X of Y of N: This is a modular approach to verification empowering applications to neither overpay nor underpay for security depending on use case. X of Y of N allows applications to combine DVNs however they like. For instance, a “1 of 3 of 5” combination of DVNs would include one required DVN and two arbitrary DVNs out of a total of five that must verify a message for cross-chain execution.
- Permissionless Execution: Replacing the Relayer and separating execution from verification, LayerZero V2 introduces Executors — a permissionless role that facilitates smooth execution on the destination chain, simplifies gas payments, and offers customizable gas settings.
- Security Stack: Each Omnichain Application (OApp) must configure a Security Stack comprising DVNs, Executor(s), chain confirmations, MessageLibraries, and chain pathways for omnichain messaging. This setup grants applications complete control over security. With V2, are opt-in, with the recommendation being that OApp developers set their own Security Stack.
- Increased Throughput: By providing the option for lazy nonce enforcement or strict nonce enforcement, V2 allows developers to choose whether they want to execute transactions in order or out of order. With out-of-order transaction execution, LayerZero’s throughput matches that of the destination chain while maintaining censorship resistance.
- Enhanced Programmability: V2’s improved protocol contract interfaces, path-specific libraries, new design patterns, and horizontal composability redefine application interaction, fostering flexibility and uninterrupted cross-chain transactions.
- Unified Semantics: V2 empowers to build applications that work the same across blockchains where LayerZero has an endpoint on; even non-EVM chains.
- V1 Compatability: For teams building on V1, the V2 launch will allow for both forward and backward compatibility.
LayerZero is in avant-garde in cross-chain communication and interoperability solutions. Their innovative technology and unique features might reshape the blockchain ecosystem by addressing limitations, enhancing user experience, and enabling seamless interaction between different blockchain networks.
Leveraging trustless and decentralized approach, LayerZero removes intermediaries, allowing for direct and more secure cross-chain transactions. Its modular and extensible architecture ensures flexibility and scalability, enabling the addition of new chains and functionalities without compromising the core protocol.
LayerZero has connected over 30 blockchains, attracted significant investments, and partnered with serious projects. All this shows its growing recognition and adoption within the blockchain community. The project is beneficial for users and developers, as it gives them an opportunity to build cross-chain applications that were impossible without the need for intermediaries.
Presumably, more innovative applications and projects will appear thanks to LayerZero's technology. As a matter of logic, this brings us to new possibilities and features in the blockchain space.
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