Key Takeaways

• With a simple communication primitive, LayerZero makes cross-chain applications possible
• Messages between chains are transferred via LayerZero’s Ultra Light Node (ULN) and decentralized oracles without the involvement of a third party
• LayerZero is modular and extensible, allowing for adding new chains without needing changes to the core protocol

LayerZero was created in the search for a better bridging solution. Since the introduction of Bitcoin in 2008, there has been a tremendous surge in the creation of new blockchains. Chains gradually got isolated from one another as a result of fragmented liquidity across the numerous chains.

Bridges were created as a crucial component of the infrastructure to connect chains to one another, allowing liquidity to move from one chain to another. Bridges, however, have furthermore shown to be among the most difficult decentralized apps (DApps) to protect.

According to blockchain analytics  company Chainalysis, 64% of the $3.1 billion taken from DeFi protocols in 2022 was lost due to bridge protocol attacks. LayerZero came as a solution to the latter problem.

What Is LayerZero?

An open-source omnichain interoperability framework  called LayerZero enables seamless information sharing between different blockchains. It is an interoperability protocol that makes it simpler for various blockchain networks to interact with one another by utilizing a cutting-edge method.

In plain English, LayerZero makes it simple for all supported blockchains to connect with one another, enabling functions like swaps, transfers, borrowing, lending, and more amongst various blockchains.

How Does LayerZero Work?

LayerZero Endpoints

On each chain it supports, LayerZero deploys a collection of smart contracts called LayerZero Endpoints. These smart contracts can be put on additional chains to integrate into LayerZero’s network. They connect all of the supported chains.

Consider a cross-chain borrowing scenario where a user is attempting to borrow USDC on the Avalanche blockchain in exchange for Ethereum deposits of WBTC.

The transaction details are provided to the LayerZero Endpoint on the chain after the user conducts the Ethereum operation.

The foundation of LayerZero is the idea that if two independent parties can confirm that a transaction on Chain A is legitimate, then Chain B may be confident that the transaction on Chain A is legitimate and can therefore complete the transaction on Chain B.

Chain A in the scenario above is Ethereum, while Chain B is Avalanche. The Oracle and the Relayer are separate, off-chain entities that comprise the system. Both of these organizations receive information about the transaction via the Ethereum Endpoint.

Using the information it has received, the Oracle creates the block header for the transaction, and the Relayer independently creates the proof for the transaction.

The transaction is legitimate if the block header and evidence agree. Once this is established, Avalanche will receive a notification to finish the transaction. This scenario involves depositing the necessary amount of USDC into the user’s wallet, which completes the cross-chain borrowing transaction.

However, some DeFi users have opposed the use of the Oracle and Relayer since there is a danger to the platform’s security in the event that the Oracle and Relayer are not truly independent and have conspired to mislead the other users.

Ultra Light Node

Without the need for an intermediary chain or expensive on-chain light nodes, LayerZero uses an Ultra Light Node (ULN) and decentralized oracles to securely transport messages between chains.

Modular and Scalable

Because LayerZero is modular and extendable, new chains and functionalities may be added without changing the basic protocol. In comparison to other strategies that might necessitate substantial changes to the protocol when it comes to adding new chains, this makes it a more flexible and scalable solution.

Use Cases

Bridging

Bridging is where LayerZero’s technology is most directly applied. In actuality, the bridging protocol Stargate Finance was the first DApp to be implemented on LayerZero.

With support for transfers between eight L1 and L2 chains, including Ethereum, BNB Chain, Avalanche, Polygon, Fantom, Arbitrum, Optimism, and Metis, Stargate Finance is an omnichain bridging protocol.

Cross-Chain Swaps

LayerZero permits not only bridging but also cross-chain exchanges. DEXs (decentralized exchanges) that handle several chains have already integrated LayerZero’s solutions, including Sushi, Hashflow, WOO Network, and others.

Cross-chain Borrowing

Similar to this, LayerZero’s technology can be included in money market protocols to permit cross-chain borrowing. Users who deposit with Radiant Capital, which is deployed on Arbitrum and the BNB Chain, can borrow on any of LayerZero’s eight supported chains.

Omnichain Fungible Tokens

Some multichain initiatives have gone above and beyond the standard DeFi functions by converting their own native tokens into omnichain fungible tokens (OFTs), which are fungible across multiple chains.

In order to facilitate seamless 1:1 native token transfers between the chains they are deployed on, projects who have expanded over many chains, like Trader Joe, have made their token omnichain. They do this by utilizing LayerZero.

Cross-Chain governance

With LayerZero, Pendle’s yield tokenization technology, cross-chain voting, reward accrual, and reward boosting are made feasible for users who locked the PENDLE token as vote-escrowed PENDLE (vePENDLE).

In the upcoming years, multichain governance support will probably also become more crucial in order to support the growing popularity of multichain protocols.

Omnichain NFTs

The acceptance of omnichain non-fungible tokens (ONFTs) is not surprising given the deployment of OFTs. The most notable example is the opening of a bridge between LayerZero and the well-known NFT collection Pudgy Penguins, allowing one of their subcollections, Lil Pudgys, to be bridged to Arbitrum, Polygon, or the BNB Chain.

Projects like OmniX have also started to develop ONFT infrastructure for the NFT area, including ONFT trading, bridge, and launchpad features.

Potential Airdrop

Many believe that there may be a potential ZRO airdrop soon, even though the team has not officially announced one. The volume of LayerZero’s omnichain bridge—Stargate increased as airdrop farmers intensified their efforts in a quest to qualify.

As evidenced by the Arbitrum, Aptos, and Blur airdrops, airdrops have been a common strategy for blockchain companies looking to create a devoted fanbase and offer investors a return on their investment.

Conclusion

The demand for trustworthy bridging and interoperability between chains has never been greater as protocols become more multichain. In order to maintain an open, omnichain crypto ecosystem, LayerZero continues to support and provide the necessary infrastructure.