LayerZero is a protocol that offers a completely new approach to transferring cryptocurrencies between multiple blockchains

LayerZero is a protocol that offers a completely new approach to transferring cryptocurrencies between multiple blockchains. An omnichain interoperable protocol, LayerZero offers a robust infrastructure on which many types of cross-chain applications can be developed. Focus on a project with the potential to revolutionize the interaction between blockchains.

What is LayerZero?

The LayerZero protocol was born from the will to answer a precise problem. Indeed, these last years, many blockchains with their own technical characteristics have been created. These blockchains gave rise to the emergence of many decentralized applications in their own ecosystem.

However, most of these ecosystems are isolated from each other as they have no way to natively communicate with each other. As a result, users and developers must split their liquidity between these blockchains. For the developers at LayerZero, this is the major drag on the adoption of blockchain by the masses.

As its name suggests, LayerZero is a layer 0 project, meaning that it is a project that offers a common foundation for all blockchains that wish to connect to it.

More precisely, it is defined as an omni-chain protocol, with an interoperable platform offering a common infrastructure on which blockchains can interact.

At the time of writing, to convert tokens between two blockchains for example, two main solutions are available, either using :

a centralized exchange platform such as Binance, but the user must trust the platform at all times of a conversion process taking place off-chain;

a decentralized (DEX) cross-chain exchange like AnySwap or THORChain, which partly solves the problem of trust thanks to on-chain transactions, but which requires the use of an intermediate consensus layer, so the user must trust this intermediate blockchain.

Both of these methods result in a trust trade-off. Thus, despite the demand, no efficient and straightforward solution requiring no trust has emerged so far. The developers of LayerZero propose to eliminate this trade-off as a foundation for future applications adopting it (bridges, DEX, etc.).

The LayerZero ecosystem

LayerZero offers a base allowing the transfer of native cross-chain tokens. But how exactly does it work?

Cross-chain swap in one transaction and without intermediary

To make a cross-chain swap, the user can use a centralized exchange platform. The user has to trust the platform, which acts as an intermediary in a BTC/ETH swap for example: by selling 1 BTC, the user expects the platform to give him the equivalent in ETH. However, the user is exposed to various risks (hack, theft, inability to withdraw funds, etc.).

On the other hand, using a decentralized cross-chain exchange requires trusting an intermediate blockchain and therefore an intermediate token. For example, THORChain and its token RUNE or AnySwap and its token ANY. Thus, the transfer of tokens requires two intermediate transactions with these cross-chain DEX.

Example of a transfer with tokens A and B on THORChain to be more concrete:

first intermediate transaction: the A tokens are converted into RUNE tokens;

second intermediate transaction: the RUNE tokens are converted into B tokens.

This conversion process therefore requires trusting this intermediate blockchain, the THORChain blockchain in our example. Cross-chain transactions, although possible here, are done at the cost of an unnecessary and expensive complexity.

LayerZero proposes a solution to make a cross-chain swap in a single on-chain transaction and without intermediary. Decentralized finance applications and decentralized exchanges can be developed on this solution.

The components of Layer Zero

The LayerZero Endpoints act as a user interface: each blockchain on the LayerZero network has a LayerZero Endpoint implemented as a series of on-chain smart contracts. This is what will allow the user to use the LayerZero protocol to exchange his tokens.

The main functionality of an Endpoint is condensed into three modules in this order: Communicator, Validator and Network.

A fourth module, the Libraries, completes the Endpoint. These are smart contracts that define how the communication for a specific blockchain should be handled. Thus, each blockchain in the LayerZero network has a Library associated with it, and each Endpoint includes a copy of all Libraries.

The Libraries allow adding support for new blockchains to LayerZero without changing the three main modules.

However, as it is, transactions would be potentially expensive depending on the blockchains used (Ethereum for example), LayerZero has developed a less expensive solution by designing the lightest possible client.

Thus, the task of retrieving the block headers and proofs of transactions required for a transaction are entrusted to two off-chain entities: the Oracle and the Relayer. This is how endpoints achieve low-cost usage, even on blockchains like Ethereum.

The Oracle and the Relayer of LayerZero

An Oracle allows real-world data to be integrated into smart contracts. It is independent, and in the case of LayerZero, will allow to read the header of a block from a blockchain to send it on the other blockchain.

LayerZero's Relayer, on the other hand, is an off-chain service similar to an Oracle, which has the task of retrieving evidence for specific transactions.

The Oracle and the Relayer must be independent to ensure the validity of a cross-chain transaction. This design ensures that there is no collusion between these two off-chain services, and this independence guarantees the implementation of trustless transactions.

The Relayer is provided by LayerZero while the Oracle will use Chainlink for this task, a network of decentralized oracles.

A cross-chain transaction with LayerZero: step by step

The figure above illustrates each of the 13 steps required for a cross-chain transaction with LayerZero.

Let's detail more concretely the role of each step:

1: the user application of the blockchain A sends a request to the Communicator containing the following information: t, the unique transaction identifier, dst, an identifier pointing to a smart contract of the blockchain B, the payload, i.e. any data that A wishes to send to B, and the payment related to the use of the Relayer;

2: the Communicator gathers the whole and sends it to the Validator;

3 and 4: the Validator sends t and dst to the Network, which is thus notified that the block header of blockchain A must be sent to blockchain B. At the same time, the Validator sends everything to the Relayer, notifying it that the proof of the transaction must be sought and sent to blockchain B;

5: the Network sends the current block identifier and the dst to the Oracle, notifying it that the block header of blockchain A must be sent to blockchain B;

6: the Oracle reads the block header of blockchain A;

7: the Relayer reads the proof of transaction associated with the transaction and stores it off-chain;

8: the Oracle confirms that the current block matches the received block header and then sends it to the Network on blockchain B ;

9: the Network sends the hash of the block header to the Validator;

10: the Validator transfers the hash of the block header to the Relayer;

11: the Relayer sends a list of data (dst, payload, proof of transaction) that correspond to the current block to the Validator;

12: the Validator uses the proof of transaction thus received with the block header stored by the Network to validate or not the associated transaction and then transmits it to the Communicator;

13: the Communicator sends the packet (dst, payload) to the user application of blockchain B.

Thus, we can observe more concretely that instead of a certain form of trust to be given to a protocol or an entity, LayerZero relies on the independence of the Oracle and the Relayer to correctly validate the cross-chain transactions. As long as there is no collusion between the Oracle and the Relayer, then LayerZero will guarantee the transaction.

In particular, step 12 is the most important, since the Validator will validate the transaction only if the block header (read by the Oracle) and the proof of transaction (read by the Relayer) it has received match.

LayerZero is the first protocol working in this way to achieve a cross-chain transaction. The developers believe that this is the ideal solution, requiring no trust from the user.

What are the roles of LayerZero's token?

At the time of writing (November 2, 2022), LayerZero has not yet made official the upcoming arrival of its own token. Nevertheless, in the source code of the protocol, the ZRO ticker is mentioned in several lines of code and would thus be related to the future token of the protocol. Thus, the roles of the ZRO token are not yet known, as well as its Tokenomics.

It is therefore very likely that it will be deployed in the near future, by means of an airdrop in particular. This has not been officially confirmed, but if you want to make yourself eligible for a potential airdrop, you can interact with LayerZero now.

As soon as the ZRO token is officially announced by the LayerZero team, this section will be updated with more information.

LayerZero's fundraising

The company at the origin of the project, LayerZero Labs, has managed to close several significant rounds of financing:

Seed round at $2 million ;

Series A at $6.6 million led by BINANCE Labs and Multicoin Capital;

Series B at $135 million in early 2022, led by FTX Ventures, a16z and Sequoia Capital.

This brings the total amount of funds raised by LayerZero Labs to $143.6 million.

LayerZero's team and partners

LayerZero Labs, based in Vancouver, Canada, is the company behind the LayerZero project and employs about 20 people. The team include

• Bryan Pellegrino: co-founder and CEO ;
• Caleb Banister: co-founder;
• Ryan Zarick: co-founder and CTO;
• Ari Litan: Director of Operations.

In terms of partners, several projects have already integrated the LayerZero protocol including:

• Aptos with Aptos Bridge;
• Harmony with Horizon Bridge;
• Stargate, an application developed on the LayerZero protocol that allows cross-chain asset transfer;
• Angle, a stablecoin protocol;
• Circle, the issuer and guarantor of USDC and EUROC stablecoins.

Our opinion of LayerZero

LayerZero Labs offers a very interesting solution for trustless cross-chain asset transfer with its LayerZero protocol.

Moreover, the project already has some credibility in the industry, materialized by the design of Aptos Bridge with LayerZero, Aptos being one of the next generation layer 1 blockchains.

Another very interesting integration is the Horizon bridge of the Harmony blockchain. Indeed, this bridge already existed before, but was victim in June 2022 of one of the biggest hacks in the industry: $100 million stolen. A few months later, at the end of October 2022, the Horizon bridge is back online with the LayerZero protocol.

Note that bridges are the preferred targets of hackers since they have the most vulnerabilities in their design, Vitalik Buterin himself pointed out. It will be very interesting to see if the solution brought by the LayerZero protocol allows to protect oneself from it.

Anyway, one thing is sure, big names in the industry already trust this project for cross-chain transfers.

A native token named ZRO will surely complete the LayerZero protocol in the form of airdrop, so don't hesitate to use the different applications based on the protocol to have a chance to be eligible.