Why we invested in LayerZero Labs

A Multi-chain, Multi-layer Future

Over the past few years, there has been a steady increase in the adoption of blockchain technologies. Take for example the most widely adopted blockchain — Ethereum: Google search volumes for the keyword “Ethereum” peaked in May 2021, coinciding with a record high 1.65million daily transactions on the Ethereum network. Simultaneously, as network participants on Ethereum competed for limited block space, the average fee per transaction on Ethereum skyrocketed to almost $70. This is because in its current state, Ethereum can only support 15–45 transactions per second, and users incentivize miners to prioritize their transactions by offering to pay a higher fee. This has sidelined a vast majority of retail investors who cannot afford to pay absurdly high fees just to process a transaction. In addition, this makes Ethereum an impractical choice for many low-value high-throughput use cases.

Source: The Block Crypto
Source: Coin Metrics
Source: DeFi Llama

Primer on cross-chain architecture & bridges

This vision of a multi-chain multi-layer future has introduced the need for cross-chain infrastructure in order to bridge the gap between the various blockchains and across scaling solutions. This has presented a unique set of problems that either hinder or defeat the core purpose of decentralized public blockchains.

Current Problems

1. Centralization

  • Lack of privacy and anonymity — CEXes require KYC, this option may be infeasible for many users who wish to preserve their privacy
  • Regulatory risk — there have been several instances where CEXes have blocked users from certain jurisdiction or prohibited the withdrawal/trading of certain assets for regulatory reasons
  • Counterparty risk — users must trust the CEXes’ custody of their assets, as the saying goes “Not your keys, not your tokens”

LayerZero Labs

At its core, LayerZero is an omnichain interoperability protocol. Think of it as the critical infrastructure layer that connects any given contract across every given chain. It is the key messaging primitive that empowers a completely new dimension of cross-chain composability and functionality.

The Solution

First, we must dive into the design that enables LayerZero to achieve this.

  1. Block header, which contains the receipts root
  2. Transaction proof — ie. Merkel-Patricia proof on EVMs
  1. An Oracle forwards the block headers — any chosen oracle (ie. Chainlink, Pyth)
  2. A Relayer forwards the transaction proofs

Power to the Protocol

Another core feature of LayerZero is that applications themselves have complete control over all security parameters. Each protocol has the ability to specify exactly which oracle and which relayer they want to use. The implementation will also be modular enough such that protocols can select an oracle that is an aggregate of a couple querying for best price, or even utilize two out of three consensus from several oracles. In addition, protocols also have the option to specify the number of confirmations they require from the source chain.

Key Benefits of LayerZero

Siloed Risk Infrastructure

Existing cross-chain infrastructure rely on specified entities to either validate transactions or transmit messages across chains. In the recent exploits, a common point of failure would be a compromised or malicious relayer. Some cross-chain designs implicitly trust that any message from the relayer network is valid. An attacker can utilize this vulnerability to tap into the entire liquidity pool, resulting in a catastrophic loss of funds. This places a massive amount of “systematic risk” upon the entire ecosystem, and any protocol bringing additional liquidity is adding more capital at risk to any potential consensus failure or exploit.

Efficiency of LayerZero

As explained above, cross-chain designs with middle-chain layers usually come with additional computation or consensus and/or intermediary tokens. These are both inefficient and unnecessary, adding both security issues and throughput limitations. LayerZero attempts to add as little additional complexity as possible while still maintaining the security of trust-minimized communication.

True cross-chain composability (so much more than just Asset Transfers)

Most cross-chain implementations are primarily focused on supporting asset bridging. This is understandable as bridging tokens is arguably the most common use-case. However, there is a world of possibilities that can be unlocked with cross-chain messaging.

User perspective: Multi-chain Money-Market Aggregation

Currently, when users are depositing their collateral to borrow assets, they are confined to the bounds of the blockchain their assets are on. If there are better rates on an application on any other chain, or if they would like to deposit their borrowed assets onto a farm on another chain, they must utilize an asset bridge and pay several transaction fees in the process.

Protocol perspective: Cross-chain Governance

We are already seeing multiple blue-chip DeFi applications being deployed onto several chains. This introduces an interesting problem for governance. Since the protocol’s users and token holders are fragmented across as much as 9–10 different chains, governance can be extremely tedious. Does a protocol host governance on the largest chain? Or a separate proposal or vote on each chain? Or potentially off-chain?

First Application: Stargate (Asset Bridge)

As LayerZero works towards its official mainnet launch, they have built the first application, Stargate, that will utilize LayerZero’s cross-chain architecture to showcase the new design space that it unlocks.

  1. Native assets: This means that there are no synthetic/intermediary tokens needed, Stargate will feature only native tokens that users desire. This eliminates unwanted intermediary tokens and unnecessary swaps.
  2. Unified liquidity: There will be one single pool of liquidity that is shared between all available chains simultaneously. These are also single sided pools with no impermanent loss. This greatly improves the capital efficiency of all locked liquidity.
  3. Instant guaranteed finality: Applications on the destination chain know for certain that a committed transaction will resolve at the source chain. This overcomes a crucial problem of transactions revering due to lack of liquidity at the destination chain.

Conclusion

In conclusion, as we progress steadily forward toward a multi-chain multi-layer world, we believe that LayerZero’s cross-chain architecture will be at the center of this, being the critical infrastructure layer that catalysts a truly permissionless and trustless omnichain future.

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Sino Global Capital

Sino Global Capital

A team of former consulting, Wall Street, private equity, government, and corporate veterans accelerating the blockchain revolution