LayerZero (ZRO): cross-chain messaging analysis

LayerZero (ZRO): cross-chain messaging analysis

Presentation, operation, opportunities, limits, etc. An independent study of the LayerZero project and its ZRO token by our team of analysts.

What you need to know 🐳

At present, LayerZero is one of the most important interoperability protocols in decentralised finance (DeFi).

Thanks to its technology enabling networks to have unified liquidity, a large number of protocols now rely on LayerZero.

General presentation 🧬

LayerZero is a cross-chain messaging protocol enabling the deployment of interoperable applications. Its technology gives contracts on different chains the ability to communicate with each other.

At a time when the number of blockchain networks is growing (there are more than 150 chains holding more than one million dollars of immobilised value, TVL, according to DeFi Llama), such a technology helps to combat the fragmentation of liquidity.

The project was launched in September 2021. At the time, there were two main ways of passing messages between chains: via an intermediary chain (like Polygon with Ethereum) or via on-chain light nodes (as with Cosmos' IBC).

These solutions have their advantages but unfortunately present significant cost and security issues.

LayerZero has therefore created a unique architecture enabling messages to be transmitted securely and inexpensively.

It is based on 3 major components: endpoints, DVNs and the executor.

  • Endpoints are specific to each blockchain and collect the information that applications send them (via block headers). They are immutable contracts.
  • DVNs are independent (permissionless) verification networks. They verify that the message from blockchain application A has been sent to its endpoint. There are currently 15 DVNs, and each project can choose to use several to strengthen its security.
  • The executor guarantees the correct transmission of messages from blockchain A to blockchain B. It makes it possible to send the message directly to the user without charging a gas fee. As with DVNs, the role of the executor is permissionless.

This architecture offers significant security benefits, since it relies on the security of DVNs.

Any application that installs the various endpoints (specific to each network) in its code can therefore pass messages between chains easily. By implementing this system, it becomes an "Omnichain" application.

For transferring cryptos, LayerZero has created a token standard called the Omnichain Fungible Token (OFT). Tokens using it can simply use LayerZero technology to move from one chain to another easily.

This standard is an extension of the ERC20 standard. It is fairly easy to set up and is used by today's largest DeFi projects (notably LRTs).

In contrast to some bridges that use an encapsulation system (blocking a token on chain A and creating a wrapped version on chain B), the OFT standard allows tokens to be transferred across multiple blockchains via a "Burn & Mint" system.


This is what the Stargate bridge (which is developed on top of LayerZero) has put in place: each LP has a global pool per network and the Burn/Mint system makes it possible to recover the same asset on the destination chain as on the originating chain.

Instead of suffering from competition from bridges that fragment market liquidity, LayerZero therefore benefits from unified liquidity.

Financing 💰

LayerZero has successfully raised $263 million (valued at $3 billion) via several rounds of financing.

  • April 1, 2021: unknown amount via a seed
  • September 16, 2021: $6.3 million via a Series A
  • March 30, 2022: $135 million via an extended Series A
  • April 4, 2023: $120 million via a Series B

The lead investors are Andreessen Horowitz (a16z), Binance Labs, Multicoin Capital and Sequoia Capital.

However, other well-known names can be found among the investors: Coinbase Ventures, The Spartan Group and Circle to name but a few.

Team 👾

The vast majority of the LayerZero team is based in Vancouver (Canada).

It was co-founded by:

They all have mainly scientific backgrounds. Some of their work on interoperability can be found on their respective networks, notably Medium.

They also founded Coder Den, a software development company.

The LayerZero community has over 700,000 followers on X.

LayerZero enjoys wide exposure, not least because of the significant speculation there has been about its airdrop.

Status of decentralisation ⛓️

While version 1 of LayerZero was based on closed components, this is not at all the case with the current version. The protocol now incorporates a permissionless security model, allowing anyone to build and run the infrastructure.

On version 1, messages were handled primarily by the oracle (Chainlink/Band, etc.) and the Relayer.

Although it is difficult to corrupt the oracle, anyone who managed to do so would have had control over the messages (requiring the Relayer to collude with it).

On the current version, messages are secured by independent validator networks (DVNs). As said above, there are currently 15 of these and anyone can become one.

Projects that rely on LayerZero's technology can therefore select the set of validators they wish to use according to their needs.

This new architecture considerably strengthens the resilience of the protocol, since if a validator were to be corrupted, it would only affect the platforms that use it.

As for the Endpoints, these are completely immutable contracts: no one has the power to upgrade them. They provide a secure interface with which to interact.


The ZRO token 🌕

On 20 June, LayerZero presented its token to the community: 8.5% of the total ZRO offering was distributed via an airdrop.

This was divided into two categories:

  • 5.5% via a "LayerZero Core" allocation (distributed by the protocol)
  • 3% via an "RPF"

The RPF allocation was distributed to users via the protocols deployed on LayerZero (such as EtherFi, for example).

Any application that had the Omnichain standard could make a request to retrieve tokens (allocations were distributed according to certain criteria).

The ZROs obtained via the DeFi protocols were then redistributed to users according to conditions specific to each application.

As for the usefulness of the token, it gives access to governance power (more details in the "Roadmap" section).

Finally, regarding tokenomics, the total supply of ZROs is set at 1 billion tokens.

  • 38.3% is for the community (via airdrops and other distributions)
  • 32,2% to strategic partners (investors and advisors)
  • 25% to contributors (the team)
  • 4% is bought back by LayerZero and will be redistributed to the community

The tokens reserved for investors and the team are subject to a three-year vesting with a one-year lock-in and monthly release over the following two years.


Roadmap 🗺️

LayerZero does not have an official roadmap, but the project is actively working on new integrations with DeFi protocols to extend its footprint across the ecosystem.

As for its token, ZRO holders will soon be able to vote every 6 months on whether to activate charges on the protocol.

These fees, expressed in ZROs, may be charged in addition to the fees on DVNs and burned in the manner of EIP-1559.

Competition ⚔️

Although LayerZero has innovative technology, its main competitor Chainlink also has an advanced interoperability solution.

In fact, Chainlink, whose main product is based on oracle management, has released a cross-chain messaging solution called "CCIP". This technology also allows messages to be transferred between chains in a simple way.

Interestingly, the deployment of CCIP does not require any additional trust assumption for a DApp that already incorporates a Chainlink price oracle.

There is therefore a risk that Chainlink will vampire the market given that its oracles are already deployed everywhere.

Other cross-chain solutions are also important, such as Wormhole's for example, but this is less present in the EVM ecosystem.

Finally, although they are not yet on the market, Optimism and ZKsync are working on interoperability solutions for their respective ecosystems.

Depending on the technology adopted, this could cause LayerZero to lose market share.

It should also be noted that its business has fallen sharply since the distribution of its airdrop.


Limitations of the 🚧 project

In addition to the serious competitors LayerZero faces, the protocol also encounters certain limitations in its operation.

For a token to adopt the OFT standard, it must be recreated from LayerZero's technology. This causes problems if a token is already installed on a chain.

If the token has little or no liquidity, the new token with the OFT standard can take over by setting up liquidity incentives.

This is the case, for example, for weETH on Optimism, where the token from LayerZero has more liquidity than the token from the official bridge (which is unusable).

But in cases where a token is already well established, the OFT standard would be virtually impossible to adopt.

This is the case for weETH on Arbitrum: there are currently more than 107,000 weETHs ($383 million) installed on the chain, spread across different protocols.

Unless huge incentives are put in place for liquidity towards the new OFT token pool, it is virtually impossible to recreate a token that will be adopted by users.

This is in fact why the OFT version of weETH is not available on Arbitrum whereas it is on OP Mainnet and Base (EtherFi has recently been deployed on these channels).

If LayerZero does not find a way to resolve this structural problem, omnichain integrations on older projects will remain very complicated.

Regulation ⚖️

Like many projects, LayerZero is exposed in the US to prosecution for issuing unregistered financial securities. On the other hand, it is protected in Europe, where this activity is permitted.

Market analysis by Chadi El Adnani, Head of Content & Research at SUN ZU Lab 📈

Since its listing on the main crypto exchanges on 20 June, ZRO has fallen by 30% before rebounding to the current price of $3.8. The token is showing high levels of liquidity over these first 10 days of trading, with daily volumes often in excess of $75 million, and an average depth of market at 50 bps in excess of $1 million on Binance.

LayerZero represents a market capitalisation in circulation of $421 million, positioning it as the 140th most capitalised crypto, with a diluted valuation (FDV) of $3.8 billion. That's in the same waters as its rival Wormhole.


Where can you buy the ZRO token? 🛒

ZRO is available on the exchange platforms Binance, Gate and Bitget for the most important (Gate and Bitget are not regulated in France).

It can also be acquired via Uniswap on a multitude of networks (Ethereum, Arbitrum, Optimism, BSC, Base, Polygon, etc.).

The Big Whale's opinion 🐳

LayerZero is establishing itself as a key player in the field of interoperability. The OFT standard is used by many DeFi tokens and continues to grow.

It is important, however, to keep up with technological innovations on this side, as the competition remains extremely tough.

With regard to its token, the ZRO currently gives holders little power, but we could speculate on other features such as fee sharing to holders, for example.

It will be crucial to closely monitor the adoption metrics for this protocol in the coming weeks.

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