Introduction
There are already hundreds of active blockchains in the cryptocurrency industry, a surge in new blockchains since the 2008 introduction of Bitcoin. It is not surprising in this multichain context that liquidity eventually dispersed throughout the several chains, causing chains to be isolated from one another.
Describe LayerZero.
LayerZero is an omnichain interoperability protocol that uses a special communication primitive to link block chains smoothly for a number of uses.
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.
What Is the Procedure for LayerZero?
Consider a cross-chain borrowing scenario where a user attempts to borrow USDC on the Avalanche blockchain using their Ethereum deposits of WBTC. The transaction details are provided to the LayerZero Endpoint on the chain once the user first conducts the operation on Ethereum.
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 thus complete the transaction on Chain B. The Oracle and the Relayer are the two separate, off-chain entities that make up the system.
Using the information it has received, the Oracle then creates the block header for the transaction, and the Relayer separately creates the proof for the transaction. The transaction is legitimate if the block header and the evidence are in agreement. Once this is established, Avalanche will get a notification to finish the transaction. In this case, the cross-chain borrowing transaction is completed by depositing the necessary amount of USDC into the user's wallet.
However, some DeFi users have opposed the usage of the Oracle and Relayer since there is a danger to the platform's security in the case that the Oracle and Relayer are not truly independent and have conspired to mislead the other users.
Examples of LayerZero's Use
Hashflow, LayerZero supports cross-chain swaps in addition to bridging.
Similar to this, LayerZero's technology may be included into money market protocols to provide 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.
In addition to the typical DeFi functionalities, some multichain projects have gone a step further by converting their own native tokens into omnichain fungible tokens (OFTs). In order to facilitate seamless 1:1 native token transfers between the chains they are deployed on, projects that have expanded over many chains, like Trader Joe, have made their token omnichain. They do this by utilizing LayerZero.
By combining LayerZero's yield tokenization protocol, Pendle, with cross-chain voting, reward accrual, and reward boosting for users who locked the PENDLE token as vote-escrowed PENDLE (vePENDLE), cross-chain governance is also made feasible. In the upcoming years, multichain governance support will probably also become more crucial in order to support the growing popularity of multichain protocols.
In addition, it is not surprising that omnichain non-fungible tokens (ONFTs) have gained popularity 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 linked to Arbitrum, Polygon, or the BNB Chain. Projects like OmniX have started to create ONFT infrastructure for the NFT area as well, including ONFT trading, bridge, and launchpad capabilities.
Currently, LayerZero has processed just over four million messages on its protocol, locking over $7 billion in total value (TVL), and handling just over $6 billion in transactional volume across around 80 DApps.
As LayerZero develops as a product, further cutting-edge goods will probably continue to be created using their technology, offering even more new features for the market.
Investors LayerZero
Some of the biggest names in the industry, like as Sequoia, a16z, and Coinbase Ventures, are also supporting LayerZero.
In fact, they recently completed a Series B investment round in early April 2023, raising $120 million at a $3 billion value—tripling its worth from the year before. The fundraising featured the support of various well-known sponsors, including more well-known names like Franklin Templeton or Christie's.
Conclusion
The demand for trustworthy bridging and interoperability between chains has never been greater as protocols become more multichain.
