What is LayerZero?
LayerZero is an interoperability protocol that is created to connect the different blockchains, utilizing novel techniques to immediately validate the cross-chain transactions that are taking place, overcoming the challenge of liquidity fragmentation, where activities on every chain is siloed within their own ecosystem.
Key Takeaways
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LayerZero aims to create a pathway and platform for proper communication between separate blockchain networks. As part of this communication, blockchain networks will be able to share assets, states, liquidity, and more.
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LayerZero runs an Ultra-light Node (ULN) and leverages the ability of a Decentralized Oracle Network (DON) to connect a decentralized application to the outside world in synergy with Relayers to transfer information between two endpoints. It also attempts to create a better security atmosphere by partitioning the communicating parties.
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LayerZero could gain application in instances where blockchain networks need to share resources between themselves or completely borrow abilities of the other and where protocols, or blockchain enthusiasts need to do the same.
According to data from CoinGecko, Layer 1 platforms control a market cap of over $800 billion. While Bitcoin and Ethereum dominate this list, other notable Layer 1 platforms like BNB Smart Chain (BSC) and Solana also control a significant share of the market. Decentralized networks keep multiplying and each network has at least one unique feature and a whole ecosystem of decentralized applications built around it.
The only solution to this dilemma is a technology that makes it possible to use different networks at once or use another network without totally abandoning the other – interoperability.
Interoperability on the Blockchain
‘Interoperability solutions’ connotes the different solutions sought by decentralized applications to create an exchange portal between separate blockchain networks. Ultimately, an interoperability protocol is expected to enable blockchain networks to mutually share their resources and also allow less-equipped networks to borrow resources from a more established network.
These resources include liquidity, crypto assets, security infrastructure, and even users. ‘Users’ in this context refers to the freedom to move between separate interoperable networks. Attempts at this have led to the creation of bridges that allows the transfer of assets between blockchain networks.
To create a communication path between two separate networks, interoperability solutions develop an intermediary by running a middle chain or a node.
Middle chains receive messages from the source chain, process them and forward them to the destination chain. The middle chain assumes the power of a proper network and has full authority over the validation and progression of information to the destination chain. Therefore, a mishap on the middle chain could dismantle the whole protocol and lead to loss of assets. Middle chains are cost-effective, but ultimately face security issues.
An alternative to using a middle chain is running an on-chain Light Node. Interoperability protocols powered by Light Nodes are regarded as more secure. Such protocols run a node on the destination chain, receive messages from the source chain, validate them, and sequentially add them to the destination chain. The Light Node is only as powerful as any other node on the network, the loss is therefore minimal in case of a dysfunction. But Light Node interoperability protocols are quite cost-intensive.
This is where LayerZero comes in. LayerZero looks to overcome the security shortfalls of existing interoperability systems and develop a bulletproof design for intercommunication between blockchain networks. So what exactly is LayerZero and how does it work?
An Introduction to LayerZero
"LayerZero will connect all chains seamlessly, having users unaware they are even using it. It will enable current and new Decentralized Applications to expand beyond the borders of EVM or Non-EVM, creating the world’s first omnichain applications. "
- Ryan Zarick, Co-founder and CTO at LayerZero Labs
LayerZero is an interoperability protocol that mediates the transfer of messages from user applications on one decentralized network to another. It conveys information between two on-chain endpoints by running (ultra) Light Nodes and utilizing relayers and decentralized oracles. Data conveyed in this process range from plain data to state changes and high-level communications between decentralized networks. Ultra Light Nodes keep proof of every transaction on the source chain and provide them (in bulk) whenever the destination chain requires them.
LayerZero claims to be working on a platform that fosters true communication between separate decentralized networks while maintaining top-level security and cutting costs. The Ultra Light Node accounts for security and cost-effectiveness while oracles and relayers in synergy power the data transfer system.
How Does LayerZero Work?
The main constituents of LayerZero’s interoperability protocol are; an Ultra Light Node, a decentralized oracle, and relayers.
Ultra Light Node
Light Nodes are like mini validator nodes on a blockchain network. For interoperability protocols, the Light Nodes are set up on the destination chain. As described earlier, Light Nodes foresee the reception of data from a source chain and the subsequent integration of the conveyed data into the destination chain, thus completing the communication cycle. But Light Nodes sacrifice cost-effectiveness for improved security.
As a fix, LayerZero uses Ultra Light Nodes (ULNs). ULNs are very much like Light Nodes, but instead of sequentially adding each new transaction to the destination chain, Ultra Light Nodes package these transactions and send them all at once at the request of the destination chain. LayerZero claims that this process saves cost while maintaining the level of security offered by on-chain Light Nodes.
Oracles
Oracles are relational database management systems. Blockchain oracles enable decentralized systems to communicate with the world outside of it. This includes a linkage between the web3 and web2 worlds and between two decentralized applications. Oracles basically create data feeds and plug the target system with these data in a form that they can easily utilize. LayerZero interoperability protocol uses decentralized oracles like the ones developed by Chainlink and Band protocol.
Relayers
Relayers complete a messaging cycle between communicating networks by sending proof of transaction to the destination. With the proof, the destination chain is able to integrate the data or message from the source chain into its own system and executes possible commands from the message.
Overview of How LayerZero Works
LayerZero creates endpoints at each of the communicating networks, say Network A (source chain) and Network B (destination chain). To send a message to Network B, a user application from Network A selects a preferred oracle (say Chainlink DON) and a relayer for their cross-chain message. The endpoint at Network A feeds the Chainlink DON and the selected relayer with the details of the message including its destination. The oracle forwards the details of this message to Network B while the relayer submits proof of the transaction to the target chain.
The communication between the oracles and the target chain takes the same form as when oracles feed blockchain protocols with data from the external environment.
Features of LayerZero
LayerZero claims to be a fix for the shortcomings of contemporary blockchain interoperability solutions. Based on how it operates, it opens up possibilities such as;
Improved Security
Based on its published design, LayerZero takes security into consideration on many accounts and sets up its system with resources to resist attempts at manipulation. As a first layer of protection, the Ultra Light Node ensures that a majority of the system remains unharmed in an unfortunate case of exploitation. This is further strengthened by the security system of the decentralized oracle networks used in communication. In a case where these two systems are bypassed, a scenario in which LayerZero claims to be rare, the segregation of the protocol’s systems provides the next straw of resistance.
The oracle and relayer systems on the source and destination chain are abstracted, as such the security system on the source chain can be affected while the target chain remains unaffected. This further minimizes possible losses.
Universal Data Exchange
In a publication made in September 2021, LayerZero’s co-founder, Ryan Zarick explained the possibility of developing a single interface and code for applications and running them on different blockchains without changing the original code. This system, according to him, will be powered by a data exchange system that enables multi-chain applications to function on different blockchains by implementing a send and receive function.
This also works for asset bridges, in this case, the bridging platform doesn’t need to create a new bridging contract for every asset or on every chain. Unlike current interoperability protocols that are majorly asset bridges, LayerZero’s design will likely support other data and resource-sharing forms.
Ryan Zarick’s presentation teases a unified liquidity system as well.
LayerZero Use Cases
So, how can these features be possibly utilized?
Bridging
Bridges are currently the most popular interoperability solution. Cross-chain bridges allow asset holders to move their assets between different Layer 1 and Layer 2 platforms. There are a handful of reasons why an investor would bridge their assets to another network, like taking advantage of the fee structure on the target chain, or benefitting from applications on the destination chain. Thanks to cheaper Proof of Stake (PoS) chains like Polygon, Fantom, and BNB Smart Chain (BSC), bridges are more important than they have ever been. But current bridging platforms have their shortfalls, apart from the poor security already discussed.
The capital intensiveness of running a bridge is due to the need to develop new infrastructures for every bridging direction. For instance, a bridging platform that supports 5 networks needs to write 5 different codes and run 5 middle chains or light nodes.
LayerZero claims to be a fix for this; first, the ultra-light node is less demanding and the universal data exchange means that creating a bridge for multiple networks using the same infrastructure and code is possible. Bridges like this are more efficient and budget-friendly, removing the need for different sets of code for bridging different chains.
Cross-Chain Swaps and Unified Liquidity
An investor who wishes to purchase a crypto asset on a different network will first need to bridge a uniform asset to the target chain and make their purchase using a decentralized exchange on the target chain. LayerZero’s testnet bridge can directly exchange Ethereum from the main network and Layer 2 solutions like Arbitrum and Optimism for Goerli ETH. A similar system can be developed on a larger scale to power cross-chain swaps and cut out the process of bridging and connecting to an exchange on the target platform.
Current bridges use separate liquidity pools, for instance, different liquidity pools serve bridging requests from Ethereum to Polygon PoS chain and from Fantom’s Opera Chain to Polygon. This could lead to a difference in efficiency. Liquidity on Ethereum to Polygon bridge could be sufficient enough to handle all requests while the Fantom to Polygon bridges lack sufficient assets on both chains to instantly complete a bridging request.
Ryan Zarick, LayerZero’s co-founder, mentions that LayerZero can leverage a unitary liquidity pool to satisfy bridging requests from several destination chains.
"LayerZero enables the holy grail of bridging: unified liquidity across all chains with guaranteed finality on the source chain. This means when a user transfers an asset from Chain A to Chain B, the user is guaranteed the asset on Chain B and the LP providers receive fees from all incoming transactions to Chain B regardless of the source chain."
Omnichain Tokens and NFTs
By design, LayerZero’s technologies, create a literal zero layer. An ecosystem capable of interacting with any other network, sharing resources, and running freely without platform restrictions – an omnichain. LayerZero could pioneer the advent of ‘non-native’ crypto assets. Non-native in the sense that they can be used on every chain without the need to go through bridges that change their original form to port them to the target chain and back. Ominichain tokens and NFTs will be unique and could enjoy a faster adoption rate as investors can easily buy and store them on their preferred blockchains.
Final Thoughts
Blockchains are constantly developing – from Bitcoin to the several forks of the core Bitcoin network and now to numerous smart contract blockchains. A good percentage of the latter are EVM-compatible forks of the Ethereum blockchain, where each of these networks has its unique features. While these types of blockchain networks already make up a large portion of the total cryptocurrency ecosystem, there are no signs of the proliferation slowing down soon.
Blockchains are set to be an important part of the future, but their final form is not known yet. The cards fall on two big guesses; a giant blockchain that fits all our needs for a decentralized network or a basket of split networks with unique properties. If the latter becomes the norm, then an effective system that allows blockchain enthusiasts to benefit from the individual strengths of the network is essential.
The many interoperability projects understand this and have been in the continuous business of developing possible communication paths between blockchain networks. Cross-chain bridges are a popular product of this attempt and have shown great usability. Bridges have powered the movement of billions of dollars worth of crypto assets between separate networks. But they are not without their own shortfalls, we reflected on these issues earlier on.
LayerZero hints at the next stage of interoperability for blockchain networks, one that transcends the bridging of crypto assets and focuses on enabling communication. We have discussed a few use cases for a system like this, but even more will emerge in the future. LayerZero’s technologies and designs could create or at least, pioneer gilt-edge interoperability systems. It's also possible that LayerZero will launch a token, and this may come with an airdrop opportunity for early adopters. However, it is important to recognize the early stage of development and what it means for users. Extra caution is recommended while interacting with novel protocols. Also, note that this article is only educational and not financial advice. Always do your own research before investing and interacting with protocols.
Joel is deeply interested in the technologies behind cryptocurrencies and blockchain networks. In his over 7 years of involvement in the space, he helps startups build a stronger internet presence through written content. Follow the author on Twitter @agboifesinachi
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