The Big Idea: LayerZero Labs

LayerZero Labs recently raised $135mm in venture funding in a deal co-led by Sequoia Capital, FTX Ventures, and Andreessen Horowitz earning a $1bn valuation. This protocol is one of the most talked about of the crypto world but what does it actually do?

Over the last several years we have seen a rise in many different blockchains, each with various positives and negatives associated with them. The idea of a multi-chain paradigm where various chains had specializations and unique benefits that could pertain to specific sub-sectors of applications was fairly widespread. Applications that have subsequently developed have had many choices of chains on which to build but one downside of this multi-chain reality is isolation between chains. Transacting between chains have historically brought a unique suite of difficulties and challenges and has required a third-party mechanism.

Centralized exchanges are a popular mechanism to transfer tokens of two different chains. This method, however, requires trust that the exchanges are correctly tracking deposits and withdrawals. Trusting a centralized exchange that has custody of assets defeats the decentralized principal of cryptocurrency.

Decentralized exchanges (DEXs) are another mechanism. DEXs involve two intermediate transactions — one to convert the sender’s token to an intermediate token and one to convert that token to the desired token (or a wrapped token). This requires trust of the intermediate consensus layer confirming the transaction on the base chain and minting the token on the destination chain. DEXs are complex and often transaction and cost heavy.

Both of these mechanisms require one form of trust that shouldn’t be necessary in a purely decentralized protocol.

LayerZero provides a solution as the first truly trustless omnichain inoperability protocol.

LayerZero is a communication protocol that sends messages across chains. The protocol requires setup of LayerZero Endpoints which are the user facing interfaces. Each chain has a LayerZero Endpoint setup via a series of smart contracts. This allows a message to be sent between chains and is the framework guaranteeing valid delivery from one chain to another. The protocol involves a few more key pieces. The first of which is The Oracle, a third party service that reads a block header from one chain and sends it to another. This can theoretically be any third party service but LayerZero uses Chainlink. The Relayer, meanwhile, is an off-chain service that gathers proof of a specific transaction and delivers that to the destination chain. For valid delivery to occur the transaction “t” associated with the message “m” needs to be validated. This occurs only if the block header and transaction proof are matched.

This matching can only happen if the block header (from the oracle) and transaction proof (from the relayer) match and are valid or they can theoretically match and be invalid. The only possibility of the latter option is if the relayer and oracle collude. This is the key to this protocol. These two major components of the protocol are independent of each other inherently, ensuring security. This leads to faith in independence as opposed to trust of mechanisms, the former being much easier to be content with. This is the nature underlying this protocol that makes it unique.

Here is a workflow diagram of the protocol transmitting a message.

T — transaction, t — unique transaction identifier for T, dst — global identifier pointing to a smart contract on chain B, payload — any data that app A wishes to send to app B, relayer.args — arguments describing payment information in the event that app A wishes to use the reference relayer.

LayerZero is truly trustless, ensures valid delivery through faith in independence, and is scalable. It requires no intermediate transactions or faith in a centralized authority. It is a transaction purely between native tokens and exclusively through the LayerZero protocol. It is also very lightweight which has been a key problem in the past. By delegating the task of fetching to off-chain entities, the LayerZero Endpoints are very lightweight and can effectively operate on historically expensive chains like ethereum.

While this messaging is most easily associated with bridging, this is an amazing technology that has massive use-case potential. Some examples of use-cases include cross-chain decentralized exchange (without needing wrapped tokens or intermediary sidechains), multi-chain yield aggregation, multi-chain lending and borrowing, improved automated market making, more purely cross-chain based applications, and greater overall liquidity. The protocol has endless applications while also ensuring security and operating in a lightweight manner.

This protocol could truly be the solution to the multi-chain difficulties within the cryptocurrency space that have been in extreme focus lately. The upside of this technology is truly notable with a huge potential market to become the premier omnichain protocol for. LayerZero truly appears to be the base layer in which the future of decentralized applications can be built to ensure pure omnichain capability.