INTRODUCTION

Over the years, there has been significant growth in the number of blockchains being deployed. With the unique functions these various blockchains offer and the trade-offs made, crypto traders now have many options to select from and as such, there is a circulation of funds across various chains.

These blockchains, in a sense of rivalry, are being developed as standalone systems. However, for an emerging industry like blockchain, instead of competition, alliance is needed in order to drive more usability. Of the major challenges facing users of various blockchains, inability to communicate is among the top. A trader who holds a particular cryptocurrency, say Bitcoin, and needs to pay for something in, say Ethereum, should be able to carry out his transaction on Ethereum blockchain with his Bitcoin currency. In other words, we need blockchain networks to get chatty with each other. Previously, this wasn’t a possibility, but realization of the limitation of this led to the idea of building blockchain bridges.

Blockchain bridges are cross-chain links between two or more blockchains. Bridges connect various blockchains by allowing transfer of assets. With bridges, users can transfer tokens and other data across the various chains available, hence, they are known to enhance interoperability.

However, blockchain bridges are known to have their flaws.Whether it’s the risk of thievery by trusted (centralized) bridges or hacks due to smart contract vulnerabilities of trustless (decentralized) bridges, the truth remains that bridges remain the primary target of hackers for exploits.

In fact, reports show that over $2 billion in crypto was lost to bridge hacks in 2022 alone.

The losses incurred from bridges these past few years have led to smarter proposals and developments in terms of aiding blockchain interoperability. One of these developments is the LayerZero protocol.

WHAT IS LAYERZERO?

LayerZero is an omnichain protocol that aims to better enhance blockchain communication and interoperability whilst maintaining security. LayerZero enables transfer of assets across the several chains it supports.

It is worth noting that LayerZero isn’t the first or only project to develop this kind of blockchain interoperability protocol. Notable projects like Cosmos and Polkadot are known as omnichain protocols that connect other blockchains and dApps to enhance interoperability.

FEATURES OF LAYERZERO PROTOCOL

LayerZero has some features that allow smooth communication and transaction across supported blockchains.

Endpoints: LayerZero Endpoints are smart contracts specifically deployed on LayerZero’s supported chains, which connect them to each other and allow communication across them.

Origin or source chain: this is the blockchain where the transaction is initiated from, i.e, the smart contract of the blockchain where the message is sent from.

Target or destination chain: this is the blockchain receiving the transaction details, i.e, the smart contract of the blockchain receiving the message.

Block header: this is the unique identifier of a particular block which contains the details about the block.

Transaction proof: this is the proof that shows a transaction is valid.

Oracle: this is one of the entities that facilitates the transfer of assets between the origin and target chain. Oracles are like database systems that collate data from other sources outside the blockchain and feed the data to the blockchains (in this case, target chains) they are applied on. They also produce the block header and send it to the endpoint of the target chain.

Relayer: the relayer facilitates the transfer of assets between the origin and target chain by generating transaction proof and sending it to the endpoint of the target chain.

Ultra Light Nodes (ULNs): these are just like nodes that validate transactions on blockchains, but these ULNs are not like regular nodes because they are lighter and don’t need to download the entire block.

Pre Crime: this is a built-in feature by LayerZero to further improve security. Pre Crime allows relayers to run a test transaction on the forked version of the actual target chain to ensure that the actual transaction won’t lead to a compromising result. This is expected to stop hacks before they happen as hacks are the major problems facing blockchain bridging.

HOW TRANSACTIONS WORK ON LAYERZERO

Let’s assume chain A which is the origin or source chain is Binance Smart Chain (BSC). Then, chain B which is the target or destination chain is Ethereum.

A trader holding $BNB which is the native token for Binance Smart Chain (BSC) wishes to swap it with the $ETH token, which is the native token for Ethereum blockchain. BSC and Ethereum are chains supported by LayerZero; also, assuming the app (referred to as User Application, UA, as it relates to LayerZero) which the trader uses for the swapping is integrated with LayerZero, this is an overview of how it will work:

The trader initiates the swap on the User Application.

The endpoint of the origin chain, that is, chain A (BSC) will be notified of this action and then send the transaction details to the oracle & relayer. {The details of this transaction will include things like the amount to be swapped, the destination/target chain}.

The oracle produces the block header for this transaction based on the details received and then passes the details to the endpoint of chain B (destination or target chain), through ULNs.

The relayer, on its own end, proves that the transaction is valid by sending a transaction proof to the endpoint of chain B (Ethereum).

The target chain, with the help of ULNs, validates the transaction proof sent to it and the message is then delivered.

The transaction is completed. In this case, the exact amount of $ETH will be sent to the initiator’s address from the target chain.

N.B: Each project/dApp on LayerZero gets to choose their own oracle and relayer for messaging.

Also, a transaction is referred to as a message in blockchain terms.

BLOCKCHAINS SUPPORTED ON LAYERZERO

Since its launch in 2022 till the time of writing, more than 8 blockchains have integrated the LayerZero protocol and are now being supported on it. Solana, Aptos, SUI, Cosmos, Polygon, Arbitrum, Fantom, Binance Smart Chain, Harmony, and Optimism are all examples of blockchains that have integrated with LayerZero.

Projects like launchpads, DEXes, bridges, NFTs, wallets, marketplaces, DeFi protocols have been deployed on and integrated in the LayerZero ecosystem.

USES OF LAYERZERO PROTOCOL

LayerZero can be applied in performing a number of activities like:

Cross-chain swapping: popular DEXes like PankcakeSwap, SushiSwap, Uniswap and TraderJoe that have integrated LayerZero’s framework allow crypto tokens from various chains to be swapped with each other.
Cross-chain borrowing: DeFi lending and borrowing protocols like Radiant Capital have employed LayerZero framework to allow their users to borrow on any of the supported chains.
Bridging: this is the most common use of the LayerZero protocol. Many bridging protocols like Stargate Finance utilize LayerZero to aid bridging of crypto assets across its supported blockchains.
Cross-chain staking: some dApps that enable crypto staking have now been integrated on LayerZero to extend staking to its supported chains.
Omnichain Fungible Tokens (OFTs): LayerZero supports fungible tokens to allow 1:1 transfer across various chains without the need for the tokens to be wrapped like they normally are in cases like this. Some are of the belief that LayerZero can introduce the concept of non-native fungible tokens, that is, tokens that aren’t native to any chain and can be used seamlessly across different blockchains.
Omnichain Non-Fungible Tokens (ONFTs): just like with fungible tokens, NFT projects can leverage LayerZero to allow their NFTs to be traded across various chains supported on the protocol via bridging.

CONCERNS REGARDING LAYERZERO PROTOCOL

While there are many interesting use cases of the LayerZero protocol, we can’t ignore the issues facing it. Certain concerns have been raised regarding LayerZero’s model and the limitation it presents to the blockchain platforms it connects.

Isolated security: earlier this year, L2BEAT, an analytics site that analyzes, compares and gives analysis into various Ethereum layer 2 solutions, put forward an argument concerning LayerZero’s choice of promoting isolated security among blockchains. This argument came in the form of an article titled “Circumventing LayerZero.”

The analytics platform, being confident about the importance of shared security especially in cross-chain protocols like LayerZero, pointed out that promoting isolated security among the chains will cause “dishonest developers to create apps that’ll eventually rug their users.”

Also proposing the argument that each dApp having its own security poses a risk for users as they’ll have to take risk with every LayerZero app they intend using.

Hence the reason L2BEAT believes that isolated security is no security at all.

Centralization: over-reliance on the oracle and relayer as entities responsible for sending messages to and fro the origin chain and destination chain have raised eyebrows about the centralized nature of LayerZero.

CONCLUSION

While there are many current and upcoming projects in the business of building interoperability channels across blockchains, LayerZero is taking the lead in this regard. With features and functions that address the problems observed from other existing interoperability protocols, LayerZero is slowly carving its path as the leading omnichain interoperability protocol in the blockchain space.