1. Introduction

1.1 Background and Purpose

With the rapid development of blockchain technology, the application scenarios of blockchain are becoming increasingly diverse, and various blockchain projects are emerging like mushrooms after the rain. Currently, the blockchain ecosystem presents a pattern of multiple chains coexisting, with different blockchain networks having their own characteristics in terms of performance, functionality, and application scenarios. However, these blockchain networks often exist in isolation from each other, forming individual ‘data islands,’ which severely hinders the further development and application expansion of blockchain technology. Cross-chain technology, as a key solution to the interoperability issue of blockchain, has become a hot research topic in the current blockchain field.

LayerZero, as an innovative cross-chain communication protocol, holds an important position and influence in the blockchain cross-chain field. It is committed to achieving seamless communication and asset transfer between different blockchains, providing possibilities for building a more open and efficient blockchain ecosystem. By delving into LayerZero, we can better understand the development trends of cross-chain technology and grasp the future direction of the blockchain industry.

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1.2 LayerZero Introduction

LayerZero is a new type of cross-chain interoperability protocol designed to break down barriers between blockchains and achieve efficient communication and asset transfer between different blockchain networks. Its core positioning is to become the “TCP/IP” protocol of the blockchain world, providing underlying cross-chain communication support for various blockchain applications.

In cross-chain communication, LayerZero plays a crucial role. Traditional cross-chain methods often have many limitations, such as low efficiency, poor security, and inadequate compatibility. LayerZero has successfully overcome these issues through innovative technical architecture. It utilizes a combination of superlight nodes, oracles, and relays to achieve secure and fast transmission of cross-chain messages. This unique design enables LayerZero to establish reliable communication bridges between different blockchains, providing users with more convenient and efficient cross-chain services.

Although LayerZero has a relatively short development history, it has achieved significant results. In 2021, LayerZero Labs was officially established, marking the start of the project. Subsequently, LayerZero attracted the attention and support of many well-known investment institutions, completed multiple rounds of financing, and provided strong financial support for the project’s development. In terms of technical research and development, the LayerZero team has been continuously striving to gradually improve the protocol’s functionality and performance. In 2022, the LayerZero mainnet was officially launched, marking the entry of the protocol into the practical application stage. Since then, LayerZero has continuously expanded its ecosystem, cooperated with numerous blockchain projects, and achieved deployment and application on multiple blockchain networks. Today, LayerZero has become one of the leading projects in the cross-chain field, making important contributions to the development of blockchain technology.

2. Analysis of LayerZero technology principles

2.1 Core Component Detailed Explanation

The technical architecture of LayerZero is mainly composed of three core components: Endpoint, Oracle, and Relayer, which work together to achieve cross-chain communication. Each of these components has unique responsibilities. The Endpoint is responsible for connecting various chains, the Oracle is responsible for data relay, and the Relayer is responsible for obtaining transaction proofs. Their collaborative work ensures the efficient operation of the LayerZero protocol.

2.1.1 Endpoint

Endpoint is a set of smart contracts deployed by LayerZero on each supported chain, which act as bridges connecting different blockchains, tightly linking all chains supported by LayerZero. The main function of Endpoint is to serve as an interface for users or applications to interact with the LayerZero protocol, responsible for handling message transmission, verification, and reception.

In practical applications, when users want to perform cross-chain operations, such as transferring assets from the Ethereum chain to the Binance Smart Chain, the user’s operation instructions will first be sent to the Endpoint on the Ethereum chain. This Endpoint will perform preliminary processing of the user’s request, including verifying the user’s identity, checking the legality of the request, and so on. Then, it will package the relevant messages and data, ready to be sent to the target chain.

Endpoints also have strong scalability, making it easy to deploy on new blockchains, thereby incorporating new chains into the LayerZero network. This feature allows LayerZero to quickly adapt to the changing development of the blockchain ecosystem and continuously expand its coverage. For example, when new public chains or consortium chains emerge and wish to connect to the LayerZero network, simply deploying the Endpoint smart contract on that chain enables communication and interaction with other chains.

2.1.2 Oracle Oracle

The Oracle is an important third-party service in the LayerZero protocol, which mainly works to relay data, i.e. block headers, from one chain to another. Block headers contain rich information such as transaction information, messages, etc., which are crucial for validating the validity of transactions.

Taking cross-chain transfer as an example, when a user initiates a transfer transaction on the source chain, the Endpoint on the source chain will send the transaction-related information to the Oracle oracle. The Oracle oracle reads the block header containing the transaction information from the source chain and sends it to the target chain. On the target chain, the Endpoint will receive the block header sent by the Oracle oracle and, combined with the transaction proof provided by the Relayer, verify the transaction. If the block header and the transaction proof match, the transaction validity can be confirmed, thereby completing the cross-chain transfer.

The existence of the Oracle solves the problem of interaction between the blockchain and external data, enabling different chains to accurately obtain and verify each other’s information, and providing reliable data support for cross-chain communication. Currently, LayerZero typically uses well-known Oracle services such as Chainlink to ensure the accuracy and reliability of data.

2.1.3 Relayer Relay

The Relayer is another key component in the LayerZero protocol, whose main responsibility is to obtain proof of specified transactions. During the cross-chain transaction process, the Relayer will obtain proof information related to the transaction from the source chain and send it to the target chain.

Unlike the Oracle oracle, the Relayer relay focuses on the specific proof of transactions, rather than the block header. This proof information can ensure that the endpoint on the target chain can accurately verify the authenticity and integrity of the transaction. For example, in cross-chain smart contract calls, the Relayer relay will obtain relevant proofs of smart contract execution on the source chain, such as transaction hash, execution results, etc., and send these proofs to the target chain so that smart contracts on the target chain can handle and respond correctly.

It is worth noting that, according to the parameters set by LayerZero, anyone can become a relayer, which helps ensure the decentralization of the system. This decentralized design makes the services of Relayer relays more diverse and reliable, reducing the risk of single points of failure. At the same time, participants who become relayers can obtain certain economic incentives by providing services, which further promotes the healthy operation of the system.

2.2 Revealing the Operating Mechanism

The operation mechanism of LayerZero is based on the collaborative work of its core components, transmitting messages between LayerZero Endpoints on different chains through Oracle and Relayer, achieving communication and asset transfer between different chains. The specific process is as follows:

1. User initiates request: The user initiates a cross-chain operation in the application on the source chain, such as sending assets or invoking smart contracts on the target chain. This operation will generate a request containing transaction information, which is sent to the LayerZero Endpoint on the source chain.

2. Endpoint handles requests: The Endpoint on the source chain receives and verifies requests, and processes them. It will package key information from the request, such as the target chain identifier, transaction data, into a message packet.

3. Oracle Relay Data: At the same time, the Endpoint on the source chain will notify the Oracle to obtain the block header of the current block. The Oracle reads the block header from the source chain and sends it to the Endpoint on the target chain. The block header contains relevant information about the transactions, which is used to verify the validity of the transactions on the target chain.

4. Relayer obtains and transmits transaction proofs: Relayer obtains proof information related to the transaction from the source chain, such as transaction hash, signature, etc. Then, the Relayer sends the transaction proof to the Endpoint on the target chain.

5. Target chain Endpoint verification and execution: The Endpoint on the target chain receives the block headers sent by the Oracle and the transaction proofs sent by the Relayer, and verifies and matches the two. If the verification passes, it proves that the transaction is valid and has not been tampered with. The Endpoint will forward the message data packet to the application on the target chain to complete the cross-chain operation. The application then performs corresponding operations based on the received message data packet, such as receiving assets or executing smart contracts.

Through the above process, LayerZero achieves secure and efficient communication and asset transfers between different blockchains. The advantage of this operating mechanism is that it delegates the work of verifying and transmitting information to external oracles and relays, allowing each chain to deploy only one super light node with less information, reducing the burden and cost of nodes, while improving the scalability and flexibility of the system.

2.3 Technical Features Analysis

2.3.1 Ultra-lightweight Node Advantages

LayerZero adopts an ultra-lightweight node design, which is a major highlight of its technical features. Unlike traditional full nodes or light nodes, ultra-light nodes do not store a large amount of blockchain data themselves, nor are they responsible for transmitting information, only for docking. It streams block headers on demand through oracles, rather than retaining all block headers like light nodes do.

This design brings many advantages. First, it reduces costs. Because the ultra-light nodes do not need to store the entire history of the blockchain, the demand for storage resources is greatly reduced, while also reducing the hardware and maintenance costs of the nodes. This allows more participants to easily deploy and operate nodes, promoting decentralization of the network.

Secondly, efficiency has been improved. The super-light node obtains block headers on demand through oracles, avoiding unnecessary block header transmission and storage, reducing the time and network bandwidth consumption of data processing, thereby improving the speed and efficiency of cross-chain communication. This advantage becomes more pronounced when processing a large number of cross-chain transactions, enabling quick completion of transaction verification and message transmission, enhancing user experience.

In addition, the design of ultra-light nodes enables LayerZero to better adapt to different types of blockchain networks, including L1, L2, and non-EVM and EVM chains. Regardless of the architecture and consensus mechanism of the blockchain, ultra-light nodes can run on them and achieve efficient cross-chain communication, providing strong support for building a full-chain ecosystem.

2.3.2 Native Transaction Support Significance

LayerZero supports native cross-chain transactions, which is crucial in cross-chain applications. Native transactions mean that users can directly trade between different chains without the need for third-party intermediaries or asset locking and unlocking operations.

For users, native trading provides a more convenient and efficient cross-chain experience. Users can directly trade assets on the target chain using assets from the source chain, without worrying about the security issues and time costs of assets during the cross-chain process. For example, users can hold ETH on the Ethereum chain and then directly trade with ETH on the Binance Smart Chain, without the need to exchange ETH for other intermediate assets or wait for the confirmation time of asset cross-chain.

For developers, supporting native transactions reduces the difficulty and cost of development. Developers can focus more on the business logic and functional implementation of the application, without having to spend a lot of effort dealing with complex cross-chain asset conversion and management. At the same time, native transactions also provide developers with more room for innovation, enabling them to develop a richer and more diverse range of cross-chain applications, such as cross-chain decentralized trading, cross-chain lending, etc.

Supporting cross-chain native transactions helps promote the integration and development of the blockchain ecosystem. It breaks down barriers between different chains, allowing assets and data to flow freely between different chains, increasing the liquidity and efficiency of the entire blockchain ecosystem, and laying a solid foundation for achieving full chain interoperability.

3. LayerZero application scenario exploration

As an innovative cross-chain communication protocol, LayerZero brings more possibilities to blockchain applications, with a wide range of use cases including cross-chain bridges, whole-chain tokens and NFTs, derivative trading, currency markets, and more. These use cases not only demonstrate the technical advantages of LayerZero but also provide new momentum for the development of the blockchain ecosystem.

3.1 Cross-chain Bridge Application

3.1.1 Stargate cross-chain bridge case

Stargate is a fully composable native asset cross-chain bridge built on LayerZero, which holds an important position in the field of cross-chain asset transfer. The core mechanism of Stargate is to utilize LayerZero’s cross-chain communication technology to achieve direct transfer of native assets between different blockchains. This means that users can directly transfer assets between different chains without the need for asset wrapping or exchange, greatly simplifying the cross-chain process.

Taking the transfer of USDC between Ethereum and Binance Smart Chain as an example, in traditional cross-chain methods, users need to first exchange USDC for other intermediate assets, then transfer through a cross-chain bridge, and finally exchange back to USDC. This process is not only cumbersome, but also involves certain risks, such as asset price fluctuations, exchange fees, etc. However, using the Stargate cross-chain bridge, users can directly transfer USDC on Ethereum to Binance Smart Chain without the need to exchange any intermediate assets, making the whole process simple, fast, and more cost-effective.

Stargate also features instant finality, which means that once users successfully submit a transaction on the source chain, the transaction will be immediately confirmed on the target chain without the need to wait for a long confirmation process. This feature makes Stargate more efficient and reliable in cross-chain asset transfers, providing users with a better experience. In addition, Stargate supports a unified liquidity pool, allowing users and applications to share a single liquidity pool across multiple chains, providing users with deeper liquidity, reducing transaction costs, and improving transaction efficiency.

3.1.2 Cross-chain Bridge Market Competition Status

In the cross-chain bridge market, LayerZero’s cross-chain bridge, with its unique technological advantages and innovative design concepts, is engaged in fierce competition with other cross-chain bridges. Compared to traditional cross-chain bridges, LayerZero’s cross-chain bridge has higher versatility and security. It adopts super light node technology, reducing the operating costs and complexity of nodes, allowing more blockchain projects to easily connect. At the same time, LayerZero’s cross-chain bridge achieves secure cross-chain message transmission through the collaborative work of oracles and relays, enhancing the security and reliability of cross-chain transactions.

Currently, the LayerZero cross-chain bridge has gained a certain market share, and its ecosystem continues to expand, attracting cooperation from numerous projects. For example, Stargate cross-chain bridge, as one of the key applications of LayerZero, has processed a large number of cross-chain transactions, ranking high in Total Value Locked (TVL) among cross-chain bridges. However, the cross-chain bridge market is highly competitive, with other bridges constantly innovating and developing. Some bridges enhance their competitiveness by optimizing technical architecture, improving transaction efficiency, and reducing transaction costs. For instance, certain bridges adopt more advanced consensus mechanisms to enhance the speed and security of cross-chain transactions; while others expand their coverage and market influence by collaborating with multiple blockchain projects.

In the future, the LayerZero cross-chain bridge needs constant innovation and optimization to cope with market competition. On the one hand, it needs to further improve its technology, enhance the efficiency and security of cross-chain transactions, and reduce transaction costs. On the other hand, the LayerZero cross-chain bridge needs to strengthen cooperation with other blockchain projects, expand its ecosystem, and increase its market share. At the same time, with the continuous development of blockchain technology, new cross-chain bridge technologies and application scenarios may continue to emerge. LayerZero cross-chain bridge needs to closely monitor market dynamics and adjust its development strategy in a timely manner to maintain its competitiveness in the cross-chain bridge market.

3.2 Full Chain Tokens and NFT Applications

3.2.1 The circulation and combination of tokens across the entire chain

The full-chain token is an important innovation in the LayerZero application scenario, which can be combined and circulated on all blockchains integrated in LayerZero. Traditional tokens often require complex cross-chain operations when transferred between different blockchains, and tokens on different chains may have compatibility issues, leading to fragmented liquidity. The emergence of full-chain tokens effectively solves these problems.

Taking the JOE token, which is integrated by Trader Joe and LayerZero, as an example, JOE, as a cross-chain token, can be bridged and circulated on multiple blockchains such as Avalanche, Arbitrum, BNB, and more. When users transfer JOE tokens between different chains, they do not need to perform cumbersome cross-chain operations, making it as convenient as trading on the same chain. This greatly enhances the liquidity of JOE tokens, allowing users to freely use JOE tokens in different blockchain ecosystems and participate in various DeFi applications.

The circulation and combination of cross-chain tokens have had a profound impact on the cryptocurrency market. It breaks down barriers between different blockchains, promotes the free flow of cryptocurrency assets, enhances market liquidity and efficiency. At the same time, cross-chain tokens provide developers with more innovative space. They can develop more diverse and rich cross-chain applications based on cross-chain tokens, such as cross-chain decentralized trading, cross-chain lending, etc., further driving the development of the cryptocurrency market.

3.2.2 Cross-chain Movement of the Entire NFT

The Chain-wide NFT is an important application of LayerZero in the field of NFT, which realizes the cross-chain movement of NFTs between different blockchains. Traditional NFTs are usually limited to circulating within the blockchain ecosystem in which they are minted, restricting the liquidity and application scope of NFTs. However, Chain-wide NFTs, through LayerZero’s technology, break through this limitation.

Taking Pudgy Penguins as an example of utilizing LayerZero’s cross-chain technology, its sub-series Lil Pudgys can now be cross-chain on Polygon, BNB Smart Chain, and Arbitrum. Users can transfer their Lil Pudgys NFTs on Polygon to BNB Smart Chain or Arbitrum, achieving the free flow of NFTs across different blockchain ecosystems. This implementation of cross-chain movement enables NFT projects to access liquidity and users from other ecosystems, expanding the market size of NFTs.

The cross-chain movement of the entire NFT has important innovative and developmental significance for the NFT market. It brings more liquidity and vitality to the NFT market, allowing users to trade and use NFTs more freely. At the same time, the entire NFT also provides more development opportunities for NFT projects. The project can attract more users through cross-chain movement, enhancing the project’s visibility and value. In addition, the emergence of the entire NFT also promotes the integration of NFT with other blockchain applications, driving innovation and development in the NFT market.

3.3 Derivatives Trading Application

3.3.1 Innovation Practice of Rage Trade

Rage Trade is a derivative trading platform built on LayerZero, which innovates in solving the liquidity issues of DEX. One of the main problems of DEX (decentralized exchanges) is the lack of liquidity, which leads to high slippage and low trading efficiency. Rage Trade bridges all ETH/USD pools by leveraging LayerZero’s cross-chain communication technology to achieve liquidity sharing between different blockchains, providing a circular flow of funds.

Specifically, Rage Trade can use LP tokens (liquidity provider tokens) from other blockchains such as Polygon, Avalanche, Solana, etc., as protocol liquidity on the Arbitrum chain. Taking the 3CRV vault as an example, when the 3CRV LP tokens are used as collateral on Chain A, Rage Trade can provide virtual liquidity for them on Chain B through LayerZero technology. This innovative model enables Rage Trade to integrate liquidity from multiple blockchains, providing users with a more diverse and efficient trading experience.

In actual applications, users trading on Rage Trade can enjoy lower slippage and higher trading efficiency. Due to the aggregation of liquidity from multiple blockchains, users can more easily find counterparties when trading, thereby reducing transaction costs. In addition, Rage Trade also provides a variety of trading strategies and tools to meet the needs of different users, further enhancing the user experience.

3.3.2 The development potential of the derivatives trading market

LayerZero has huge development potential in the derivatives trading market. With the continuous development and application of blockchain technology, the derivatives trading market is gradually rising, and the demand for efficient cross-chain communication and liquidity management is increasing. The emergence of LayerZero provides new solutions for the derivatives trading market, which is expected to further drive the market development.

LayerZero can achieve seamless communication and asset transfer between different blockchains, providing a more convenient and efficient infrastructure for derivative trading. Through LayerZero, derivative trading platforms can integrate the liquidity of multiple blockchains, increase market depth and liquidity, reduce trading costs, and attract more users to participate in trading. At the same time, LayerZero’s technology also provides possibilities for innovation in derivative trading, allowing developers to create more complex and diverse derivative trading applications based on LayerZero to meet the investment needs of different users.

LayerZero can also promote the globalization of the derivatives trading market. As LayerZero supports multiple blockchains, users from different countries and regions can connect to the global derivatives trading market through LayerZero, enabling cross-border transactions. This will break geographical restrictions, increase market competitiveness, and promote the prosperity of the derivatives trading market.

3.4 Currency Market Application

3.4.1 Radiant Capital’s lending model

Radiant Capital is a cross-chain lending platform based on LayerZero, and its lending model has unique advantages. Through the information transmission of LayerZero and the routing interface of Stargate, Radiant Capital allows users to deposit any asset on Arbitrum and BNB, and instantly borrow any asset on the blockchains supported by LayerZero.

This cross-chain lending model provides users with greater flexibility and convenience. Users can freely allocate assets between different blockchains according to their needs, achieving optimal asset allocation. For example, if a user has idle assets on Arbitrum but needs to borrow on the BNB chain, through Radiant Capital, the user can deposit assets on Arbitrum into the platform, and then borrow the required assets on the BNB chain without the need for complex cross-chain operations and asset exchanges.

The lending model of Radiant Capital also has the characteristics of high efficiency and low cost. Due to LayerZero’s cross-chain communication technology, which can achieve rapid information transmission and asset transfer, users’ lending requests can be processed in a timely manner, greatly improving lending efficiency. At the same time, by sharing liquidity across different blockchains, Radiant Capital reduces the cost of lending and provides users with more competitive lending rates.

3.4.2 Future Trends of the Currency Market

LayerZero has broad prospects for application in the currency market and is expected to lead the development trend of the currency market in the future. With the deep application of blockchain technology in the financial field, the demand for cross-chain interoperability in the currency market will continue to increase. As an advanced cross-chain communication protocol, LayerZero can provide efficient and secure cross-chain solutions for the currency market, promoting innovation and development in the currency market.

In the future, LayerZero may drive the currency market towards a more decentralized, efficient, and global direction. In terms of decentralization, LayerZero’s technology can support the development of more decentralized finance (DeFi) applications in the currency market, reduce reliance on traditional financial institutions, and improve market transparency and fairness. In terms of efficiency, LayerZero’s fast cross-chain communication and asset transfer capabilities will further improve the trading efficiency of the currency market, reduce transaction costs, and enhance user experience. In terms of globalization, LayerZero can break geographical restrictions, allowing users from different countries and regions to more conveniently participate in the global currency market, promoting the free flow of funds and the integration of global financial markets.

LayerZero may also promote the deep integration of the currency market with other blockchain applications. For example, combining derivative trading, insurance, payment, and other applications to create a more diverse range of financial products and services, meeting the growing financial needs of users.

4. LayerZero advantages and risk assessment

4.1 Significant Advantages

4.1.1 Security Enhancement

LayerZero has significant advantages in terms of security, and its unique design mechanism effectively reduces transaction risks. LayerZero adopts a dual verification mechanism where oracles and relays independently verify transactions. A transaction is considered legitimate only when both oracles and relays confirm its validity, thereby reducing the occurrence of malicious transactions. This double verification mechanism is like putting two locks on transactions, significantly enhancing transaction security.

Taking cross-chain transactions as an example, in traditional cross-chain methods, due to the lack of effective verification mechanisms, transactions are easily susceptible to attacks, leading to asset loss. However, LayerZero forwards the block headers from the source chain to the target chain through oracles, and the relayer forwards the transaction proof to the target chain. Together, they prove the validity of the message, ensuring that the information is indeed submitted to the original chain. This verification method makes it difficult for attackers to tamper with transaction information because they would need to control both the oracle and the relayer simultaneously, which is very challenging in LayerZero’s design.

LayerZero’s design also eliminates the possibility of collusion. Each user application can freely choose its own relayers and oracles. LayerZero does not impose the selection of these components, but ensures their independence through design, making it difficult for them to collude easily. This design effectively guarantees the security of transactions, allowing users to cross-chain operations with more confidence.

4.1.2 Lightweight and Efficiency

LayerZero’s lightweight design makes it efficient in processing transactions. It adopts super light node technology, which, compared to traditional full nodes or light nodes, does not need to store the entire blockchain’s historical data or retain all block headers. Instead, it streams these block headers on demand through oracles. This design significantly reduces the burden and cost of nodes, enabling LayerZero to operate more flexibly.

In terms of transaction speed and throughput, LayerZero performs exceptionally well. Due to the efficiency of super light nodes, LayerZero can quickly process transactions, achieving fast transaction confirmation and settlement. Compared to traditional cross-chain bridges, LayerZero has a faster transaction processing speed, able to complete transactions in less than a minute, while traditional cross-chain bridges may take several minutes or even hours. LayerZero’s network can handle a large number of transactions without slowing down, making it ideal for decentralized applications (DApps) requiring high throughput. This allows LayerZero to meet the needs of a large number of users, providing them with a smoother user experience.

4.1.3 Cross-chain composability

LayerZero has a unique advantage in cross-chain composability, providing strong support for application composition and governance between different blockchains. LayerZero is a general messaging primitive, which means that any application can connect any contract on blockchain A to any other contract on blockchain B. This feature allows developers to build more complex and diverse cross-chain applications, achieving true cross-chain composability.

From the user’s perspective, LayerZero supports the aggregation of multi-chain currency markets, allowing users to freely allocate assets between different blockchains to achieve optimal asset allocation. All the complexities related to multiple exchanges, bridging, and intermediate tokens have been abstracted, making the user experience simple and intuitive. For example, users can hold assets on the Ethereum chain and then carry out lending operations on the Binance Smart Chain without the need for cumbersome cross-chain conversions and operations.

From a protocol perspective, LayerZero supports unified governance, allowing users and token holders of each chain to vote locally through simple messages from any chain they are on. This cross-chain governance mechanism makes governance between different blockchains more coordinated and efficient, helping to promote the integration and development of the blockchain ecosystem. For example, in a cross-chain decentralized autonomous organization (DAO), members from different chains can vote through LayerZero to collectively decide on the organization’s development direction.

4.2 Potential Risks

4.2.1 Security verification is insufficient

Despite LayerZero taking a series of measures in terms of security, there are still some potential risks. There are certain issues with the trust assumptions that oracles and relayers need to operate independently. Although LayerZero assumes that relayers and oracles are independent, honest participants, this assumption may not always hold true in practical applications. If relayers and oracles are controlled by attackers, causing the block headers and transaction proofs they provide to be invalid but still matching, it may lead to malicious information being executed, thus triggering security issues.

Each user application in LayerZero can define its own relayers and oracles, which can be changed at any time. This means that the security policies of applications have greater flexibility, but also increase security risks. If an application chooses to undermine the independence of relayers and oracles, LayerZero has no mechanism to prevent it. Checking the security of a given application only once is not enough, as it may change its security configuration at any time after the check, making real-time monitoring of security risks for applications very difficult.

4.2.2 Decentralization Challenges of Relay

Achieving decentralized relaying is an important challenge faced by LayerZero. Although LayerZero theoretically supports anyone to become a relay to ensure the decentralization of the system, it is not easy to achieve true decentralized relaying in practice. On the one hand, relays need to have certain technical capabilities and resources to ensure the stable operation of relay services. This may limit the possibility of some ordinary users becoming relays, thus affecting the degree of decentralization of relays.

On the other hand, the incentive mechanism for relayers is also a key issue. Without a reasonable incentive mechanism, relayers may lack motivation to provide high-quality relay services, and may even engage in malicious behavior. Currently, LayerZero needs further improvement in the incentive mechanism for relayers to attract more participants and ensure the stability and reliability of relay services.

5. the current development and challenges of LayerZero

5.1 Financing History and Market Valuation

LayerZero has achieved remarkable results in financing, attracting participation from many well-known investment institutions. In September 2021, LayerZero completed a $6 million Series A financing, led by Multicoin and Binance Labs, with participation from Sino Global Capital, Defiance, and others. This round of financing provided important financial support for LayerZero’s early development, helping it to take solid steps in technology research and development and market expansion.

In March 2022, LayerZero made a major breakthrough, announcing the completion of a $135 million Series A+ financing. This round of financing was led by FTX Ventures, Sequoia Capital, and a16z, with participation from Coinbase Ventures, PayPal Ventures, Tiger Global, and Uniswap Labs, among other well-known institutions. This large-scale financing round has brought LayerZero’s post-investment valuation to $1 billion, successfully joining the ranks of unicorns in the crypto space. The participation of many top investment institutions has not only brought abundant funds to LayerZero but also enhanced its market visibility and influence, attracting more attention from developers and projects.

In April 2023, LayerZero once again completed a $120 million Series B financing, with a further valuation of $3 billion. In addition to continued support from existing capital, traditional institutions such as Sotheby’s and Samsung have also joined the investment camp. This round of financing marks LayerZero’s broader recognition in the market, attracting attention not only in the cryptocurrency field, but also in traditional finance and technology. The entry of traditional capital brings more resources and cooperation opportunities to LayerZero, helping it further expand its business and ecosystem.

The valuation changes of LayerZero reflect the market’s high recognition of its technology and development prospects. From the initial financing in 2021 to a valuation of 3 billion US dollars in 2023, LayerZero’s valuation shows a rapid growth trend. This is mainly due to its innovative cross-chain technology and extensive application prospects. LayerZero is committed to solving the interoperability issues between blockchains. Its full-chain interoperability protocol features efficiency, security, and lightweight, providing strong underlying support for various blockchain applications. With the continuous development of blockchain technology, the demand for cross-chain interoperability is growing, and LayerZero’s technical advantages make it highly competitive in the market.

LayerZero continuously expands its application scenarios during its development, collaborates with numerous projects, and its ecosystem is gradually growing. For example, Stargate, as a cross-chain bridge built on LayerZero, has processed a large number of cross-chain transactions, bringing practical application value and market share to LayerZero. These successful application cases further enhance market confidence in LayerZero and drive up its valuation.

5.2 Ecological Construction and Project Integration

LayerZero has achieved significant results in ecological construction, and has integrated many well-known blockchains, including Ethereum, Binance Smart Chain, Avalanche, Arbitrum, Solana, Aptos, etc. These blockchains cover different types and application scenarios. The integration of LayerZero enables efficient cross-chain communication and asset transfer among them, providing users with more convenient services.

In terms of project integration, LayerZero has cooperated with projects in multiple fields, covering DeFi, NFT, stablecoins, and other directions. In the DeFi field, Stargate is a fully composable native asset cross-chain bridge built on LayerZero, enabling direct transfer of native assets between different blockchains, providing DeFi users with more convenient cross-chain asset trading services. Rage Trade is a derivative trading platform built on LayerZero, which uses LayerZero’s cross-chain communication technology to self-construct bridges for all ETH/USD pools, achieving liquidity sharing between different blockchains and effectively solving the liquidity problem of DEX. Radiant Capital is a cross-chain lending platform implemented based on LayerZero, allowing users to deposit any assets on Arbitrum and BNB, and instantly borrow any assets on the blockchains supported by LayerZero, providing users with more flexible lending services.

In the NFT space, Pudgy Penguins, utilizing LayerZero’s cross-chain technology, its sub-series Lil Pudgys can now be cross-chained between Polygon, BNB Smart Chain, and Arbitrum, achieving the free flow of NFTs across different blockchains, bringing more liquidity and vitality to the NFT market. In the stablecoin sector, PayPal announced that its USD stablecoin PayPal USD (PYUSD) has integrated LayerZero’s cross-chain interoperability protocol, enabling seamless transfer between the Ethereum and Solana blockchains, providing a new solution for stablecoin cross-chain applications.

The development trend of the LayerZero ecosystem presents a positive momentum. With the continuous development of blockchain technology and the continuous expansion of application scenarios, LayerZero will continue to attract more blockchain projects and applications to integrate into its ecosystem. In the future, LayerZero may further strengthen cooperation with traditional financial institutions and enterprises to promote the application of blockchain technology in a wider range of fields. With the continuous growth of the LayerZero ecosystem, it will play a more important role in the cross-chain field, becoming a key infrastructure for building a full-chain ecosystem.

5.3 Witch Review Event Impact

5.3.1 Event Review

On May 2, 2024, LayerZero officially announced that the first phase snapshot on the X platform has been completed, and the market’s expectations for its airdrop have reached a peak. However, on May 3, LayerZero released an official announcement stating that the airdropped tokens will be released soon, but ensuring the persistence of airdrop users to formulate a token distribution plan, expecting to launch a one-month long witch hunt operation.

The witch hunt operation is divided into three major stages. The first stage is a 14-day self-exposure stage, during which users can voluntarily expose their own witchcraft behaviors, and the official will reserve 15% of the airdrop allocation for such accounts; the second stage is the official review stage, during which LayerZero officials will conduct witch screening according to specific rules, and accounts discovered during the official review will not retain any airdrop quota; the most controversial is the third stage - bounty reporting, which runs from May 18th to May 31st, where anyone can submit a report on Github, and successful reporters will receive 10% of the airdrop allocation from the reported account, with the remaining 90% going to the airdrop pool, while the reported account will receive nothing.

In the first round of witch self-disclosure, 803,000 addresses were identified as potential witches, with over 338,000 addresses self-reporting as witches. During the reporting process, LayerZero received 3,550 witch hunt reports, each report containing at least 20 addresses detailing witch operations. In the end, about 1.04 million addresses were reported and identified as witches, and the official statement indicated that this witch restriction could save approximately 1% of the token total supply (about 10 million), which will be reallocated to eligible addresses.

5.3.2 The Impact on Users and the Market

The witch hunt incident has had a significant impact on user trust. Many users believe that LayerZero’s review mechanism is too strict, especially the bounty reporting mechanism, which has led to mutual reporting among users, resulting in a tense and untrustworthy atmosphere in the market. Some users’ addresses have been falsely judged as witch addresses, and although there is an appeal mechanism, some users have not been successful in appealing, which has raised questions about the fairness of LayerZero for these users.

In terms of market trading, LayerZero’s on-chain data plummeted by more than 90% after announcing the crackdown on witches. This indicates that the witch hunt incident has had a significant negative impact on the market activity of LayerZero. Many users have reduced their trading activities on LayerZero because they are worried that their addresses will be identified as witch addresses. Some projects that were originally planning to participate in the development of the LayerZero ecosystem have also slowed down or suspended their cooperation plans due to concerns about the impact of this incident on the future development of LayerZero.

The witch hunt incident has brought many challenges to the future development of LayerZero. LayerZero needs to rebuild user trust, optimize the review mechanism, and ensure fair treatment of every user. LayerZero needs to take measures to restore market activity and attract more users and projects to re-engage in its ecosystem. If LayerZero fails to address these issues properly, it may affect its competitiveness and market position in the cross-chain field.

5.4 ZRO Token Economic Model

• ZRO Token Basic Information

Total supply: 10 billion coins (fixed and unchangeable)

Token Functionality:

1. Governance Voting Rights: Deciding on major decisions such as protocol fee switch, ecosystem fund allocation, etc.

2. Pay the cross-chain message verification and execution fees.

3. Staking incentives: may be used in the future for participating in verification nodes or liquidity mining.

• ZRO Token Allocation Structure

Community distribution breakdown:

1. Retrospect Plan (8.5%): The first airdrop will take place on June 20, 2024, and eligible users can claim it.

2. Future Plans (15.3%): Reserved for future distribution to users, developers, and ecosystem builders through snapshots, proposals, etc.

3. Ecosystem Growth (14.5%): Managed by the foundation, initially releasing 5% for ecosystem incentives, grants, and liquidity allocation.

Conclusion

Looking ahead, LayerZero is expected to achieve further breakthroughs in technology, continuously optimize core components, enhance security, and explore new technological applications. In terms of market expansion, LayerZero will target traditional finance, supply chain management, the Internet of Things, as well as emerging blockchain application areas, by formulating differentiated market expansion strategies to expand the user base and market share. The development of LayerZero will have a profound impact on the blockchain industry, promote the integration and development of the blockchain ecosystem, lead the development direction of cross-chain interoperability, and promote innovation and diversification of blockchain applications.