Omni-chain protocol LayerZero is paving the way for cross-chain interoperability
As we highlighted previously, LayerZero’s Omnichain Fungible Tokens (OTFs) captured our attention as a potential game changer in the space. This is because DeFi is changing at a rapid pace, evolving towards an omnichain future.
Over the past year, we have seen an explosion of Layer 2 solutions, with the most recent addition being Coinbase’s Base, built on the Optimism Stack. But there’s a challenge. Even as these advancements take place, achieving what seems like smooth cross-chain interoperability in DeFi remains a puzzle, with fragmented liquidity and security flaws. However, LayerZero’s solution sidesteps these issues, improving upon security while simultaneously unifying liquidity.
While bridges are an option, they come with their own set of risks, making the search for a safer, more efficient cross-chain solution a number one priority for many protocols.
Have you ever heard the term “Omni-chain” and scratched your head? In order to understand, let’s first take a step back and look at its evolution.
In the current blockchain landscape, the ecosystem heavily leans on tools like oracles (think Chainlink) and bridges (like Multichain). Why? Because blockchains, by nature, aren’t directly interoperable. Oracles bridge the gap between on-chain and off-chain data, providing precise and secure price feeds (in the context of LayerZero they also assist in sending messages and block headers). Bridges, on the other hand, are critical for moving assets between different networks. However, while this sounds streamlined, the backend process is actually quite complex and not really ideal. Typically, bridges take hold of the user’s assets and then produce a wrapped version on the target chain, which ultimately leads to multiple versions of the same asset.
Enter Omni-chain solutions, like LayerZero. Their ability to go through several blockchains in a single transaction is exactly what the space needs to carry on innovating. Imagine sending a message from Ethereum to Polygon, then to Optimism, and beyond, all in one go. It changes the way we think about protocols existing on multiple blockchains, enabling dApps on different networks to message directly.
Now, security is a concern for everyone in the space. It’s such a crucial element to get right as DeFi revolves around capital efficiency and entrusting protocols with valuable assets. Yet, the frequent bridge exploits, leading to over $2 billion in losses in 2022 alone — according to Coindesk — cast a shadow on this trust. It begs the question, can LayerZero offer a safer alternative?
While it’s a tall order to label anything as entirely fail-safe, LayerZero is actively taking strides in this area to ensure the utmost security.
An instrumental component in their ability to do this is their ultra-light node. This enables the robust security features of a light node with the cost-efficiency of a middle chain. Simply put, LayerZero serves as a relayer for messages between blockchains, but crucially, never directly holds funds. This is a significant difference from traditional bridges that often struggle with custody-related security challenges.
It’s evident that Omni-chain technology is becoming increasingly more popular with leading DEXes such as Sushiswap and Stargate implementing cross-chain swapping via LayerZero.
LayerZero’s method for inter-chain communication is both strategic and effective. Using Oracles and Relayers, data can be sent between chains while verifying the proof of these transactions. This is done by using block headers combined with transaction proofs, ensuring every transaction’s validity. Additionally, anyone utilizing LayerZero could run their own Relayer or Oracle for the network, minimizing the risk of collusion.
How Does a LayerZero Transaction Work?
- Transaction Initiation: Just like any other blockchain interaction, the first step is to initiate a transaction. This will notify the network of data to be transferred between chain A and chain B.
- Communication with LayerZero: This transaction data is sent to LayerZero’s communicator. Here, it’s packaged and relayed to the validator.
- Validator Delegation: The validator, along with the network, informs the Relayer and Oracle about their respective duties. The Relayer’s job is to get the transaction proof, and the Oracle is responsible for acquiring the block header.
- Data Retrieval: Both the Relayer and Oracle pull their respective data from Chain A, holding it securely off-chain.
- Transaction Verification: The Oracle forwards the block header to Chain B. To confirm the transaction’s authenticity, the network and validator cross-check the block header with the transaction proof.
- Completion: Once the transaction is authenticated, Chain B’s communicator receives the necessary information, delivering it to the user application on the same chain.
LayerZero’s Omni-chain approach offers a fresh take in the fast-changing DeFi world. As the space moves more and more towards a multiple chain future, easy cross-chain interoperability becomes more crucial everyday.
LayerZero promises better communication between chains while also focusing on enhanced security. Unlike traditional bridges that can be risky, LayerZero’s method avoids directly holding onto user funds. This approach, combined with the support from big players in the space and its strong transaction validation, suggests that LayerZero could be the future of cross-chain messaging.