Thread by @0xJunior

As @StargateFinance reaches 1 billion dollars in TVL let's look at the underlying omnichain interoperability protocol @LayerZero_Labs. THREAD!🧵✍️👇

https://twitter.com/StargateFinance/status/1506075609373552641

If we want to understand the novel approach @LayerZero_Labs is providing we need to first understand the problem:

We are currently living in a multi-chain world and as new blockchains continue to emerge every day, we begin to face the problem of fragmentation of applications and liquidity.
And while all ecosystems continue to grow and expand, liquidity issues will only continiue to grow.

The second issue is the ability for protocols to be composable with one another. That means be able to share state (State sharing is the ability for one chain to make 'calls' to another chain and execute various tasks such as staking, voting...)

Today we move assets from one blockchain to another through bridges which all have similar mechanism. The bridge needs to input assets from one chain, hold custody of it and then create synthetic version of the bridge on another chain.

The security risk is, when you're creating synthetic/wrapped version of your asset, you are trusting the bridge to hold custody of your assets while you only have the synthetic. And if the bridge gets hacked (what we've seen multiple times in recent history) your assets are gone.

So is @LayerZero_Labs like a bridge? No. It is purely focused on allowing interoperable on-chain generic messaging between user applications on separate chains. Bridges can then be built on top of LayerZero and and will utilize its underlying messaging capability.

Before we move forward let's look at current approaches to cross-chain messaging.
1. Middle chain approach:
Middle chains receive, validate, and forward messages between chains (Axelar, Gravity...)

The middle chain is granted full signing power to all messages, making it a single point of failure. The obvious concern here is if the middle chain is exploited, all liquidity on all paired networks can be stolen. But important to note this approach is typically the cheapest.

2. On-chain light node:
On-chain light nodes receive and validate every block header for each pairwise chain on the opposing chain. To put it simply you take the entire sequential history of block headers and store them on the opposite chain.

Then, transaction proofs containing messages are forwarded and validated on-chain against the block headers.
This on the other hand is the most secure approach but the most expensive solution.

And now we come to the LayerZero's ultra light node approach: Ultra Light Node (ULN), the security of a light node with the cost-effectiveness of middle chains.
How does it do this?

This is achieved by performing the same validation as an on-chain light node but instead of keeping all block headers sequentially, block headers are streamed on demand by decentralized oracles.

The process:
1. The Oracle (i.e., Chainlink), which relays block information like the block header.
2. The Relayer, which relays transaction proofs against relayed info by the Oracle.

The ‘compartmentalization of risk’ is key here. LayerZero’s architecture limits exploit risk to the specific Oracle-Relayer pairing that was exploited. Middle chain design, however, means an exploit can place all liquidity on all paired networks at risk.

Not going to go too much into detail in each potential use case that #LayerZero provides, but here are some example use cases:
- State sharing (If for example Sushiswap wanted to expand to a new ecosystem, it would allow them to do that with a single interface and code base)

- Unified liquidity bridge (LayerZero allows single pool of liquidity tied to all connected chains)
- Cross-chain lending and borrowing
- Swaps (for example you could swap from ETH on Ethereum to SOL on Solana in a single transaction from the source chain

- Multi-chain yield aggregator (Taking advantage of lucrative farming opportunities on different chains, thus providing beneficial network effects like reducing market inefficiencies and increasing liquidity)

All this will lead to omnichain future because LayerZero will connect all chains seamlessly, having users unaware they are even using it.This will then enable current and new Decentralized Applications to expand beyond the borders of EVM or Non-EVM.

Good example of that is #stargatefinance which is a first dApp on top of LayerZero protocol. Best way to describe it is - multichain single-sided stablecoin curve pools.

If I try to explain with an example is: you're swapping USDC from ETH → Avax you would let StarGate handle ETH USDC Eth Pool → USDC Avax pool in one transaction.
Stargate is basically a composable native asset bridge with unified liquidity and fast finality

It aims to be the first bridge to solve 'the bridging trilemma' (instant finality, unified liquidity, native assets on the destination chain).

So this means you want to receive the desired funds on destination chain immediately when a transaction is successful, having access to a single liquidity pool between several chains, as well as the desired asset on the destination chain.

In conclusion thanks to @LayerZero_Labs which laid the groundwork for composability and interoperability, now we just need to wait and see how this will develop and evolve. Exiting #multichain experience is ahead of us!

Sources:
1. medium.com/layerzero-offi…
2. layerzero.network/pdf/LayerZero_…
3.medium.com/stargate-offic…

4. S/O to @0xRainandCoffee and @intern_mickey (subscribe to his substack) for article - rainandcoffee.substack.com/p/the-omni-lay…

If you liked this thread follow and retweet!👍🫶😇