Author: Ishraq Alim, Mihai Grigore, Messari; Translation: Deng Tong, Golden Finance
Summary
In the second quarter of 2024, LayerZero expanded its cross-chain interoperability protocol, adding support for 12 new networks and facilitating the transfer of $5 billion in crypto assets. In the second quarter of 2024, the average transfer value increased by 78%, reaching over $400 per transaction.
The transfer volume of Ethereum increased by 26% in the second quarter of 2024, from $0.725 billion in the first quarter to $0.913 billion, thanks to the gas fee reduction caused by the Dencun upgrade and the introduction of full-chain re-collateralization, which incentivized the use of LayerZero.
The ZRO token was launched on June 20, 2024, and was airdropped to 1.28 million eligible wallets, implementing anti-Sybil measures and a claimable "donation proof" mechanism for token distribution.
In the second quarter of 2024, LayerZero deployed over 50,000 full-chain applications (OApps), with increasing adoption rates in the fields of gaming, DeFi, AI, bridging, and other applications that utilize its full-chain communication capabilities.
Preface
Despite the secure design of blockchain, facilitating secure communication between networks poses challenges. LayerZero is an interoperability protocol that allows full-chain applications, such as tokens, to securely communicate across more than 80 networks.
It sends and receives messages through a set of immutable endpoints and is verified and executed by a decentralized validator network (DVN) and executors that do not require permission. The executor executes the instructions of the message in the target chain, while the DVN ensures the end-to-end validity of the message. Each standalone application built on LayerZero can configure a security stack (including executor and DVN) and block confirmation based on the security level required for sending and receiving messages.
LayerZero is a standardized communication protocol that allows full-chain applications to communicate on different networks. Its main use case is to transfer arbitrary data between these networks, with asset transfers being the most common type of data transfer. Other use cases include any application that may need to send messages between multiple chains, including games, cross-chain governance, identity solutions, re-staking, and enterprise products.
LayerZero V2 will be launched in January 2024 with a general message passing system and general security attributes, which simplifies cross-network communication and improves developer experience.
LayerZero Labs is the initial developer and core contributor of the LayerZero protocol. In April 2023, it raised $120 million in Series B financing. LayerZero launched its native token ZRO in June 2024.
Key Indicators
Performance Analysis
Financial overview
Market Cap and Tokens
On June 20, 2024, the LayerZero Foundation launched the native token ZRO for the LayerZero Protocol. As a fully fungible token (OFT), ZRO grants holders governance control over the fee-switch of the protocol, which is a permissionless mechanism to charge and burn ZRO fee tokens per message sent through LayerZero.
When ZRO was launched, its market cap exceeded 1 billion USD, with a token price of $4.40. In the second quarter of 2024, ZRO ranked among the top three cross-chain messaging protocols with a market cap exceeding 0.86 billion USD and a price of $3.30.
Messaging fees
Messaging fees are collected in the native token of the source chain. These fees serve three purposes:
They are allocated to DVNs and executors for verification and execution.
They are used to pay for gas fees on the target chain.
If the protocol fee accumulation is activated, they are burned on the source chain, which is a decision controlled by token holders and is currently disabled.
The revenue generated by DVNs and executors from these fees is used to pay for security costs. Each application chooses its own DVN configuration for verification. Additionally, executors are chosen to accurately deliver messages. If the fee switch is activated, the protocol fee accumulation reduces the circulating supply of ZRO through the burning mechanism. This incentivizes ZRO holders to participate in governance and control the supply and market cap.
In the second quarter of 2024, the total message transmission fee paid by users decreased by 34% to $12.7 million compared to the previous quarter. The main sources of message transmission fees are Arbitrum ($3.4 million), BNB Chain ($3.2 million), Optimism ($2.3 million), and Polygon ($1.4 million). This decrease occurred after the Dencun upgrade, which reduced Ethereum gas fees through EIP-4844, making LayerZero transactions cheaper. In addition, the decrease in fees is consistent with a 58% decrease in message volume from 29.6 million to 12.3 million messages in the first quarter of 2024, which is due to the surge in activity related to token releases.
The average cost indicator calculates the fee charged for each message sent on the network. A large portion of these fees is used to pay for gas fees on various networks. High-cost chains like Ethereum can raise the average cost charged because of their higher transaction costs. Among the measured networks, Polygon has the lowest average transaction cost, with an average cost of $1 per message sent in the second quarter of 2024. Token releases can lead to a surge in transaction fees on chains that support ZRO (for example, the average gas fee on Arbitrum increased from under 1 cent to 87 cents). With the introduction of the Dencun upgrade, both Arbitrum and Ethereum saw a decrease in average fees by 63% and 45% respectively.
Value transfer
As of the second quarter of 2024, LayerZero has over 54,000 contracts using its full-chain communication protocol and operates on more than 80 different networks, including Ethereum, Optimism, Arbitrum, Polygon, Solana, BNB Chain, TRON, and Base. These contracts use LayerZero message transmission for various use-cases and support nearly 300 user-facing applications.
Asset transfer (bridging) between different networks is one of the most common use-cases for LayerZero. Other use-cases include gaming, cross-chain governance, and identity solutions.
Using bridges built on LayerZero, assets can be transferred by exchanging native assets on the source chain for native assets on the target chain (e.g., Stargate) or by using LayerZero's token standards called Full-Chain Homogeneous Tokens (OFT) and Full-Chain Non-Homogeneous Tokens (ONFT). Standard OFTs are burned on the source chain and minted on the target chain. Examples of native bridge connectors using standard OFTs include Aptos Bridge, Core DAO, and Harmony Bridge. For existing native tokens, bridge connectors can adopt the OFT standard by locking the native tokens on the source chain and minting equivalent tokens on the target chain. The target chain receives the tokens and issues new tokens, with a 1:1 ratio for each locked or burned token.
In the second quarter of 2024, a total of $5 billion in asset value was transferred through LayerZero via bridging applications in the top ten networks, a 26% decrease compared to the previous quarter. This decrease is primarily due to efforts to prevent Sybil mining before token generation events (TGEs), which may indicate a more legitimate usage of the network. Despite the decrease, this number is still 42% higher than the annual low point in the fourth quarter of 2023.
By preventing Sybil mining, the on-chain data shows real users rather than inflated numbers from entities using multiple wallets (the LayerZero Foundation defined it as a cluster of 20 addresses linked to the same person before the TGE). Although the total value of transferred assets decreased, the average value per message increased by 78.2% to over $400 per message. This indicates that genuine users are utilizing the LayerZero protocol to facilitate higher-value transactions compared to industrial Sybil miners.
In the second quarter of 2024, Arbitrum ($1.2 billion), Ethereum ($0.913 billion), and Optimism ($0.893 billion) were the top three sources of LayerZero bridging transaction volume. Ethereum's transfer volume increased by 26% month-on-month, from $0.725 billion in the first quarter of 2024 to $0.913 billion in the second quarter of 2024. Several key factors incentivize users to use the Ethereum ecosystem, including the reduction of gas fees due to the introduction of EIP-4844 and the introduction of native cross-collateralization, which incentivizes users to use LayerZero.
Protocol Overview
Usage
The number of messages (packets) sent is a key indicator of LayerZero's overall usage, as they are initiated by users and used for all use cases, such as bridging (e.g., Stargate), token issuance (e.g., PancakeSwap and ether.fi), cross-chain liquidity (e.g., Orderly Network), governance (e.g., Angle), gaming (e.g., Nine Chronicles), cross-chain identity (e.g., Clusters), and fee/reward allocation (e.g., Pendle). By excluding Sybil holders from token issuance, LayerZero adjusts the on-chain usage metrics to reflect persistent users rather than inflated numbers from entities using multiple wallets. The data for the second quarter of 2024 accurately represents the true usage of the protocol.
In the second quarter of 2024, the number of messages sent on LayerZero exceeded 12.3 million, a decrease of 58% compared to the previous quarter. This decrease in data may be due to the community's expectations for native token releases.
Application Deployment
Applications that send and receive messages through LayerZero are called On-Chain Applications (OApps). These applications consist of smart contracts deployed on source or target networks. OApps connect to LayerZero via endpoint contracts on their respective networks. These applications can have various functionalities, including asset/token transfers, governance voting, fee/reward allocation, and in-game items.
In the second quarter of 2024, the LayerZero protocol surpassed the milestone of 50,000 OApps, ultimately deploying nearly 55,000 OApps. As part of the ZRO TGE, the team was invited to submit proposals and deploy OApps for the token. The team includes: GMX, Solidly Labs, DeFi Kingdoms, and Merkly.
Qualitative analysis
Key developments
Token issuance
LayerZero Foundation launched its native token ZRO on June 20, 2024, with a total supply of 1 billion. Of this, 23.8% is allocated to the community and builders, excluding foundation and growth allocations, the latter of which received a separate 14.5%. On the first day, 8.5% of the token supply was allocated: 5% to core contributors, 3% through Request for Proposal (RFP) allocations, and 0.5% to an independent community pool for content creators, artists, and researchers, separate from the main community pool. Over 1.28 million wallets qualified for this initial airdrop. The remaining tokens will be distributed over the next 36 months, with additional retroactive allocations every 12 months and further RFPs for future builders. The allocation details are as follows:
38.3% allocated to the LayerZero community (0.383 billion ZRO)
32.2% allocated to strategic partners (0.322 billion ZRO)
25.5% allocated to core contributors (0.255 billion ZRO)
4.0% token buyback (40 million ZRO)
In order to incentivize the development of LayerZero, a Request for Proposal (RFP) was conducted prior to the token release in May 2024. Developers must launch an OApp on the LayerZero protocol to be considered for allocation. As of May 31, 2024, over 200 development teams have submitted ZRO allocation applications and deployed their own OApps. The number of developers in the RFP alone exceeds that of some major blockchains.
The launch of LayerZero's ZRO token has had a significant impact on the Arbitrum network as the coordinating chain for token claims. This event has led to a sharp increase in daily revenue, reaching $3.4 million. The token launch may result in a surge in transaction fees on Arbitrum, with average fees jumping from less than 1 cent to 87 cents.
Protocol Fee Conversion
The main function of the ZRO token is to allow holders to control the protocol fee conversion through governance. Every six months, ZRO holders can activate or deactivate the fee conversion of the protocol through an immutable on-chain vote, which holders can vote on any chain where ZRO is deployed. If activated, the collected fees will be used by the treasury contract to burn ZRO. This mechanism ensures that ZRO holders have a direct impact on the fee structure of the protocol.
Proof of Donation
To promote ecosystem development during the distribution of ZRO, LayerZero has developed a new mechanism called Proof of Donation. This approach allows participants to claim ZRO tokens by making donations to the Protocol Guild, a funding mechanism developed on Ethereum Layer 1. The donation amount is either a stablecoin or ETH equivalent to $0.10. The LayerZero Foundation matches all donations to the Protocol Guild, up to a maximum amount of $10 million.
Sybil Detection
To ensure fair distribution of tokens, LayerZero has implemented a three-step process to exclude Sybil users who exploit the system using multiple addresses. Sybil activity is the target. Sybil users have the opportunity to self-report and receive 15% of their expected allocation. Those who do not report will be publicly listed, and others may report them to receive a bounty. The Sybil detection process was carried out in collaboration with LayerZero, Nansen, and Chaos Labs. This initiative successfully filtered out Sybil farming and revealed the true purpose of the protocol, as shown in this report.
Ecosystem
Network Integration
In the second quarter of 2024, LayerZero added support for more than 12 new networks, bringing the total number of networks to 83, including Solana, TRON, Sanko GameCorp, ebi.xyz, Sei Network, Taiko, Skale Network, Humanity Protocol, Merlin Chain, Camp, and Oasys. The support for Solana and TRON expands the number of non-Ethereum Virtual Machine (EVM) networks supported. Solana's integration initially supported eight networks, but expanded to the full network grid supported by LayerZero. LayerZero V2 realizes its vision of a complete chain protocol by expanding to networks with unique consensus and security models.
Application Integration
In the second quarter, LayerZero deployed over 50,000 OApps, with an increase in the number of applications in areas such as games, DeFi, AI, token issuance, and other fields that utilize its full-chain communication. Notable deployments include Woo Ecosystem, Soul Protocol, Phuture Finance, Anzen Finance, Myso Finance, Iskara, ether.fi, SatoshiSync, Ra1l, and Morpheus. Ether.fi is a liquid Ethereum staking platform that supports full-chain staking on multiple L2s, including Blast, Base, and Linea. Ether.fi supports over $0.5 billion worth of ETH staked on L2. Deploying OApps is simplified with tools like BCW Group's LZ Genie, which features project creation, deployment, and DVN configuration settings.
On May 28, 2024, Stargate Finance launched Stargate V2, featuring transaction batching to reduce costs, the Artificial Intelligence Planning Module (AIPM) for optimizing liquidity allocation, and Hydra Bridge as a Service for bridging assets to newer chains. Stargate V2 supports 16 chains, including Ethereum, BNB Chain, Avalanche, Polygon, Arbitrum, and Optimism. This release introduces Kaia as the first Hydra chain, enabling high-speed, low-cost asset transfers between Klaytn and other chains. V2 pools and incentives went live on May 27th after successful governance approvals and audits, and full bridging functionality was enabled on May 28th. Notably, Stargate is the first bridge launched on LayerZero and has over $0.5 billion in assets as of July 1, 2024.
Enterprise Integration
In May 2024, LayerZero Labs partnered with IntellectEU to facilitate the first Delivery versus Payment (DvP) transaction using the LayerZero protocol. This transaction involved sending Swift MT messages between the Hyperledger Besu (private) and Polygon (public) blockchains. The development of DvP transactions aims to seamlessly integrate existing financial institution infrastructure with blockchain technology. This collaboration expands LayerZero's existing partnerships with major financial institutions, including JPMorgan and Apollo's Onyx Digital Assets, as well as Avalanche's Evergreen Subnet, Spruce.
Game publisher Ubisoft is partnering with Oasys and using LayerZero as an interoperability provider to develop its first blockchain-based game, Champion Tactics Grimoria. This collaboration utilizes LayerZero's full-chain interoperability protocol to enhance cross-chain functionality, allowing players to securely own and trade unique digital assets on different blockchain networks.
Integrated DVN
There are over 35 DVNs available for application builders on LayerZero. This includes a diverse set of validator solutions, including zk-tech solutions like Polyhedra and Lagrange, validator-based teams running DVN like Nethermind, multi-party computation (MPC) solutions like Zenrock, enterprise validators like Google Cloud, and DVNs owned by applications like Abracadabra and Tapioca. Symbiotic recently announced a DVN to facilitate L2 staking for Ethena Labs.
In addition, teams can build DVN adapters in V2 as a feature, which allows applications built on LayerZero to leverage third-party validators such as bridges, oracles, and interchains, as well as Chainlink and Axelar as DVNs. LayerZero Labs provides initial DVN adapters for CCIP and Axelar; however, this is an permissionless task, as demonstrated by the multi-bridge solution Hashi building their own DVN adapters. By integrating external validators in the LayerZero ecosystem, this provides an scalable approach.
Upcoming Events
Expanding to the Cosmos Ecosystem
Solana, Tron, and Aptos are among the first non-EVM Layer-1 networks supported by the LayerZero protocol. LayerZero Labs has collaborated with Initia Labs to explore extending full-chain support to Cosmos chains. These expansions demonstrate LayerZero's commitment to standardizing interoperability between different blockchain ecosystems.
Summary
In the second quarter of 2024, LayerZero made significant progress, particularly with the launch of its native token ZRO, which had a major impact on the Arbitrum network. Daily revenue surged to 3.4 million US dollars and transaction fees increased from less than 0.01 US dollars to 0.87 US dollars. To prevent Sybil mining, the total value of transferred assets declined by 26% compared to the previous period, but the average value per message increased by 78.2% to over 400 US dollars. LayerZero expanded its ecosystem, adding support for 12 new networks, with over 54,000 deployed OApps (on-chain applications) and a 10% increase in total amount. These advancements in cross-chain interoperability, strategic partnerships, and innovative solutions continue to make LayerZero a key player in the field of full-chain message transmission.