In the past 2 years it has become abundantly clear that we are moving towards a multichain where apps pick an choose their base chains according to the business and tech tradeoffs. Ethereum’s own scaling roadmap has now shifted from shading to rollup based scaling.
To highlight this trend we can see that just in 2023:
According to DeFi lama the total 7 D bridge volume across all chains was equal to $5.81 bn market. Stargate which is a bridge built ontop of LayerZero alone contributed to $1.78 bn (30%) of this market. This is equivalent to a $69.72 bn annual volume market overall for cross-chain bridges
However this is only the market for bridging tokens. It is expected that other use-cases enabled via generalized messaging capabilities can unlock even more more value in longer term through cross-chain composability. This means use cases such as cross-chain swap, lending, voting or another dApp experience that the developers want to build between their smart contracts across two chains. Based on the current state of industry I believe token transfers will dominate most of the volumes in interoperability market however other use cases could contribute upto 20% in txn volume in the next 2 years. Combining all these we are looking at $85 bn volume annual market for interoperability at the minimum. This could easily double or triple in the next 5 years based on the volumes and adoption rate we saw in 2021
Currently, neither LayerZero nor its main competitors, Axelar and Wormhole, charge any fee for their message transfer services. Therefore, it can be difficult to understand the potential of LayerZero as a business without first understanding its market positioning. The LayerZero protocol serves as the base layer of the interoperability stack and drives growth through user-facing dApps that are built on top of it. Developers can already integrate their apps with blockchains that have a LayerZero endpoint. An example of this is Stargate Finance, which was built by the LayerZero team as a demo application and main application for users to interact with the protocol. Stargate Finance is not just a frontend; it leverages its token emissions in LP farms to incentivize a liquidity network that users can use to exchange native stablecoins across chains. Stargate Finance applies a 0.06% bridge fee on all transactions that is sent to Stargate’s treasury and not to LayerZero or Stargate LPs.
Based on this example it is likely that most of the fees will be captured on the dApp layer, at least in cases like bridge, which require liquidity pools. LayerZero might eventually levy a message transfer fee that is a portion of the Stargate txn of 0.06%. It is assumed that this will be after the launch of $ZRO token which has references in the LayerZero code as well. So presently we can predict that LayerZero might be earning a 0.01%-0.03% in $ZRO tokens after network fee is turned on. Given its current market share of nearly 30% this would be about $2-$7 mn annualized revenue in the current market conditions. We will discuss this bit in greater detail in our valuation section later
LayerZero ecosystem consists of a few bridge protocols, some DeFi projects and a few NFT projects as well
Highlights: