At its core blockchain interoperability protocols are essentially a cross-chain message transfer service, these messages can facilitate a number of use cases such as token swaps, cross-chain lending, governance, gaming or any other contract call contract calls on another chain. The most widely used application built on top of any interoperability tech is a bridge which is used to move liquidity across different chains, but generalized interoperability is about one-click interactions between smart contracts across blockchains

LayerZero is a generalized interoperability protocol designed to carry messages across chains via gas-efficient, non-upgradable smart contracts. The core emphasis of its design is simplicity and efficiency, and it aims to reduce the trust assumptions on an externally owned validator set. Although it falls into the externally verified bridge/interop protocol category, it seeks to maximize security by minimizing third-party trust assumptions compared to its competitors.

What is LayerZero

Key features:

1. Reduced developer overhead: Due to the simplicity of its design, apps built on top of LayerZero only need to integrate a send and receive function to L0 contracts to build cross-chain functionalities.
2. Low-cost validation: LayerZero's 3rd party intermediaries work together to listen to transactions from source chains and submit them to the destination chain. In order to do this, they need to set up a system to index both blockchains in real-time. The simplest solution to which is running their own nodes, but this is very costly. Thus, LayerZero offers ultra-light node endpoints and a lightweight client that works as a low-cost replacement for running a blockchain node.
3. Native asset transfer: Despite supporting the least number of chains compared to its direct competitors, L0 boasts the most amount of bridge volume due to the nature of transfer facilitated via its main bridge product, Stargate. We will explore this in a later section.

The following sections are about the LayerZero protocol and its transaction lifecycle. For a look at its market positioning, ecosystem, and valuation, the reader can move to the parent page of this report.

LayerZero - Valuation Thesis

How LayerZero works?

Traditionally the user in order to get their tokens from say Ethereum over into Avalanche would have to go through a series of different websites/UI, swap fees, wallet networks, and bridges/DEXs/CEXs depending on how they go about it. This is very inefficient but is the current state of chain hopping.

Traditional cross-chain bridging fails in 2 broad areas, having a consensus forming middle chain validate and forward messages between chains, and running a light node on-chain.

Middle Chain

Middle chains receive, validate and forward messages between chains. Hence the name “middle chain”. Middle chains are granted full signing power to all messages, making for a single point of failure.

This is worrisome because, in the event of a consensus corruption event, all liquidity can be stolen across all chains. Most middle chains bond 100’s of millions while simultaneously securing tens of billions. You can see the issue here around these being insecure.

On-Chain Light Node

On-chain light nodes receive and validate the block headers for each pairwise chain on the opposing chain. Transaction proofs containing messages are forwarded and validated on-chain against those block headers. Transmitting messages this way is the most secure way of doing it however it's also the most expensive. Running a light node on Ethereum currently costs tens of millions per day per pairwise chain.