TVL has soared to $3 billion. What is the current hottest cross-chain project, Stargate?

Author: Richard Lee, Chain Catcher

More than a week after its launch, the cross-chain bridge protocol Stargate officially surpassed the $3 billion mark in total locked value (TVL) today at noon. According to data from DeFi Llama, this figure ranks 12th among all DeFi protocols, making it the fastest-growing DeFi project in terms of TVL in recent times.

At the same time, the price of Stargate's token STG has increased about threefold in just a few days, currently priced at $3.27, with a diluted market cap reaching $3.27 billion, making it the cross-chain bridge protocol with the highest diluted market cap. Benefiting from the continuous rise in STG prices, the annualized yield for stablecoin liquidity provided by the platform has recently remained around 20%, which is also the main reason for the continuous growth in the platform's locked value.

It is understood that Stargate was launched by the cross-chain interoperability protocol development team LayerZero Labs on March 18, as the first application product built on LayerZero. LayerZero completed a $6 million funding round last September, co-led by Multicoin and Binance Labs, with participation from Sino Global Capital, Defiance, Delphi Digital, and others.

In addition to a star-studded investment lineup, recent momentum has also been bolstered by former SushiSwap head 0xMaki and SBF's investment firm Alameda Research: On March 16, LayerZero announced that 0xMaki had joined the team full-time as Chief Strategy Advisor; Alameda Research also acquired all shares in Stargate's initial token public offering (100 million tokens, accounting for 10% of the total STG issuance).

What are the product experts and whales looking at? What is the underlying mechanism of Stargate? How does it differ from previous cross-chain bridge solutions? For a long time, cross-chain bridges have been a hotspot for hacker attacks; can the new mechanism bring security guarantees?

Background and Operating Mechanism of Stargate

Stargate is positioned as an "asset cross-chain bridge," developed by the same team from LayerZero Labs that created the cross-chain interoperability protocol standard LayerZero.

LayerZero is a general-purpose information cross-chain transmission protocol created by the development team, which can be understood as similar to the TCP/IP protocol in internet communication, positioned as a "protocol standard," upon which various targeted application products can be developed. Stargate is the first application product launched by this team that applies this protocol standard, focusing on cross-chain transmission in the asset domain.

Regarding asset cross-chain, the prerequisite to understand is that cross-chain bridges do not actually transfer the same asset from one chain to another; instead, they lock assets on one chain and release equivalent assets or issue equivalent asset substitutes on another chain.

Therefore, generally speaking, cross-chain products typically provide two functions: one is an asset liquidity pool, and the other is message interoperability (i.e., Chain B can be aware of and confirm asset transfer requests from Chain A).

In terms of message interoperability, Stargate adopts LayerZero's communication mechanism. The description of its mechanism on LayerZero's official website states:
LayerZero is a configurable user-end application that runs ULN (Ultra Light Node) on-chain endpoints (essentially a series of smart contracts).

LayerZero relies on two components to transmit messages between on-chain endpoints: oracles and relayers. When an application sends a message from Chain A to Chain B, the message first reaches the endpoint on Chain A, which then notifies the oracle and relayer (as specified by the application) of the message and its target chain.

The oracle forwards the block header to the endpoint on Chain B, while the relayer is responsible for submitting the transaction proof. Once the transaction proof is verified on the target chain, the message is transmitted to the target chain.

Among them, the oracle is a third-party service that sends the block header to another chain to verify the validity of the transaction proof on that chain. Currently, LayerZero primarily uses ChainLink in practice.

The relayer is an off-chain service, and theoretically, users can also build their own relayers. In early practice, LayerZero provided relayer services. To ensure that transactions can be effectively delivered, LayerZero believes that oracles and relayers must be independent of each other.

In terms of asset liquidity, Stargate claims to provide a "unified liquidity pool for native assets," maximizing capital efficiency. This means that, unlike independent and segmented liquidity pools targeting specific networks and trading pairs, Stargate shares liquidity across various chains, allowing all chains to access each other's liquidity. For example, if there is a USDT pool on Chain A, then USDT-related transaction requests initiated by other chains like Chain B and Chain C can utilize the native USDT asset pool on Chain A.

Previous projects have also adopted this model; however, the inherent drawback of this model is that a user's cross-chain transaction request may fail. For instance, when User 1 sends a request to transfer a certain type of asset from Chain A to Chain B, if User 2 from Chain C also wishes to transfer the same type of asset to Chain B with a larger cross-chain scale, the faster transaction confirmation time on Chain C may significantly reduce the liquidity and depth of that asset on Chain B, potentially causing User 1's cross-chain request to fail within a specific slippage range.

Stargate claims to solve this weakness. Stargate's solution is to introduce the "Delta (Δ) algorithm," a novel resource balancing algorithm that achieves unified native asset liquidity across all chains while ensuring that cross-chain requests are successful.

According to the Stargate whitepaper, each chain in the network maintains a single liquidity pool, which is "soft-partitioned" into multiple slices, each belonging to other remote chains in the network. For example, in a network composed of Chain X, Chain Y, and Chain Z, the $100 liquidity available locally on Chain X will be "soft-partitioned" into $50 belonging to Chain Y and $50 belonging to Chain Z.

How does the Delta algorithm prevent liquidity pools from being overdrawn? Stargate borrows and returns liquidity between these "soft partitions," maintaining the balance of these partitions through algorithms when faced with unbalanced transaction volumes. However, the effectiveness of this algorithm in balancing liquidity remains to be verified.

The Essence of Market Cross-Chain Solutions and Stargate's Three Innovations

In his 2016 article "Chain Interoperability," Vitalik classified cross-chain technology into three categories: hash time locks, witnesses, and relays. This classification is still largely applicable to cross-chain products on the market today.

Among them, hash time locks (and other external coordination middleware) are currently less commonly used in the market due to functional and business limitations.

Cross-chain bridge products on the market primarily adopt "witness" or "relay" solutions.

Depending on the verification method, "witness" can be understood as "third-party verification," usually involving some reputable institutions that conduct multi-signature custody of cross-chain assets or construct an intermediate blockchain network to handle some consensus or logic in cross-chain transactions; "relay" can be understood as "native verification," which verifies whether the message comes from the source chain, and if so, executes the operation.

The "light node" model is the most common "relay" type solution: deploying each other's light node clients between two target chains to verify transactions by validating block headers.

The LayerZero protocol adopted by Stargate can be understood as an "enhanced version of the light node model," hence they refer to themselves as "ultra-light nodes." The enhancement lies in the fact that LayerZero's clients (i.e., their so-called "endpoints") do not deploy block headers for all blocks on the other chain; "you do not need to fetch every block, many of which you do not care about; you can transmit a single block for the transactions you care about on demand." LayerZero co-founder Bryan Pellegrino explained in an interview with Coindesk.

With the help of LayerZero and the Delta algorithm, Stargate is expected to achieve the following innovations in terms of transaction costs, security, and composability:

1. Increased Efficiency and Reduced Costs

According to a research article by Sino Global Capital, cross-chain designs with intermediate chain layers typically incur additional computation, consensus, and/or intermediate tokens. These are both inefficient and unnecessary, increasing security issues and throughput limitations. LayerZero aims to add as little extra complexity as possible while still maintaining the security of trust-minimized communication.

In the simplicity of LayerZero's design, neither the relayer nor the oracle forms any consensus or verification; they simply transmit messages. Since all verification is completed on their respective source and target chains, speed and throughput limitations are entirely dependent on the properties of the two transaction chains.

Moreover, the "light node" model offers higher verification accuracy compared to third-party verification, coming closer to a trustless state. However, this model has not been widely adopted for a long time because, on one hand, not all blockchain networks' underlying architectures support the implementation of light node clients, and on the other hand, deploying light node clients on Ethereum typically incurs high gas fees, making it unsuitable for ordinary users' daily transactions.

2. Increased Difficulty of Malicious Acts, with Potential to Segregate Security Risks Across the Entire Ecosystem to Specific Applications

In LayerZero's verification mechanism, cross-validation of block headers and transaction proofs is required to complete the entire verification process.

Therefore, hacker attacks can only occur when there is collusion between the oracle and the relayer network. Pellegrino summarized: "In the worst-case scenario, the system is as secure as Chainlink, which is a very good worst-case scenario."

Additionally, in LayerZero's design, both oracles and relayers are permissionless, allowing various applications to choose the oracles and relayers that suit them, providing the advantage of isolating the risks borne by the protocol and its users.

Since attacks must be jointly executed by specific oracle and relayer pairs, any other protocol without the exact same oracle-relayer pair will not be affected. This effectively segregates the risks borne by any ecosystem into narrow "application-specific risks."

Regarding oracles, Stargate currently uses Chainlink, but according to Chain Catcher, LayerZero may offer services similar to "oracle aggregation" and "relayer aggregation" in the future, allowing different project parties to choose different service suites to reduce systemic risks.

3. Composability and Convenient User Experience

Stargate's blog states that Stargate unlocks true composability, allowing any application to perform all operations of cross-chain transactions by wrapping a cross-chain bridge enabled with the Delta (Δ) algorithm.

For example, suppose a SushiSwap user wants to swap wBTC on Ethereum for JOE on Avalanche. In this case, they can now execute this operation in a single transaction on the source chain without leaving the SushiSwap interface. This provides a complete unified experience for multi-chain applications like SushiSwap and Abracadabra.

Recently, 0xMaki and others have already proposed in the Sushi governance forum to integrate Stargate to facilitate the transfer of native assets across multi-chain networks.

In the future, as Stargate integrates with more cross-chain applications, its user experience advantages may be further unleashed.