Bixin Ventures: Why are we investing in LayerZero?

Original Title: “Portfolio Insights: LayerZero”

Authors: Henry Ang, Mustafa Yilham, Allen Zhao & Jermaine Wong, Bixin Ventures

The future of Web3 will be a multi-chain world, where numerous modular and monolithic blockchains together form the entire ecosystem. However, the current experience for users when performing cross-chain operations is not smooth. For example, assets on Ethereum must undergo cross-chain transfers to be used on Arbitrum; NFTs held by users can only circulate within the blockchain ecosystem they were minted on. The cross-chain process is quite painful, requiring consideration of wrapped assets, high gas fees, and waiting times, among many other factors.

Imagine if your assets could seamlessly flow between multiple chains, or if you could use Dapps across multiple blockchains without cross-chain transfers, or if there were a way for developers to easily deploy applications utilizing multi-chain assets… The realization of these ideas is based on one premise: assets will no longer exist in isolation on their native chains, which is the crucial all-chain future that LayerZero is building.

We believe that in the future, users will use Dapps without needing to know which blockchain they are deployed on, similar to how users do not need to know whether Instagram, TikTok, or Google are hosted on Amazon Web Services or Microsoft Azure. The foundational layer that LayerZero is developing aims to achieve a true vision of interoperability, connecting all Layer 1s, whether they are in the EVM ecosystem, IBC ecosystem, or other ecosystems. Users will no longer be troubled by whether mainstream protocols like Aave or Compound support certain chains.

TLDR: Multi-chain is just the beginning; we hope to achieve the vision of all-chain interoperability together with LayerZero.

Introduction to LayerZero

LayerZero is a universal data communication protocol that securely and simply transmits information across chains to enable cross-chain communication between applications. By deploying "LayerZero Endpoints" (lightweight clients composed of smart contracts with communication, validation, and networking capabilities) on the respective chains, users can achieve cross-chain communication in a single trustless and secure transaction.

LayerZero uses Oracles (currently Chainlink) and Relayers to convey information between LayerZero Endpoints on the target chain. Notably, any entity can take on the roles of Oracle and Relayer, with the design premise being independence, openness, and permissionless. The Oracle publishes the block headers from the source chain to the target chain, while the Relayer publishes transaction data and validates transaction proofs, with both Oracle and Relayer remaining independent.

Endless Possibilities

The charm of the LayerZero architecture lies in its ability to allow users and developers to execute anything they want across chains via smart contracts, whether it be trading, asset transfers, NFT transfers, gaming, social interactions, etc. Below are use case analyses of LayerZero in various application scenarios.

Bridging & Trading

A common asset cross-chain model is the easily implemented Lock-Mint mechanism, but the biggest drawback of such cross-chain technology is the inability to send native assets across different chains, with most relying on intermediate wrapped assets. These cross-chain solutions also face practical issues, such as lack of liquidity, high slippage, high fees, and long waiting times, leading to a poor user experience.

Stargate is a protocol built on LayerZero that enables seamless on-chain transfers of assets. It is the first protocol to address the cross-chain trilemma. With Stargate, users and applications can transfer native assets across chains while utilizing the protocol's unified liquidity pool and achieving instant transaction finality. Additionally, based on Stargate, users and applications do not need to deal with wrapped assets, allowing users to easily swap USDC on Ethereum for USDT on Arbitrum. Data shows that since its launch, Stargate has processed over 1 million transfers and over $4.5 billion in transaction volume, with applications like Sushiswap deployed on Stargate, enabling users to exchange native assets. Furthermore, Stargate allows users to pay the gas fees required for multi-chain transactions using their gas tokens from the source chain, addressing a pain point for users when conducting multi-chain asset transactions.

Cross-Chain Token Transfers - Omni Fungible Tokens

Similar to bridging, transferring tokens across different chains often involves wrapped non-native tokens, which not only affects composability but also leads to fragmented liquidity. For instance, the UNI token on Ethereum and the UNI token on Avalanche are two different assets that cannot be used interchangeably in applications, especially for long-tail tokens, where insufficient liquidity often results in different prices.

LayerZero attempts to solve the above issues by pioneering Omni Fungible Tokens, a new type of token that can be composable across all blockchains integrated with LayerZero. For example, Trader Joe has integrated with LayerZero to launch JOE as an Omnichain Token, which is a truly native multi-chain token that can be bridged across Avalanche, Arbitrum, BNB, and more.

Another interesting example is how Pendle uses LayerZero to deploy omnichain veTokenomics: Pendle users can synchronize their vePENDLE balances on Ethereum across all chains supported by the protocol (like Arbitrum). This way, veTokens are no longer isolated on different chains, allowing users to easily enhance rewards across various Pendle pools.

Cross-Chain NFT Transfers - Omni Non-Fungible Tokens

Similar to the above example, NFTs will no longer exist in isolation within their native ecosystems—users can move their NFTs across ecosystems like Ethereum, Polygon, and Solana. One example is that in January this year, Pudgy Penguins announced the use of LayerZero's omnichain technology, allowing its sub-series Lil Pudgys to cross-chain between Polygon, BNB Smart Chain, and Arbitrum. This means that numerous NFT projects can gain liquidity and users from other ecosystems through cross-chain interactions without having to launch entirely new projects on another chain, thereby splitting their user base.

Derivatives Trading

One significant issue with DEXs is the lack of liquidity. Rage Trade attempts to address this by building on LayerZero, generating yields by bridging ETH/USD pools from protocols like GMX and Sushiswap, and providing circular liquidity. In other words, Rage Trade can utilize LP tokens from other blockchains like Polygon, Avalanche, and Solana as liquidity on the Arbitrum chain. For example, when 3CRV LP tokens are used as collateral on Chain A, we can also provide virtual liquidity for Rage Trade on Chain B.

Money Markets

LayerZero also plays a role in the lending space. Users deposit collateral on one chain and borrow other assets on another chain through LayerZero's cross-chain messaging. Utilizing LayerZero messaging and Stargate's stable routing interface, Radiant Capital allows users to deposit any asset on Arbitrum and BNB chains and instantly borrow any asset on other LayerZero-supported blockchains. For example, users can collateralize ETH on Arbitrum and borrow USDT on Avalanche. This process achieves true all-chain asset interoperability and maximizes liquidity across various blockchains.

Looking Ahead

As developers continue to explore new omnichain use cases, we look forward to more innovative applications built on LayerZero, covering scenarios such as NFTFi, yield aggregators, omnichain wallets without RPC adjustments, gaming, social interactions, and DID.

We are very excited about LayerZero's vision to achieve true interoperability in the Web3 ecosystem to enhance user experience. LayerZero has sent over 3 million messages and has expanded to over 40 public chains, including non-EVM chains like Aptos and Solana. Its appeal demonstrated in Stargate and other top protocols or projects, such as Sushiswap, Trader Joe, and Pudgy Penguins, not only proves LayerZero's excellent market adaptability but also showcases the efficient execution of the star team led by Bryan Pellegrino, Ryan Zarick, Caleb Banister, Ari Litan, and Irene Wu.