LayerZero - A New Era of Web3?
Greetings, reader @cryptocholy, I missed you! Even in my hibernation, I heard about LayerZero, and now it's my turn!
The goal of this article is to examine the phenomenon of the LayerZero project, which has become one of the most discussed topics in recent months.
It seems like everything has already been said about the project, but in reality, very little has been said about its essence. Delving deeper, one can incidentally discover a series of important insights that will provide a basis for analyzing other projects and complement the Web3 landscape.
I will talk about the strategy through which funds accumulate their main capital, and I will present arguments explaining why this strategy is likely to work with LayerZero (is this strategy available to us?).
What makes this project special and what role have VC assigned to it? Why are they betting that the L0 solution is a crucial part of the future of Web3?
This article is useful for those who wish to:
- Rethink the long-term value of $ZRO tokens
or life after the drop. - Prepare for the active market phase. (1-2 years ahead)
- Gain new analysis ideas that can be applied to other projects.
- Examine investment theses adhered to by leading VC.
We are in a period of opportunity: the bear market is most likely over, during the crisis the strongest projects have hardened and survived, which will probably determine the future of the bull market, very soon the $BTC halving is an important starting point on the way to the active phase of the market.
Now we have the opportunity to gather the "achievements" of the bear market, similar to $SOL, $FLOW, $AVAX, and $NEAR (which went through the previous bear market and "blossomed" in the recent bull market). Some are already doing this actively through "multi-contribution" projects, there is another way suitable for longterm investors, which I will discuss below. Let's get started!
Disclaimer: This article might seem overly positive about LayerZero, but that's the point - using a specific project as an example, I want to explore the reasons behind its high market and audience esteem to offer fresh insights. I'm assuming that after all the ups and downs in Web3, the project passed rigorous assessment and gained support from industry leaders.
Throughout the article, I've mainly used information from public sources (since I can't access non-public information to share).
This isn't an investment recommendation - remember to do your own research (DYOR).
The technical section was co-authored by the creator of the myslepotok channel.
To save your time, I've divided the article into two parts:
1. General analytical information about the project, ideas, and insights.
2. Delving into the project's essence, technological aspects, competitive comparison, and its ecosystem.
Don't be alarmed that the article seems large, much of the length is for those willing to dive deeper
Summary: the uniqueness of LayerZero’s output (VC trend)
Technology, what problems it solves
Competitors and the network effect, is LayerZero already ahead?
Why LayerZero when there are bridges?
The subsidiary product — Stargate
About the team and how the investment was raised
Was AirDrop an imposition? Or an ingenious marketing move?
Is a $3 Billion valuation a lot?
Overall conclusion, LayerZero’s impact on the future of web3, why is it coming now?
Cryptocholy: looking for like-minded people (??????)
How LayerZero is technologically organized: features, advantages and disadvantages, 13 steps to deliver the message.
LayerZero’s competitors through the lens of technology and marketing.
Summary: the uniqueness of LayerZero’s output (VC trend)
Among the big web3 venture players, there is now a successful investment thesis: invest large amounts of capital in late-stage projects (Series A, B, C), thus leveraging all kinds of resources to influence the multiplication of their $10/30/100Minvestment in favor of spreading it over 100 projects with a $500K check.
A16Z, for example, in their last $4.5 billion fund, allocated only a third of their budget to early stage investments.
There is one pattern, quite often the final round closes a couple months/quarter before listing, which by the standards of venture capital investment is a very short wait time.
The first project that allowed me to see this pattern was APTOS.
The project raised $350M+ from the smartest money in web3.
March 2022, $200M round at a valuation of $800M
July 2022, $150M round at a ±$2M valuation
September 2022, strategic investment from Binance Labs and Dragonfly at $4B valuation
October 2022, APTOS listing, FDV ±$8B (and on the top ±$19B), cliff launched
Quite quickly, the project grew 5 times in valuation even before listing. Investors multiplied their multi-million dollar investments in a very short period of time.
At this point, there's less risk of losing investments: the product has undergone a long process, tested many ideas, built a strong team, and secured funding for years of work. This means results and achievements can be tracked (unlike seed investments where you invest in founders' ideas).
Moreover, there's usually strong VC support, which helped them notice trends and profit from the $APT market rally.
Next, I decided to identify similar projects to highlight a common trend. I selected them based on the following metrics:
March 2022, $1.5B valuation round
July 2022, - $OP listing, trades at $7B on average, at peak >$12B
March 2022, $3B valuation round (LayerZero is also valued at $3MLD)
Last Series B round - 2021 at $1B valuation, however, 2022Q4-2023Q1 could be purchased on OTC at $2/5B FDV valuation
In all these projects, there was an opportunity to invest based on the valuation of the latest round (or close to it).
With a substantial amount of funds and connections, a project secures better listings, marketing, market-making, and partnerships.
Excluding ARBITRUM, these projects share a common investor, A16Z:
Moving on to the subject of this LayerZero article:
Last round raised $120M at a $3 billion valuation in April 2023.
Expected token release: Q3/Q4 2023.
Listing the merits of all LayerZero investors is unnecessary, as the best have been attracted: A16Z, Sequoia, Binance Labs, CoinFund, Franklin Templeton, Tiger Global, Multicoin, Spartan, DeFiance, and this is just a part of the list.
I'd like to specifically highlight the latest funding round.
The round was conducted for "strategic alignment,'" said LayerZero's CEO, meaning that they didn't need fundsanymore.
"We wanted to make a leap in the gaming industry and in the Asia market, and a significant portion of this capital is intended for the company's development there."
There is a possibility that it is more of an initiative of the funds to invest in them.
Because they saw the potential in this project to execute the same strategy as with Optimism, Arbitrum, Aptos, Worldcoin, Sui.
By many metrics, we can see how LayerZero fits into the late round investing strategy, as I've discussed regarding the successful launches of $OP, $SUI, $ARB, $APT, $WLD.
For a while, this strategy was known as "Fat protocol," investing in L1 blockchains (now L2). Investors profited significantly (Flow, Solana, Arbitrum, Optimism, etc.). Yet, the "Fat protocol" idea is fading as profitability shifts from blockchains to applications. Former GP Spartan noted this, suggesting apps will surpass blockchains in profitability (for more insight, check out: https://t.me/Defiscamcheck/2963).
The precedent that adds confidence is that LayerZero Labs, with investors like FTX and Alameda, swiftly bought back their stake in November 2022.
"This puts us in an incredibly strong position for the next few years. We have a runway of at least 7 years, even in our aggressive forecasts. We have substantial capital and one of the most exceptional teams in the entire cryptocurrency space," said LayerZero's CEO.
Unveiling the essence of LayerZero's technology, we realize it's a delayed-action bomb. The protocol's aim is to connect all blockchains and their applications. In other words, this protocol isn't just outside the competitive struggle between blockchains and applications, but it catalyzes it, opening doors to a new future for Web3.
A valid question arises: why did the project gather a record-breaking ±$300 million from the world's top backers?
Let me remind you that VCs are the ones who have the key influence and sometimes even determine the future of web3 so far, they already know what we might see in 2024 and beyond, (as they support the early stages of these projects) and this directly influences their decision to invest huge amounts of capital at this kind of valuation.
"There are no more doubts that the future of cryptocurrencies and Web3 is multi-chain, and LayerZero has built critically important infrastructure that makes this possible," said A16Z GP Ali Yahya.
Multicoin, as lead investors in one of the pivotal early rounds of LayerZero in 2021, introduced the world to Solana(leading the seed round), and they supported Arweave, Dune Analytics, CyberConnect, and Sei during their seed stages, all of which consecutively debuted on the Binance Launchpad.
"LayerZero is leading the path for the first omnichain applications, making way for lending, AMM, governance, and more to work across networks," explained Kyle Samani, Managing Partner at Multicoin Capital. "Dapp developers no longer need to write code for specific chains; they can use LayerZero to create a unified interface that communicates across all chains. Anyone wanting to share or consolidate data across multiple chains - which most applications do today - should use LayerZero."
In my understanding, A16Z is currently the most must-watched venture player in Web3, so I'll try to tell you about them soon:
Founded in 2009, they've quickly become a global leader:
Backed Facebook, Pinterest, GitHub, Instagram, Skype, Coinbase, and more.
Chris Dixon, GP&CEO of a16zcrypto, is at the top of Forbes' "Midas List 2022," ranking the world's best venture capitalists for the Coinbase deal.
In the crypto realm, they've backed Ripple (angel round), Solana, Flow (Dapper Labs in 2018), played a pivotal role in Coinbase's creation, supported Near, led the first venture round for Uniswap in 2020, and also invested in Aptos, Avalanche, dYdX, Compound, MakerDAO, Arweave, and the list goes on.
In 2022, in an article about bear market research, we mentioned that Andreessen Horowitz raised a $4.5 billion crypto fund to capitalize on advantageous deals in the declining market. This has made them the wealthiest fund in the Web3 space.
Indeed, A16Z has set an unofficial goal - to reach a billion cryptocurrency users by 2031.
Increased presence of investors from Web2:
Samsung Next is the venture arm of Samsung, actively investing in blockchain startups. They are early backers of projects like Axie Infinity, Sui, Aleo, and Sandbox.
BOND is a Web2 institutional investor that has supported companies like Airbnb, DocuSign, Facebook, LinkedIn, Spotify, and Square.
Franklin Templeton is a significant institutional player with over $1.5 trillion under management. They have a vast portfolio and have recently entered the crypto space. In their portfolio, they also hold investments in Sui and Aptos.
I see this as a new level of onboarding: the project is being discussed even beyond the Web3 community. It seems like a decent entry point for new users into the market.
Christies has only a few investments, one of which is in LayerZero. Interestingly, they invested in two rounds. Their other investments are in products related to NFTs and art.
I believe this is a strategic investment; the company is actively embracing Web3 and has been selling NFT art through its auction house for a while now
This indicates that LayerZero has the potential to become a facilitator for the next mass adoption, including in the NFT space, as they solve the issue of NFT interoperability between networks.
Web3 is reaching a necessary level of product maturity and can even exert strategic influence on Web2/traditional business products. This attraction to institutional investors is due to projects like LayerZero solving crucial problems, which in turn attracts users and businesses to Web3.
Technology
LayerZero is an omnichain interoperability protocol.
"Our mission is to connect every smart contract on every network," said LayerZero's CEO.
An omnichain protocol like LayerZero enables users and developers to interact with various blockchains as if they were a single network.
In simpler terms, if two different systems are interoperable, it means they can "communicate" with each other and understand each other's language, even if they were developed by different teams and use different technologies or standards.
The core of omnichain is straightforward: with many networks and scattered users/apps/money in Web3, moving tokens is risky, and centralized exchanges pose issues. Omnichain aims to let users/apps fully benefit from Web3 without needing to understand the intricacies. In essence, it turns the cryptocurrency ecosystem into a unified network.
LayerZero's technology boils down to solving the problem of isolating products and users' capital that have spread across various networks. The protocol enables blockchains to "exchange messages" with each other, allowing, for example:
- safely transferring tokens/NFTs from one network to another
- giving Ethereum apps access to liquidity on Solana, Aptos, etc.
- "communicating" between incompatible (and compatible) blockchains, creating a new level of applications and user experience.
You can be a supporter of a specific blockchain while having access to solutions from any other blockchain. Without taking extra steps, this interaction experience would go unnoticed for you.
In the context of the fact that Web3 aims for specialized networks, it's challenging to envision the future without such technologies. For instance, Zora developed a layer2 solution for NFTs. Without LayerZero, it would be difficult to imagine how NFTs could be "transported" across different networks.
Additionally, Web3 aims to adapt to new users. Currently, for a newcomer to feel comfortable even in DeFi, they need to grasp the basics of several main blockchains, dozens of projects, and, even more complex, how these blockchains interact with each other.
It's not the easiest task; it's simpler to register on an exchange where you can trade almost any token without considering networks and other intricacies. But can we rely on trust in centralized structures?
"Not your keys - not your tokens."
Imagine an exchange that pools liquidity from all blockchains, provides access to top-notch lending, yield farming, trading, margin trading protocols for any tokens across networks—all within a single decentralized application.
Sounds impossible? But that's precisely what the aspiration of LayerZero's technology is all about.
"By enabling composability across chains, LayerZero empowers developers to build decentralized applications that were previously simply impossible." - Ali Yahya, GP at A16Z
Moreover, all the processes of "communication between networks" will occur seamlessly, and the end user won't even notice.
The essence of the LayerZero solution in simple words
They solve the problem of interoperability between different blockchains. An analogy from the real world could be the international air travel system. Different countries have their own airlines and airports, each operating by their own rules and standards. However, thanks to international standards and agreements, passengers can travel from one country to another, transferring between flights of different airlines. This is possible because these systems are interoperable - they can interact with each other to ensure smooth and efficient travel for passengers.
Similarly, LayerZero allows different blockchains to "communicate" with each other and exchange transactions, even if they were developed by different teams and use different technologies. This can make the use of cryptocurrencies and blockchain technologies much simpler and more convenient for users, just as international air travel makes travel easier and more convenient for passengers.
Sequoia Capital provided a simple analogy to describe this technology as well:
For context, the current state of cryptography can be compared to DoorDash or Uber working only among other iOS or Android users. Imagine if you could only request rides from drivers who had the same type of phone as you, even if a driver with a different phone was just a minute away. Or, as an additional analogy, imagine if Gmail users could only send emails to other Gmail users, Yahoo users could only send emails to other Yahoo users, and so on. The current fragmentation of cryptocurrencies across Layer 1 blockchains creates barriers for users and protocols. Networks are most efficient with unified users, data, and liquidity.
Competitors and the "network effect"
It would be presumptuous to think that only one team is tackling such a massive problem. I'll provide a list of projects that are working to address a comparable issue:
In the context of discussing competitors to the LayerZero (L0) project, it's important to note that the valuation and the latest funding round took into account the competitive landscape. However, L0 doesn't solely focus on technology; it emphasizes efficient management and marketing as well. These three components combined give L0 a unique advantage over other projects.
Comparing LayerZero (L0) to competitors like Avalanche (AVAX), Cosmos (ATOM), Polkadot (DOT), and Near (NEAR) (mentioned in some investment reviews) is not relevant due to L0's more modern technological approach. More detailed information about the competition can be found in supplementary materials (also including a more in-depth analysis of competitors like Chainlink and Axelar).
Chainlink's Cross-Chain Interoperability Protocol (CCIP):
LayerZero's technology actively incorporates services from ChainLink, including "risk domination accounting."
CCIP has strong connections and reputation, but a smaller user base. They aim to provide services to central banks and companies rather than individual users. L0 also focuses on user adoption while pursuing a parallel strategy.
Chainlink and LayerZero (L0) offer similar functionalities, such as message exchange and endpoints in each network. However, there are key differences in terms of decentralization and security.
Chainlink, for instance, boasts a high degree of decentralization due to its numerous node validators. However, unlike L0, Chainlink lacks an oracle and relay, potentially reducing security levels. In L0, the oracle and relay interact to verify transactions, preventing the possibility of compromise by Chainlink or node hacks.
Originally, L0's whitepaper mentioned plans to integrate Chainlink's oracle. However, this decision was made with the awareness that Chainlink is their competitor.
Therefore, L0 developed its own oracle and relay, which mutually verify each other, providing an additional layer of security.
"At the moment, Axelar is more decentralized than L0 (this will be improved with ZkLightClient implementation), but it entered the market during a time when 3ac, Terra, and Celsius were experiencing difficulties, leading to a negative impact on its token's reputation and reduced demand for its technology.
LayerZero's network effect as a competitive advantage
A16Z's Crypto Startup School (2020) highlighted the importance of the network effect in the growth of crypto startups."
In simple terms, the network effect refers to a project's ability to quickly and widely gain the trust of customers/users, making it harder for competitors to catch up without significant advantages.
To emphasize the importance of this aspect, it's worth noting that this lecture is conducted by Ali Yahya, the General Partner of A16Z. He was directly involved in investment deals with LayerZero, Matter Labs (ZkSync), Solana, and Alchemy. There's no doubt that LayerZero has taken this competitive strategy into account.
A great example of a leader in the field is Ethereum. By entering the market first, gaining influence and trust, it has become nearly impossible to displace it from its position. This is evident with modern Layer 1 competitors, as they often find themselves integrating with Ethereum to attract users.
A similar trend is observed with LayerZero. Competitors' solutions either haven't gained significant traction yet or have just launched. In contrast, LayerZero is not only engaging in substantial marketing efforts among users and projects, but also actively hiring staff to promote its offerings. Notably, they are placing special emphasis on the gaming sector, as indicated by the CEO's statements.
It's also important to consider the significantly greater pool of high-quality resources, both in terms of funding raised and the potential network connections.
It's also crucial to take into account that the project has processed over 50 million transactions, with the most active days seeing volumes exceeding 1 million transactions.
Even though there's talk of increased activity from certain users, it's crucial to realize that the project hasn't faced major technical problems during this period. The stress test actually gave the team useful data. It's hard to imagine competitors handling a similar situation, which is a big advantage for LayerZero.
This experience is really helpful considering their goal of "connecting blockchains and supporting large-scale applications." LayerZero is already working with over 30 networks.
There are more than 100 applications, some already existing and some in development, that are worth paying attention to.
Lastly, to strengthen its advantage, LayerZero is hiring marketing leaders from successful products, like Polygon, which has a strong DApps ecosystem.
Why LayerZero when there are bridges?
Most cross-chain transactions today occur on what are called bridges, which facilitate interactions by locking assets from one chain and minting equivalent tokens on another, acting as intermediaries.
According to the DeFi Llama data aggregator (2022), around $33 billion worth of cryptocurrency is currently locked in bridge protocols.
However, these bridges introduce additional layers of centralization and security vulnerabilities, as they act as intermediaries.
Hackers have managed to steal $2.6 billion from bridges.
I discussed this barrier and even vulnerability in my analytical article six months ago.
It's reasonable to assume that the stronger the decline, the more significant the problem causing it. This hindered further development. Subsequent projects must already include its solution, capable of doing so, and give birth to innovative products that catalyze further growth.
Likely, LayerZero could potentially become the "solution to the bridge problem" in the future.
Investors believe that LayerZero won't fall victim to such thefts. "We had convictions about the future of cross-chain interaction, but the technology to support it was lacking - until we met LayerZero," says Michele Beil, a partner at Sequoia.
To move, for example, $1000 worth of cryptocurrency from blockchain A to blockchain B, a person needs to send a message from A through an intermediary chain that confirms the transaction, and then this intermediary chain informs B that A has transferred the funds. However, these intermediary chains are attractive targets for hacker attacks.
LayerZero, in simple terms, eliminates the need for using an "intermediary chain" through its solution, allowing tokens to move freely from point A to point B.
The subsidiary product – Stargate
Certainly, Stargate is a significant aspect to highlight, as it was developed by the LayerZero team to showcase the technology of their core product.
Stargate is a liquidity transport protocol, in simple terms, a bridge built on the LayerZero technology.
The achievements are remarkable — over $18 billion worth of value has been transferred through this protocol since its launch.
And the argument about dropshippers' activity won't hold here. In the first month of its launch alone, the volume reached over $1.4 billion.
In recent months, the protocol has maintained the top position in the bridge rankings for trading volume, with almost twice the advantage over the competition.
A part of this volume may involve dropshippers:
But we observed significant volumes even before the Series-B announcement, and the marketing effect cannot be disregarded, which clearly attracted, among other factors, active users.
The public market has already valued one of LayerZero Labs' products, which represents the core technology, at $600 million.
About the team and how the investment was raised
CEO of LayerZero, Brian Pelligrino:
- In 2015, he was one of the world's top poker players.
- In 2016, he sold an AI for baseball analytics to several major baseball companies.
- In 2018, he co-founded a token launch platform with an engineer from A16Z, sold it, and returned to AI.
- In 2020, he created the world's best AI for playing poker in collaboration with Caleb Bannister (Chief Engineer and co-founder of L0) and Ryan Zarick (CTO of L0).
- With the launch of Binance Smart Chain in 2020, he became fascinated by the technology and decided to create a game (in collaboration with current co-founders). That's where he encountered the issue of unreliable bridges.
- In May 2021, LayerZero became the starting point: the official document "LayerZero: Trustless Omnichain Interoperability Protocol" was released.
The document outlined how their free and open-source protocol would become the first to enable direct transactions across all blockchains while remaining decentralized, transparent, and immutable.
During that time, the protocol was being developed quietly, without drawing excessive attention. However, around that time, co-founder of SushiSwap, 0xMaki, joined LayerZero. He could have easily joined almost any team in the web3 space, but he chose a relatively unknown startup that had very little at the time.
And what did one of the most prominent figures in web3 bring to the table? Naturally, connections. 0xMaki is involved in business development, which involves forging partnerships and opening the right doors. However, even without him, the core team of LayerZero has been doing well in this regard.
In October 2021, feeling inspired by the addition of 0xMaki, Pellegrino tweeted:
"We are legally assembling the greatest team in cryptography, and no one even knows about it yet."
Sequoia partner Michelle Bailhe saw this and sent a direct message. "I didn't know him," says Bailhe, "but his contribution to crypto Twitter was optimistic and interesting. When Sean and I met him, Brian's intellectual prowess and clarity of thought on one of the most complex issues in cryptography were irresistible."
That's great to hear! The Sequoia website has excellent material about getting acquainted with LayerZero.
Before the creation of the Transmission Control Protocol/Internet Protocol (TCP/IP), different intranets connecting universities and government institutions in various countries couldn't exchange data with each other.
This analogy helps explain why, in 2022, they jointly led a Series A+ fundraising round, raising $135 million. "LayerZero's technology is the glue for cryptography."
"It's what brings the rest of the cryptocurrency together. The collective value is much, much greater than the sum of its parts. Brian wants all of cryptocurrency to win, wants every pocket of cryptocurrency to be more valuable."
The $ZRO token
The token is not officially confirmed yet, however, its quotes can already be found on Binance. Details of the latest funding round have been leaked to public sources, and news articles about LayerZero mention "token warrants." Recent transactions involving market maker Wintermute have also caught the attention of the information sphere.
And community investigations suggest a potential heightened interest from exchanges:
$ZRO has at least three use cases:
1. Payment for validation (autonomy and decentralization)
2. Voting for network changes - governance (decentralization)
3. Payment of fees instead of native tokens
It will allow launching your own Oracle & Relayer to process transactions, leading to greater autonomy and decentralization of the network. Currently, Chainlink is the only Oracle, and the Relayer is operated by L0 in partnership with Polygon and Sequoia Capital. This solution aims to enhance the network's autonomy and decentralization.
The ability to pay fees using $ZRO tokens instead of native tokens is suggested in GitHub and other project repositories. This concept, shared by the "Мыслил. Удивился. Пишу." channel, proposes that users or businesses can pay fees using $ZRO tokens, which can be stored in a smart contract or the user's account.
It's also mentioned that investors in LayerZero Labs might receive $STG tokens (Stargate) in addition to $LZO tokens.
The official tokenomics details are not available yet.
Similar to other projects like Aptos, Optimism, and Arbitrum, it's likely that the tokenomics details and user rewards might be announced a week or two before the token is listed.
Was AirDrop an imposition? Or an ingenious marketing move?
One notable strategy to attract users to the ecosystem is by using events like listings and airdrops. For example, Arbitrum's listing and a significant airdrop took place on March 23rd. Furthermore, a high-profile funding round of over $120 million from major funds is expected to be announced on April 2nd. These rounds usually involve significant preparation time and are often longer than a month or two, especially considering the challenges of the last quarter of 2022.
It's very likely that these are interconnected things, and articles are even appearing in news sources about a potential airdrop, following the example of $ARB.
Doesn't this seem like a "vampire attack," aimed at sparking user interest? What could be more enticing than a potential airdrop? In this case, the L0 team didn't need to do much; they simply guided.
At this point, we're at a stage where almost everyone is confident that there will be some kind of airdrop. This speaks to the fact that a massive audience is now aware of the LayerZero project itself.
https://www.bsc.news/post/layerzero-airdrop-what-you-need-to-know-if-it-happens
https://thedefiant.io/layerzero-activity-triples
https://www.okx.com/landingpage/potential-layerzero-airdrop
Is a $3 Billion valuation a lot?
First, let me provide some context:
We endured a very challenging year in 2022.
Startup valuations in the industry sharply dropped by 50% from the first half of 2022 to the second half of 2022. Since then, crypto-startup valuations have further declined by 15% compared to the first half of 2023, reaching nearly 70% of their previous levels. - VP BD Ava Labs
Overall, investors are seeing lower valuations, leading them to invest smaller amounts.
In the first half of 2023, web3 startups raised around $5 billion, a significant decrease from the approximately $30 billion raised during the same period in 2022. This represents a sixfold reduction.
The first quarter of 2023 also witnessed the lowest capital volume invested in the vertical since the fourth quarter of 2020.
The first quarter of 2023: LayerZero raises a Series B round of $120 million at a valuation of $3 billion.
This is the largest funding round in the web3 industry in 2023.
In times of record-low fundraising and low valuations for the industry, LayerZero manages to secure a record-breaking funding round. Let's move on:
LayerZero's listing is planned for Q3/Q4.
Bitcoin's halving is scheduled for April 2024.
A cliff in 12 months will unlock approximately six months after the halving:
Halving in late 2012 -> late 2013/early 2014: Bitcoin's All-Time High (ATH)
Halving in 2016 -> 2017: Bitcoin's ATH
Halving in 2020 -> 2021: Bitcoin's ATH
In other words, there's a good chance that the distribution of $ZRO will occur under some of the market's most favorable conditions.
It's worth considering that several global projects are waiting for opportune timing to launch. This could potentially lead to the most vibrant bull market in the history of cryptocurrencies. Let's delve into more details: https://teletype.in/@cryptocholy/tribute
If the current valuation of $3 billion for LayerZero seems substantial, let's recall the market capitalizations of projects during the previous bull market ($SOL):
Based on the trend, it's quite possible that we might witness new record levels:
Grayscale: Cryptocurrencies today are like the internet in 1995 in terms of the number of users, market capitalization, and other adoption metrics.
Grayscale: Currently, the cryptocurrency space represents only 1.2% of the total global market volume. In 5 years, it could be 5%, in 10 years, 10%, and in 30 years, 20% of the stock market share. Over the course of 25 years, the market could reach a capitalization of $100 trillion.
How does this relate to LayerZero? A year ago, bets were placed on this project as a foundational element of the future web3, and the latest substantial funding round has only reinforced this perspective.
Future full-scale applications that simplify the experience for new web3 users, along with AAA+ games aiming to attract not only new users but also unite enthusiasts from existing networks, are quite likely to be built using LayerZero. Without such technology, it's challenging to envision something truly massive at the moment.
In other words, there's a significant chance that we'll witness this project serving as the "circulatory system" of the next stage in blockchain technology's development.
Conclusion
Already, LayerZero is demonstrating impressive results. We clearly observe the narrative of drop hunting, which provides interesting insights. Drop hunters are also targeting "Fat-protocol" projects, basing their analysis on the possibility of a generous airdrop being a good investment, considering metrics, team, and analysis almost like venture capitalists. Interestingly, all of this is preceded by technology, experience, team, and other factors.
Currently, several projects are preparing to enter the market or are actively in development, including ZkSync, ZkEVM, Base, Linea, Scroll, and even modular blockchains such as Mantle have integrated. We await developments like Celestiaand others.
Important note: The projects mentioned above are highly advanced technological solutions that will undoubtedly impact the future of web3. They are currently being valued by the market, enjoying significant demand from users and investors alike. We are poised to invest in several of these projects as they hold substantial potential.
These projects have proven their significance, attracting substantial resources and attention.
What's most interesting? LayerZero's solution (Stargate/products based on L0) is currently and will continue to act as a unifying element for these projects. It encompasses all the new networks, blockchains, and layerX solutions, essentially embodying the concept of omnichain.
In other words, with the emergence of LayerZero, a new phase will begin. Ignoring the metrics of drop-hunting, which will continue to transfer value using LayerZero-based bridges, the technology will be applied and advanced. When all these projects fully enter the open market, L0 could genuinely become the circulatory system, an essential component of web3.
The metric of drop-hunting is a clever trick for analysis, given resource limitations. The goal is to select the most promising project, ensuring the received tokens hold value and demand—akin to a form of investment.
We can see the direction in which the future of web3 is heading. Blockchain technologies have gained an entirely new application and manifestation. Sometime in the future, I'll provide more details about the aforementioned projects, but considering all the data, it becomes difficult to argue against something:
I'm looking for like-minded individuals
If you resonate with the ideas and analytical insights described above, I would be glad to connect with like-mindedindividuals.
Some time ago, I became a partner at a web3-focused venture capital firm (I will provide more details in a personal conversation). Our goal is to build a resilient portfolio of fundamental projects, the dawn of which we anticipate at the peak of the market: LayerZero, ZkSync, StarkNet, Lens Protocol, Celestia, and others.
We see this as an excellent way to diversify the portfolio, which will include a strategic index of leading "fat protocol" crypto projects that have withstood the bear market and undergone thorough due diligence by VCs. The unlocking of tokens for these projects is expected to coincide with the potential peak of the bull market.
We have invested in LayerZero by participating in a direct SAFT with the project's team (as of the time of this article, a small allocation of $150-200k remains).
We are in the final stages of negotiations with several of the aforementioned projects.
At the moment, our portfolio under this thesis already includes: Sui, Aptos, Sei, ZkSync, Celestia.
We are interested in mutually beneficial sharing of deals, networking, and analysis to collectively explore new opportunities.
We would be delighted to collaborate with those who:
1. Recognize the value of this proposition, share the vision outlined above, and possess investment experience.
2. Have an average investment check of over $25,000.
3. We are also open to communicating with representatives from the VC sphere (Syndicates, Community-VCs, individual investors) who are interested in deal exchange, analysis, and introductions.
Feel free to reach out to me through private messages:
Please do not perceive this as advertising, as the response rate will likely be less than 0.1%, only from those for whom this is truly relevant and valuable.
Additionally, based on this, I will begin building a free private community of like-minded individuals. Therefore, if you bring value in a different direction, I'd still be happy to engage in conversation using the form above.
DEEP DIVE INTO LAYERZERO, READ IF YOU NEED MORE INFORMATION:
LayerZero Technology:
The core idea of LayerZero (L0) revolves around implementing a mechanism for cross-chain message transmission between different blockchains. This mechanism involves the interaction of smart contracts within networks A and B with UltraLightNode (ULN) and Endpoint components. These components, in turn, communicate with Oracle and Relayer, which exist off-chain.
The process of sending a cross-chain message consists of three stages:
1. The user interacts with the smart contract in network A, which communicates with ULN. ULN initiates a request to Oracle and provides transaction data. Oracle verifies the user's request and the validity of tokens for transmission.
2. The Relayer verifies the consistency between the data from the contract in network A and the data from Oracle. If the data match, the process advances to the sending stage. Otherwise, the transaction is rejected.
3. In the final stage, the message's sending is confirmed to the contract in network B using ULN. Oracle receives confirmation of the transaction's execution and completes the cycle.
Key components of the system include: User Application, UltraLightNode & Endpoint, and Oracle & Relayer. Let's delve into each of them for a better understanding of the technical aspects.
1. User Application: These are applications built on the L0 platform that operate within networks (on-chain). An example is the Stargate contract used for receiving or sending funds in Polygon or any other supported network.
2. UltraLightNode & Endpoint: These are smart contracts created by L0. The User Application interacts with them to provide instructions for required actions. First, the action is received by the Endpoint in the sending network, which then passes the information to ULN. This ensures a secure method of interacting with Oracle & Relayer while minimizing transaction costs.
3. Oracle & Relayer: These components are located off-chain and operate independently to enhance security and reduce costs. Oracle receives the transaction ID from ULN, processes the data, and sends it to Relayer for verification. After the transaction is executed, Relayer reports its successful completion. Relayer validates the authenticity of data from Oracle, and if valid, sends the message-instruction through ULN to the User Application in network B.
Advantages of LayerZero (L0) technology compared to other cross-chain services:
- Reliable Transaction Validation: Due to the mutual cross-check mechanism between Oracle and Relayer, transactions are validated with high reliability.
- Significant Cost Reduction: L0 achieves lower transaction costs by utilizing an efficient data transfer system. Only headers are transmitted on-chain, while off-chain components extract the necessary data, thereby reducing fees in the sending network.
- Utilization of OFT and ONFT Standards: L0 allows for the use of both fungible and non-fungible tokens (OFT and ONFT standards) for various token transfers.
- Independence of Oracle and Relayer: The separation of Oracle and Relayer components ensures security even in the event of a compromise of one of them.
- Third-Party Oracle and Relayer Integration: The technology allows for the incorporation of external Oracle and Relayer services for enhanced security and autonomous data transmission.
Technologically, L0 addresses the drawbacks outlined in the whitepaper of its competitors such as Polkadot, Thorchain, Anyswap, Cosmos, and Chainlink. However, its most relevant competitor in terms of technology (excluding marketing and reputation factors) is Axelar.
Drawbacks of LayerZero technology:
- Decentralization Concerns: Dependency on external services for Oracle from Chainlink and Industry TSS Oracle (owned by Polygon and Sequoia) raises concerns about decentralization.
- Limited Oracle Nodes: L0 has a limited number of Oracle nodes (approximately 5), whereas a competitor like Axelar boasts around 70 nodes for its Oracle equivalent (consensus).
- Sole Relayer Ownership: L0 has a single Relayer owned by the project, which also contributes to lower decentralization levels.
The limited number of nodes is being addressed through the transition to the Zklight client, which is being tested by a friendly project called Polyhedra.
Technological Features of LayerZero:
L0 employs UltraLightNode (ULN), Oracle, and Relayer, which presents a more economical solution.
LayerZero is working on launching the Project Essence validation system, which will allow users to deploy their own Oracles and Relayers for L0-based applications and decentralize the network.
Omnichain Fungible Token (OFT):
The LayerZero team has developed a technology to address liquidity issues associated with bridges, DEXes, and CEXes. This is achieved through the Omnichain Fungible Token (OFT) standard, which operates on a "mint-and-burn" principle for transferring tokens between networks. This eliminates the need for liquidity pools with locked project or user funds, as tokens are transferred 1:1 without loss in quantity and token uniqueness.
OFT works in a sequence similar to regular message transmission but requires additional setup in Networks A and B, along with adherence to specific conditions:
1. Creation of a contract by LayerZero or its derived product in both networks.
2. Interaction only with ERC-20/BSC-20 tokens, meaning with the smart contract of the token issued in the network, but not with the native token of that network.
1. The user interacts with the smart contract in Network A, which sends all their tokens to a burn address (0x000..).
2. ULN then transfers the data, and Oracle and Relayer jointly verify the destination network, the "burning" of tokens, their total amount, and hash matching.
3. After data validation, Relayer sends the information to ULN in Network B, which in turn instructs the contract deployed in the destination network to create (mint) an equivalent number of tokens 1:1 for the user's smart contract.
Advantages of the OFT Standard:
No need to hold wrapped token analogs to verify their existence.
The entire token supply resides with users rather than in contracts or pools.
No token loss during transfer, payment only for network fees and transfer service.
Minimization of hacking risk due to absence of pools in sending and receiving networks.
Disadvantages of the OFT Standard:
Complexity in distributing tokens based on this standard, as the issuer must be L0 or a product based on it.
Pricing depends on trading on DEXes, CEXes, and the issuer token's condition.
The OFT standard is fully utilized in two L0 projects - the BTC Bridge and Stargate Finance. There's also partial usage of the OFT standard in products like USDC (Fantom) and the Aptos Bridge.
After developing and implementing OFT, the L0 team created an alternative technology for NFTs called ONFT. The working principle of ONFT is similar to the ONFT standard, where NFTs are transferred while preserving their uniqueness.
Capability to store and transfer NFTs across any ONFT-compatible network while maintaining uniqueness and authenticity.
Low demand for using the technology in the overall NFT market share.
Lack of sufficient liquidity to establish ONFT collection prices and the challenges for teams managing such collections in the development of uncharted marketplace territories that support ONFT collections.
Currently, this technology is used in a number of collections and projects for transmitting ONFTs, including collections like Pudgy Penguins, Holograph, and Polyhedra.
LayerZero's competitors through the lens of technology and marketing
The effectiveness of a project is determined by the collaborative efforts of "whales" - marketing, technological infrastructure, and management. In some projects, one of these components may be absent or dominate over the others.
Some projects thrive thanks to one or several branches, as people don't always need a perfect product; they need something they're ready to embrace.
Dogecoin and Shiba Inu confidently secure spots in the top 20 rankings of all cryptocurrencies. Dogecoin's success can be attributed to luck, while Shiba Inu's success stems from a combination of luck, management, and marketing.
Polygon has been "reengineered" and is striking deals with world-leading companies while actively contributing to the L2 trend, showcasing the effectiveness of their marketing department.
Bitcoin brought us the technology of cryptocurrency, the principles of anonymity and decentralization, while Ethereumintroduced an ecosystem and the DeFi/NFT/DAO sectors.
As L0's competitors, Chainlink's CCIP, Axelar, Wormhole, and several analysts point to Avalanche, Polkadot, Cosmos, and Near.
Axelar, although surpassing L0 in decentralization, doesn't experience significant demand due to the negative impact of 3ac's crashes, Terra, and Celsius on its token's pricing.
Wormhole, a product from 2017 that survived crashes on FTX, bear markets, and a multi-million-dollar hack in 2022, is still present in the market.
What unites Axelar and Wormhole? Uniswap chose them, leaving out LayerZero, Celer, DeBridge, and Multichain. Many might not have heard of Wormhole, but they remember Axelar. They are connected by technology and effective management.
LayerZero, known throughout the crypto space in 2023, wasn't chosen by Uniswap. However, it outperforms all metrics, hires top Polygon managers, and naturally attracts traffic after announcing their funding round and Arbitrum's release. They don't hide anything, and it's part of their marketing plan.
Marketing for many is seen as banner advertising, but it permeates human consciousness and behavior, opening opportunities for projects. Without management, a project will collapse; without marketing, it won't gain attention.
Differences in approaches and strategies can be observed. AVAX, for example, is another L1 blockchain launched before L2 solutions emerged. Their approach of dividing networks into C, X, and P now seems outdated.
On the other hand, DOT could be considered conceptually outdated despite the initial enthusiasm around the project. The idea of creating multiple L1 blockchains based on DOT hasn't panned out. As an alternative example, Optimism successfully developed a working SDK on which projects like Base and OpBnB were launched.
Cosmos and NEAR, on the other hand, have encountered management issues. After receiving funding, we didn't witness an "explosion of development." While Cosmos conducts hackathons, neither project shows significant progress.
In contrast, Polygon demonstrates an example of effective management and marketing. They don't focus solely on technology but strive to ride the L2 trend. Their business-oriented approach is respectable.
Overall, when selecting investors, the bet was likely placed on the team's enthusiasm, their professional experience, potential trends (Optimism's success, Arbitrum's movements, presence of multiple EVM blockchains), and the understanding that their technology, though not revolutionary, can ride the trend. Among real technology competitors, Axelar, CCIP, IBC, and Nomad can be highlighted, although their successes are limited.
Let's examine the technological component of the L0 project, setting aside the marketing aspect. In this context, special attention is given to comparison with competitors such as Axelar, CCIP, IBC, and Nomad.
Axelar and CCIP present interesting technological examples. However, their approaches and implementations have their peculiarities.
IBC, for instance, is not just a cross-chain messaging service; it's a blockchain that can handle token transfers to other networks connected to the Cosmos Hub. However, the set of networks connected to IBC leaves something to be desired. Currently, the top connected networks include Cronos and Kava, and Cosmos promises to add Ethereum support only by the end of this year. This, coupled with the specifics of the Tendermint technology, makes IBC's use more expensive than L0, even with Ethereum or other top-20 network support.
On the other hand, CCIP is a real global competitor to L0. Like L0, CCIP is a cross-chain messaging protocol with off-chain services, making its use cheaper than other competitors. Both have points on each network (L0 has endpoints, CCIP has ramps), and while L0 has an oracle and relayer, CCIP has only DON, on which they installed ARM, an equivalent of a relayer, for double-checking. However, CCIP appears more technologically advanced than L0, as it serves as its own oracle and can spin up many DONs, whereas L0 is directly dependent on its main competitor - Chainlink.
It's worth mentioning Circle separately, which moved away from L0 and started using OFT technology (with the "mint and burn" principle) not on L0 but on CCTP. Circle, aware of its power and capitalization, went its own way, connecting over 20 services right from the launch.
LayerZero is primarily a message-passing service focused on creating and deploying infrastructure across a wide range of networks, including both EVM (Ethereum Virtual Machine) and non-EVM networks. Despite this, the LayerZero team develops flagship products based on their technology, including Stargate, Aptos bridge, testnetbridge, and btcbridge.
As of the time of writing, LayerZero's technology is available on over 30 mainnet networks and nearly 40 testnet networks. About 95% of these networks are EVM-based, making their integration relatively straightforward due to established methods and experience. However, each non-EVM network has its own unique characteristics that require an individual approach, slowing down the integration process.
Among non-EVM networks, Aptos is currently represented, being one of the first of its kind to be integrated. The decision to integrate Aptos was likely made in advance, considering the recent market entry of Aptos and the good relationship between the LayerZero leadership and the Aptos team.
The prospects of adding new networks can be evaluated in two ways: through a marketing lens (based on team and leadership announcements) and through a technical lens (based on the technical groundwork for network integration).
Potential Applications of LayerZero Technology and Team Priorities:
LayerZero's technology opens up new opportunities for cross-chain products, including DEX/Bridges, Governance, Lending, and Yield. DEX/Bridges built on LayerZero allow for token transfers between networks without the need for wrapped tokens, reducing fees and risks. Cross-chain Governance enables projects to reach a broader audience by distributing their tokens across multiple networks. Cross-chain Lending allows assets in one network to be used as collateral in another, eliminating the need for token swaps. Cross-chain Yield Aggregators can leverage LayerZero to create the most profitable yield farming conditions across different networks.
Based on the job openings listed on their website, the LayerZero team appears to be interested in developments in the Gaming, Capital Markets, and Enterprise sectors. This suggests the potential use of LayerZero technology for transferring assets or instruction messages to large businesses, the gaming industry, and financial organizations.
The LayerZero Ecosystem
The main goal of the L0 team is to provide technology and ready-to-use SDKs for the development of infrastructure, with a focus on cross-chain interactions. The L0 ecosystem includes around 70 popular applications, with more than 1000 transactions and 400 user interactions, and the total number of connected User Applications amounts to 5000.
Let's delve into each of the categories that are part of the L0 ecosystem and assess the project levels within them based on criteria such as user demand in the cryptocurrency community, implementation quality, and popularity within the L0 ecosystem.
1. Bridge: This category includes projects that operate entirely on LO technology, hybrid projects that use liquidity pools on network sides, and optional projects that utilize only parts of LO functionality. An example of an ideal L0-based bridge is btcbridge, which transfers messages about btcb token transfers and burns them on another network using FT. Hybrid projects include stargate, aptosbridge, testnetbridge, and liqudswap, as well as numerous bridges in the destination network, such as harmony and coredao bridge. Optional projects like pancakeswap, sushiswap, and fi woo use stargate pools and L0 technology to process user exchange requests. The LO ecosystem represents a vast number of bridges, which may not be as popular as the examples given but collectively make up a significant portion of all transactions within L0, indicating the high demand for affordable and accessible cross-chain bridges in the global industry and their popularity among ecosystem users. In terms of quality, given the abundance of such solutions and the actions of developers who have managed to create a ready-made base of examples and convenient documentation for deploying their own bridge or incorporating it into their product, the implementation quality can be considered high.
2. Networks: Among the networks in L0, the most popular ones are Arbitrum, Polygon, and Optimism, along with numerous gaming networks. However, non-EVM networks like Bitcoin, Ripple, and Dogecoin are not as popular.
3. DEFI: This category includes platforms where tokens can be exchanged or purchased, and then sent to another network using the L0 technology. Examples include Angle Money, Interport, Cashmere Labs, Abracadabra, Credo Finance, and Radiant.
4. DEX: This category, while in demand in the cryptocurrency industry, might not be the most logical for implementation in the context of L0 technology's characteristics. Representatives of this category include Ragetrade and Dexalot.
5. NFT platforms: In the LO ecosystem, there are both trading platforms for exchanging or selling NFTs and aggregator sites that allow for the creation and transfer of NFTs using ONFT technology. Examples of such platforms are Omnisea and Omni-X, and the aggregator sites include Holograph, Zkbridge, and Merkly. Special attention should be given to the Polyhedra project, which is developing Zkbridge. This project combines OFT technology and ZK technology while parallelly developing its own infrastructure solutions.
6. NFT collections: This category is underdeveloped due to low demand for cross-chain NFT collections. One notable example is the Pudgy Penguins, a beloved collection by the LO team. They were one of the first omnichain collections and were actively promoted by their holders on social media due to their recognizability.
7. Gaming: The team is actively developing the gaming sector by connecting numerous "gaming" networks and projects that allow the transfer of gaming tokens across different networks to expand the user base. They are focusing on the development of games in the Asia-Pacific region. An example of a popular game is DeFiKingdoms.
8. Launchpad: In the current market conditions, launchpads are not very popular. Examples include Omnisea and Dappdapp.
9. Wallet: Projects like Reunit and MSafe have added support for exchanges using L0 technology within their wallets.
10. Infrastructure: An extremely interesting section as it encompasses atypical projects with intriguing concepts. This section includes Name Services, which have high demand in the omnichain sphere but are challenging to implement without incorporating popular Name Services like ENS. Representatives include SNS, Zk NS. Polyhedra is one of the standout projects in this category as, in addition to cross-chain NFT transfers, it is developing the capability to launch Oracle on ZK technology, which will make L0 more decentralized and secure. Currently, Oracle for L0 is directly competing with Chainlink. Other representatives in this category include Zklink, Ottersec, and Zellic. This category can be considered in demand for expanding the project's ecosystem, with low popularity within L0 due to the complexity of infrastructure projects, but with a high level of quality for future implementation.
Summing up the ecosystem overview, it's worth noting that the most developed categories are Bridge, Networks, DeFi, NFT platforms, Gaming, and Infrastructure. This indicates L0's inclination towards expanding its reach to other networks through token transfer technologies and NFTs.
