ZeroX.fund

Article by echo_z

The public offering was seized by Alameda under SBF, supported by 0xMaki, and after its launch, the token price soared over 10 times. Recently, it has also achieved a valuation of $135 million. LayerZero Labs is undoubtedly the hottest Web3 team recently. The same team has created a cross-chain underlying protocol and the first application built on it. On the day the underlying protocol LayerZero was announced, the public offering of the supporting application Stargate was also announced.

The enormous prospects of inter-chain communication, combined with the already launched cross-chain products, make this project stand out.

Chain Tea House has previously introduced Stargate and has conducted more in-depth research on these two projects, attempting to analyze their core mechanisms, future prospects, operational capabilities, and project valuations, summarized as follows.

Table of Contents:

Product Mechanism
1.1 LayerZero
1.2 Stargate
Stargate Token Economics
2.1 Token Function and Value Capture
2.2 Token Distribution
Stargate Operational Status
3.1 Product Ecosystem
3.2 Token Operations
Team and Financing
Advantages and Risks

1. Product Mechanism
   From the most macro perspective, LayerZero is cross-chain infrastructure that achieves inter-chain communication through a set of smart contracts deployed on each chain; Stargate is a specific application built on it, functioning similarly to a DEX but focusing on cross-chain transfers of native assets.

With LayerZero's inter-chain communication capabilities, future projects built on it can achieve cross-chain lending, cross-chain staking, etc. All functions currently realized within a single chain can be completed across chains. Stargate currently implements cross-chain transfers of stablecoins and the native token STG, which is essentially the first step in demonstrating LayerZero's capabilities.

The white papers for both projects were co-authored by the three co-founders of LayerZero Labs. Below, Chain Tea House will briefly introduce the product mechanisms described in their white papers.

1.1 LayerZero

LayerZero is a "Trustless Omnichain Interoperability Protocol." Compared to existing cross-chain solutions, the prospects proposed by LayerZero are indeed very appealing.

Current mainstream cross-chain methods include: 1) Cross-chain protocols like THORChain/Anyswap that require intermediary tokens to complete, and 2) Cross-chain ecosystems like Polkadot/Cosmos that achieve cross-chain communication through a hub chain.

In the 1) scheme, reliance on intermediary tokens brings additional operations, delays, and costs. In the 2) scheme, a hub chain is still needed as an intermediary to complete inter-chain communication within the ecosystem, and it is not directly open to chains outside the ecosystem.

Therefore, existing cross-chain solutions require some intermediary to complete the process, while LayerZero aims to eliminate intermediary tokens and chains, achieving direct communication between all chains. This process is realized by additionally setting up two independent entities—Oracle and Relayer—to independently obtain certain information from a block and verify it with each other. The functions of these two entities are similar; they just obtain different information, akin to using two sources for verification.

The specific working steps of Oracle and Relayer are illustrated in the following diagram. The image is complex but can be simply understood as two phases: 1) Oracle and Relayer independently obtain certain information from Chain A; 2) Oracle and Relayer send the obtained information to Chain B.

LayerZero will deploy a terminal on each chain, composed of a series of smart contracts from LayerZero, which can be understood as a "communication point" on that chain. The purple part in the diagram, namely Communicator/Validator/Network, is the core component of the LayerZero terminal, whose function is to notify Oracle and Relayer to obtain specific information and receive messages from them.

Source: LayerZero White Paper

Each arrow and number in the diagram represents a step. Steps 1-5 represent the process when a transaction event occurs on Chain A, where the LayerZero terminal notifies Oracle and Relayer to obtain the corresponding information from Chain A. Step 1 shows all the content notified by the terminal, including the identifier t of a transaction event, the target chain dst to which it needs to be sent, any data payload that Chain A wants to transmit to Chain B, and the relayer parameters relayer_args needed by Chain A.

The terminal will send all content to the Relayer, but for the Oracle, it only sends the target chain dst and the block header of the transaction t, without sending the transaction event t. As seen, in step 6, the Oracle obtains the block header blk_hdr of the event from Chain A, and in step 7, the Relayer obtains the transaction proof proof(t) of the event from Chain A. The difference in functionality between Oracle and Relayer is that one obtains the block header while the other obtains the transaction event proof.

In the subsequent steps 8-11, Oracle and Relayer will send the obtained information to the LayerZero terminal on Chain B. However, since a block may contain multiple transaction events, the information sent by the Relayer will take one more step than the Oracle—after the terminal on Chain B receives the block header sent by the Oracle, it will send the block header hash to the Relayer, which will then package and send the proofs of all transaction events corresponding to this block header to Chain B. Note that in step 7, the Relayer obtains a single event's transaction proof from Chain A, while in step 11, the Relayer sends a list of multiple transaction event proofs to the Chain B terminal.

At this point, the block header from Chain A, as well as all necessary transaction event proofs within that block, have been collected by the terminal on Chain B. In steps 12-13, the components within the terminal will complete verification and send it to the smart contract on Chain B.

Since this process essentially relies on the two sources of Oracle and Relayer, the matching of information on both sides completes the verification. Therefore, the necessary condition for ensuring communication security is that Oracle and Relayer are independent entities that will not collude to cheat. Currently, LayerZero's default configuration uses Chainlink as the Oracle and LayerZero's own Relayer, but developers can also customize configurations in the future.

Among all existing cross-chain solutions, the one closest to LayerZero is Cosmos. The team specifically clarifies the differences between LayerZero and Cosmos:

1. Cosmos's IBC requires running a full-chain light node to verify cross-chain information. In LayerZero's process, information verification only requires obtaining specific transaction events and their corresponding block headers as needed, without needing to read all events on Chain A, allowing LayerZero's terminal to be extremely lightweight.

2. IBC can only provide direct communication for chains that adopt fast-finality consensus (i.e., all transactions are quickly packaged and cannot be reverted). For chains like ETH/BTC that adopt probabilistic-finality consensus (i.e., as blocks increase, the probability that the block verification result cannot be tampered with also increases; proof-of-work public chains belong to this category), an additional peg zone interface chain is needed, which is more complex. In contrast, LayerZero can provide direct communication for all types of public chains.

The differences between LayerZero and Cosmos are also some of LayerZero's most important advantages: the protocol can achieve a very lightweight design to reduce cross-chain steps and fees; and it can provide direct communication for all types of public chains without relying on intermediary chains or assets.

1.2 Stargate

As the first Dapp developed based on LayerZero, Stargate's core lies in enhancing the utilization of funds through a "resource balancing algorithm," treating the liquidity of single-coin assets across chains as a complete liquidity pool to avoid single-chain depletion as much as possible.

As illustrated in the diagram, suppose there is a total of $4 million in funds on the source chain, and there are four target chains. In dispersed liquidity, each target chain is allocated $1 million, and the maximum transfer limit per transaction is $1 million. In contrast, in unified liquidity, the funds are placed in the same pool, and the maximum transfer limit per transaction is $4 million, allowing for deeper trading.

Source: "∆: Solving the Bridging Trilemma"

The benefits of a unified liquidity pool are obvious, allowing funds to be used where needed with high flexibility; the challenge lies in how to allocate funds on each channel as needed while ensuring that individual channel liquidity does not deplete.

The solution proposed by the Stargate algorithm is to create an "initial accounting" for each target chain, which means pre-assuming the bandwidth on each channel, and during actual transfers, allowing target chains to "borrow and repay" funds from each other to achieve on-demand allocation of the unified liquidity pool.

Stargate refers to the initial accounting as "soft partitioning." As shown in the diagram, suppose there is $100 on source chain X; this money will be soft-partitioned into $50 on target chains Y and Z. If chain Y needs to transfer $60 during the actual transfer, it will "borrow" $10 from the soft partition of chain Z. When new funds enter chain X, they will first fill the deficit on chain Y, and the remaining amount will be allocated to all soft partitions according to their proportions.

Source: "∆: Solving the Bridging Trilemma"

If a particular channel has exceptionally high demand, will it drain funds from other channels? It is indeed possible, which would affect transfer users on other chains. To balance the demand across channels, when a particular channel's balance is low, additional fees will be charged to transfer users to incentivize the balance of funds across all channels.

Through LayerZero's cross-chain communication capabilities and the aforementioned algorithm, Stargate claims its product solves the impossible triangle problem of cross-chain transfers, namely: instant guaranteed finality (i.e., transactions on both the source and target chains can be simultaneously confirmed); unified liquidity; and cross-chain native asset transactions.

It is precisely because it achieves instant guaranteed finality and cross-chain native asset transactions that Stargate also possesses cross-chain composability: it can interact with smart contracts on both the source and target chains, unlike traditional bridge smart contracts that only interact with smart contracts on the source chain.

For example, users can perform a Swap on the source chain, then transfer to the target chain, and continue to Swap on the target chain, with the entire process completed in a single transaction.

It is worth noting that recently, the Cobo security team released an analysis report pointing out that recent updates submitted by Stargate have fixed serious vulnerabilities present in previous versions. The original text mentioned: "Although the LayerZero project team has fixed the currently obvious vulnerabilities, it does not rule out the possibility of other vulnerabilities being exploited." The security risks associated with Stargate must be noted.

2. Stargate Token Economics

The underlying LayerZero protocol has not yet released a token; this section analyzes the Stargate token economic model.

2.1 Token Function and Value Capture

The platform's native token is STG, and its function is similar to Curve. Users can lock their tokens to obtain veSTG for voting, with the weight of veSTG allocated based on the locking time, although the staking function has not yet been launched.

The platform primarily profits by charging transfer fees. Each time a non-STG token transfer occurs, a platform fee of 0.06% is generated, of which 3/4 goes into the liquidity pool to incentivize LPs, and 1/4 goes into the treasury, which will be managed by veSTG holders in the future.

Additionally, as mentioned earlier, when there is high demand for transfers on a particular day, the platform will charge extra fees to balance channel bandwidth. Cross-chain transfers of STG do not incur platform fees; users only need to pay gas fees.

To promote the ecosystem, Stargate has also launched a whitelist program, where for products with high transaction volumes, 0.003% of each transaction will be distributed to that product, funded by the treasury.

2.2 Token Distribution

The token cap is 1 billion, and all tokens have been generated during the genesis period.

The token distribution is shown in the diagram below, with 35% held by investors and the team; ~35% for initial sale and early liquidity; and 30% allocated to the community.

In the initial sale and early liquidity portion: 10% is for the Launch Auction, with a one-year lock-up period, and 5% is added to the early liquidity pool in Curve. These two parts constitute the Protocol Launch in the diagram below. After the auction ends, 15.95% of STG will be sold in a Bonding Curve format, which has no lock-up period.

Additionally, 2.11% is allocated for early incentives, released over a total of 3 months; a cap of 1.55% is for DEX liquidity on six chains other than ETH.

However, since 100 million STG from the first round of Protocol Launch was seized by two addresses from Alameda, the team has recently added a round of community auctions, selling a total of 20 million STG, accounting for 2% of the total.

Source: Official docs "Tokenomics" section

Token release is shown in the diagram. Since there is a one-year lock-up period for investors, the team, and the public offering portion, a large number of tokens will begin to be released linearly starting in March 2023.

Source: Official docs "Tokenomics" section

3. Stargate Operational Status

3.1 Product Ecosystem

Stargate currently supports the functionality of transferring assets with a 1:1 price correspondence across seven chains, including mainstream stablecoin assets USDT/USDC/BUSD, as well as the platform's native token STG.

The seven supported chains are: ETH/BSC/AVAX/Polygon/Arb/Opt/FTM. For example, users can transfer USDC on ETH to USDT on the BNB chain or convert STG on Arbitrum to STG on Fantom.

The official Medium disclosed that in the next 6-8 weeks, they will consider adding Solana/Terra/Cosmos Hub/Osmosis, and will deploy on each chain in the next 4-6 months.

Team member 0xMaki recently proposed integrating Stargate within the Sushiswap community to achieve a better transfer experience and expand Sushi LP traffic. If implemented, it would be a milestone in the construction of the Stargate ecosystem.

According to the current community vote, 95% support.

Source: https://forum.sushi.com/t/enter-the-stargate-omnichain-strategy/9741

3.2 Token Operations

Stargate has completed its public offering. The 100 million STG from the public auction was all seized by two addresses from Alameda, so the team initiated a second round of community auctions, selling an additional 20 million STG. As of the time of writing, the second round of auctions is still ongoing.

The CEO of Alameda admitted on Twitter to purchasing STG and promised to hold the tokens for three years, indirectly indicating SBF's supportive stance towards Stargate. SBF's endorsement undoubtedly serves as a strong boost for the token price.

In the token distribution of Stargate, 2.11% of STG is allocated for early liquidity incentives, totaling 2,110 tokens. This incentive program lasts for about 3 months.

Currently, users staking stablecoins on Stargate can earn an APY ranging from 15% to 18%. For stablecoins, this is a very high APY, which explains why it has attracted $3.7 billion in TVL.

Since most STG is locked or managed by the community, the actual circulating STG in the early stages is not much, approximately 10% of the total, around 100 million tokens, including: 5.58% sold in the Bonding Curve; 5% in Curve liquidity; and 2.11% early incentives to be fully distributed after three months. The current FDV is approximately $3.5 billion, with a circulating market cap of about $350 million.

Source: https://twitter.com/princebtc28/status/1506426976269180950

4. Team and Financing

The team consists of three co-founders: Bryan Pellegrino as CEO, Ryan Zarick as CTO, and Caleb Banister.

All three graduated from the CS program at the University of New Hampshire and have had many professional intersections since graduation.

In 2010, the three co-founded the software development company Coder Den. Ryan Zarick and Caleb Banister later co-founded 80Trill and Minimal AI; CEO Bryan Pellegrino founded OpenToken in 2017. Until 2021, the three reunited to co-found LayerZero Labs.

According to the CEO's tweet in March, LayerZero Labs has a total of 24 employees.

On March 15, the official Medium announced that 0xMaki had joined LayerZero full-time to handle business development.

In April 2021, the team raised $2 million in seed funding. In September 2021, they secured $6.3 million in Series A funding, led by Binance Labs and Multicoin Capital, with other participants including Sino Global Capital, Defiance, Delphi Digital, Robot Ventures, Spartan, Hypersphere Ventures, Protocol Ventures, and Gen Block Capital.

On March 31 of this year (just yesterday), it was announced that LayerZero Labs received $135 million in Series A+ funding at a valuation of $1 billion. This round was led by FTX Ventures, Sequoia Capital, and a16z, with participation from Coinbase Ventures, PayPal Ventures, Tiger Global, and Uniswap Labs.

5. Advantages and Risks

Chain Tea House believes that LayerZero Labs' core advantages include:

1. High certainty in the track and a high ceiling. The cross-chain transfer of native assets can bridge the data silos of public chains, potentially forming a unified trading depth across all networks, bringing a new landscape to blockchain development.

2. The product is already live, and the cross-chain transfer functionality is straightforward, with user experience indeed surpassing cross-chain bridges and networks like Cosmos/Polkadot that require additional wallet downloads.

3. Strong capital support, ensuring team resources. Its risks mainly lie in the high security vulnerabilities associated with cross-chain operations; Stargate has already experienced serious security vulnerabilities, and the possibility of other security vulnerabilities cannot be ruled out.

Stargate's valuation is already high, with a current TVL of $3.7 billion corresponding to an FDV of $3.5 billion. Assuming a comparison with the leading DEX Curve, which has a TVL of approximately $20 billion and an FDV of around $8.7 billion, Stargate's valuation is actually higher than that of Curve.

Appendix
https://medium.com/layerzero-official https://stargateprotocol.gitbook.io/stargate/v/user-docs/