Hotairballoon Project Analysis: The first cross-chain bridge solution launched by LayerZero to solve the "three difficulties of bridging" problem.

1. Background

First of all, with the continuous development of the blockchain industry, various forms of chains have emerged, such as Layer 1, Layer 2, Layer 3, sidechains, Rollups, etc. There are both homogeneous chains and heterogeneous chains, and on each blockchain, there are many different protocols.

These different blockchains and protocols have fragmented the world of blockchain into isolated information islands. A large amount of encrypted assets are distributed on these different chains and protocols, which undoubtedly reduces the efficiency of capital utilization.

The emergence of cross-chain bridges can build bridges between these different chains, connecting assets on one chain to other blockchains.

For example, the Base cross-chain bridge launched by Coinbase can bridge encrypted assets from other chains to the Base network. Users can enjoy some early dividends of the Base chain. At the same time, assets on the Base chain can also be bridged to other blockchains through cross-chain bridges.

The advent of cross-chain bridges greatly improves the efficiency of capital utilization.

According to defillama's data statistics, in the current DeFi landscape, the total value locked (TVL) of cross-chain bridges ranks fourth, reaching a volume of 9.7 billion US dollars, second only to the Dex track.

In addition, in the field of cross-chain bridges, there are generally issues such as low security, high fees, and slow cross-chain speeds. Stargate protocol emerged in such a background.

II. Overview of Stargate Protocol

Stargate Finance is a multi-chain cross-chain bridge protocol based on LayerZero, created by LayerZero Labs in March 2022. It is also the first DApp based on the LayerZero protocol, and it is a protocol that enables asset transfers between multiple blockchains.

The goal of Stargate is to simplify the process of transferring assets from one blockchain to another, eliminating the need for cumbersome locking, minting, burning, and redemption steps, and enabling the convenience of completing the transfer in a single transaction.

Since Stargate is a cross-chain protocol built on LayerZero, it is necessary to start with LayerZero when talking about Stargate.

What is LayerZero

LayerZero is an omnichain interoperability protocol that builds a new lightweight node model and provides a secure and reliable infrastructure for various cross-chain protocols.

In theory, LayerZero can achieve message transmission on any chain that supports smart contracts. For example, if a user sends a message on Chain A, this message can be passed to Chain B, allowing the smart contract on Chain B to perform the corresponding operation. LayerZero enables communication between different chains, including asset transfers between different chains.

LayerZero is not a public chain or an application ecosystem, but a more underlying protocol. LayerZero's positioning is similar to the TCP protocol in the transport layer of the Internet, on which many different DApps can be built.

How does LayerZero achieve cross-chain interoperability?

First, let's understand the difference between full nodes, light nodes, and super light nodes.

Full Node: A node that synchronizes all blockchain data, including storing block headers and specific transaction information.

Light node: Only stores a small portion of blockchain data, such as block headers and other information, and does not store the specific transaction information inside the blocks.

Ultra-light node: Does not retain all block headers, but transmits and synchronizes block headers on-demand using oracles, achieving the desired state more efficiently.

Layerzero achieves full-chain interoperability by deploying an endpoint (client) on each chain. The endpoint runs an ultra-light node (ULN), and then transfers block headers containing cross-chain information on-demand through oracles (instead of sequentially transmitting all block headers to reduce costs). Transaction proofs are then transmitted through Relayers for verification, ensuring the correctness of cross-chain information.

The diagram below shows the process of a user application (UA) on Chain A sending a message to a user application on Chain B through LayerZero.

LayerZero's full chain interoperability is achieved through the combined action of three core components: Endpoint, Oracle, and Relayer.

Based on LayerZero's full chain interoperability, many previously difficult-to-implement businesses can be achieved, such as full-chain cross-chain bridges, cross-chain transactions, and cross-chain lending. Stargate is the first cross-chain bridge officially launched by LayerZero, and it is also the first DApp based on the LayerZero protocol. The LayerZero team refers to it as the product that solves the "three-bridge dilemma".

III. How does Stargate achieve cross-chain functionality?

It is well known that there is an "impossible triangle" theory in public chains, which means that it is not possible for a public chain to simultaneously satisfy decentralization, security, and scalability. A public chain can only satisfy two of these aspects at most.

For example, in the case of Bitcoin, it has a relatively high degree of decentralization and security, but its scalability is poor. For many public chains, although scalability and security have been improved,But it sacrifices the degree of decentralization.

The "impossible triangle" dilemma in the public chain field can be solved through modularized public chains.

Similarly, in the cross-chain field, there is also an "impossible triangle" theory, which are:

• Instant Guaranteed Finality;

• Unified Liquidity;

• Native Assets.

That is to say, in most cross-chain bridges, only one or two of these points can be achieved at most, and not all three points can be achieved best.

However, Stargate cross-chain bridge built on the LayerZero protocol can simultaneously satisfy these three major characteristics of cross-chain bridges, namely, ensuring instant finality, achieving unified liquidity, and supporting native assets.

In some common cross-chain bridges, the "lock+mint+burn" method is mostly used, which means that assets are locked in the source chain and synthetic assets are minted in the target chain. To transfer the assets back to the source chain, the previously minted synthetic assets need to be burned, and then the original tokens need to be redeemed. This does not achieve instant finality.

Stargate has developed a new resource balancing algorithm that can unify the liquidity of all native blockchains and provide instant guaranteed finality.

Stargate has opened up a new era of cross-chain bridges, enabling assets to flow freely between different chains.

In other words, Stargate can achieve unified liquidity pool management, and each chain can also access the liquidity on other chains.

For example, if there is a USDT liquidity pool on Chain A, other chains can borrow and return the USDT liquidity on Chain A for USDT-related transactions, thereby maintaining liquidity balance in the face of imbalanced trading volumes, and improving the efficiency of capital utilization.

However, when multiple chains share a liquidity pool, there may be transaction failures due to insufficient liquidity depth. When multiple chains share a liquidity pool, the number of users and the number of concurrent transactions increase, thereby reducing the liquidity in the pool and causing some cross-chain transactions to fail.

For example, if Chain A has a liquidity of 100 USDT, Chain B requests a liquidity of 60 USDT, and Chain C requests a liquidity of 50 USDT, the total USDT liquidity of Chains B and C exceeds the total USDT liquidity on Chain A. In this case, one of the cross-chain requests will fail.

Also, Stargate introduced Equilibrium Fees to evenly distribute liquidity across different chains.

For example, when too much funds are transferred out of Chain A, higher fees will be charged for further fund transfers from Chain A. This relies on users' spontaneous trading behavior to maintain liquidity on each chain.

In general, Stargate utilizes a "resource balance algorithm" to enhance the utilization of funds and treats the liquidity of individual assets on each chain as a complete liquidity pool, aiming to avoid the depletion of any single chain and achieve timely distribution and on-demand allocation within a unified liquidity pool.

4. Team

The exact number of members in the Stargate Finance team is currently unknown. However, considering that Stargate Finance is the first application on LayerZero Labs, based on feedback from the early community, it is known that Stargate Finance has a close relationship with LayerZero and shares some developers. The Stargate whitepaper was co-authored by three co-founders of LayerZero.

Therefore, in terms of the team, we can start with the members of LayerZero.

Caleb Banister

Founder of LayerZero Labs, graduated from the University of New Hampshire with a major in computer science.

2005.06 – 2010.12: Software Developer at UNH Interoperability Laboratory. 2010.09 – 2021.02: Co-founder of Coder Den. 2018.03 – 2021.02: Co-founder of 80 Trill. 2019.06 – 2021.02: Co-founder of Minimal AI. Founded LayerZero in 2021.

From the resumes of the three core members of the team, it can be seen that they reunited in 2021 to co-found LayerZero Labs. The team has outstanding capabilities in machine learning algorithms and blockchain development, and they have a long history of collaboration, with years of development experience and successful entrepreneurial experience.

In addition, Sushiswap's co-founder 0 x maki has also joined the team full-time as Chief Strategic Advisor to assist in the cross-chain ecosystem development of Layerzero.

V. Basic Products

1. Cross-chain Functionality (Transfer)

Cross-chain functionality is the most important feature of Stargate and is very intuitive in the user interface. It allows for cross-chain 1:1 exchange of native assets and ensures immediate finality of results.

The currently available chains include Ethereum Mainnet, BNB Chain, Avalanche, Polygon, Arbitrum, Optimism, Fantom, Metis, Polygon zkEVM, zkSync Era Mainnet, and the recently supported Base Network.

In the Stargate platform, supported cross-chain assets include stablecoins, ETH, CAKE, STG, CRV, RDNT, and other tokens.

2. Provide Liquidity (Pool)

Liquidity providers can add liquidity to Stargate and earn rewards in each cross-chain (transfer) transaction on Stargate.

Users can choose different liquidity pools to add liquidity. Currently, the main pool is the stablecoin pool. After providing liquidity, you will receive LP tokens and receive cross-chain transaction fee rewards from the protocol.

3. Liquidity Mining (Farming)

Stargate liquidity providers can stake their LP tokens to earn STG rewards.

After users receive LP tokens by providing liquidity, they can use them for liquidity mining and earn STG rewards. Currently, the APY can reach up to 12% or higher, which is considered a good return for stablecoin mining.

4. STG Pledge (Stake)

Users can pledge their STG tokens and choose the duration of the pledge. The longer the pledge time, the more veSTG tokens they can obtain.

veSTG will serve as the governance token of the Stargate platform, and the more you hold, the more governance weight you can obtain.

VI. Token (STG) Economic Model

The token of the Stargate platform is STG, with a total supply of 1 billion. The distribution is as follows:

• 17.50% — Stargate core contributors (locked for 1 year, linear unlock for the next 2 years);

• 17.50% — Investors (locked for 1 year, linear unlock for the next 2 years);

• 65.00% — Stargate allocated to the community, dedicated to realizing the vision of making cross-chain liquidity transfers a seamless single transaction process.

The following are the details of the community allocation:

1) 15.00% — Stargate protocol launch;

a) 10.00%: STG launch auction purchases (snapped up by 2 addresses by Alameda).

b) 5.00%: STG-USDC pool on Curve.fi.

2) 15.95% — Joint curve auction, released later;

STG tokens can be staked to obtain governance tokens veSTG, holding which allows for voting rights. The longer the stake period, the greater the voting power for the staker.

VII. Development Status and Competitive Landscape

1. Trading Volume

According to defillama's data, the daily trading volume of Stargate has reached 170 million USD across various cross-chain bridges, with over 72 million USD being traded on the Stargate network alone, accounting for nearly 50% of the total cross-chain trading volume, far exceeding other cross-chain protocols.

Moreover, among all the cross-chain bridges on Polygon, Arbitrum, Avalanche, Fantom, and BSC chains, Stargate has the highest trading volume, highlighting its industry position.

2. TVL

The total value locked (TVL) of Stargate exceeds $300 million, far higher than other cross-chain bridges like Hop.

Even among all DeFi protocols, Stargate ranks as the 30th in terms of TVL.

3. Active Users

According to the data statistics from tokenterminal, the daily number of active users for Stargate has reached 48,000, which is more than 10 times the daily number of active users for other cross-chain bridges. From the trend chart, it can be seen that Stargate's active users have shown significant growth since the end of March.

4. Fee

The fees generated by Stargate in the past year have been continuously increasing, with a growth rate of over 400% in the past six months. It can be said that the growth rate is relatively fast.

Compared with other cross-chain bridges, Stargate generates more than $80,000 in fees every day, far surpassing the fees generated by other cross-chain bridges.

5. Financial Analysis

From Stargate's financial condition, we can see that the Earnings have been continuously increasing in recent months, with a significant increase compared to the previous month. In particular, the Earnings in July have exceeded $1 million.

The trading volume in recent months has also been increasing. The trading volume in March reached over $900 million, while the trading volume in June reached $2.6 billion, nearly three times that of March.

The number of active users each month is also steadily increasing.

From the financial data of Stargate, it can be seen that whether it is active users, trading volume, or earnings data, they are all growing. To some extent, these data indicate that Stargate is developing rapidly.

VIII. Future Potential

The native token of the Stargate platform is STG. The function of the token is similar to Curve, and users can lock their tokens to obtain veSTG for voting, and the weight of veSTG is allocated based on the lock-up time.

The platform mainly generates profits by charging transfer fees. Every time a token transfer occurs, other than STG, a platform fee of 0.06% will be generated.

In addition to the 0.06% fee charged for non-STG token cross-chain transfers, cross-chain transactions may also incur pool rebalancing fees, and the specific fees depend on the imbalance of weight between the source and target chains relative to the pool balance.

Therefore, Stargate's business includes not only 2 C, but also 2 B, and even the business model of 2 B is more imaginative than 2 C. Based on Stargate, more complex DApps can be built.

Currently, STG's market cap is only over $100 million, ranking 173rd. STG still has significant room for future growth. Hotairballoon will continue to monitor the latest updates from Stargate and share them with everyone in a timely manner.

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