introduction
Today, the importance of cross-chain bridges remains self-evident.
However, the torrent of VC infrastructure coins also dimmed after the storm of inscriptions and Meme+AI. In this dull market , it is more appropriate to examine the evolution of history with objective emotions and take the opportunity to explore the immortal truth behind it.
In 2023, LayerZero quickly rose to prominence with its unique ultra-light node architecture and became a star project in the cross-chain track. At that time, its valuation was as high as 3 billion US dollars. The LayerZero V2 version launched in 24 years brought 30 million on-chain cross-chain transactions, and it is also the industry leader.
Omnichains vision has attracted many developers and gained the favor and investment of top institutions such as Sequoia Capital, a16z, and Binance Labs; but on the other hand, it has also been questioned due to issues such as centralization and security, sparking heated discussions in the industry.
Some people jokingly call it technical garbage and super intermediary, believing that its V1 version is technical garbage in that it only builds a framework but does not do practical work. In essence, it is just a 2-of-2 multi-signature model, and the V2 version itself does not bear the security responsibility of the cross-chain verification network (DVN), which is a case of making money out of nothing.
Some people also say that LayerZero’s entry into the business model over the past three years is truly astonishing, and that alliances and coalitions are reappearing in the modern era.
To find out who is right and who is wrong, let Shisijun conduct an in-depth analysis of its business model based on its technical solution to evaluate whether its foundation is solid or whether it is just a castle in the air built on the beach?
1. Technical Analysis: LayerZero’s Architecture Evolution and Security Assumptions
1.1. V1: Ultra-light nodes and security risks
LayerZero V1 (hereinafter referred to as V1) introduced the concept of Ultra Light Node (ULN), the core of which is to deploy a lightweight endpoint contract on each chain as a message sending and receiving point, and the two off-chain entities, Oracle and Relayer, work together to complete cross-chain message verification.
[Image source: LayerZero V1 official white paper, used to reflect the link between Relayer and Oracle]
Essentially, he offloads the heavy computational work of block synchronization and verification to oracles and relayers, keeping on-chain contracts extremely simple.
V1 calls this design “ultimate trust separation” and because it avoids the need for source chain light nodes to run fully on the target chain, the cost is much lower than other cross-chain bridge architectures.
So obviously, V1s 2-of-2 trust model has the advantage of efficiency, but also has obvious security risks :
Collusion risk. This “anti-collusion” is entirely based on social trust and economic motivation, but lacks the mandatory constraints of cryptoeconomics.
Unclear boundaries of responsibility: Oracles and relayers are off-chain roles, and V1 cannot directly control their operation. If the oracle service goes down and the Relayer stops running, cross-chain messages will not be delivered, affecting availability (just as the Stargate bridge was called a cross-chain assassin in 2023 due to fee issues, which caused dissatisfaction, it was actually a problem of service supply).
Chain-level risk: It completely relies on the security of each connected public chain itself, and LayerZero lacks an arbitration mechanism for intermediary roles.
Although V1 claims that Oracle and Relayer are permissionless roles and anyone can run these nodes, this is not the case in practice. In the vote on the Uniswap cross-chain bridge plan in early 2023, some people questioned the excessive centralization of V1 and preferred Wormhole, which has large institutional validators.
As for the detailed mechanism of V1, I have already explained it in detail 2 years ago, so I will not repeat it in this article:
1.2 V2: DVN mechanism and its security analysis
LayerZero V2 (hereinafter referred to as V2), launched in early 2024, introduced the concept of Decentralized Verifier Network (DVN) in the verification layer, getting rid of the original model that only relied on oracles + relayers.
[Image source: LayerZero V2 official white paper, used to reflect DVN’s optional multi-group voting]
With the help of a network composed of multiple verification nodes for signature confirmation of cross-chain messages, developers can independently select and combine multiple DVNs to verify messages according to application requirements, so that security strategies are no longer limited to a fixed 2-of-2 model.
Obviously, there are advantages:
The sources of DVN can be very diverse. According to Irene, the strategic director of LayerZero, teams can run their own DVN or use other existing cross-chain bridges/networks as DVNs. Even individual teams can do this, which introduces more independent stakeholders to the system. The more people who build together, the bigger the pie will be .
Different cross-chain verification schemes can coexist: whether it is the validator of Arbitrum’s official cross-chain bridge, Wormhole’s 19 guardians, Axelar’s PoS nodes, or MPC multi-signatures, they can all be part of its verification layer.
User choice autonomy: You can choose a combination of Chainlink Oracle Network + LayerZero Labs DVN + Community DVN
Is that enough?
No, the security of users depends on the quality of DVN itself and its combination strategy, which is the shortest board of the barrel:
The fragmentation of security strategies means that the strength of different DVNs may vary greatly. Some DVNs are backed by professional institutional nodes and have staked tokens, while others may only have multiple signatures or a small number of nodes . There is no unified security standard for the entire network, but rather a security island that operates independently.
Although V2 provides multiple DVNs to choose from and recommends using them in combination, the final choice is up to the application . If the developer chooses a weak DVN for verification alone, it will pose a risk. From the market perspective, if a single DVN is strong enough, other DVNs are often seen as redundant, and many projects may tend to use only one (for cost or convenience). Therefore, DVN needs to ensure that the staking penalty is greater than the value that can be stolen or supplemented with other deterrents (legal, reputation).
The introduction of multiple DVN combinations also increases the complexity of the system. ** Attackers can exploit technical vulnerabilities rather than economic attacks. For example, the design of the Nomad bridge is optimistic verification, but an implementation bug led to the theft of 190 M.
1.3 How to technically evaluate the transition from V1 to V2?
First, from the perspective of compatibility
Todays V2 is the undisputed king of compatibility. It can be easily connected to EVM, SVM and even the Move system. Its supporting documentation, use cases, developer community, and developer relations (hackathons, etc.) are all industry-leading benchmarks. These have reduced the difficulty of access and ultimately made it one of the preferred solutions for a large number of new public chains.
Secondly, from the perspective of security
Although V2 provides a stronger upper limit of security, the lower limit is also lowered. After all, it was at least a well-known oracle institution before.
It becomes more like a market platform, allowing various verification networks to compete to provide security services.
But from the users perspective, responsibility disputes will arise sooner or later. Now the official claims that it only provides a neutral protocol, and the specific security is determined by the applications DVN selection. Once something goes wrong, there will be a situation of mutual shirking of responsibility.
Moreover, the “decentralized” slogan of the current V2 is still quite watery. DVN seems to have eliminated the single point, but most applications still tend to use a few officially recommended DVN combinations, and the actual control of the system is still in the hands of LayerZero and its partner organizations.
Unless the DVN network can develop hundreds or thousands of independent validators and ensure honesty through a strong economic game mechanism (such as staking + punishment), LayerZero will still not be able to escape the shadow of the fragile trust model. But at that time, there will be economic benefits that will in turn affect the motivation of DVNs.
Next, let’s move on to the business perspective.
2. Implicit Transformation of Cross-Chain Track
2.1 Macro trends that capital is concerned about
Let’s look at the data directly. Here is the financing situation of each track in the Web3 field from 2022 to 2024:
Since the division of tracks may not be completely consistent, different statistical amounts may differ. The statistics in this article are only to reflect the trend. It is recommended to refer to the original text. For data sources, see the reference link at the end of the article:
Overall:
The ones that have seen a sharp drop are Cefi facilities. My understanding here is that Cefi will still need financing in 2022, while those that can generate their own revenue in 2023/2024 have already survived and occupied the market, and will no longer be able to compete in the red ocean, so the overall decline has occurred.
Web3 games brought some volume after the TG boom in 24 years, but from a personal perspective, with the decline of TG popularity again, both Gamefi and OnChain are tracks that have been almost falsified by the market, and the fake demand has left nothing but a mess .
I won’t go into other details, but no matter how you look at it, infrastructure actually has the best certainty in an uncertain market.
2.2 Is financing still keen on the cross-chain track?
As for infrastructure, the most typical one besides the public chain is the cross-chain bridge, and its track advantage is very clear:
With the explosion of multi-chain, cross-chain is a rigid demand. Whoever can control cross-chain traffic will have the opportunity to become the toll collector of the highway in the multi-chain world.
Pain points and opportunities coexist: Cross-chain bridges are hailed as a key element of Web3 innovation, which can inspire new applications such as cross-chain DeFi, cross-chain NFT, and inter-chain identity; however, cross-chain bridge security incidents occur frequently, and hacked funds account for nearly 70% of the total amount stolen in the entire industry.
Platform network effect and moat: Capital has always valued the potential for future monopoly or oligopoly. If a cross-chain protocol becomes a de facto standard (such as the status of TCP/IP in the Internet era), early investment will reap rich returns. This also explains why a16z, Jump, etc. did not hesitate to fight over the choice of Uniswap cross-chain bridge.
Cross-chain is more than just asset transfer: In traditional cognition, cross-chain bridges are tools for transferring tokens, but investors are more interested in the prospect of Arbitrary Message Bridge (AMB). LayerZero, Hyperlane, etc. are also positioned as full-chain communication protocols.
In short, capitals enthusiasm for the cross-chain track is the result of the superposition of multiple factors: there is the reality of demand explosion and pain points to be solved, as well as strategic considerations for competing for standards in the future multi-chain interconnected landscape.
However, in fact, the number of new financings generated by cross-chain bridges in 24 years is very small, but this does not mean that it is not popular, but because this track is no longer something that new players can take over , and the product form of bridges in the market has also changed.
2.3 Changes in the parties of the cross-chain bridge under the multi-chain trend
In the early blockchain era, cross-chain bridges usually appeared as independent service providers . However, with the development of multi-chain application ecology, the positioning of cross-chain bridges is changing, tending to be more like underlying services (Party B) , and integrated into the user experience of applications or wallets:
Cross-chain is gradually becoming background-oriented, service-oriented, and quasi-interface-oriented. For example, wallets such as MetaMask and OKX have integrated bridge aggregators. The bridge no longer directly controls C-end users, but obtains traffic through the B-end (DApp, wallet). This requires that cross-chain solutions must be easy to integrate, modular, and meet the needs of applications. Otherwise, the application party will choose other service providers, and the cross-chain bridge provider will become a To B model .
The polarization of discourse power: In the bridge controls the user model, the bridge has the final say on which chains it can connect to and how much handling fees it charges. If a project wants to connect to a bridge, it often has to comply with its rules. This is still the case on new chains. However, it is the opposite in large chain projects. For example, when Uniswap was deployed on BSC, it selected the cross-chain bridge solution through governance voting, and the bridge had to bid.
There is also a role change. The initial V1 version of layerZero still relies on a reliable oracle. At this time, the bridge is Party B and the oracle is Party A.
The launch of v2 has triggered more competition among DVN roles, which has made layerZero the first party, while the party that actually performs the bridge verification function has become the second party. In order to get a better recommendation position, the second party will naturally change the profit-sharing logic with the first party.
It is always more profitable to be a platform than a store, as it is close to transactions yet free from dust . It must be said that it is indeed the change in layerZero’s own business positioning that has brought about its current voice in the market.
2.4 LayerZero’s Strategy of Alliances
LayerZero’s positioning is very special. It is a public facility for cross-chain communications, but it is not the ultimate undertaker of the business.
As a witness to the 10-year explosion of mobile Internet platformization, I have to say that this strategy of early subsidies to occupy the market and later internal circulation to occupy profits is too familiar! After platformization, the security responsibility has been transferred to lower levels .
As mentioned earlier, LayerZero gives the choice of verifying security to the user application, that is, the application has its own security. From a contractual point of view, if cross-chain theft occurs, LayerZero Labs can fully claim that they are not involved in asset custody, and the responsibility should be borne by the relevant DVN or application.
Win-win cooperation replaces subsidies: Many infrastructure projects will offer incentives or subsidies to attract applications. LayerZero, on the other hand, prefers to bind interests (such as investing in other projects or letting other parties invest in itself).
These chains even allocate funds from ecological funds to encourage protocols to integrate LayerZero. LayerZero Labs also actively attracts various parties in financing and cooperation (Coinbase and Binance are shareholders, not to mention a16z, circle and other background parties with a lot of resources). This VC lineup means that it has been recognized by most of the ecological entities on the chain.
2.5 Why is LayerZero’s Series C round so hard to find?
But looking at it from the other side, he has already completed the B round of financing (valued at 3 billion), and 2 years have passed. So what should the scale of the C round be to meet his expectations?
Lets look at the current size of his transactions, based on his official data, and the middle value, compared to the number of messages 1 year ago:
[Image source: LayerZero official website]
The total number of messages has reached 144 million, compared to about 114 million a year ago. The annual new transaction volume is 30 million, and the annual growth rate is only 26.3%, which is obviously much slower than in 22/23.
Obviously, the main reason is that the airdrop expectations were largely absorbed after the coin issuance. But in any case, coin issuance is a kind of income, and it can even be considered as overdrawing future income, but the project valuation must return to revenue.
However, once the revenue amount is calculated, it becomes awkward. Let’s first make a simple estimate based on the number of transactions: 30 million × $0.10 = 3 million US dollars/year
0.1 dollars is the low-amount per-transaction fee range of regular bridges. If the amount is larger, the pledge fee route is adopted. The market average Take Rate is 0.05%. In the 23-year data, in Stargate, an asset cross-chain bridge based on LayerZero, users will need to pay a handling fee of 0.06% each time they use it.
Assuming the total transfer amount in the past year was 10 billion (estimated by comparing the number of transactions to the total number), and using a fee rate of 6 per 10,000, the revenue would be 6 million US dollars.
Therefore, based on the two algorithms, a gross profit of 300,000 to 600,000 W is reasonable . However, considering the actual operational support, it is very likely that the company is still in a loss-making state.
Therefore, even if we completely ignore the cost and calculate based on the highest return, with a valuation of US$3 billion, its PE ratio is 500 times . It should be noted that Apple, Amazon and other Internet leaders that are widely regarded as bubbles only have more than 30.
Obviously, it will not be possible to negotiate a good price for the next C round in the short term. After all, no one can digest the expected PE of 500 times at present.
Conclusion
After 2 years, I wrote a before and after comparison of LayerZero. I can see its creative breakthrough and also catch a glimpse of the next generation of cross-chain bridge. Finally, I will use objective comments for reference.
Since its birth, LayerZero has completed the journey of cross-chain bridge from 0 to 1, and from following to leading in just three years.
In the V1 version, it innovates with “ultra-light nodes”, combined with a streamlined version of the oracle 2 of 2 multi-signature, to seize the market in small steps.
In the V2 version, it uses the platform strategy of framework as protocol to bind the multi-chain ecology, and uses the ingenious design of risk sinking to ensure its own stability. It is the cross-chain protocol that supports the most chains and chain types in the market, and it is indeed worthy of the industry leader.
Although there are criticisms that it does not do the “dirty work” (DVN verification) but only acts as an intermediary, it is undeniable that this is exactly the business logic of LayerZero’s success: to be the most universal and stable standard bottom layer, and leave the specific implementation to the market . As a platform, it converts traffic revenue through competition at the bottom layer.
This idea does meet the needs of the multi-chain world (the emergence of a large number of new chains urgently requires cross-chain basic support), and also conforms to the trend of the role of the cross-chain bridge shifting from Party A to Party B.
Technically, the evolution of LayerZero V1/V2 demonstrates the industrys continuous exploration of balancing security and decentralization. The oracle + Relayer model and the DVN mechanism allow us to reflect on the boundaries of trust minimization.
The author believes that although the V2 version does not exist now, it does have the potential to achieve complete decentralization in theory. It’s just that the market and users may not necessarily have such high decentralized security requirements.
From a business perspective, LayerZeros platform strategy is worth studying, and its focus on developer standards brings the strongest compatibility. Through modularization and standardization, it becomes a torch that everyone contributes to, rather than a stove that burns wood alone.
This model reduces its own risks. Although it takes away profits from DVN, it creates a larger ecological landscape.
Finally, PE’s estimate is just my personal opinion in the absence of official announcement of operating costs. Perhaps in the future, changes such as changing from cross-chain charging to asset management charging may instantly bring about a large amount of monetization. After all, in any era, traffic is always king and monopoly is always profitable.
[Image source: coinmarketcap]
Finally, another measurement algorithm is to look at the market value of the issued currency in circulation. 7b is obviously a fanatical sentiment. How should we understand 2B now?
References:
https://layerzero.network/publications/LayerZero_Whitepaper_V2.1.0.pdf
https://www.chaincatcher.com/article/2162896
https://www.chaincatcher.com/article/2085560
https://www.rootdata.com/RootData2023 Web3 Industry Development Research Report and Annual List.pdf
