ChainX Technical Committee: How is LayerZero changing the crypto world?

1.Unify the liquidity of all bridges

In the current system, bridges compete to attract liquidity providers to use their services. This would fragment the limited available liquidity between bridges and their respective paired pools, making capital inefficient. LayerZero changes this — it allows a single liquidity pool to be tied to all connected chains (but with liquidity on various chains) and guarantees the finality of asset transfers on the source chain. This means that various problems that may arise in the process of cross-chain interaction are reduced, for example, there is no need to generate wrapped tokens to make the cross-chain process more secure.

To illustrate this more vividly, let’s take JD.com as an example: JD.com has established large-scale warehouses in major cities in China. When a user buys a certain product, JD.com does not need to ship to the user from another city far away from the user, but directly distributes the product stored locally to the user. Obviously, this reduces all kinds of problems in the logistics process.

2. Interoperability (Universal Messaging/Contract Calling)

People might confuse LayerZero with protocols that only allow cross-chain asset transfers. However, it is much more than that. To be precise, LayerZero is an omni-chain interoperability protocol. The universal messaging approach of LayerZero actually offers a wider range of potential use cases. Essentially, any message or shared state between two independent chains can be unified through LayerZero.
In other words, we can write instructions in the original payload carrying the message for one chain to issue a “call” to another chain and perform various tasks (such as pledging, voting, swap, etc.).

Here is an example of cross-chain lending:
Assuming you own ETH on Ethereum and want to participate in mining on Avalanche, here are the steps currently required:
1. Lending ETH on Ethereum
2. Borrow assets using collateralized ETH
3. Bridge to Avalanche (toll)
4. Exchange to AVAX (fee, you need to already have AVAX)
5. Enter mining
6. From mining coins to native assets (fees)
7. Bridge back to Ethereum (fees)
8. Repay the loan on Ethereum
9. Recover Collateral

Now compare with LayerZero:
1. Lending ETH on Ethereum
2. Borrow AVAX directly on Avalanche
3. Enter mining
4. Pay off your loan on Avalanche
5. Release collateral on Ethereum

This involves calling at least 3 existing Dapps, in short, LayerZero provides a simpler and cheaper user experience.

Another example is that existing Dapps that enable one-click exchange of users’ native assets on two different chains can only swap the tokens on the original chain before using the bridge to cross-chain. Instead, it cannot cross-chain to the target chain first and then swap between tokens. Bungee (https://www.bungee.exchange/) is one such example.

However, cross-chain bridges using the LayerZero protocol (such as Stargate and, in the future, SoSwap) allow user assets to be cross-chained from the original chain to the destination chain before swap. this is due to the ability of the LayerZero protocol to have programmable contract calls. Specifically, LayerZero bridges are cross-chain combinable, which allows cross-chain transfers to be combined with the destination chain’s smart contracts, a feature not available in other bridges. Current bridges only provide traditional composability, supporting combinations with smart contracts on the source chain, but not with the destination chain. Cross-chain asset transfers via the LayerZero bridge, however, can be combined with contracts on both the source and destination chains, maximizing their flexibility. For example, an asset can be swapped at the source chain, bridged to the destination chain with LayerZero, and completed on the destination chain, all in the same cross-chain transaction. Cross-chain composability provides convenience beyond all existing solutions and opens up many new opportunities for cross-chain applications.

3. Imagine: Building a new Ethereum Layer 2 network with LayerZero protocol

The current Ethereum Layer 2 network needs to perform both token transfer and settlement operations as well as run various applications. This makes the Layer 2 network essentially no different from the Layer 1 network. In addition, this is causing the Layer 2 network to become very congested as well.
With LayerZero’s cross-chain contract calling capability, users will only need to transfer tokens on the layer 1 network, and will no longer need to transfer tokens across the chain to the Layer 2 network, which will only be responsible for running applications and handling complex logical operations. This makes the execution of applications and the settlement of tokens completely separate, thus building a more pure and truly meaningful “layer 2 network”.