0xResearch
How LayerZero Seamlessly Connects Blockchains | Bryan Pellegrino
Wed Jul 19 2023Description
Zero X Research podcast episode featuring Brian Pellegrino, co-founder and CEO of Layer Zero Labs. TVML and Cosmo's ecosystem are converging on Ethereum for liquidity. Protocol teams may prefer to do programmatic sales on centralized exchanges rather than DEXs for better verification of KYC user base. Retail attention is returning to the crypto market. Effort Capital predicts that MKR will be a top 10 asset by market cap in the next few years. Avi doesn't deserve to be at the band that we should add words at. Layer zero is designed to provide a flexible and modular security system for large applications. Layer zero and IBC are interesting concepts for moving state data between chains. Layers are like isolated execution environments with strong trade-offs. The speaker is not concerned with determining the exact number of volume on the bridge, but rather focuses on building a bridge with maximum utility. V2 aims to incentivize liquidity and reduce gas emissions on the Stargate platform. The goal should be to capture as much surface of fees as possible in an efficient manner. OFT is a contract structure that turns control of assets back to the end creator, avoiding delegation to third parties. Operating with veto rights allows for maintaining external security while having control over messages
Insights
Zero X Research podcast episode featuring Brian Pellegrino, co-founder and CEO of Layer Zero Labs
The episode covers various topics including Polygon's token rebranding, concerns about finding product market fit as an L2, and interest in alt-L1s transitioning to Ethereum-based L2s.
TVML and Cosmo's ecosystem are converging on Ethereum for liquidity.
The convergence of TVML and Cosmo's ecosystem on Ethereum for liquidity brings up discussions about the challenges and trade-offs involved in migrating chains, the role of decentralized sequencers in L2s, and the emergence of multiple chains and sidechains.
Protocol teams may prefer to do programmatic sales on centralized exchanges rather than DEXs for better verification of KYC user base.
The preference for programmatic sales on centralized exchanges highlights the importance of regulatory clarity and the impact of recent rulings on Coinbase's position in the market.
Retail attention is returning to the crypto market.
The return of retail attention to the crypto market raises questions about the valuation of Ave compared to its peers, the potential of decentralized social media platforms, and the investment potential of MakerDAO.
Effort Capital predicts that MKR will be a top 10 asset by market cap in the next few years.
The prediction about MKR being a top 10 asset highlights the undervalued nature of DeFi assets, the challenges faced by decentralized social platforms, and the innovations introduced by Curve in the DeFi space.
Avi doesn't deserve to be at the band that we should add words at
The bullet points in this chapter discuss the potential of Maker in capturing the RWA market, the advantages of DeFi over traditional financial institutions, and the role of Maker in attracting institutional liquidity.
Layer zero is designed to provide a flexible and modular security system for large applications.
This chapter explores the benefits of Layer zero in providing a flexible security stack, its use cases in value transfer-related traffic, and its potential in gaming applications and interoperability among games.
Layer zero and IBC are interesting concepts for moving state data between chains.
The discussion on Layer zero and IBC focuses on the challenges of moving state data between chains, the integration of Polyhedra as a zk messaging client, and the future of layer zero as a base layer infrastructure.
Layers are like isolated execution environments with strong trade-offs.
The trade-offs involved in layers, the significance of layer zero in overall volume, and the transaction activity on Stargate are key insights from this chapter.
The speaker is not concerned with determining the exact number of volume on the bridge, but rather focuses on building a bridge with maximum utility.
The focus on building a bridge with maximum utility, the introduction of CCTP as a potential solution, and the upcoming upgrade of Stargate V2 are discussed in this chapter.
V2 aims to incentivize liquidity and reduce gas emissions on the Stargate platform
The aim of incentivizing liquidity and reducing gas emissions on the Stargate platform, the proposal for using wrapped assets, and the importance of protocol value accrual are key insights from this chapter.
Chapters
- Zero X Research podcast episode featuring Brian Pellegrino, co-founder and CEO of Layer Zero Labs
- TVML and Cosmo's ecosystem are converging on Ethereum for liquidity.
- Protocol teams may prefer to do programmatic sales on centralized exchanges rather than DEXs for better verification of KYC user base.
- Retail attention is returning to the crypto market.
- Effort Capital predicts that MKR will be a top 10 asset by market cap in the next few years.
- Avi doesn't deserve to be at the band that we should add words at
- Layer zero is designed to provide a flexible and modular security system for large applications.
- Layer zero and IBC are interesting concepts for moving state data between chains.
- Layers are like isolated execution environments with strong trade-offs.
- The speaker is not concerned with determining the exact number of volume on the bridge, but rather focuses on building a bridge with maximum utility.
- V2 aims to incentivize liquidity and reduce gas emissions on the Stargate platform
- The goal should be to capture as much surface of fees as possible in an efficient manner.
- OFT is a contract structure that turns control of assets back to the end creator, avoiding delegation to third parties.
- Operating with veto rights allows for maintaining external security while having control over messages
Zero X Research podcast episode featuring Brian Pellegrino, co-founder and CEO of Layer Zero Labs
00:00 - 06:23
- Promotion for the Permissionless event in Austin, Texas, offering a 30% discount with code 0x30
- Discussion about Polygon's token rebranding and architecture revamp
- Polygon renaming their Matic token to Paul and increasing token supply
- Migrating from their own sovereign EVM-based L1 to become an L2
- Concerns about finding product market fit as an L2 and the hype cycle of infrastructure
- Interest in alt-L1s transitioning to Ethereum-based L2s
- Trade-offs between incentivizing validation with native tokens on Alt-L1s versus ETH L2s
- Observation of attention and value flowing back to Ethereum as a home base
TVML and Cosmo's ecosystem are converging on Ethereum for liquidity.
05:59 - 12:44
- Cosmo's ecosystem is replicating security by migrating chains to the Cosmo's hub.
- L2s in Ethereum require decentralizing sequencers, which adds overhead.
- C-Lo Green Chain will leverage I-GANDA for data availability, requiring payment from Celo.
- Offloading parts of the modular stack to other chains reduces sovereignty but comes with a cost.
- The L2 space is likely to resemble a Cosmo sap chain in the future.
- A proposal is made to analyze the cost of being an L1 versus an L2 with a DA layer and decentralized sequencer.
- Running off a centralized sequencer shifts L1 settlement costs to users.
- Multiple chains and sidechains like Avo, Mantol, World Coin, Celo Green Jane, and Paul are emerging.
- ZK technology is still in its early stages but promises interoperability between chains.
- 'Hyper-productive tokens' like POO can validate multiple chains and offer various roles.
- Concerns arise about how many consensus or validator clients an e-validator can handle when restaking with iKenday.
- Centralized builders may dominate the future if restaking requires validating multiple things simultaneously.
Protocol teams may prefer to do programmatic sales on centralized exchanges rather than DEXs for better verification of KYC user base.
12:17 - 19:03
- Regulatory clarity benefits developers and users in the token issuance space.
- Coinbase is a big winner after the judge ruling, with its stock price increasing by 24%.
- Relisting XRP for trading indicates positive market sentiment towards potential securities being deemed non-securities by the SEC.
- Coinbase's trade volume heavily relies on non-Bitcoin and ETH assets, so the ruling is good news for their future revenue stream.
- Competitors like Binance are facing regulatory crackdowns and layoffs, while Coinbase's narrative as a compliant entity gains traction.
- Clear regulatory guidelines in the United States make Coinbase more bullish as an exchange and custody provider.
- FTX's rise in the US was a threat to Coinbase, but FTX's issues allowed Coinbase to maintain its dominant position.
- The legal implications of the ruling are complex, with differing perspectives on its impact and expectations for future SEC actions.
- While many celebrated the victory, others caution that it is just one round won and expect continued SEC scrutiny in the industry.
Retail attention is returning to the crypto market.
18:34 - 25:37
- Ave's valuation is questioned compared to its peers with better products.
- Decentralized social media platforms like Lens V2 are not yet a smooth experience and may not replace major social media platforms for a significant amount of time.
- The benefits of decentralized social media and ownership of a social graph are not compelling enough to switch from centralized platforms at this point.
- MakerDAO has more brand awareness in the traditional finance space compared to Aave, making it a more attractive investment option.
- Effort Capital believes MKR will be a top 10 asset by market cap in the next few years.
Effort Capital predicts that MKR will be a top 10 asset by market cap in the next few years.
25:09 - 32:16
- MKR is considered a very undervalued DeFi asset.
- Decentralized social platforms face challenges similar to those faced by centralized platforms like Facebook.
- The Lindy effect is evident in the market, with DAI remaining unchallenged and maintaining stable value.
- Curve's peer-to-pool model, where lenders deposit assets and borrowers borrow from the protocol, is a scalable DeFi model.
- A more profitable model involves capturing the entire amount of interest that flows in from borrowers by playing the role of the lender and having the stablecoin borrowed.
- Curve has introduced two key innovations: collateral conversion model and dynamic interest rate curve based on market conditions without user intervention.
- These innovations lead to less governance and push towards autonomous financial applications in DeFi.
- Aave's model for RWAs lacks innovation compared to Curve's models.
- There is enthusiasm for bringing Curve over to Solana, but it is uncertain if it will happen.
- Successful social apps often find their niche or introduce new content types to attract users.
- Maker (MKR) has potential to become a top 10 asset, although not necessarily by the end of 2025.
Avi doesn't deserve to be at the band that we should add words at
31:57 - 38:54
- Maker has the potential to become a top 10 asset in the next five or ten years
- RWA's (Real World Assets) will be a huge component of crypto and DeFi in the next decade
- Maker is well-positioned to capture the RWA market with its existing frameworks and financial models
- DeFi wins by offering lower borrowing costs than traditional financial institutions
- Once there is a good regulatory framework, more institutions will tap into Maker liquidity for real-world asset exposure
- Maker is ahead of other protocols in terms of RWAs
- The endgame transition for Maker will be interesting to watch and could deter conservative institutions from tapping into Maker liquidity
- Trillions of dollars could flow into DeFi on the back of MakerDAW over the next decade
- Protocols that effectively use their tokens have an advantage over those that don't
Layer zero is designed to provide a flexible and modular security system for large applications.
38:28 - 45:12
- The traditional model of delegating security to third parties is not suitable for larger applications dealing with significant amounts of money.
- Layer zero allows for a more flexible security stack by incorporating various groups like Chainlink and zkSync.
- Running the Oracle component is relatively easy, but running the Relayer, which handles execution, is extremely difficult due to the scale of operation.
- Changes will be made to make it easier for people to run the Relayer in the future.
- There are currently four large applications and several node info providers building on Layer zero.
- The majority of teams deploying contracts on Mainnet do not communicate with Layer zero directly.
- Around 70% of traffic on Layer zero is value transfer-related, with bridges, lending protocols, and DeFi applications being the most common use cases.
- Gaming applications show a strong interest in Layer zero technology due to its promise of interoperability among games.
- Layer zero differs from other communication platforms like IBC by providing a more flexible and modular security system.
Layer zero and IBC are interesting concepts for moving state data between chains.
45:05 - 51:21
- Sending every block header from one chain to another is expensive and not feasible.
- Polyhedra is a leading zk messaging client integrated within layer zero.
- Layer zero provides unified semantics and allows different systems to fit in the middle.
- The future of layer zero involves staying at the base layer and avoiding the mistakes of previous models.
- Rolling your own bridge can lead to security vulnerabilities, as seen in recent hacks.
- The industry's future will involve modular infrastructure and a focus on core competencies.
Layers are like isolated execution environments with strong trade-offs.
51:01 - 57:48
- Moving state data between layers is valuable and necessary.
- Layer two to layer one pathways are more commonly used than expected.
- Layer zero is a significant portion of overall volume in the ecosystem.
- Stargate has high transaction activity, indicating potential organic use.
- Average transfer size on Stargate is around $455, lower than other bridges.
- Approximately 54% of Stargate volume may be attributed to civil activity.
The speaker is not concerned with determining the exact number of volume on the bridge, but rather focuses on building a bridge with maximum utility.
57:26 - 1:04:08
- The introduction of CCTP (Circle Backing Bridge) could change the demand for Stargate by solving the inventory problem of moving assets between chains.
- There are currently limitations and low volume usage of CCTP, and security concerns exist due to potential risks if the system is compromised.
- Stargate V2 will be a significant upgrade that reduces emissions to near zero and cuts gas costs by a large percentage.
- The economics of Stargate will change, resulting in higher net profit for the protocol.
- The speaker mentions that they prefer to focus on building rather than being noisy about development updates.
V2 aims to incentivize liquidity and reduce gas emissions on the Stargate platform
1:03:50 - 1:10:17
- Hydra proposal suggests using wrapped assets on Stargate to eliminate the need for sketchy bridges
- Stargate would supply underlying assets to its native pools, reducing the need for emissions
- Users get free bridging and ecosystems benefit from more reliable wrapped assets
- Risk is sharded away from users and LPs through the wrapped asset contract
- Protocol value accrual should be used to grow protocol liquidity and capture fees efficiently
The goal should be to capture as much surface of fees as possible in an efficient manner.
1:09:49 - 1:16:24
- Layers within the ecosystem can charge their own fees, but it may get commoditized over time.
- Stargate is beneficial for layers and applications as it increases traffic and volume of fees.
- Bridges like Stargate focus on capital efficiency and liquidity.
- Liquidity is crucial for LPs and users, who are willing to pay a premium for convenience and trust.
- Applications and consumers find value in having liquidity readily available.
- Omni chain fungible tokens (OFTs) were created to address issues with multi-chain transfers.
- Moving assets to third-party providers had security risks and functionality limitations.
OFT is a contract structure that turns control of assets back to the end creator, avoiding delegation to third parties.
1:15:58 - 1:22:46
- OFT allows for secure messaging pathways between contracts and guarantees solvency of the entire system.
- Moving assets using OFT is cost-efficient, with near-zero fees and unlimited amounts of money can be moved within the contract.
- Teams can monetize OFT by owning a large percentage of every fee and charging lower fees to consumers.
- Abracadabra has used OFT for its decentralized stablecoin MIM, enabling transfers across different chains and capitalizing on zero fees.
- The security model in OFT allows application owners to choose their validators and stack different security structures.
- Application owners have veto rights if malicious activity occurs, but also serve as a fallback if they get hacked.
Operating with veto rights allows for maintaining external security while having control over messages
1:22:23 - 1:28:32
- Adoption of OFT takes time, but there are already large projects using it
- BTCB on Avalanche is similar to WBTC, relying on Avalanche as a bridge
- Lending and borrowing with collateralization anywhere and borrowing anywhere is an interesting idea for layer zero