Buidl on LayerZero – the Emergent Cross-Chain DeFi Applications
LayerZero is an Omnichain Interoperability Protocol. You could think of that as a blockchain communication tool. It enables dApps to deliver messages across different blockchains. It is an infrastructure for dApps to realize cross-chain communication. Check our previous article about LayerZero and its first application Stargate. (Related reading: Stargate - the Prosperous Future of Blockchain Interoperability)
First of all, the LayerZero team is intact from the FTX/Alameda implosion. The project raised $135 million from the FTX venture and some other VCs early this year. While there is an unfortunate amount of $11.5M kept on FTX, all other funds are safe, allowing for seven years runway according to the team. Amid the FTX crisis, LayerZero labd has successfully bought back all equity positions held by Alameda and FTX Ventures, I would assume they got a good deal considering that FTX was desperate for capital at the time.
In addition to its flagship product - Stargate, several notable projects, including SushiXswap and Hashflow, integrated LayerZero's infrastructure to provide cross-chain applications. Let's have a look at how these adoptions perform starting from Stargate.
Being the first product powered by LayerZero, Stargate caught immense attention early this year. With the market cooling down, both $STG price and protocol TVL collapsed along with the broader market. Nonetheless, the protocol has maintained a quite decent usage and even gaining traction in terms of transaction counts since October.
$STG is the governance token for Stargate. Alameda originally acquired 10% of the token supply during the community auction, and Stargate has managed to repurchase all tokens held by Alameda amid this crisis.
When we covered Stargate in March, $STG had no value accrual. The community has passed a proposal for a value accrual mechanism to $STG stakers in July. Each non-STG transfer through the Stargate protocol will incur a total 6 bps fee and distribute to:
- Protocol Treasury: 4bps
- veSTG (the locked version of $STG) Holders: 1bp
- Liquidity Providers: 1bp
Fees are now accruing to veSTG. Total revenue accumulated by the protocol now reaches $1.2M, and the daily fees grow in tandem with the increasing transactions.
Hashflow is a DEX for cross-chain transacting, it uses request-for-quote (RFQ) model where the price is quoted by off-chain market makers rather than using an on-chain AMM for price discovery. The protocol uses LayerZero as the message-passing system for cross-chain transactions. LayerZero charges a small fee for its services.
Trades on Hashflow are purely relying on market makers, traders execute transactions based on the price quoted by off-chain market makers with transactions settled on-chain. Since prices are sourced directly from market makers, there is no slippage, bridgeless, and no impermanent loss for liquidity providers. However, this introduces counterparty risk.
Hashflow uses several large crypto market makers, such as Wintermute and GSR, which quote bids and ask prices to traders. Market making is an important part of the operation of centralized exchanges such as Binance and FTX. Both Wintermute and GSR were market-making in FTX and suffered some loss of funds due to the bankruptcy of the exchange.
Given the current drama, and the awareness of the custodial risk of centralized exchanges for both traders and market makers, it is possible that both traders and market makers will both turn their activities more to DeFi.
$HFT token is used for governance and participation in DAO, no direct or indirect revenue distribution plan has been proposed. In essence, the protocol doesn't generate any revenue, as it doesn't charge fees on transactions. A fee on transactions could be put in place in the future by DAO governance. It remains to see how the protocol could earn revenue and how the $HFT token could accrue value.
Rage Trade is an $ETH perpetual protocol using a distinct design from current competitors. Current popular perpetual protocols include dYdX, which relys on a more traditional order book and market makers, GMX using a shared liquidity pool, and Perpetual Protocol using vAMM (virtual AMM).
While all the above designs have their merits and some, like GMX, have achieved great success, the liquidity fragmentation problem isn't solved. Each protocol needs to bootstrap its own liquidity to facilitate trading, either through a liquidity pool or market makers.
Rage Trade's liquidity solution
Rage Trade allows users to deposit yield-generating assets, such as Liquidity providers positions in AMMs, money markets, and derivates markets across various blockchains into Rage Protocol to serve as a source of liquidity.
Arbitrum is the host chain where Rage Trade protocol is deployed, and LP positions from Arbitrum as well as other supported chains connected by LayerZero can be deposited into vaults in Arbitrum as collateral. Rage uses LayerZero's cross-chain messaging protocol to pass messages to/from Arbitrum and other chains.
80% of the LP position is untouched by Rage, remaining 20% is used to provide liquidity on Rage. Rage recycles the LP shares from other DeFi protocols from other chains to provide liquidity in Rage's ETH perp.
This project is in the early stage and is now only deployed on Arbitrum, the function to connect with other chains using LayerZero is still in development, and no token announced at this moment.
This article only covers three, in my opinion, the most interesting projects built on LayerZero. There are several other projects leveraging LayerZero' s technology to build cross-chain applications, such as Radiant Capital, OmniBTC, and Cedro Finance, most of which are in very early stages.
A non-comprehensive list of LayerZero's ecosystem:
- Radiant Capital: Multichain Lending Protocol
- OmniBTC: DEX+Lending+Bridge, connect to Bitcoin network
- Cedro Finance: Multichain Lending Protocol
- MugenFinance: Cross-chain RealYield
- InterSwap: Multichain DEX
- CashmereLabs: Multichain DEX
- holographxyz: Multichain NFT Marketplace
- OmniX_NFT: Multichain NFT Marketplace
And many existing well-known protocols are integrated with LayerZero, such as Chainlink, Sushiswap, Clearpool, and Angle Protocol.
LayerZero opens possibilities for innovative designs of cross-chain applications, and what could be built is only limited by the imagination of builders. In the future, users should not notice which chain they are using; instead, they can just use one dApp that connects each and every chain with unified liquidity.