Messari Research: LayerZero Q2 Key Metrics and Performance Analysis

Authors: Ishraq Alim, Mihai Grigore, Messari; Translation: Deng Tong, Golden Finance

Summary

• In the second quarter of 2024, LayerZero expanded its full-chain interoperability protocol, added support for 12 new networks, and facilitated the transfer of $50 billion in encryption assets. In the second quarter of 2024, the average transfer value rose by 78%, reaching over $400 per transaction.
• The transfer volume of Ethereum rose by 26% quarter-on-quarter, increasing from $7.25 billion in the first quarter of 2024 to $9.13 billion in the second quarter of 2024, thanks to the drop in gas fees caused by the Dencun upgrade and the introduction of full-chain re-mortgaging, which has incentivized the use of LayerZero.
• ZRO Token was launched on June 20, 2024, airdropped to 1.28 million eligible wallets, implementing anti-Sybil measures for Token distribution and a claimable “donation proof” mechanism.
• In the second quarter of 2024, the number of LayerZero’s On-Chain Applications (OApps) deployed exceeded 50,000, and the adoption rate of applications in the fields of games, Decentralized Finance, AI, bridge, and other areas that utilize its full-chain communication is rising.

Preface

Although the original design of blockchain is secure, promoting secure communication between networks has been challenging. LayerZero is an interoperable protocol that allows whole-chain applications (such as Tokens) to communicate securely across over 80 networks.

It sends and receives messages through a set of immutable endpoints, and is verified and executed by a set of permissionless decentralized validator networks (DVNs) and executors. Executors execute the instructions of the messages in the target chain, while DVNs ensure end-to-end validity of the messages. Each independent application built on LayerZero can configure a security stack (including executors and DVNs) and block confirmation according to the security level required for sending and receiving messages.

LayerZero is a standardized communication protocol that allows full-chain applications to communicate across different networks. Its primary use case is to transfer arbitrary data between these networks, with asset transfer being the most common type of data transfer. Other use cases include any applications that may need to send messages across multiple chains, including games, cross-chain interaction governance, identity solutions, stake, and enterprise products.

LayerZero V2 will be launched in January 2024, with a universal messaging system and universal security attributes, which can simplify cross-network communication and improve developer experience.

LayerZero Labs is the initial developer and core contributor of the LayerZero protocol. In April 2023, it raised a $120 million Series B financing. LayerZero launched its native Token ZRO in June 2024.

Key Metrics

Performance Analysis

Financial Overview

Market Cap and Token

On June 20, 2024, the LayerZero Foundation launched the native Token ZRO of the LayerZero protocol. As a fully fungible Token (OFT), ZRO grants holders the governance control over protocol fee switches, which is a permissionless mechanism to charge fees for each message sent through LayerZero and destroy ZRO fee Tokens.

When ZRO was launched, its market capitalization exceeded $1 billion, with a price of $4.40 per Token. In the second quarter of 2024, ZRO achieved a market capitalization of over $860 million and a price of $3.30, ranking among the top three Cross-Chain Interaction messaging protocols by market capitalization.

Message Delivery Fee

The messaging fee is charged in the form of the native Token of the source chain. These fees have three purposes:

• Assigned to DVN and executor for verification and execution.
• Pay the gas fee on the target chain.
• If the protocol fee accumulation is activated, it will be destroyed on the source chain, which is a decision controlled by the Tokenholder governance, and is currently closed.

DVN and the executor use the revenue generated from these fees to pay for security costs. Each application selects its own DVN configuration for validation. At the same time, an executor is also selected to accurately deliver the message. If the fee switch is activated, the accumulated protocol fees will reduce the circulating supply of ZRO through a destruction mechanism. This control over supply and market capitalization incentivizes ZRO holders to participate in governance.

In the second quarter of 2024, the total messaging fees paid by users dropped by 34% to $12.7 million compared to the previous quarter. The main sources of messaging fees are Arbitrum ($3.4 million), BNB Chain ($3.2 million), Optimism ($2.3 million), and Polygon ($1.4 million). This decline occurred after the Dencun upgrade, which reduced the gas fees for ETH on LayerZero transactions through EIP-4844. Additionally, the decrease in fees is consistent with a 58% decrease in message volume, from 29.6 million messages to 12.3 million messages, due to the expected token releases causing a surge in activity in the first quarter of 2024.

The average cost metric calculates the cost of sending each message on the network. A large part of these costs is used to pay for various gas fees on the network. High-cost chains like Ethereum can increase the average cost incurred because of their high Transaction Cost. In the measured networks, Polygon has the lowest average transaction cost, with an average cost of $1 per message sent in the second quarter of 2024. Token issuance may lead to a surge in on-chain Money Laundering that supports ZRO (for example, the average gas fee on Arbitrum has pumped from less than 1 cent to 87 cents). With the launch of the Dencun upgrade, the average costs of Arbitrum and Ethereum have decreased by 63% and 45% respectively compared to the previous period.

Value Transfer

As of the second quarter of 2024, LayerZero has over 54,000 contracts using its full-chain communication protocol, running on over 80 different networks, including Ethereum, Optimism, Arbitrum, Polygon, Solana, BNB Chain, TRON, and Base. These contracts use LayerZero message passing for various use cases, supporting nearly 300 user-facing applications.

Transferring assets (bridge) between different networks is one of the most common use cases of LayerZero. Other use cases include games, Cross-Chain Interaction governance, and identity solutions.

By using bridges built on LayerZero, native on-chain assets can be swapped for native assets on the target on-chain (e.g. StarGate), or transferred using LayerZero’s token standards (referred to as On-Chain Fungible Token (OFT) and On-Chain Non-Fungible Token (ONFT)). The standard OFT is burned on the source on-chain and minted on the target on-chain. Examples of native bridging using the OFT standard include: Aptos Bridge, Core DAO, and Harmony Bridge. For existing native tokens, the bridge can adopt the OFT standard by locking the native on-chain tokens and minting equivalent tokens on the target on-chain. The target chain will receive the tokens and issue new tokens, with a 1:1 ratio for each locked or destroyed token.

In the second quarter of 2024, the total value of assets transferred through bridge applications on LayerZero in the top ten networks is $5 billion, a decrease of 26% compared to the previous period. This decline is mainly due to efforts to prevent Sybil Mining before the token generation event (TGE), which may indicate a more legitimate use of the network. Despite the decrease, this number is still 42% higher than the annual low point in the fourth quarter of 2023.

By preventing Sybil Mining, on-chain data shows real users instead of artificially inflated figures from entities using multiple Wallets (LayerZero Foundation defined 20 Address clusters linked to the same person prior to TGE). Although the total value of assets transferred decreased MoM, the average value per message rose by 78.2%, reaching over $400 per message. This indicates that genuine users are utilizing the LayerZero protocol to ensure higher value transactions compared to industrial Sybil Miners.

In the second quarter of 2024, Arbitrum ($1.2 billion), Ether ($913 million), and Optimism ($893 million) were the top three source networks for LayerZero bridge volume. The transfer volume of Ether rose by 26% quarter-on-quarter, from $725 million in the first quarter of 2024 to $913 million in the second quarter of 2024. Several key factors incentivize users to use the Ethereum ecosystem, including the introduction of EIP-4844 and the introduction of native LayerZero stake, which has led to a drop in gas fees for Ether, thereby incentivizing users to use LayerZero.

Overview of the protocol

Usage

The sent messages (packets) are a key metric of the total usage of LayerZero, as they are initiated by users and used for all use cases, such as bridge (e.g., StarGate), token issuance (e.g., PancakeSwap and ether.fi), cross-chain interaction liquidity (e.g., Orderly Network), governance (e.g., Angle), gaming (e.g., Nine Chronicles), cross-chain interaction identity (e.g., Clusters), and fee/reward allocation (e.g., Pendle). By excluding Sybil holders from token issuance, LayerZero adjusts the on-chain usage metric to reflect persistent users rather than artificially inflated numbers from entities using multiple wallets. The data for the second quarter of 2024 accurately represents the real usage of the protocol.

In the second quarter of 2024, the number of messages sent on LayerZero exceeded 12.3 million, a decrease of 58% compared to the previous period. This may be due to the community’s expectation for the release of native Tokens in the first quarter of 2024.

Application Deployment

Applications that send and receive messages through LayerZero are called Off-chain Applications (OApps). These applications consist of Smart Contracts deployed on the source or target network. OApps are connected to LayerZero through endpoint contracts on their respective networks. These applications can have various functions, including asset/Token transfer, governance voting, fee/reward distribution, and game items.

In the second quarter of 2024, LayerZero protocol has achieved a milestone of over 50,000 deployments, ultimately deploying nearly 55,000 OApps. As part of the ZRO TGE, the team was invited to submit a proposal and deploy OApps for the Token. The team includes GMX, Solidly Labs, Decentralized Finance Kingdoms, and Merkly.

Qualitative Analysis

Major Progress

Token issuance

The LayerZero Foundation launched its native token ZRO on June 20, 2024, with a total supply of 1 billion. Among them, 23.8% is allocated to the community and builders, excluding the foundation and the rise allocation, which received 14.5% separately. On the first day, 8.5% of the token supply was allocated: 5% was allocated to core contributors, 3% was allocated through Request for Proposal (RFP), and 0.5% was allocated to an independent community pool for content creators, artists, and researchers, different from the main community pool. More than 1.28 million wallets are eligible for this initial airdrop. The remaining tokens will be distributed over the next 36 months, with additional retroactive allocations every 12 months and further RFPs for future builders. The allocation details are as follows:

• 38.3% allocated to the LayerZero community (383 million ZRO)
• 32.2% allocated to strategic partners (322 million ZRO)
• 25.5% allocated to core contributors (255 million ZRO)
• 4.0% Token repurchase (40 million ZRO)

In order to incentivize the development of LayerZero, a Request for Proposals (RFP) was conducted before the Token was released in May 2024. Developers must launch OApp on the LayerZero protocol to be considered for allocation. As of May 31, 2024, over 200 development teams have submitted ZRO allocation applications and deployed their own OApp. The number of developers in the RFP alone exceeds that of some major blockchains.

The launch of LayerZero’s ZRO Token has had a significant impact on the Arbitrum network as a coordinated chain for Token claims. This event has led to a surge in daily revenue, reaching $3.4 million. The launch of the Token may lead to a significant increase in Money Laundering on Arbitrum, with average fees rising from less than 1 cent to 87 cents.

protocol fees conversion

The main function of ZRO Token is to allow holders to control protocol fee switching through governance. Every six months, ZRO holders can activate or disable the fee switching of the protocol through an immutable on-chain vote, which can be cast from any on-chain deployment of ZRO. If activated, the collected fees will be used by the treasury contract to burn ZRO. This mechanism ensures that ZRO holders have a direct impact on the fee structure of the protocol.

Donation Certificate

To promote ecosystem development during ZRO distribution, LayerZero has developed a new mechanism called Donation Proof. This method allows participants to receive ZRO Tokens by donating to Protocol Guild, a funding mechanism for Ethereum Layer 1 development. The donation amount is 0.10 USD stablecoin or ETH. LayerZero Foundation matches all donations to Protocol Guild, up to a maximum amount of 10 million USD.

Sybil Detection

To ensure fair distribution of Tokens, LayerZero has implemented a three-step process to exclude Sybil users who use multiple Addresses to exploit the system. Sybil activity is the target. Sybil users have the opportunity to self-report and receive their expected allocation of 15%. Those who do not report will be publicly listed, and others may report them to receive a bounty. The Sybil detection process was carried out in collaboration with LayerZero, Nansen, and Chaos Labs. This initiative has successfully filtered out Sybil farming, revealing the true purpose of the protocol, as shown in this report.

Ecosystem

Network Integration

In the second quarter of 2024, LayerZero added support for more than 12 new networks, bringing the total number of networks to 83, including Solana, TRON, Sanko GameCorp, ebi.xyz, SEI Network, Taiko, Skale Network, Humanity Protocol, Merlin Chain, Camp, and Oasys. The support for Solana and TRON has expanded the number of non-ETH Virtual Machine (EVM) networks supported. Solana’s integration initially supported eight networks but expanded to the full network grid supported by LayerZero. LayerZero V2 realizes its vision of a complete chain protocol by expanding to networks with unique consensus and security models.

Application Integration

In the second quarter, the deployment of LayerZero’s OApp exceeded 50,000, with a rise in the number of applications in gaming, Decentralized Finance, AI, Tokenissuance, and other areas utilizing its full-chain communication. Notable deployments include Woo Eco, Soul Protocol, Phuture Finance, Anzen Finance, Myso Finance, Iskara, ether.fi, SatoshiSync, Ra1l, and Morpheus. Ether.fi is a liquid ETH staking platform that supports full-chain staking on multiple L2s including Blast, Base, and Linea. Ether.fi supports staking over 500 million USD worth of ETH on L2. With tools like BCW Group’s LZ Genie, the deployment of OApps is made more streamlined, with functions including project creation, deployment, and DVN configuration settings.

On May 28, 2024, StarGate Finance launched StarGate V2, featuring trade batching to drop costs, Artificial Intelligence Planning Module (AIPM) for optimizing Liquidity allocation, and the Hydra bridge-as-a-service for bridging assets to newer chains. StarGate V2 supports 16 chains, including Ethereum, BNB chain, Avalanche, Polygon, Arbitrum, and Optimism. This release introduces Kaia as the first Hydra chain, enabling high-speed, low-cost asset transfers between Klaytn and other chains. After obtaining governance approval and audits, V2 pools and incentives went live on May 27, and the full bridge functionality was enabled on May 28. It is worth noting that StarGate is the first bridge launched on LayerZero, with over $5 billion in assets as of July 1, 2024.

Enterprise Integration

In May 2024, LayerZero Labs partnered with IntellectEU to facilitate the first Delivery versus Payment (DvP) transaction using the LayerZero protocol. This transaction involved sending Swift MT messages between the private Hyperledger Besu and public Polygon blockchains. The development of DvP transactions aims to seamlessly integrate existing financial institution infrastructure with blockchain technology. This collaboration enhances LayerZero’s existing partnerships with major financial institutions, including JPMorgan and Apollo’s Onyx Digital Assets, as well as Avalanche’s Evergreen Subnet and Spruce.

Game developer Ubisoft partnered with Oasys and used LayerZero as an interoperability provider to develop its first blockchain-based game, Champion Tactics Grimoria. This collaboration utilizes LayerZero’s full-chain interoperability protocol to enhance Cross-Chain Interaction functionality, enabling players to securely own and trade unique digital assets on different blockchain networks.

DVN Integration

There are over 35 DVNs available for application builders on LayerZero. These include a diverse set of validator solutions, such as zk-techs like Polyhedra and Lagrange, validator-based teams running DVNs like Nethermind, longer computation (MPC) like Zenrock, enterprise validators like Google Cloud, and application-owned DVNs like Abracadabra and Tapioca. Symbiotic recently announced a DVN to facilitate L2 stake for Ethena Labs.

In addition, teams can build DVN adapters as a feature in V2, which enables applications built on LayerZero to utilize third-party validators such as bridges, Oracle Machines, and intermediate chains, Chainlink, and Axelar as DVNs. LayerZero Labs provides initial DVN adapters for CCIP and Axelar; however, this is an unlicensed task, just as multi-bridge solution Hashi builds its own DVN adapter. By integrating external validators into the LayerZero ecosystem, this provides a scalable approach.

Upcoming Events

Expanded to the Cosmos ecosystem

Solana Tron and Aptos are among the first non-EVM Layer-1 protocols supported by LayerZero protocol. LayerZero Labs has partnered with Initia Labs to explore extending full-chain support to the Cosmos chain. These extensions demonstrate LayerZero’s commitment to standardizing interoperability between different blockchain ecosystems.

Summary

In the second quarter of 2024, LayerZero made significant progress, with the launch of its native Token ZRO being particularly prominent, which had a significant impact on the Arbitrum network, with daily revenue soaring to $3.4 million, Money Laundering rising from below $0.01 to $0.87. To prevent Sybil Mining, the total value of transferred assets decreased by 26% compared to the previous period, but the average value of each message rose by 78.2%, reaching over $400. LayerZero expanded its ecosystem, adding support for 12 new networks, with over 54,000 OApp (On-chain Applications) deployments, and the total amount rising by 10%. These advancements in Cross-Chain Interaction interoperability, strategic partnerships, and innovative solutions continue to make LayerZero a key player in the field of full-chain message transmission.