Author: Fourteen君

Introduction

Today, the importance of cross-chain bridges is still self-evident.

However, the flood of VC infrastructure coins has also faded after the storm of Meme+AI, and in this calm market, it is more appropriate to use an objective mood to examine the evolution of history and seize the opportunity to uncover the immortal truth behind it.

In 2023, LayerZero, with its unique "Ultra Light Node" architecture, quickly rose to become a star project in the cross-chain track, with a valuation as high as $3 billion at the time. The LayerZero V2 version launched in 2024 brought 30 million on-chain cross-chain transactions, also making it an industry leader.

The Omnichain vision has attracted many developers and received 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 for issues such as centralization and security, sparking industry discussions.

Some have mockingly called it "technical garbage" and a "super intermediary", believing that its V1 version only builds a framework without doing real work, and that the V2 version itself does not bear the security responsibility of the cross-chain verification network (DVN), but is just a wolf in sheep's clothing.

Some also say that LayerZero's commercial model penetration over the past three years has been astonishing, with a revival of the ancient art of alliance and connection.

Right or wrong, let Fourteen君 start from the technical solution and conduct an in-depth analysis of its business model to assess whether its foundation is solid or just a castle in the air built on sand.

I. Technical Analysis: The Architectural Evolution and Security Assumptions of LayerZero

1.1 V1: Ultra Light Node and Security Vulnerabilities

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, with oracles and relayers, two off-chain entities, collaborating to complete cross-chain message verification.

Essentially, it has shifted the heavy block synchronization and verification calculations to the oracles and relayers, thus keeping the on-chain contracts extremely simple.

V1 calls this design "ultimate trust element separation", and since it avoids running the source chain light nodes on the target chain, the cost is much lower than the architecture of other cross-chain bridges.

So obviously, V1's "2-of-2" trust model has the advantage of efficiency, but also has obvious security vulnerabilities:

• Collusion risk, this "anti-collusion" is based entirely on social trust and economic incentives, without the strong constraints of cryptoeconomics.
• Unclear boundaries of responsibility: both oracles and relayers are off-chain roles, and V1 cannot directly control their operation. If the oracle service goes down or the relayer stops running, cross-chain messages will not be delivered, affecting availability.
• Chain-level risk: it is completely dependent on the security of the connected public chains themselves, and LayerZero lacks an arbitration mechanism for the intermediate roles.
• Although V1 claims that the Oracle and Relayer are permissionless roles where "anyone can run" these nodes, in practice this is not the case, as evidenced by the concerns about the excessive centralization of V1 in the Uniswap cross-chain bridge proposal vote in early 2023, with a preference for Wormhole with large institutional validators.

1.2 V2: DVN Mechanism and Security Analysis

The core change in LayerZero V2 (hereinafter referred to as V2) launched in early 2024 is the introduction of the "Decentralized Verifier Network (DVN)" concept in the verification layer, breaking away from the previous model relying solely on oracles and relayers.

By leveraging a network of multiple verification nodes, developers can independently choose and combine multiple DVNs to verify cross-chain messages, so the security strategy is no longer limited to the fixed 2-of-2 model.

The advantages are still there:

1. The sources of DVN can be highly diversified. According to the introduction of LayerZero's strategic director Irene, the team can run their own DVN, or use other existing cross-chain bridges/networks as DVN. Even individual teams can, which introduces more independent stakeholders to the system, and the more people involved, the bigger the cake.
2. Different cross-chain verification schemes can coexist: whether it's the verification nodes of the Arbitrum official cross-chain bridge, the 19 guardians of Wormhole, the PoS nodes of Axelar, or MPC multi-signatures, they can all be part of its verification layer.
3. User choice autonomy: users can choose a combination like "Chainlink oracle network + LayerZero Labs DVN + community DVN".

Is this enough?

No, the user's security is indirectly dependent on the quality of the DVN itself and the combination strategy, which is still the shortest board of the barrel:

1. Fragmentation of security strategies, with large differences in the strength of different DVNs. Some DVNs have professional institution nodes and staked tokens behind them, while others may only be multi-signatures or a few nodes. The entire network lacks a unified security standard, but rather security islands acting on their own.
2. Although V2 provides multiple DVN options and recommends using a combination, the final choice is up to the application. If the developer chooses a weak DVN for solo verification, they are sowing the seeds of risk. From a market perspective, if a single DVN is already strong enough, the other DVNs are often seen as redundant, and many projects may tend to use only one (for cost or convenience reasons). Therefore, DVN needs to ensure that the staking penalty is greater than the value that can be stolen, or supplemented by other deterrents (legal, reputation).
3. The introduction of multi-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 was optimistic verification, but an implementation bug led to the theft of $190 million.

1.3 Technical Evaluation of V1 to V2

First, from the perspective of compatibility

The current V2 is the undisputed king of compatibility, able to easily connect to EVM, SVM, and even the Move system, and its supporting documentation, use cases, developer community, and developer relations (hackathons, etc.) are all industry benchmarks, which greatly reduces the integration difficulty and makes it one of the first choice solutions for many new public chains.

Secondly, from the perspective of security

While V2 provides a higher security ceiling, it has also lowered the security floor, after all, there used to be reputable oracle institutions.

It has become more like a market platform, allowing various verification networks to compete to provide security services.

But from the user's perspective, the issue of responsibility disputes will inevitably arise. Now the official claims to only provide a neutral protocol, and the specific security is determined by the DVN chosen by the application. In the event of an incident, the responsibility will be passed around.

And the "decentralization" flag waved by the current V2 still has a lot of water. While DVN seems to have eliminated the single point, most applications still tend to use the few DVN combinations recommended by the official, and the actual control of the system is still in the hands of LayerZero and its partner institutions.

Unless the DVN network can develop hundreds or even thousands of independent verifiers, and guarantee their honesty through a strong economic game mechanism (such as staking + punishment), LayerZero cannot escape the shadow of the fragile trust model. But at that time, the economic benefit perspective may in turn affect the motivation of the DVNs.

Next, let's move on to the business perspective for further research.

II. The Implicit Transformation of the Cross-Chain Track

2.1 Macro Trends in Capital Focus

Let's look at the data directly, the following is the financing situation of various tracks in the Web3 field from 2022 to 2024:

Due to the inconsistency in the division of the track, the statistical amounts may differ. The statistics in this article are only for the purpose of reflecting the trend. It is recommended to refer to the original text, and the data sources can be found in the reference links at the end of the article:

In general:

The facilities that have seen a significant decline are in the CeFi category. My understanding is that CeFi still needed financing in 2022, while those that were able to self-generate revenue by 2023/2024 have survived and occupied the market, so there is no longer much competition in the red ocean, resulting in an overall decline.

While Web3 games saw some volume after a surge in popularity in 2024, from a personal perspective, with the subsequent decline of the TG hype, both GameFi and OnChain are almost market-falsified tracks, leaving behind only a mess.

I won't go into further details, but no matter how you look at it, the infrastructure actually has the best certainty under an uncertain market.

2.2 Is financing still enthusiastic about the cross-chain track?

Among the infrastructure, the most typical one besides public chains is the cross-chain bridge, and its track advantages are very clear:

• Multi-chain explosion, cross-chain is a must-have, whoever can master the cross-chain traffic will have the opportunity to become the "highway" toll collector in the multi-chain world.
• Pain points and opportunities coexist: Cross-chain bridges are hailed as a key element of Web3 innovation, capable of unleashing new applications such as cross-chain DeFi, cross-chain NFTs, and cross-chain identities; but cross-chain bridges have also been plagued by security incidents, with stolen funds accounting for nearly 70% of the total amount stolen in the entire industry.
• Platform network effects and moats: Capital has always valued the potential for future monopoly or oligopoly, and if a cross-chain protocol becomes the de facto standard (like the status of TCP/IP in the Internet era), early investment will reap bountiful returns. This also explains why a16z and Jump are not afraid to go to war in the choice of Uniswap's cross-chain bridge.
• Cross-chain is not just about asset transfer: In the traditional perception, cross-chain bridges are tools for transferring Tokens, but the greater imagination of capital lies in the prospect of "Arbitrary Message Bridges (AMB)", with projects like LayerZero and Hyperlane also positioning themselves as cross-chain communication protocols.

In short, the capital's enthusiasm for the cross-chain track is the result of the accumulation of multiple factors: the real-world drive of surging demand and unresolved pain points, as well as the strategic consideration of competing for standards in the future multi-chain interconnection landscape.

However, in fact, the number of new financings for cross-chain bridges in 2024 was very small, but this does not mean that the track is no longer popular, but rather that it is no longer a track that new players can take on, and the product form of bridges in the current market has also undergone changes.

2.3 The transformation of the cross-chain bridge's parties in the multi-chain trend

In the early days of the blockchain era, cross-chain bridges often appeared as independent service providers, but with the development of the multi-chain application ecosystem, the positioning of cross-chain bridges is changing, tending more towards underlying services (as the party B), integrated into the user experience of applications or wallets:

• Cross-chain is gradually becoming backgrounded, serviced, and semi-standardized. For example, wallets like MetaMask and OKX have integrated bridge aggregators, and the bridges no longer directly control the end-user, but obtain traffic through the party B (DApps, wallets). This requires cross-chain solutions to be easy to integrate, modular, and meet the needs of applications, otherwise the application side will choose other service providers, and the cross-chain bridge providers will become a To B model.
• The polarization of discourse power: In the "bridge controlling the user" model, the bridge can decide which chains to connect to and how much to charge in fees, and project parties often have to comply with its rules if they want to access a certain bridge, which is still the case on new chains. However, this is the opposite in major chain projects. For example, when Uniswap deployed on BSC, it chose the cross-chain bridge solution through governance voting, and the bridge had to come and bid.

There is also a role transformation, in the initial V1 version of LayerZero, it still relied on reliable oracles, and the bridge was the party B, and the oracle was the party A.

Now with the launch of the V2 version, it has triggered more competition between the DVN roles, which has made LayerZero become the party A, and the actual executor of the bridge verification function has become the party B. In order to get a better recommendation position, the party B will naturally change the profit-sharing logic with the party A.

It is always more lucrative to do a platform than to do a shop, as it is close to the transaction but not tainted by the dust, and it is indeed a change in LayerZero's own business positioning that has brought about the current market discourse power.

2.4 LayerZero's strategy of alliance and expansion

LayerZero's positioning is very special, as it is the public infrastructure for cross-chain communication, but it is not the ultimate bearer of the business.

As a witness to the platform explosion of the mobile Internet in the past 10 years, I have to say that this tactic of subsidizing the market in the early stage and then occupying the profits through internal competition is too familiar!

After platformization, the security responsibility has been shifted down.

As mentioned earlier, LayerZero has handed over the choice of verification security to the user applications, that is, "applications have their own security". From the contract point of view, if there is a cross-chain theft, LayerZero Labs can completely claim that they did not participate in asset custody, and the responsibility should be borne by the relevant DVN or application.

Win-win cooperation replaces subsidies: Many infrastructure projects will do incentive programs or subsidies to attract applications. But LayerZero is more inclined to bind interests (such as investing in the other party's project or letting the other party invest in itself).

These chains even allocate funds from the ecosystem fund to encourage protocol integration with LayerZero. LayerZero Labs has also actively absorbed various parties in financing and cooperation (Coinbase and Binance are both shareholders, not to mention the background of a16z, Circle and other abundant resources), this VC lineup has already meant that it has gained the recognition of most of the chain ecosystem entities.

2.5 Why is LayerZero's Series C round so elusive?

But looking at it the other way, it has already completed a Series B round (with a valuation of $3 billion), and it has been 2 years since then, so what scale would the Series C round need to be able to keep up with its expectations?

Let's look at its current transaction volume, based on its official data, and the middle value, benchmarked against the news a year ago:

【Source: LayerZero website】

The latest total number of messages is 14.4 million, while a year ago it was about 11.4 million, an annual increase of 3 million messages, with a growth rate of only 26.3%, which is much more moderate compared to 22/23.

Clearly, the main reason is that the airdrop expectations were largely digested after the token was issued, but in any case, the token issuance is a kind of income, or even a pre-emption of future income, but the project valuation needs to return to revenue.

However, once the revenue amount is calculated, it becomes embarrassing. Let's start with a simple estimate based on the number of transactions: 3 million x $0.10 = $300,000 per year.

$0.10 is the normal low-amount-per-transaction fee range for bridges, and if the amount is larger, the fee is charged through pledging, with the market average Take Rate being 0.05%, while in the 2023 data, the user needs to pay a 0.06% fee for each use of the Stargate cross-chain bridge based on LayerZero.

Assuming a total transfer amount of $10 billion over the past year (estimated based on the transaction number ratio), at a rate of 0.06%, the revenue would be $6 million.

So combining the two calculations, a gross profit of $300,000 to $600,000 is reasonable. However, considering the actual operational support, it is very likely that it is still in a loss-making state at the moment.

So even completely ignoring the cost, based on the highest revenue, with a valuation of $3 billion, its PE ratio would reach 500 times. It's worth noting that even tech giants like Apple and Amazon, which are often perceived as bubble stocks, are only around 30 times.

Obviously, the next Series C round won't be able to get a good price in the short term, after all, no one can currently digest the 500x PE expectation.

Conclusion

After a two-year gap, the author's comparison of LayerZero before and after also sees its breakthrough creativity, and also glimpses the outline of the next generation of cross-chain bridges, and finally uses objective comments as a reference.

LayerZero has completed the journey from 0 to 1 and from following to leading in the cross-chain bridge field in just three short years.

In the V1 version, it innovated with the "super light node" and the simplified 2of2 multi-signature with oracles, and quickly seized the market with small steps.

In the V2 version, it adopted a platformization strategy of "framework as a protocol" to bind the multi-chain ecosystem, and a clever design of "risk sinking" to ensure its own stability. It is currently the cross-chain protocol that supports the most chains and chain types in the market, and it is indeed the industry leader.

Although there have been criticisms that it does not do "dirty work" (DVN verification) and only acts as an intermediary, it is undeniable that this is the successful business logic of LayerZero: to do the most universal and stable standard at the bottom, and leave the specific implementation to the market choice. As a platform, it converts the benefits of traffic flow by leveraging the competition of the underlying layer.

This approach is indeed in line with the needs of the multi-chain world (the emergence of a large number of new chains urgently needs the basic support of cross-chain bridges), and also follows the trend of the role of cross-chain bridges shifting from the A-side to the B-side.

Technically, the evolution of LayerZero V1/V2 demonstrates the industry's continuous exploration of balancing security and decentralization, the oracle+Relayer model and the DVN mechanism, which make us reflect on the boundaries of minimizing trust.

The author believes that although the V2 version does not exist now, it does have the potential to achieve complete decentralization in theory, but the market and users may not have such a high demand for the security guarantee of decentralization.

From a business perspective, LayerZero's platform strategy is worth studying, as it has brought the strongest compatibility in the direction of developer standards. Through modularization and standardization, it has become a torch that everyone gathers firewood for, rather than a stove that burns firewood alone.

This model reduces its own risk, and although it gives away profits to DVN, it has created a larger ecological landscape.

Finally, the PE estimation is just the author's own opinion, and there may be changes in the future, such as shifting from cross-chain charging to asset management charging, which could bring about a huge realization, after all, traffic is always the way in any era, and monopoly is always a high profit.

【Source: coinmarketcap】

Finally, another way of calculation is to look at the market capitalization of the circulating tokens, 7b is obviously a frenzy, and how should we understand 2B now?