Interoperability is a very vowel-filled word that just means being able to do actions across blockchains.
Why does it need to exist? If the crypto ecosystem all sat on one blockchain, we wouldn’t need interoperability at all. However, there are now multiple large blockchain ecosystems (like Ethereum, Polygon, Binance Smart Chain, etc.) and as such they fragment liquidity (e.g. let’s say $1B sat on chain A, $1B chain B, if assets could flow freely across the chains, you’d have access to $2B worth of liquidity vs. $1B).
Existing solutions: the truth of the matter is, this tech is nascent so no solution is particularly widespread. Nevertheless, existing solutions are on the spectrum from centralized to decentralized.
E.g. decentralized exchanges (DEX) have liquidity pools that use an intermediary token RUNE such that to swap A to B, they behind the scenes swap A to RUNE, RUNE to B. If you didn’t have the intermediary token, all pairs of all tokens would have their own very fragmented liquidity pools.
New solutions: there are many but today, let’s dig into LayerZero’s proposed solution!
Remember, what they’re trying to solve for is: decentralization, cutting out intermediaries, and security
The crux of LayerZero’s design is that transfers are verified through two independent sources - an Oracle and a Relayer which have to agree on the validity of a transfer.
The Oracle reads a block header from chain A and sends it to chain B, so it’s one source of verification that the transaction is legit. (if you don’t know what an oracle is, I’ll explain in another newsletter but the premise is smart contracts only know what’s on chain, they’re not connected to the outside world. Oracles are like magical globes which spit out data from the outside world in a decentralized manner)
The Relayer fetches proof of a specific transaction, so technically it is looking for different data than the Oracle. It is a second independent verification that the transaction is legit.
LayerZero can achieve essentially 3 layers of decentralization and security. The first is simply that the Oracle and Relayer are independent (this is true now). The second is when the Oracle and Relayer are themselves decentralized networks (the current Chainlink Oracle is, the Relayer currently is not as it’s run by LayerZero labs). The third is when there is a marketplace of Oracles and Relayers, and devs can choose various combinations depending on tradeoffs (this does not yet exist).
At the third level of decentralization and security, the promise is that even if an Oracle and Relayer pair are compromised (e.g. Oracle A and Relayer A), the compromise only affects that pair instead of the entire system.
Today’s post is really a tale as old as crypto time: we need to solve for liquidity, decentralization, and security.
Note: LayerZero is a messaging protocol, so it’s more general than just sending assets, but the primary use case at the moment is around sending assets to combine liquidity.
Neither GC nor any of its advisory clients, including all GC-managed investment vehicles, holds any form of ownership or financial interest in the cryptocurrency or digital asset described in this post. GC has not performed any due diligence, research, analysis, or evaluation of the potential merits, if any, of this cryptocurrency or digital asset project and GC cannot verify any claims made by any promoter or supporter of the cryptocurrency or digital asset described. Nothing in this post should be seen as, nor is it intended to be, a recommendation or suggestion to invest in, purchase, sell, hold, trade, or participate in this or any cryptocurrency or digital asset project. GC in no way endorses or encourages anyone to circumvent or violate any applicable laws, rules, and regulations, including any applicable Anti-Money Laundering/Know-Your-Customer (AML/KYC) and related banking and financial regulations. (See Disclaimer below for further details.)
Disclaimer
Views expressed in “posts” (including podcasts, videos, newsletters, and social media) are those of the individual GC personnel quoted therein and are not the views of General Catalyst Group Management, LLC, “GC”) or its respective affiliates. GC is an investment adviser registered with the Securities and Exchange Commission. Registration as an investment adviser does not imply any special skill or training. The posts are not directed to any investors or potential investors, and do not constitute an offer to sell — or a solicitation of an offer to buy — any securities, cryptocurrencies, or any financial instrument or property, and may not be used or relied upon in evaluating the merits of any investment.
The contents in here — and available on any associated distribution platforms and any public GC online social media accounts, platforms, and sites (collectively, “content distribution outlets”) — should not be construed as or relied upon in any manner as investment, legal, tax, or other advice. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Any projections, estimates, forecasts, targets, prospects, or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Any charts or figures provided here or on GC content distribution outlets are for informational purposes only, and should not be relied upon when making any investment decision. Certain information contained in the content has been obtained from third-party sources. While taken from sources believed to be reliable, GC has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. In addition, posts may include third-party advertisements or links to websites not associated with GC in any way; GC has not reviewed such advertisements or websites and does not endorse any content contained therein. All content speaks only as of the date indicated and is subject to change at any time.
Under no circumstances should any posts or other information provided on this website — or on associated content distribution outlets — be construed as an offer soliciting the purchase or sale of any security or interest in any pooled investment vehicle sponsored, discussed, or mentioned by GC personnel. Nor should it be construed as an offer to provide investment advisory services; an offer to invest in an GC-managed pooled investment vehicle will be made separately and only by means of the confidential offering documents of the specific pooled investment vehicles — which should be read in their entirety, and only to those who, among other requirements, meet certain qualifications under federal securities laws. Such investors, defined as accredited investors and qualified purchasers, are generally deemed capable of evaluating the merits and risks of prospective investments and financial matters.
There can be no assurances that GC-managed investment vehicle’s objectives will be achieved or investment strategies will be successful. Any investment in a vehicle managed by GC involves a high degree of risk including the risk that the entire amount invested is lost. Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by GC and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by GC is available here: https://www.generalcatalyst.com/portfolio/. Past results of GC’s investments, pooled investment vehicles, or investment strategies are not necessarily indicative of future results. Excluded from this list are investments (and certain cryptocurrencies or digital assets) for which the issuer has not provided permission for GC to disclose publicly. GC has no special role in any of cryptocurrency or related projects or power over their management. To the extent any GC-managed investment vehicle has any form of ownership or financial interest in a cryptocurrency, digital asset, or related project, GC does not undertake to continue to have any involvement in these projects other than as an investor and token holder, or holder of a form of economic or ownership interest, or right to a future ownership interest, and other token holders should not expect that it will or rely on it to have any particular involvement.
For other GC site terms of use, please go to https://www.generalcatalyst.com/terms-of-use/. Additional important information about GC, including our Form ADV Part 2A Brochure, is available at the SEC’s website:
http://www.adviserinfo.sec.gov