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Multicoin Capital: Why did we invest in LayerZero?

Multicoin Capital

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LayerZero is a general information relay service that can be used for almost anything.

Original title: "Building Bridges"

Original author: Kyle Samani, Multicoin Capital

Original compilation: 0x9F, Rhythm BlockBeats

A year and a half ago, Ethereum was the only Layer 1 chain that mattered. Now, Layer 1 has Ethereum, Solana, Terra, Polygon, Celo, Flow, Avalanche, NEAR, Fantom, BNB Chain, and Layer 2 has Optimism, Arbitrum, StarkEx, StarkNet.

We live in a multipolar world and will never return to a unipolar world. This means that bridging will become extremely important.

Today I am pleased to announce our investment in LayerZero, an almighty interoperability protocol that integrates dapps and liquidity converge. We led their last investment round in September 2021 and are investing again in this round announced by LayerZero on the 30th. This is a $135 million Series A+ round, including a large group of strategic investors such as a16z crypto, Sequoia, FTX, Paypal Ventures, Animoca, Rene Marcelo Claure (Softbank CEO), Blizzard ( Avalanche Ecological Fund), Polygon Ecological Fund, Fantom Ecological Fund, Dapper Labs, Kronos Research, Ethernity, ImToken Ventures, Matrixport, Coinbase, Gemini... Notable angel investors in this round also include Tom Brady, Justin Timberlake and Maria Eitel et al.

Cross-chain bridges are one of the most complex technical areas in the encryption world. Dmitriy Berenzon of 1kx wrote an excellent overview of the cross-chain bridge design space .

We believe that the cross-chain bridge will exert a strong network effect on each pair of bridged chains. For users, it is troublesome to deal with the difference between renBTC, tBTC, WBTC on Ethereum, or WormholeETH and SolletETH on Solana. In the long run, a single cross-chain bridge is expected to dominate the liquidity of each pair of bridged chains.

Given that most teams are building their own cross-chain bridges - Optimism cross-chain bridge, Arbitrum cross-chain bridge, Starknet cross-chain bridge, Avalanche Cross-chain bridges, Polygon cross-chain bridges, Near’s rainbow bridges, etc. - we expect these bridges to become the dominant cross-chain bridges of their respective ecologies. LayerZero is actually a layer above all these bridges, rather than directly competing with these cross-chain bridges.

LayerZero is the simplest and lightest cross-chain information transmission method. LayerZero does not directly manage asset custody and anchor token creation/destruction. Instead, LayerZero lets these specialized cross-chain bridges above handle these activities.

In addition to the LayerZero protocol, the LayerZero team also launched a cross-chain bridge Stargate based on the LayerZero protocol. Stargate's design idea is to be a cross-chain and equivalent value currency trading DEX similar to Curve or Saber. If a user wants to transfer USDC from Arbitrum to Optimism or from Polygon to Aurora (Near), now they can directly use Stargate.

How does Stargate work?

When the Stargate contract on the sending chain receives USDC, the LayerZero protocol will forward the status of the sending chain to the receiving chain, and the Stargate contract on the receiving chain will Release USDC to users.

The advantage of this approach is its flexibility and simplicity. Liquidity is naturally aggregated into pools in pairs (so there is no situation where multiple pools compete for the same receiver flow). Stargate provides instant guaranteed end results with minimal trust.

While Stargate is the flagship application built on the LayerZero protocol, we expect the LayerZero protocol to support a variety of new workflows. Because LayerZero is a general information relay service that can be used for almost anything. Some examples are as follows:

1. Use assets on B chain to vote on governance proposals on A chain without moving assets back to A chain

2. Use the collateral on the A chain to borrow on the B chain

3. Use the collateral on the A chain as a derivative on the B chain

4. Based on the chain behavior on the B chain, it affects the NFT on the A chain

LayerZero has launched most of the major EVM compatible chains: Ethereum mainnet, Optimism, Arbitrum, Polygon, Avalanche, Fantom and BNB Chain. Additionally, LayerZero will roll out support for Celo, Aurora (Near), Solana, Cosmos, and Terra in the coming months.