Layer Zero: Building the Global Economy of Blockchains
September 20th, 2022

Layer Zero is an omni-chain interoperability protocol that is going to create a global crypto economy built on an interconnected web of blockchains. 

That seems like a bold statement. Let me share with you why I think this will be true. 

Our Current State

Imagine a world where if you lived in New York City and wanted to buy the new BMW i4 eDrive40, you would need to fly to Germany, purchase the vehicle, and then you would have to ship it back to where you lived and worked. 

Nobody would do that. It would be expensive and waste a ton of time and energy. 

This is the current state of the crypto economy. 

Most people tend to operate and engage in commerce on one primary chain. You might primarily engage with DeFi protocols on Ethereum, buy NFTs on Solana, or be a degen on Optimism. Each chain has its own values, advantages and disadvantages: Ethereum is secure, but can be expensive for transaction fees. Solana is cheap, but centralized and has a history of shutting down. 

Living and working on Ethereum is like living in New York City, it seems to have everything you need, but it is really expensive to live there. Solana is like Kathmandu, Nepal, which has much of the same goods and services available for much cheaper, but you also have random power outages during the day that you can’t predict. 

We want to be able to exchange goods and services, to put our capital to use. But in the current state of crypto we are living in a fragmented economy. The only way to move your assets and gain access to different crypto economies right now is to use a bridge protocol like Hop or Across. 

Bridge protocols are expensive because they require multiple transactions and there is the problem of your capital being spread out across different micro-economies. On top of the expense and inefficiency of using a bridge protocol, you are also exposed to significant risk given the amount of reported bridge hacks this past year. 

This brings us back to the purchasing a car abroad metaphor. It’s expensive, inefficient, and it might get lost at sea. It is a possible solution, but it's not the best solution. 

How does the global economy solve this problem? By creating trade agreements. 

Trade Agreements are Essential to the Global Economy

Trade agreements are a contractual arrangement on the conditions of trade of goods and services between nation states. Trade agreements reduce tariffs (bridge costs), remove barriers that impede the flow of goods and services, and encourage international investments. 

The global economy is innately tied to trade agreements, allowing countries around the world to obtain the resources they want and need. A healthy global economy gives people the ability to choose a variety of goods and services and fosters competition, which drives innovation, economies of scale, and increased international relations (we work together to accomplish a shared goal). 

The global economy relies on secure trade agreements to promote productivity and growth. 

The global crypto economy will require secure agreements between blockchains in order to promote productivity and growth. 

Layer Zero solves this problem by creating secure, trustless connections between blockchains.

Creating Trustless Trade Agreements  

The Layer Zero whitepaper introduces a simple, elegant solution to a hard problem: how do we build secure connections between blockchains? 

The solution lies in a low-level communication primitive they call Valid Delivery. 

“Valid delivery is a communication primitive that enables cross chain token transfer by providing the following guarantees: 
1. Every message m sent over the network is coupled with a transaction t on the sender-side chain. 
2. A message m is delivered to the receiver if and only if the associated transaction t is valid and has been committed on the sender-side chain.” 

Imagine you want to transfer your capital from Ethereum mainnet to Cosmos. The cross-chain transactions consists of a transaction t(ETH), a communication protocol or layer between Ethereum and Cosmos, and a message m. The Valid Delivery primitive states that m is only delivered to Cosmos when the t(ETH) is committed and valid. 

This is an important step. Blockchains are immutable because once transactions are executed they can be verified and are irreversible. This forms the basis of trust in the blockchain, and is a feature that enables the trustless nature of blockchain technology.

Now that we have an immutable tx(ETH), the Layer Zero protocol relies on two independent entities to corroborate the validity of a transaction. Layer Zero calls these two parties the Relayer and the Oracle. Once the Relayer and Oracle independently verify the validity of tx(ETH) through a series of proofs, then the communication protocol can deliver m to Cosmos with the guarantee that tx(ETH) is valid and immutable. 

Layer Zero Whitepaper
Layer Zero Whitepaper

The Future

When I read the Layer Zero whitepaper I notice two things: communication and connection. How do we communicate with each other to build secure, trustless connections?

The result of the Valid Delivery mechanism is a Web3 version of a trade agreement that is decentralized, trustless, and immutable. 

By creating a secure connection between blockchains, Layer Zero has built connections between digital nations and unlocked the potential of a global crypto economy.

What does a global crypto economy built on an interconnected web of blockchains look like? 

It looks a lot like our current global economy: increased capital efficiency, access to liquidity pools across chains, the ability to move NFTs between chains, increased competition for goods and services, multi-chain investments and the death of chain maxis, migration of goods, services, and labor markets, and so much more.   

The significance of being able to validate blocks trustlessly to produce a digital ledger was not fully appreciated when it was first discovered. The world could not imagine what blockchain technology would enable, must less appreciate a trustless, secure, and decentralized layer 1 protocol. 

In much the same way, the significance of creating trustless, valid communication between blockchains could be just as disruptive. 

It might be the key to building the global digital economy.

Subscribe to Siddhearta
Receive new entries directly to your inbox.
View collectors
This entry has been permanently stored on-chain and signed by its creator.