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Sliding into X-Chain DMs


Up till this point we have covered a few of the cross-chain solutions that allow for the transfer of wealth between chains. However, there is one area that we have yet to cover – cross-chain messaging.


We have been talking about Polkadot for a while and the usefulness of interoperability between the Layer 1 Parachains built on it. However, Polkadot is just one project that classifies itself as a “Layer 0” protocol.


So, what does Layer 0 mean in this context, and how useful is cross-chain messaging when it comes to solving the interoperability dilemma?


Disclaimer: This is not investment nor investment advice. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.


TLDR

  • Layer 0 ecosystems such as Polkadot and Cosmos partly resolve the interoperability issue.

  • Polkadot’s XCM and the Cosmos IBC allow for messages to be passed between chains built using their infrastructure, but this is limited to their respective ecosystems.

  • LayerZero allows for messages to be passed between chains that are completely unrelated.

  • The Polkadot XCM should go live any day now which will allow Parachains to communicate with each other (finally).

What is a Layer 0?

Layer 1 blockchains allow decentralised applications to be built on top of them, like the relationship between Ethereum and SushiSwap. However, Layer 0 protocols allow Layer 1 blockchains to be built on top of them. But why would anyone do this? Why would you build an entire blockchain on top of another infrastructure?


The main reason is that Layer 1 blockchains have limitations, and the idea is that Layer 0 protocols fix these limitations.


Since most Layer 1 blockchains are built to be useful in a general sense, developers building dApps on top of these chains usually must make compromises in their application design to fit the limitations of the underlying blockchain infrastructure. The key point is that these chains are not optimised for every single use case, but rather as many use cases as possible. This leads to a few problems:

  • Scalability – one limitation is that dApps and developers are constantly in competition for the L1s resources leading to slow and expensive transactions**.** We have seen this on Ethereum since the explosion of DeFi.

  • Usability – application developers on L1s are essentially stuck with the limitations of the underlying blockchain because upgrading the network requires a hard fork which is often an absolute nightmare for both public relations and the health of a community.

  • Control – dApps built on a pure Layer 1 are pretty much under the governance of the community of that chain. dApps are fully dependent on the Layer 1 they are built on, and if there are bugs on that Layer 1 then the dApps will just have to deal with that until the L1 governance does something. CAN THE DEVS PLEASE DO SOMETHING?

Layer 0 protocols solve these issues because:

  • Each Layer 1 chain can be built for each use case, meaning that the developers are no longer limited by what they can and can’t do – they can just build a chain that suits their specific needs.

  • The workload is now spread across multiple Layer 1 chains, rather than everyone competing for space on a congested chain. This frees up network resources as DEXs, lending protocols, etc, are no longer competing for resources against other sectors.

  • The motivations and incentives for the developers using these chains are aligned, usually by sector – there can be a chain for lending, one for decentralised exchanges, etc. For the most part this means that any changes to the chain that would benefit one specific dApp will usually benefit them all and can be actioned faster, with less friction between all parties.

There is another added benefit for blockchains and dApps built within a Layer 0 ecosystem – cross-chain communications.


Communications

Some proponents of Layer 0 protocols argue that pure L1s are outdated and that Layer 0 networks are the way forward. Why? Interoperability.

Although the Layer 0 format is excellent for developers, it is also massively beneficial for the end-user because any asset can be used on any of the Layer 1 blockchains built within that ecosystem. This removes the need for processes like bridging because the infrastructure is already there.


There are a couple of contemporary examples of this kind of interoperability – for example, Polkadot and Cosmos:

  • The Polkadot XCM (Cross-Consensus Message Format) allows Parachains and their respective dApps to communicate with each other and transfer tokens/assets.

  • The Cosmos IBC (Inter-Blockchain Communication) basically allows tokens to be transferred between Cosmos chains (think THORChain, Osmosis, etc) creating an interconnected network.

It should be noted that although these innovations allow for interoperability between chains built on Polkadot/Cosmos, the rest of the blockchains like Ethereum and Solana are still segregated. They cannot use these communications networks.


Is there anything else worth mentioning? There certainly is!


Closing the Gap

LayerZero is an infrastructure that allows for the passing of messages between multiple chains that are not related to each other. Designated as an “Omni-Chain Interoperability Protocol”, the sole purpose of the infrastructure is to verify a message sent from one chain and validate it on another. At the highest level, LayerZero is a smart contract endpoint where applications can seamlessly connect to and utilise as a sort of postal service that carries messages between chains. Here’s an overview:

There are 3 important components that facilitate the transmission of messages – the endpoints, the Oracle, and the Relayer. When a message is sent by an application (dApp):

  • The message is transmitted through the first endpoint on Chain A, which tells the Oracle and the Relayer what the message is and its destination chain.

  • The Oracle forwards the block header (basically an identification of the block the message was signed on) to the endpoint on Chain B.

  • The Relayer submits a proof of the transaction to the endpoint on Chain B. This proof is validated on Chain B, and the message is sent to the relevant destination address.

This has several advantages over other forms of cross-chain communications:

  • For there to be a security breach, both the Relayer and the Oracle must be colluding or compromised.

  • Arguably the biggest advantage of this method is state sharing. This means that a project operating on multiple chains would be able to prove transactions across all chains they are active on. For example, an operation such as taking a loan can be verifiable on any chain that the lending protocol is connected to through LayerZero, which would theoretically allow for collateral to be posted on one chain and the loan taken on another.

  • On-chain governance could be carried out no matter what chain the voters were on since votes can be verified using the LayerZero messaging infrastructure.

These are just a few examples of the utility of LayerZero, and ultimately the goal of the project is that no one will actually know that it is LayerZero carrying out the cross-chain messaging. This is generally the end goal for all cross-chain comms – you don’t question how your bank changes your currency when you buy something from another country, it just works.


Problem Solved?

To summarise, Layer 0 ecosystems are generally a step in the right direction for interoperability and indeed Polkadot and Cosmos were some of the very first protocols to consider this an issue. However, their limited reach means that they only solve part of the problem. Unrelated chains are still isolated and so to reach them requires the use of other means of cross-chain communications.


LayerZero has taken this interoperability a step further by allowing messages to be passed between multiple chains, not just those on one ecosystem. This essentially opens a similar method of communications comparable to the XCM and IBC but on a much larger scale. It is important to note, however, that LayerZero is still in the relatively early stages of development and has not been battle-tested yet.


At this point, it should be clear that there is no one-size-fits-all solution to the multi-chain thesis. There are still a couple of solutions we are yet to cover – so stay tuned!

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