The Interop Wars, Pt. I

Any individual who turned a blind eye to crypto after the events of 2022 and returned today will see a vastly different landscape of protocols and scaling solutions.

A true end-game has emerged – one filled with innumerable blockchains, both generalized and app-specific allowing for the end user to mix-and-match to find the best chain for their use-case. This cross-chain future is predicated on interoperability, enabling a seamless flow of data, assets and information across chains, rollups and virtual machines.

In a recent Not Boring, Packy McCormick’s labels this future not cross-chain but omnichain:

“I think the right way to view blockchains is as nodes in one larger Omnichain network.

In that view, competitors become complements. Each chain can focus on doing one thing really, really well. As more chains enter the fray, instead of becoming more confusing and fragmented, the Omnichain becomes more capable.”

We at Unit Zero love the idea that one day all blockchains will be kumbaya, operating in individual but connected worlds via an information superhighway. However, as things stand today today, we find that reality hard to envision. Not only will it take a lot of work at the L1/L2 level to build systems worth integrating, but we are a long way off from the seamless flow of data across these integrations.

Taking it a step further, the protocols competing to build the highways connecting omnichain – dubbed Interoperability Network – will certainly NOT be a happy-go-lucky group of co-contributors. No, in fact, we believe it will be quite the contrary – a back alley knife fight to become the canonical cross-chain transport layer of choice.

Introducing The Interop Wars.

Over the course of the last 18-24 months, the theater of war has been set, and minor battles have been waged across leading interoperability networks, namely Axelar, LayerZero and Wormhole.

These battles have been fought in governance forums and on social media, but are only the opening salvos to the war for market share and canonical integrations.

Just like in the early days of the internet, wars were fought over core protocols and primitives, most popularly between TCP/IP and OSI. As the internet proliferated globally, different communications protocols were developed in the US and Europe, preventing interconnective and frictionless communication. TCP/IP (US) v. OSI (Europe) was critical to the growth of the internet, as there needed to be a single communications system to transfer data – TCP/IP eventually won out and we have the modern internet. Similarly, in order for the Omnichain to be scalable, and have the user experience needed to usher in a new wave of onchain daily active users, social consensus around interoperability networks will need to be made, making it a winner take most environment.

In part one of this examination of the competitive landscape of interoperable protocols, we introduce the players and recap past battles won and lost. In part two, we dive into specific protocols in much greater detail, talk about newcomers emerging on the scene, and outline a path to victory for each of them.

The Players

While the bridging/interoperability landscape is extremely crowded, the primary war for supremacy is currently being waged between three main entities – Axelar, LayerZero and Wormhole.

Axelar

Axelar is an interoperability protocol that delivers secure cross-chain communication through a proof-of-stake validator network. Leveraging the Cosmos SDK, Axelar operates a permissionless validator set of 75 validators coordinated by Tendermint. Validators are incentivized through block rewards (positive reinforcement) and slashing (negative reinforcement) to operate honestly and ensure security of the network.

Additionally, Axelar offers a hub-and-spoke network, with the Axelar validator set sitting at the middle, enabling cross-chain communication from over 60 chains across the Ethereum, Cosmos, Polkadot and more.

LayerZero

Unlike Axelar’s hub-and-spoke model, LayerZer v1 is a point-to-point relayer/oracle model that connects nearly 50 chains across web3. In theory, LayerZero’s relayer and oracles can be permissionless, offering consumers a wide range of choices for security and scalability; however, the technical expertise and costs associated with operating these entities has forced centralization, with LayerZero running the primary relayer and only two oracles, Google and Chainlink, running oracle services.

Despite the centralization of LayerZero, the LZ team has made incredible strides in recent months to develop a v2 built on Decentralized Verifier Networks. This model aims to address the centralization concerns of their initial v1 and offer the users of LZ more flexibility and design choices when implementing interoperability solutions.

Wormhole

Similar to LayerZero (and unlike Axelar), Wormhole is not a blockchain itself, but a communications protocol that allows for general message passing between blockchains. However, Wormhole is closer to Axelar in architectural considerations, as they deploy a group of 19 permissioned validators, called Guardians. In its early days, Wormhole was developed by the team at Jump Crypto, but has since spun out into its own entity. Given that Jump has firm roots in Solana, leading development for Fire Dance, etc. Wormhole developed into one of the leading gateways into Solana from the EVM, helping it quickly gain popularity in web3.

Wormhole has faced its challenges since inception, facing a major $320M+ hack of its Ethereum collateral wallet back in 2022. However, over the last 6 months, speculation over a Wormhole token has certainly increased adoption as the degen airdrop farmers quickly attempted to rack up qualifying transactions. Now that $W is set to release in the next few weeks, all eyes are on Wormhole and its path to decentralization.

Opening Salvos

Given these three entities are, at least on the service, extremely similar, they have engaged in a number of bouts over the last few years. The thing is, these conflicts are hardly avoidable. As the interoperability landscape grows with every new layer2, parallelized-EVM zk proof yadda yadda that gets launched and wants to connect to the central user and liquidity hubs that currently exist. Well, when these initial connectors are made, it makes sense to only leverage one or two options to prevent fragmented liquidity and user journeys.

To drill down a little bit, each one of these providers all have their own versions of non-native assets that they create on the integrated chain. Which means, as a user, if one were to bridge ETH to new L2 XYZ via both LayerZero and Axelar, one would have two different versions of wETH in my wallet on that chain – each with different liquidity depth and integrations into XYZ’s DeFI protocols. This is far from an ideal user experience; thus, many new blockchains work tirelessly before launch to integrate with one or two interoperability protocols and use their assets to deepen liquidity through the ecosystem. As mentioned earlier, this is very similar to the early Protocol Wars of the internet playing out again in real time.

Here are some major highlights from the last few years:

The Uniswap Bridge Assessment: In late 2022, a suggestion hit the Uniswap governance forums requested to deploy Uniswap’s protocol to the Binance Smart Chain, as it had rapidly become the second largest chain for DeFi and DAUs behind Ethereum. Quickly thereafter 5+ bridges and interop protocols flooded the forum with proposals; however, given the vc-backed power of both Wormhole and LayerZero, it became a two horse race. I will spare the minute details here – if you are interested Packy’s Not Boring on LayerZero provides a great recap.
TL;DR - investors, degens and college blockchain clubs alike all got in the mix to give their opinions on which protocol had the more secure and scalable solution. WIthout a clear consensus, an assessment was provisioned. The Result? Wormhole and Axelar were declared the most secure interoperability solutions and Wormhole won the bid.

The Lido stETH fiasco: This to-do happened relatively recently, and there isn’t a ton of reporting on it, so we will try to provide some color. Given the permissionless nature of A.) blockchains B.) open-source protocols and C.) DAOs, people with the right mix of development expertise and capital are able to innovate rather quickly in the space. That’s why, when in October of 2023, LayerZero announced the “official” stETH bridge, integrating with chains like BNB and Avalanche, everyone should have been thrilled! Right? Capitalism and the free market at work!
Wrong.
Very quickly after LayerZero announced their stETH bridge, the Lido governance forums were flooded with people angry at LayerZero for progressing without the Lido DAO’s official blessing. Additionally, a bunch of interop providers wrote and signed a letter urging the DAO to take a more comprehensive look into all providers.
Well, once again, Wormhole got the last laugh as a joint proposal between Wormhole and Axlear was approved as the canonical stETH bridge, leaving LayerZero on the outside looking in…again.

As you can see, the interoperability space is far from friendly. Yes, some protocols may work together when needed, like Axelar and Wormhole’s stETH proposal; however, everybody here is playing for keeps. Throw hundreds of millions of VC dollars in the mix, and you have one of the most interesting industries in all of web3 to keep your eye on over the coming years.

Now that the scene has been properly set, next week we will dig deeper into each protocol and outline competitive advantages and potential endgames.

Disclaimer: Unit Zero Labs may own assets mentioned in our articles and research. This is not financial advice.