Binance Research (Jie Xuan Chua, CFA)
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The existence of numerous L1s has contributed to the fragmentation of liquidity and siloed ecosystems. For the multi-chain thesis to play out, interoperability between protocols needs to improve.
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There are generally three different approaches to interoperability – middle chains; light nodes; and ultra light nodes.
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Middle chains act as the intermediary between two chains, facilitating cross-chain messages by providing consensus and validation services.
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Unlike full nodes that contain the entirety of blockchain data, light nodes store only parts of the ledger’s transaction history. We examined the Inter-Blockchain Communication (“IBC”) Protocol and Cosmos.
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Similar to light nodes, ultra light nodes perform validation. However, instead of storing all block headers in order, these are streamed on-demand by oracles. We used LayerZero and Stargate as case studies in this report.
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The development of generic messaging protocols is key to true cross-chain interoperability and is essential for the long-term growth of a multi-chain ecosystem. Considering the nascency of technology and the risks associated with each solution, developers need to be aware of the trade-offs and take deliberate steps to mitigate risks to users.
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