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Target Name

LayerZero

Ticker

ZRO

Strategy

long

Position Type

token

Current Price (USD)

Circulating Market Cap ($M)

Fully Diluted Market Cap ($M)

CoinGecko

$ZRO - the most hated token warrants a hated rally

Cody Poh

•

24 Jun 2024, 05:30am

Overview

LayerZero leveraging oracles and relayers to effectively send cross chain messages; in which oracles disseminates block information and relayers confirms the authenticity of messages sent and under v1 relayers are run by LayerZero Labs themselves
LayerZero v2 enables the integration of external validation models (e.g. Axelar or Wormhole); and enable customisable security model depending on application layer use cases; which positioned the protocol as the transport layer in all crypto rather than the verification layer
- shoutout to Michael’s previous pitch on $AXL (link); some points are taken from that post
to date LayerZero has integrated w/ >80 chains ranging from EVM based chains and Ethereum layer 2s and 3s to weird ghost chains and w/ >53k applications including Stargate and Merkly as two of the top most used omni chain applications

Investment Thesis

LayerZero w/ farming activities exhausting still averages >10x daily cross chain messages (i.e. ~40k) comparing to Wormhole and Axelar (i.e. both ~4k daily messages) which appears to be a clear dislocation of traction versus valuation
competitors have their own fundamental design problems which gives LayerZero an extended lead in the cross chain messaging race w/ existing traction + lindy effects; which makes $ZRO a more preferred asset to own if institutional money were to express their view on interoperability
- LayerZero already had integrated w/ >80 chains + >50k omnichain applications; Stargate only takes up ~10% of daily messages sent and if we stripped that out from the traction LayerZero still leads both Axelar and Wormhole by a lot
- Axelar requires +0.3% validator inflation w/ each additional EVM chain support and currently the annual inflation stands at >11% w/ >14 external chains; and in order to scale to LayerZero’s level that would equates to >30% inflation making $AXL tough to own
- Wormhole usage still primarily focuses on Portal Bridge (i.e. their “canonical bridge) w/ >50% messages routed to facilitate that; and Wormhole Gateway validates Axelar’s design but also means they are late to the game lagging at least 2 years behind
psychological valuation floor where LayerZero Labs raised their previous round at 3bn led by a16z; token currently trading at <3bn gives attractive risk reward
“hated rally” as given by how industrial farmers not liking how the LayerZero team actively hunt down sybils + having to pay to claim - previously we have seen $SEI airdrop farmers being disappointed w/ their airdrop allocations but it did a >5x w/ the parallel execution narrative and I see a good possibility of this happening again

Catalysts

$ZRO airdrop farmer selling exhausting; the underperformance post airdrop is a hybrid of market being miserable + $ZRO selling flows dominating and this would end as more take profit
$ZRO utility announced; the token use case is still unclear to me and there are some speculation on how $ZRO could be staked in the network to offer cryptoeconomic security few months ago - this could introduce token supply sink to the system
the “hated rally” - as mentioned above

Valuation

$ZRO currently trades at 2.7bn FDV w/ ~40k daily cross chain messages; if this were to re rate to multiple $W or $AXL is currently trading at it could be 3-5x outcome
$AXL averages >4k daily cross chain messages trading at 630mn FDV; and $W trades at >3.3bn FDV w/ also >4k daily cross chain messages (if we take away # of Pyth messages which apparently skews the messages number count; consider those as low value usage given Pyth price feed does not “facilitate” any cross chain transactions)

Risks

LayerZero hate continues - love what Bryan is doing to screw airdrop farmers out and I do think it’s net positive to the industry in the longer run; but if the “villian” image sticks that could result negatively to LayerZero
- the counter argument to this would be that most LayerZero integration is done on the application level; it is tough to boycott LayerZero actively on a large scale w/ >50k applications integrating their tech
lack of “narrative” to kick off the “hated rally” - interoperability seems to be an outdated narrative as it has been telegraphed for so long and related tokens barely budged; and in the $SEI case it comes w/ the parallel execution narrative which in $ZRO case that seems to be lacking

•

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The author and/or others the author advises currently hold, or plan to initiate, an investment position in target.
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Comments (6)

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saushank

•

The thing i am confused on is that what happens to layer zero as a product say once chain abstraction really comes in or agg layer type solution come in. Though still far but end game for pretty much all these players is to do what layer zero is doing more efficiently

Arthur Cheong

•

Great call, now that price is up 50% since this do you think the R/R is still as favourable? What's your price target for next 1 - 3 months?

Cody Poh

•

my mental model is that $ZRO should be an order of magnitude more expensive than $W or $AXL - given technological advancement + BD + traction

so depending on how the market react to the upcoming $W unlock - otherwise i think in the upcoming 1 to 3 months; a 5 to 7bn FDV outcome is very do-able

Cosmo Jiang

•

Is this a fundamental pitch, or is it a technical-factor driven pitch? My assumption is it was the latter based on the title. Otherwise, the fundamental assessment needs some work as others above have already mentioned.

If the focus really is on hated rally - would love to see more analysis supporting that.

Cody Poh

•

it’s more of a technical driven pitch for me; and my hypothethesis is that $ZRO should be the best way for most liquid managers to express their view on the interoperability theme given the a) the # of cross chain messages after farming activities exhausted + b) the best scalability compared to existing solutions + c) most liquid managers could not have pre positioned for this token since it’s a new token + d) vesting is at least a year away from us - and therefore I would expect some if not all liquid managers building a small position on this name + “hated rally” is just a result of that
on the fundamental side; admittedly I have not done much work on a) $ZRO token utility since it is not fleshed out by the team + b) how would LayerZero architecture look like in a “chain abstraction” universe - but I would imagine LayerZero would still be very well positioned as they are selling an “plug and play” architecture which could be adopted by any “chain abstraction” chains or toolings plus their own security model + competitors are not built the same or should be considered as “one layer above” (e.g. Axelar mostly sell crypto economic enabled security + Wormhole also does similar by selling stakeholder enabled security - and LayerZero has focused on building a transportation layer that could potentially embody any chains in the future)
imagine NEAR or Gravity Chain finally offers chain abstraction and the easiest way for them to speak to any chain is through incorporating LayerZero’s architecture; in which light weighted on chain client called LayerZero Endpoint is deployed in >80 chains allowing OFT to move around the ecosystem in a censorship resistance + permissionless fashion (briefly spoke about how Axelar’s scalabilily is dampened by the token inflation + Wormhole’s 19 guardian model makes it non censorship resistant)

john kennedy

•

Really high quality investment thesis and call. Well done @hopydoc!!!