1. Intro: Interoperability Landscape

1.1 In the Last One Year …

Over the past year, the field of cross-chain communication has advanced rapidly. Initially, solutions focused primarily on bridging assets across blockchains through mechanisms like lock-and-mint or burn-and-mint.

However, as decentralized applications (dapps) have expanded to operate across multiple networks, the ability to securely pass messages and invoke smart contracts on different chains (known as General Message Passing or GMP) has become increasingly important.

GMP has opened up new opportunities for building novel applications with improved user experiences. For example, Stargate - a cross-chain liquidity network powered by LayerZero - leveraged advanced algorithms enabled by GMP to manage pooled assets across multiple blockchains efficiently. During this transformative period, a variety of promising cross-chain solutions have also gained market share, including Wormhole Gateway, CCIP, Hyperlane, and others.

1.2 Current Trend

The emergence of General Message Passing (GMP) infrastructure has enabled the rise of "omnichain" blockchain projects. Omnichain refers to the abstraction of interoperability solutions to connect seamlessly with other blockchains through custom logic. This allows application developers to write code that can be reached across multiple blockchains.

Omnichain standards like the Omnichain Fungible Token (OFT) aim to facilitate true cross-chain operability without additional asset wrapping or custody needs. For example, OFT20/OFT-721 tokens issued on LayerZero allow tokens to be transferred between any chains currently with no slippage. Another example is the xERC20 (aka. ERC-7281) standard from Connext, which proposes an open token format that solves issues issuers face without locking them into a specific bridge solution. xERC20 tokens preserve their 1:1 value when moving across blockchains as ERC-20 compatible assets with enhanced security.

Additionally, multiple projects are currently building omnichain applications.

1. Rage Trade is a decentralized perpetual crypto futures trading platform that utilizes LayerZero's interoperability protocol for cross-chain functionality. It recycles liquidity pools across Ethereum, Arbitrum and beyond to expand availability for traders.

2. Radiant Capital is developing an "omnichain money market" that will consolidate fragmented liquidity from different blockchains into a single lending marketplace. This will allow users to deposit and borrow funds across multiple distributed ledgers.

3. The Axelar Virtual Machine (AVM) acts as a programmable layer that automates complex multi-asset deployment and management across blockchains. Developers can write smart contracts once and run them on Ethereum Virtual Machine, Cosmos, and other ecosystems. Axelar uses a "hub-and-spoke" topology where individual blockchains connect to its central hub, simplifying cross-chain development.

In summary, omnichain infrastructure seeks to seamlessly interconnect any blockchain network, allowing the free movement of digital assets and data between blockchains. This significantly abstracts away the notion of “using other blockchain.”

1.3 Current Landscape of Interoperability, L1, and ZetaChain

Interoperability projects are being developed to seamlessly connect different blockchains and simplify the process of using other chains. These projects provide an infrastructure that facilitates connectivity. Many projects are starting to take advantage of this.

Furthermore, when we examine current Layer 1 blockchain and rollups, we can observe that each blockchain has its own execution environment and third-party interoperability solutions to establish connections. Although rollup frameworks are working on solutions to connect with other rollups using the same codebase, this is not yet available in production.

This is where Zetachain comes into play. It serves as an intermediary, combining interoperability solutions and Layer 1 functionality. Dapps can be deployed on Zetachain and utilize blockchain with its native interoperability features, including support for native Bitcoin integration.

2. Zetachain: Enabling Omnichain

ZetaChain, a project that has recently secured $27M funding, is currently undergoing trials in its testnet phase. The project has a unique architecture that combines interoperability solution and L1 features by implementing the "Omnichain" concept.

This section delves into ZetaChain's architecture and assesses the potential possibilities.

2.1 Architecture of ZetaChain

ZetaChain is a Proof of Stake (PoS) blockchain built on the Cosmos SDK. It utilizes the ComeBFT (formerly known as Tendermint Core) consensus engine to achieve fast finality times.

Using ComeBFT, ZetaChain is able to produce new blocks approximately every 5 seconds. The consensus protocol also provides instant finality, meaning blocks are irreversible as soon as they are added to the chain. Throughput testing has shown the network can potentially process up to thousands of transactions per second.

The ZetaChain network is composed of distributed validator nodes that participate in block validation and consensus. Validators stake cryptocurrency to secure the network and are rewarded for their participation.

Zetachain consists of three components that operate the network.

1. Basic Validators - They utilize the Tendermint consensus protocol to vote on block proposals. Their voting power is proportional to their bonded/delegated stakes. In return, they receive block rewards and transaction fees.

2. Observers - They have a crucial role in achieving consensus on external chain events and states by monitoring connected chains. There are two roles for observers:

• Discover relevant external transactions/events/states and report them to verifiers. At least one honest sequencer is required. Observers can operate in active mode with a full node or passive mode with a light client.

• Verify and vote on ZetaChain to reach consensus.

1. TSS Signers - They hold ECDSA/EdDSA keys for authenticated interaction with external chains. A simple majority can sign on behalf of ZetaChain, with economic safety ensured through bonded stakes and incentives.

• The private key is distributed across all validators to prevent a single/minority entity from signing messages.

• ZetaChain supports smart contracts that manage native vaults/pools on connected chains like Bitcoin, adding smart capabilities.

• Zetachain can accept tokens from connected chains as input and create outbound token transfer transactions to connected chains, including Bitcoin

Zetachain is a forerunner in the omnichain landscape, engineered to streamline and optimize the deployment and operation of cross-chain smart contracts. Specifically designed for the zEVM environment, Zetachain ensures that all logic and states are consolidated efficiently, negating the need for app contracts to manage reverts, as this is adeptly handled by the Zetachain protocol.

2.2 Omnichain Contract

The ZetaChain hosts an Ethereum Virtual Machine (EVM) compatible execution layer called zEVM, enabled by an EVM module in Cosmos SDK. Contracts can be deployed and used in this VM.

To reduce the complexity between chains, ZetaChain introduces omnichain smart contracts. These contracts:

1. Can be programmed like regular EVM smart contracts

2. Can directly manage assets on external blockchains

3. Can be called from external blockchains

On zEVM, an Omnichain smart contract can directly hold foreign assets as if they were native zEVM assets. On external chains, these assets are controlled by a TSS address. This TSS address is controlled by the Zetachain validators.

Within zEVM, they are represented as ZRC20 contracts - ERC20 compatible contracts that can deposit and withdraw assets. ZRC20 acts as a ledger to track the native assets held by ZetaChain. Any zEVM smart contract can become omnichain by interacting with ZRC20 contracts and implementing a simple interface to be callable from external chains.

See the appendix for details on deploying a simple swap contract on zEVM.

3. Omnichain Applications

Zetachain's programmability and high throughput capabilities allow for diverse decentralized applications to be developed. As a smart contract platform compatible with Ethereum Virtual Machine, Zetachain can host dapps in various domains from DeFi and gaming to supply chain management.

Currently several applications are in development on Zetachain's testnet, with more complex dapps expected to be created as the network matures.

3.1 DeFi

DeFi promises to disrupt traditional finance by introducing decentralization, transparency, and accessibility. Zetachain's omnichain infrastructure is well-positioned to unlock the full potential of DeFi by allowing applications to seamlessly interact across multiple blockchains.

Potential use cases are like below

1. Portfolio management and accounting is one area that would greatly benefit. With Zetachain, users could view and manage all their crypto holdings in one place, regardless of where the underlying assets are held. They would see the total value of their portfolio without needing separate wallets or trackers for each individual chain. Transactions like sending payments or trading would no longer be limited by network boundaries.

2. Decentralized exchanges are another natural fit. Popular DEX protocols like Uniswap have already proven their model on Ethereum, but their impact could be multiplied many times over with a cross-chain version. Zetachain's omnichain smart contracts would enable a DEX to pool liquidity and allow trading across multiple blockchains, significantly increasing trading volumes. Users could trade seamlessly between any supported coin with reduced complexity and risks compared to multi-step cross-chain solutions today.

3. Lending and borrowing applications such as Aave and Compound could also leverage Zetachain to become truly omnichain DeFi platforms. With the ability to deposit and borrow assets from different chains in a single protocol, users would have much more flexible options to generate yield or obtain financing. The increased liquidity would benefit both lenders and borrowers.

4. Lastly, Zetachain's universal payments ability has the potential to bring real utility to individuals and businesses. A decentralized system for sending and receiving value across chains could open the door for new use cases that are not reliant on specific token standards. Both crypto users and mainstream consumers could gain a more accessible on-ramp to the burgeoning DeFi economy.

By enabling trusted cross-chain interactions, Zetachain is well-positioned to realize the full promise of DeFi by allowing applications to achieve previously impossible omnichain functionality and scale. Portfolio management, DEX trading, lending and payments could all be transformed.

3.1.1 Eddy Finance

Eddy Finance is a decentralized exchange (DEX) built on the ZetaChain blockchain. As a DEX, it facilitates cross-chain asset transfers and trading between different blockchain networks such as Bitcoin and Ethereum in a trustless manner.

Eddy Finance leverages omnichain Smart Contracts to orchestrate transactions of native blockchain assets as if they existed on a single chain. This enables seamless interaction with assets on their original blockchains, reducing risks compared to wrapped alternatives. Users can pool assets like ETH, BTC, and USDC into a unified liquidity pool for trading.

The protocol aims to provide traders with the best swap prices and minimum transaction costs through its automated market making functionality. Slippage is minimized while gas fees are kept low, enhancing the user experience.

In addition to serving as a DEX, Eddy Finance allows users to earn yield by providing liquidity to its pools. The platform is currently live on testnet, where beta testers can try the first cross-chain swaps integrated, including those involving Bitcoin.

Source: Introducing Eddy Finance: Breaking Barriers and Connecting Chains | by Eddy Finance

3.1.2 LENX

Omnichain Lending Protocol, empowering BTC

LENX is a decentralized money market protocol that facilitates lending and borrowing of crypto assets across multiple blockchain networks, including Bitcoin in an efficient and liquid manner.

The key components are:

• Suppliers deposit assets into lending pools to earn interest. Their funds are pooled rather than lent directly, providing instant liquidity.

• Borrowers can take loans by over-collateralizing with another asset. Interest rates are dynamically set by smart contracts based on supply and demand.

• Smart contracts issue LTokens to represent supplied assets and manage the lending pools autonomously.

• It supports various ERC20 and ZRC20 tokens, providing a cross-chain lending marketplace.

The core advantages are increased liquidity through asset aggregation, flexible borrowing/lending without wait periods or maturity dates, and autonomous management of rates and liquidations through blockchain-based smart contracts.

3.2 Entertainment: Gaming, NFT, and Social

More use cases can be built around entertainment sector, where it included gaming, NFT, and social.

Multi-chain NFTs could be enabled through Zetachain's omnichain functionality. This would allow the same NFT collections to be issued on multiple blockchains such as Ethereum, Flow, and Solana. Zetachain smart contracts could facilitate the transfer of NFTs across chains, solving a core challenge with multi-chain NFTs. The smart contracts would track NFT ownership and the blockchain an NFT is located on at any given time. This allows the provenance of a cross-chain NFT to always be known. When an user wants to transfer an NFT to another blockchain, they would transfer it to the Zetachain escrow contract. Zetachain would then mint the identical NFT on the destination blockchain.

Zetachain could also power applications like universal digital identities and assets that work seamlessly across blockchains. An identity system or name service built on Zetachain could serve as identities for all chains. Users would not need separate identities for each individual blockchain. Instead, their single identity could be used to access and leverage assets from all chains, such as collectibles, tokens from gaming applications.

Another potential use case is omnichain DAOs enabled by Zetachain. Decentralized autonomous organizations are communities that coordinate activities and make decisions in a decentralized way. With Zetachain, DAOs could orchestrate governance, activities and asset management across multiple blockchains in a chain-agnostic way. This would allow DAO participants and assets to freely interact across different blockchains through a single organization.

Another advantage is that dapps can be built on top of Bitcoin. This opens up a wide range of possibilities for developers. With Zetchain's built-in Bitcoin support at the chain level, developers can easily create dapps that take advantage of Bitcoin.

3.2.1 zkMe:

zkMe is a decentralized Web3 credential network that leverages the power of zero-knowledge proofs to enable secure and private credential issuance and verification.

Source: The Web3 zk-Credential Network

3.2.2 P12

Project Twelve (P12) is a GameFi ecosystem with sustainable economies. The Metaverse platform where Web2 and Web3 players co-exist. The GameFi ecosystem with a sustainable economy.

Source: P12-Whitepaper

4. Looking Ahead

4.1 Omnichain Structure can bring the full potential of DeFi

Currently, DeFi is suffering from liquidity fragmentation, and developing a cross-chain dapp requires not only additional development but also an understanding of other networks. The Omnichain concept can reduce this additional burden and improve both the UX (User Experience) and DX (Developer Experience).

This is made possible through native interoperability support, embedded at the chain level. Additionally, Zetachain can support non-smart contract chains such as Bitcoin, enabling the development of a robust ecosystem around Bitcoin.

4.2 Slow Processing compared to other cross-chain solutions?

Zetachain has a fast block time of approximately 5 seconds, allowing for quick transaction processing. Additionally, it offers instant finality, eliminating the need for block confirmation and preventing any re-organization of the blockchain. However, it's important to note that the cross-chain transactions' throughput may not reach high levels due to various factors. These factors include limitations imposed by the latency and throughput of external chains, the key-sign throughput of the Trusted Setup Signers (TSS), and other considerations such as the speed of external node RPC (Remote Procedure Call) interactions.