LayerZero vs Wormhole vs Axelar vs Chainlink: What’s the Best Interoperability Protocol?

As the blockchain industry grows and more ecosystems flourish with unique and valuable decentralized applications, an issue begins to arise: fractionalization. Indeed, even though both Ethereum and Solana have billions of dollars in total value locked on their protocols, there is no native way for that money to flow from one chain to another. Today, based on security, performance, and token potential, we’ll evaluate four top interoperability protocols – LayerZero, Wormhole, Axelar, and Chainlink CCIP.

At their core, interoperability protocols aim to tackle the complex problem of how to send messages between different blockchains. Within a blockchain, there is a large level of composability, meaning that anyone can build on top of existing smart contracts to add their own features or capabilities, leading to the commonly-referenced phrase of smart contracts as “money Legos.” However, a smart contract can only integrate with others on its blockchain and not interact with the outside world. The purpose of an interoperability protocol is to introduce a way by which messages can be sent between blockchains without sacrificing decentralization or security. 

With these protocols come entirely new and innovative ways to build decentralized applications. Tokens are no longer required to exist on a single blockchain and can instead be native to numerous chains simultaneously. Similarly, a user could start a trade on Ethereum and receive funds on Solana, all through one transaction. The problem of fractionalized liquidity and differences in blockchains becomes minimized as the primary reason to build on one chain over another becomes a developer preference.

Arguably the most well-known, albeit the least adopted, interoperability protocol is LayerZero. Its purpose is to create an “omnichain future” based on its network and ability to interact with over fifty blockchains. Conceptually, it can be considered the layer zero connecting different layer 1 blockchains, meaning the tokens can exist and be transferred using its messaging system. There are three main components of LayerZero: the oracle, the relayer, and the light node. The oracle is the entity responsible for transferring a message from the source blockchain to the destination. The relayer, a separate entity from the oracle, provides proof that the oracle's message is legitimate and accurate. The light node, simply a smart contract on both blockchains, is the mechanism by which messages can be sent and received before the oracle moves. One unique feature of LayerZero is that it allows applications to choose whichever relayer and oracle they want, which, while opening up greater modularity, also poses a risk if an application chooses a colluding pair of operators.

LayerZero is most famous for its massive $3 billion valuation and promise of an eventual token release, making it a favorite protocol of airdrop farmers for over a year. The LZO token is expected to be released in H1 2024 and is rumored to be one of the biggest airdrops in history.

Wormhole has been in the news recently for its recent airdrop, which distributed around $1 billion of its W token to early adopters of the protocol. Wormhole operates similarly to LayerZero, with the main difference being that the role of the oracle is fulfilled by a set of 17 guardian nodes – highly reputable and vetted validators that must confirm each transaction. Wormhole is arguably the most accomplished protocol and was the only one unconditionally approved for use by Uniswap. It also boasts handling over 1 billion cross-chain messages, and can interoperate with the Cosmos and Polkadot messaging systems. Even though it may not have the valuation of LayerZero, Wormhole boasts the most adopted protocol and momentum does not seem to be changing anytime soon.

It must be noted that Wormhole was exploited for 120,000 ETH, worth around $325 million, in 2022, though its security has become much more robust since then.

Axelar is another protocol with features and designs similar to LayerZero and Wormhole. Here, the primary differentiator is that the role of the oracle is fulfilled by a proof of stake network of distributed validators, all of whom must stake the AXL token and can be penalized for acting maliciously. This makes Axelar the most decentralized protocol. Since it is a system built on a blockchain, it is possible to write smart contracts to automate the flow of messages or build upon them natively, leading to greater flexibility and power in application development. It facilitates connections to over 50 blockchains and over $7 billion in transaction volume. It has the lowest valuation of any covered protocols at only $1 billion but has seen a 600% increase since last October and might still be undervalued based on its potential. Some argue that the token has not performed as well as the others because it was released in 2022 and did not enjoy speculation and wash trading from airdrop farmers that may have propped up the metrics for other protocols.

Chainlink’s CCIP, or cross-chain interoperability protocol, is yet another product the decentralized computing company offers. Chainlink is most well-known for its oracle service, which is used to connect blockchain applications to real-world data, and they have a near-monopoly on this service among top protocols. The hope of CCIP is to provide another Chainlink-vetted product to its customers, who may choose it over other solutions due to the ease of integration with its existing Chainlink stack. Additionally, if protocols adopt CCIP over another solution, they can be assured that they are not introducing any new attack vectors to their protocol. CCIP uses Chainlink’s robust decentralized oracle network to act as both the oracle and the relayer. As the newest solution, with a mainnet launch last year but still a closed alpha trial period, CCIP has not yet seen any major adoption. That being said, given the LINK token’s value throughout its suite of products, its price action is not solely tied to CCIP. Thus it is a relatively safer bet on interoperability with some downside hedge. 

Interoperability will become increasingly important in every decentralized application as we move into a cross-chain future. These four protocols vary in distinct ways, making tradeoffs around decentralization, security, and token appreciation. Yet, all offer promising solutions and have proven robust thus far. Only time will tell if there will be a single winner or if this market is big enough for multiple leaders to succeed.

By Lincoln Murr

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