From governance to staking: a comprehensive analysis of the multiple applications and future growth of ZRO tokens

Original title:LayerZero Part 3——Zero token: Utilities and Future Prospect

Author: Animoca Brands Research

Compiled by: Scof, Chaincatcher

Overview

• The $ZRO token is launched in June 2024, and planned application scenarios include protocol governance, transaction fee payment, and staking for DVN security. These three features have a significant impact on the value of $ZRO.
• We expect that the circulating supply of $ZRO will increase rapidly over the next three years, as usage within the protocol grows and its popularity as a common currency for cross-chain transactions.
• We propose a valuation framework for $ZRO that utilizes the market cap to volume ratio (MCTx), combined with forecasted volume scenarios. The framework is intended to provide readers with a perspective on the relationship between protocol growth and token value.

introduce

In the first and second parts about LayerZero, we introduced the mechanism, business model and dynamics of the entire cross-chain field of the LayerZero protocol. In the third part of this article, we will focus on the protocol token $ZRO.

Token usage

LayerZero’s $ZRO token went live on June 20, 2024 and is listed on major exchanges such as Binance, OKX, Bybit, and Gate.io. Initially, $ZRO was distributed via airdrops to reward early contributors and community members. Over the past five months, the project team has steadily launched multiple token applications, further expanding its role in the LayerZero ecosystem.

The applications of $ZRO tokens can be summarized into three typical categories. These categories are more common among infrastructure tokens, and we will explain them one by one:

1. Protocol Governance : $ZRO holders can vote on key protocol decisions, affecting the development direction and evolution of LayerZero.
2. Protocol transaction fees : $ZRO can be used to pay protocol fees. In addition to the local tokens on the chain, it can also be used to pay transaction fees within the LayerZero network.
3. DVN security staking : $ZRO is an accepted staking asset used to help secure LayerZero Labs’ Distributed Verification Network (DVN) and support the security and stability of the network.

Protocol governance

The first announced use of $ZRO was for governance of a potential protocol fee switch, which was mentioned in the original $ZRO token introduction.

• The LayerZero protocol may charge a fee equal to the total cost of cross-chain message verification and execution. If DVN and Executor charge $0.01 for transactions between Arbitrum and Optimism, LayerZero may also charge $0.01.
• There will be an “immutable voting contract” with public on-chain referendums held every six months, allowing $ZRO holders to vote on whether to activate or deactivate the protocol fee switch.

LayerZero currently charges a fee per transaction, covering the costs incurred by DVNs and executors to perform their roles. If protocol fees are implemented, there will be an additional layer added on top of these operating costs. According to the project team, this additional fee could be as high as 100% of existing transaction fees. Although the semi-annual voting contract has not yet been announced, support for this protocol fee is already built into LayerZero's V2 code base, and a feature called "_payTreasury" is already able to charge this additional fee.

UNI token price during fee switch proposal

Looking at the potential fee switch governance mechanism of the $ZRO token, we can find a similar case from Uniswap’s $UNI token, which also has similar protocol fee governance features.

When $UNI launched in 2020, it included an option to allow the community to vote on whether to activate the fee switch. If the switch is activated, a portion of decentralized exchange (DEX) transaction fees will be transferred to the protocol, which may benefit $UNI holders. Since mid-2022, multiple fee switch proposals have been proposed, with each announcement triggering a significant increase in the $UNI price. For example, the price of $UNI surged by 65% ​​in March 2024 when the new proposal was released, but fell back after the voting results were announced. A similar pattern of price fluctuations was seen for the May 2024 proposal.

However, to date, all fee switch proposals have been voted down or withdrawn. While the introduction of fees may align with investor interests by creating value for the protocol and $UNI holders, it faces two main objections:

1. Competitiveness impact : Increasing protocol fees may make Uniswap less competitive because it effectively taxes transactions, which may increase costs for liquidity providers or users.
2. Regulatory risk : Distributing the generated value to token holders or stakers may raise regulatory concerns, particularly if this practice is considered a distribution of income, which may trigger issues related to securities laws.

It is unclear whether $ZRO will face the same voting challenges as Uniswap’s $UNI. The key lies in the specific design of the fee voting mechanism, which has not yet been fully announced. Given the rapid growth and fierce competition in the cross-chain protocol space, LayerZero’s current priority may be to focus on expanding market share rather than pursuing short-term value accumulation for $ZRO. Finding a balance between enhancing the value of the protocol and maintaining competitive transaction costs will be key for LayerZero to promote sustainable long-term growth, while also considering the interests of investors.

In a recent presentation, LayerZero CEO Bryan Pellegrino announced during a Q&A that the first referendum vote is scheduled to take place on December 19, 2024, exactly six months after the token’s launch. The video of the speech was released on November 19, 2024, and the price of $ZRO has been increasing since then.

Agreement transaction fees

In addition to its announced uses, the protocol’s codebase also supports $ZRO as an alternative currency for transaction fees. When the "payInLzToken" flag is set to TRUE, protocol transaction fees will be paid in $ZRO instead of the native token of this chain. However, the native token remains the protocol’s default payment method, and we have yet to see projects actively switch to $ZRO to pay fees.

Accepting $ZRO as protocol fees significantly expands the utility and demand for the token. Connected projects will need to maintain $ZRO reserves to cover ongoing protocol usage and create ongoing demand. As the LayerZero ecosystem grows, demand for $ZRO will grow accordingly, requiring larger reserves to support increasing cross-chain operations.

This expansion of cross-chain demand for $ZRO will also have a compounding effect: as LayerZero links expand, $ZRO will cover multiple ecosystems and become one of the most widely used tokens in a cross-chain space. Its widespread availability has the potential to make $ZRO the currency of choice for cross-chain transactions, similar to ETH’s role in the EVM ecosystem.

Despite the many benefits, converting the default native token to $ZRO still requires adequate preparation and incentives, such as:

1. $ZRO Deployment : Currently, $ZRO has been deployed on 8 chains, while LayerZero covers 90 networks. Expanding $ZRO’s adoption to more chains is critical to its widespread adoption as the default fee token.

2. Project incentives : Currently, the application scope of local tokens on the chain is wider than $ZRO, so sufficient incentives need to be provided to encourage project parties to choose $ZRO. Possible incentives include fee discounts when using $ZRO, or the creation of a single $ZRO reserve covering fees on all LayerZero supported chains, which would make it more attractive to developers.

3. Operation implementation : For the 50,000 contracts that have been deployed, the _payInLzToken flag needs to be manually enabled on a contract-by-contract basis. To simplify this process, it may be necessary to implement a unified switch at the protocol level or provide one-time incentives to encourage project teams to adjust their contract settings.

Given the importance of $ZRO as a protocol fee currency, it’s important to keep a close eye on LayerZero’s plans and developments in promoting $ZRO as a fee token.

LayerZero’s fee flow

Staking: A Distributed Verification Network (DVN) Framework for

Cryptoeconomics

In October 2024, LayerZero and EigenLayer announced a collaboration to develop an open-source cryptoeconomics framework for distributed verification networks (DVNs). The framework aims to enhance the security of DVNs by introducing economic incentives, allowing users and decentralized applications (dApps) to consider not only their technical stability but also other factors when selecting a DVN.

The framework introduces an arbitration process, running on a designated chain (e.g., Ethereum), that allows DVN to stake assets and verify them when the validity of cross-chain messages is questioned. The specific process is as follows:

• Staking : Stakeholders lock assets into DVN through EigenLayer's AVS, and those assets may be slashed if the DVN is found to have misbehaved or had verification errors.
• Verification : If a user or dApp questions the validity of a message, the framework triggers a round-trip message requiring other DVNs to verify the accuracy of the original message.
• Veto : If a mismatch is found, the Veto contract will escalate the decision and call token holders to vote on whether to reduce the pledge of DVN.
• Slash : If the vote confirms malicious or wrongdoing, the staked assets will be slashed.

As an open source framework, any DVN can adopt it and freely choose to stake assets. LayerZero Labs’ DVN will be the first to implement the framework on Ethereum, accepting $ZRO, $EIGEN, and $ETH as collateral assets. Since LayerZero Labs DVN is still responsible for most of the verification work of the protocol, the new staking pool may become an important driver of $ZRO staking.

Specific incentives for $ZRO holders to participate in this staking pool have not yet been announced, so it is difficult to predict the total amount of $ZRO that may be staked at this time. Overall, staking helps regulate the supply of tokens in circulation, perhaps similar to a “central bank” balancing demand and supply.

$ZRO Token Economics

The distribution and unlocking plan for $ZRO was clarified in the initial announcement. The total supply is 1 billion $ZRO tokens, divided into four categories:

• 38.3% to the community : including operating funds for the LayerZero Foundation.
• 32.2% goes to strategic partners : such as investors and advisors.
• 25.5% to Core Contributors : allocated to current and future team members.
• 4% of tokens for LayerZero Labs buyback : used for future community activities.

At the time of the Token Generation Event (TGE), 25% of $ZRO tokens have been unlocked, all from the community category. The remaining unlocked tokens will be unlocked linearly in the second and third years, and by the end of the third year, all 1 billion tokens will be fully unlocked.

Of the 25% of tokens unlocked:

• 8.5% is used to reward early contributors and has been distributed to the community through airdrops.
• 5% is allocated to the LayerZero Foundation’s treasury, including the liquidity pool.
• 11.5% is reserved for future events.

Token unlocking plan

By the second half of 2024, the amount of tokens in circulation will stabilize at approximately 11% of the total supply. This stability is to be expected as there are no further unlocks during the first year. Starting in the second year, supply will increase and the remaining 75% of tokens will be fully unlocked by the end of the third year. With the pace of unlocking accelerating, the majority of tokens have been allocated to strategic partners (32.2%) and teams (25.5%), and these tokens may quickly enter circulation after being unlocked.

The rapid unlocking of investors and teams may put time pressure on the LayerZero team, requiring them to increase the overall value of the project as quickly as possible. We estimate that by the end of the three-year unlock period, approximately 65% ​​of $ZRO tokens will be in circulation (based on Chainlink). This means that the circulating supply will increase fivefold compared to current levels. Such rapid supply growth requires a corresponding increase in the market capitalization of projects to keep prices stable.

$ZRO Value Framework

In order to help readers establish a clear mental model to evaluate the value of $ZRO, we propose a structured framework based on trends in the cross-chain field and LayerZero’s strategic positioning in this field. This framework is designed to help users evaluate the $ZRO token by considering a variety of factors, although the specific parameters will vary based on personal views on the industry and project growth.

Our goal is not to provide a definitive combination of parameters, but rather to provide a flexible framework that readers can adapt to their own analyses. It is important to note that this framework is not exhaustive or conclusive.

method

One way to evaluate the $ZRO token is to apply the market cap to trading volume ratio (MCTx), combined with LayerZero’s projected three-year trading volume scenario. The reason for choosing the MCTx ratio is that transaction volume is the main driver of the protocol's success, and transaction volume data is widely available across major projects, allowing us to evaluate a reasonable range. The three-year time span coincides with the unlocking period of the $ZRO token, and the cross-chain space is likely to maintain high growth momentum. In addition, we will perform cross-validation by comparing it with Layer 1 protocols like Ethereum and Solana.

Market capitalization to trading volume ratio (MCTx)

First, we establish a reference market capitalization to trading volume ratio (MCTx), using Wormhole, Axelar and ZetaChain as benchmarks to compare with LayerZero. All four protocols focus on cross-chain messaging and have released tokens in the past 12 months. We track their average daily trading volume and market capitalization using data from Q3 2024 as an observation window, as this period is further away from any short-term volume peaks.

Market capitalization to cross-chain transaction volume ratio

Comparable projects have MCTx ratios between 50 and 100, while LayerZero's current ratio is lower. One reason may be the relatively low circulating supply of $ZRO, which is related to its late TGE issuance and first-year unlocking schedule. Another factor may be that $ZRO has limited utility compared to other projects. For example, AXL and ZETA tokens not only facilitate cross-chain transactions but also support the operations of their respective blockchains.

We expect that as the industry evolves, MCTx ratios will converge among leading projects and transaction volume will become the dominant driver of protocol value. In the following examples, we use an MCTx ratio of 50 for illustration.

The next step is to create scenarios for LayerZero's future trading volumes. In the second part of our coverage of LayerZero, we estimated that the current cross-chain transaction/message volume is approximately 3.5 million per month (or approximately 120,000 per day), with LayerZero accounting for 25% to 30% of the market share. We also expect annual transaction volume growth across the industry to reach approximately 100% due to on-chain liquidity expansion and increased chain count.

Based on these parameters, readers can formulate hypothetical scenarios for LayerZero's transaction volume in the next three years based on different combinations of industry growth rates and LayerZero market share. In the process, readers may need to estimate daily trading volume under different scenarios and apply the MCTx ratio to arrive at an estimated range of ZRO market capitalization at a specific point in time.

LayerZero transaction volume in the next three years

By applying an MCTx ratio of 50, we can convert each daily volume scenario into a market capitalization estimate. This results in a market capitalization forecast for the $ZRO token over the next three years of $2 billion in the most conservative scenario and $47 billion in the most optimistic scenario.

LayerZero’s estimated market capitalization over the next three years

To derive the present value of $ZRO, we introduce additional assumptions: 65% of the circulating supply of $ZRO tokens and apply a 35% discount rate to adjust for future value. Based on these parameters, we calculated an estimate of the current $ZRO token value for each scenario.

LayerZero Possible Token Price

Keep in mind that the method described above is just one of many possible ways to evaluate $ZRO. The estimated value of $ZRO is very sensitive to several factors, including the future growth rate of the cross-chain industry and LayerZero’s market share within it. The future direction of the industry will largely depend on the broader cryptocurrency market environment, which itself is highly volatile. At the same time, LayerZero's market share will be affected by its ability to provide powerful technology that can retain users, and its ability to effectively seize emerging business opportunities.

Triangulation of MCTx ratios

As an additional reference, the MCTx ratios used in the previous section can be triangulated. One way is to convert the MCTx ratio into an MCTx fee ratio and compare it with leading infrastructure projects such as Ethereum and Solana. In the first part of our LayerZero analysis, we estimated the average transaction fee on LayerZero to be approximately $0.70. Based on this data, an MCTx ratio of 50 (i.e. $1,000 per day) would have an MCTx expense ratio of 196.

This puts LayerZero’s three-year MCTx fee ratio close to Ethereum and Solana’s current ratios, which are 250 and 226 respectively. This similarity also means that $ZRO needs to become a core part of the LayerZero ecosystem in the same way that $ETH and $SOL are in their respective networks to support the legitimacy of its multiples. Whether $ZRO is able to achieve this remains a controversial topic, with both sides having their arguments.

Supporting arguments may include :

• Cross-chain protocols and Layer 1 projects generate protocol revenue by charging transaction fees and paying fees to verification nodes.
• With the recent introduction of the EigenLayer partnership, the $ZRO token may play an important role in LayerZero’s DVN operations, similar to how $ETH and $SOL play in their respective networks.

Market Cap vs. Transaction Fees Comparison

Opposition:

Possible objections include:

• $ZRO has not yet become the default transaction fee payment token : Currently, $ZRO is not used as the default fee token for all transactions, so its widespread adoption remains limited.

• Fee switching introduces uncertainty : The switching function of transaction fees introduces uncertainty for users and developers, which may affect their decision-making, especially if the fee structure changes frequently.

• $ZRO is not currently used as a "transaction currency" : $ZRO is currently only used as a protocol fee payment tool and has not been expanded into a widely used transaction currency. Therefore, the main token function as a cross-chain transaction is still not fully realized.

• $ZRO is not the only token available for DVN staking : Although $ZRO plays an important role in the LayerZero ecosystem, it is not the only token available for DVN staking, which limits its exclusivity in certain scenarios.

Different views on these factors may affect market participants' assessment of the MCTx expense ratio and MCTx volume ratio, and thus adjust based on different assumptions about the future role of $ZRO.

Other risks to consider

Robustness of LayerZero V2 Architecture

LayerZero V2 was launched in December 2023, and no security vulnerabilities have been reported yet. The protocol’s confidence in its design is reflected in its $15 million bug bounty, one of the highest in the industry.

One of the core features of LayerZero’s security model is that there is no collusion between the DVN (Decentralized Verification Network) and its actors. This design has worked well so far, in part because the executors are entirely run by LayerZero, while DVN remains decentralized. However, as LayerZero allows external parties to build executors, the possibility of collusion increases.

Additionally, as more projects adopt LayerZero as their primary cross-chain asset transfer and governance infrastructure, the incentives for malicious actors to attempt to attack the network will gradually increase. If a security breach occurs, it could cause significant damage to LayerZero's growth momentum, slow down future development, and negatively impact the value of the $ZRO token.

Deployment of $ZRO utility

By the end of 2024, the utility of $ZRO has not yet been fully realized. High expectations for $ZRO need to be backed up by real-world usage, such as:

• Semi-annual fee switching voting : By introducing a fee switching voting mechanism, the value accumulation expectations of token holders will be improved.

• Use $ZRO as the fee currency by default : increase the holdings of $ZRO in decentralized applications (dApps) and increase the velocity of funds.

• Adoption of $ZRO as a universal transaction currency : Expand the use cases of $ZRO so that it is not only used within LayerZero, but becomes a widely accepted cross-chain token.

If these utility goals are achieved, it will significantly increase the role of the $ZRO token in the LayerZero network. However, as the technology advances, LayerZero will face more than just development challenges. Driving widespread adoption will require strategic efforts in user engagement, partnerships, and ecosystem incentives to fully integrate these benefits.

Summarize

The $ZRO token plans to become the core of the LayerZero ecosystem, providing key utility for governance, protocol fees, and DVN staking. In addition, as the protocol develops, $ZRO’s role is expected to further expand and may become a widely used cross-chain transaction currency. We expect that over the next three years, the utility of LayerZero and $ZRO will go through a phase of rapid growth.

Despite $ZRO's current lack of direct utility, we have outlined a potential valuation model to help readers provide context for future protocol development and assist in evaluating $ZRO's role in the future of the protocol through projections of the MCTx ratio and the protocol's future transaction volume. Role.