Bryan Pellegrino is cofounder and CEO of LayerZero Labs, the company behind omnichain interoperability protocol LayerZero.In April, his firm raised $120 million at a $3 billion valuation from firms such as Andreessen Horowitz and Sequioa Capital.
In this discussion we cover why it has been so difficult to find an efficient and secure way to transfer assets between blockchains and how interoperability protocols are much more than bridges, which have become very lucrative targets for hackers over the past year .
Forbes: What is your background and how did you get into crypto?
Bryan Pellegrino: I went to school for computer science but dropped out after three years to play poker professionally.I did that full time for eight years; went to 80 countries, and was one of the best poker players in the world.I heard about bitcoin in 2010; every poker player knew about it because all the payment processors were gone and the websites started to use bitcoin to be able to deposit and withdraw from any of the remaining poker sites.
I stopped playing poker in 2011 and started a company that got acquired two years later.I had literally no idea what I was going to do in my life.So I packed up my wife and my 1.5-year-old son and did 12 months, 12 countries—starting in Reykjavik and ending in Tokyo.
I realized three months in that I couldn’t not work for 12 months so I started writing some code for fun that modeled pitcher vs hitter matchups in baseball.A friend showed it to a group of MIT Ph.D.s who were working on something similar.They got super excited and said there’s somebody you have to talk to—I got on the phone and that person was Billy Beane, developer of the Moneyball concept and general manager of the Oakland A’s.
I ended up selling those models to a bunch of the pro baseball teams, started a customer relationship management company in the valley with the first ever engineer out of Andreessen Horowitz and a couple guys at Google called Hero.app.Two years later, the company was acquired by People.AI.I took a year to do independent research with my two cofounders, who also started my first company with me.We were college roommates.
The next major thing was LayerZero, and I have been in the space since 2013.
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Forbes: When did you realize that bridges or interoperability protocols would be a necessary component of blockchains?
Pellegrino: We weren’t trying to necessarily start a company.We were doing arbitrage and a bunch of on-chain trading.A lot of that is about getting in the correct block positioning on both chains; you need to be able to get in the mempool (a list of pending transactions waiting for validation) at a perfect position.One day we started seeing transactions that were beating us into the mempool with zero gas (transaction fee) paid.Miners were just inserting their own transactions and I said they are literally colluding against us.There’s nothing we can do.
It’s a rigged game so I knew that the endeavor was just dead immediately.Then eventually flashbots came in and commoditized this whole process.
At that time in the news cycle, I was starting to realize that Binance Smart Coin (BSC) has more volume and users than Ethereum.It really stuck out because I had been around for a long time and there were a lot of other chains, but nobody used them.It was such a large outlier and we started thinking okay, what can you do? You have this second execution environment that’s fast and cheap and then you have Ethereum that’s secure, but at the same time getting more and more expensive and basically unusable.So, we started saying let’s build a toy game for ourselves and see what we could do.We designed a game on BSC where you’d have all your gameplay in a fast, cheap kind of environment.
And once you won you would mint an NFT to Ethereum and the permanent NFT would live there.
What we realized as we were building it was that we still had to have a central coordinator that sat outside and just triggered events on both contracts.It’s basically a fully centralized system, so why are we even using the blockchain? What’s the point? Surely somebody has solved this, and we looked into the landscape of bridges, which port assets from one blockchain network to another.We were horrified by the security.There’s no way we would have trusted millions of dollars, let alone billions or tens of billions to any of the existing bridges at the time.
For us, the big realization was that value transfer is just a special case of generic messaging.The thing we were trying to build at the time were generic messages that weren’t transferring value, they were triggering an event to mint an NFT.
The first thing we did was design a better bridge.So we built a precursor, Stargate.
In doing so we realized we still need to reinvent the transport layer to move the messages to do this bridging.And that clearly is the more generalizable problem, and that became LayerZero.
Forbes: What was the biggest issue with decentralized bridges? And how did you fix the value transfer part of it?
Pellegrino: We were convinced wrapped assets were just a terrible construct.When you use Uniswap, you take the risk that the Uniswap protocol is broken.
But once you’ve done your swap, you’ve done your risk, you go on with your day, and you never think about Uniswap again.
You don’t inherit any more risk.When you move into a wrapped asset construct, you make this synthetic IOU and the user carries the risk in perpetuity, even if it’s one year later.If they hold the asset and the bridge on the destination chain gets hacked, the IOU is worth nothing.So holding that risk in perpetuity totally changes the relationship that the user has with the assets.And nobody understands that really, on top of all the other problems.
One of the reasons we designed Stargate the way that we did, and one of our underlying theses is that risk needs to be shifted to the liquidity providers (LPs).
Forbes: What was the solution you came up with for that?
Pellegrino: There are two components here.We created LayerZero, which is a generalized messaging protocol; it doesn’t know if it’s bridging value or mutating NFT data.
It’s just an arbitrary contract, like a packet on the internet.A packet is primitive.A computer generates a set of bytes, sends it over and the computer on the other side ingests the bytes and does something with it.We think about LayerZero identically.You have arbitrary contract invocation, so invoke a contract, generate a set of bytes, move the bytes, invoke another contract with those bytes.That was LayerZero, this pure generic messaging layer.
Forbes: Can you explain how Stargate, which is the bridge for moving value, avoids the security risks associated with the more traditional bridges?
Pellegrino: LPs deposit on both chains.So, LPs will put $300 million of USDC on Ethereum, $300 million on Polygon, $300 million on Avalanche and then a user can deposit a million here and withdraw a million there.
So, the pools are changing in balance, but it’s always made of assets.
Forbes: What’s the AUM of Stargate?
Pellegrino: It’s $480 million right now.
Forbes: Let’s talk about some of the other use cases for the cross-chain messaging protocol.
Pellegrino: Right now we see about 250,000 messages per day.About 50% of that is Stargate.Then you have the custom bridges, you have the Goerli bridge for test ether.Then you have Avalanche’s wrapped bitcoin and DeFi kingdoms, which is an NFT game, and it goes down from there.
Forbes: What are your thoughts on the controversy when Uniswap was looking to bridge over to BSC, where you lost a vote to Wormhole? How do you see yourself compared to Wormhole?
Pellegrino: When we were building LayerZero, we were really building a protocol, not a service.That means once LayerZero was live, if our entire team disappeared from the face of the earth that protocol will exist in perpetuity until the end of time.The second point is that if we wanted to be entirely malicious, if our only goal was to try to exploit or manipulate an application, there are ways to make it so that there is nothing that we can do.When you look at existing messaging protocols, including Wormhole, they’re really more of a third-party service.
There’s a couple things that they do.One, the contracts are entirely upgradable.And this introduces massive underlying risk.If you have the ability to change the underlying code, it’s an existential risk for every single application built on top of that security set because the team can make changes at any point in time.And at some point over the timescale, somebody’s going to make a mistake.
Forbes: Don’t things need to be upgradeable? There’s a difference between upgrading all the time—that can introduce risk–but there has to be ways to, if nothing else, make sure that things can be tweaked if necessary.
Pellegrino : I don’t think there is.Again, I think Uniswap is a perfect example.When Uniswap goes from V1 (version 1) to V2 from V2 to V3, they probably wished that they had an easy button they could press to move tens of billions of dollars to the new version.V1 still has liquidity in it.
So does V2.But if they had the ability to do that, they would also have the ability to rug all the underlying LP and they would never be what Uniswap is now.
Forbes: What are your thoughts about the Goerli bridge? (Goerli is Ethereum’s primary testnet.) What’s the economic value of allowing people to switch between eth and goerli eth, especially since this is being retired in a matter of months?
Pellegrino: So Goerli has always been the testnet that the applications actually live on (Ethereum has multiple testnets that each serve different purposes).Fast forward to today.Now you have all these smart contracts and application developers who want a place to test their code in a beta before they go to mainnet and have potentially hundreds of millions or billions of dollars in these contracts.Goerli was this hub, and it became extremely useful because all the major applications were there.There came a point when goerli eth was so incredibly hard to get.When we were trying to get goerli eth, we had to go on Twitter and ask, does anyone have this? We had to pay them and buy it over OTC desks.It was just insane to us that the way you would go and get this asset to even be able to test was that you needed to know somebody or you needed to go and beg.
Nine months go by and we ask what is the thing that can be most useful? And in the office the thing that was most voted for and most talked about was the need to make it easier to get goerli eth because this is a nightmare.Fast forward to today and the goerli bridge is going to do around 1.5 million transactions this month.Many developers have come out and said this has helped us tremendously, but we made no money from this.We’ve lost a reasonable amount of money on it.
Forbes: What would be the thought process behind doing an airdrop, a hypothetical one?
Pellegrino : We never once said anything publicly about an airdrop, and anybody who says that they know anything about an airdrop is completely incorrect.
Forbes: Thank you.
Steven Ehrlich.
