Introduction

Since the DeFi Summer boom, the Ethereum ecosystem has grown rapidly. However, its performance limitations have hindered further expansion. Established public blockchains have returned, new ones have emerged strongly, and Layer2 solutions have been introduced, all contributing to the rise of a multi-chain era. In this multi-chain landscape, the DeFi ecosystems of different chains remain relatively independent, making interoperability between chains essential for development. Cross-chain bridges have emerged to meet this need, and this new sector is gaining momentum.

A cross-chain bridge connects different blockchains, enabling the transfer of tokens and assets from one chain to another. These chains can have different protocols, rules, and governance models, and the bridge provides a secure way for them to communicate and operate together. Most cross-chain bridges consist of the following components:

• Monitoring: A participant, known as an oracle, validator, or relayer, monitors the state of the source chain.
• Message Transmission: Once an event is detected, the information is transmitted from the source chain to the target chain.
• Consensus: In some models, consensus must be reached among the participants monitoring the source chain before the information is relayed to the target chain.
• Signature: Participants must individually or collectively, through multi-signature, encrypt and sign the information sent to the target chain.

Early on, centralized exchanges (CEX) were the most commonly used bridges for transferring assets between blockchains. However, as the industry grew, people became dissatisfied with the centralized management approach, leading to the development of multi-point verification methods. These methods are more reliable because the likelihood of collective wrongdoing is lower than in centralized systems. For example, the Polygon Bridge uses PoS+Plasma, while 19 independent validators verify Solana’s cross-chain bridge Wormhole.

A more decentralized approach evolved from multi-point verification, relying on miners from both chains to maintain the system. This method, now common on many blockchains, involves minting and burning tokens. For instance, by locking a corresponding aToken on Chain A, an oracle informs a smart contract on Chain B. After miners verify the transaction, new bTokens are minted on Chain B. When users transfer from Chain B to Chain A, the bTokens on Chain B are burned, releasing the originally locked aTokens on Chain A.

Native verification involves validators on the source chain witnessing and guaranteeing transactions without relying on third-party validators or staking assets. This is usually achieved by running a light client of one chain within another chain’s Ethereum Virtual Machine (VM). Stargate Finance, built on LayerZero, uses this native verification method. This article will explain how its cross-chain implementation works and analyze its token model and current development status.

What is Stargate Finance?

Stargate Finance is the first cross-chain bridge built on the LayerZero protocol. It allows it to transmit information across different blockchains and connect their liquidity, enhancing capital efficiency. Users of Stargate can provide liquidity on a single blockchain, and the Delta algorithm dynamically allocates this liquidity across other blockchains while ensuring instant verification and native compatibility of assets. Within its first month of launch, Stargate performed exceptionally well, with a TVL exceeding $3 billion at one point.

Founded in 2021 and supported by the LayerZero Labs team, Stargate Finance shares some of its development team with LayerZero. The white paper was co-authored by LayerZero’s three co-founders. In March 2022, Stargate Finance held its first token auction, publicly issuing 10% (100 million) of its tokens to the community, raising $25 million. All STG tokens issued in this public offering will be locked for three years. To ensure broad community participation, the team added an additional 20 million STG to the auction after the initial sale, with a token price of approximately $0.25, raising a total of about $29.72 million from both auctions.

Source: stargateprotocol.gitbook.io

LayerZero

Stargate Finance is built on the LayerZero protocol, so understanding this protocol is crucial.

LayerZero is a trustless, fully interoperable chain protocol that offers powerful communication tools for developers to create cross-chain Dapps. The main components of LayerZero are the Endpoint, Oracle, and Relayer.

The Endpoint is a user-facing component of smart contracts that handle the processing logic. Each blockchain must deploy a LayerZero Endpoint, which can be utilized by other applications on the same chain. For instance, if a Dapp wants to send information from Chain A to Chain B, it first interacts with the Endpoint on Chain A.

The Oracle, an external component separate from the LayerZero protocol, sends block headers to another chain. This process enables the target chain to verify the validity of transactions from the original chain.

The Relayer, an off-chain service, collects transaction proofs from the original chain and transmits them to the target chain. To ensure effective transaction validation, the Oracle and Relayer operate independently of each other.

Source: layerzero.network

How Does Stargate Finance Work?

Stargate Finance is the first fully composable native asset bridge built on the LayerZero protocol. When Stargate sends a cross-chain message (from Chain A to Chain B), the process begins by calling the smart contract of the LayerZero Endpoint. The message first goes to the Endpoint on Chain A. This message and the information for Chain B are then packaged and sent to both the Oracle and the Relayer.

The Oracle reads and confirms the block header. After verifying that the block has received multiple confirmations on Chain A, the Oracle sends the block header to the Endpoint on Chain B. Upon receiving the block header, the Endpoint on Chain B queries the Relayer for the transaction proof that Stargate initiated on Chain A. Once the off-chain verification is complete, the Oracle and Relayer send the necessary information to Chain B, thus completing the cross-chain communication.

Delta Algorithm

The Stargate Finance team has identified an “impossible triangle” in cross-chain asset bridges. This triangle consists of three elements: instant verification confirmation (ensuring timely transaction confirmations), unified liquidity (shared access to a single liquidity pool across multiple chains), and asset nativeness (allowing users to receive native assets directly through the cross-chain bridge, rather than synthetic wrapped assets). Achieving all three aspects simultaneously is impossible, so developers must prioritize and choose one or two elements.

Source: medium.com

Stargate Finance introduced the Delta balancing algorithm to address the impossible triangle challenge by dynamically allocating liquidity across various public chains, ensuring instant asset verification and nativeness. The Delta algorithm maintains a soft-partitioned liquidity pool on each chain. This pool is virtually divided into slices for other chains within the network, with liquidity allocated based on pre-assigned weights, thus efficiently managing all deposited funds.

The Delta algorithm continuously monitors the virtual liquidity pools on each chain. Users can perform cross-chain transfers seamlessly if the liquidity is not overdrawn. If the balance of a soft partition falls below its initial value, a liquidity deficit occurs. For instance, if Chain A has a virtual liquidity shortfall, the new incoming liquidity will first address this gap. Once the gap is filled, any remaining liquidity is redistributed to other virtual liquidity pools based on their designated weights.

Economic Model

STG Token Distribution

STG is the native token of Stargate Finance, with a total supply of 1 billion tokens. The distribution is as follows:

• 17.5% allocated to core contributors
• 17.5% allocated to investors
• 20.39% allocated to the community
• 15.95% reserved for the Bonding Curve
• 2.11% for the initial release plan
• 1.55% to provide liquidity on early DEXs on BNB, Avalanche, Polygon, Arbitrum, Optimism, and Fantom chains
• 15% reserved for protocol launch

The team temporarily reallocated 2% of the community funds for the protocol launch, resulting in 17% of STG being used. Of this, 12% (2% as a temporary increase, 10% locked for three years) was used for the STG auction, which is fully locked in the first year and then released linearly over the following six months. Additionally, 5% was allocated to the STG-USDC Pool on Curve.

Source: stargateprotocol.gitbook.io

Tokens allocated to core contributors and investors will be fully locked for the first year and then released linearly over the following two years. Tokens designated for the Bonding Curve, initial release plan, early DEX liquidity, and future community initiatives are released immediately at launch. The token releaser schedule is detailed below:

Source: stargateprotocol.gitbook.io

Current Uses of STG Tokens:

1. Cross-Chain Transfer Fees: When non-STG tokens are transferred through the Stargate protocol, a 0.06% fee is charged. Of this fee, 0.045% goes to liquidity providers (LPs) and 0.015% goes to the protocol’s treasury.
2. Stablecoin Liquidity Pools: Stargate has stablecoin liquidity pools where a 0.06% fee is charged each time liquidity is withdrawn. Of this fee, 0.045% goes to the liquidity pool and 0.015% to the treasury.
3. Liquidity Mining Rewards: Users who provide stablecoin liquidity receive LP tokens. These LP tokens can be staked to earn STG tokens as rewards.
4. Governance: Users can stake and lock their STG tokens for 3 to 156 weeks to receive governance tokens called veSTG. The longer the STG tokens are locked, the more voting power users have in community governance.

Current Development

Stargate Finance supports multiple networks, including Ethereum, Polygon, BSC, Arbitrum, Optimism, and Avalanche. Its user interface (UI) is similar to other cross-chain bridge protocols, offering a clean and straightforward experience.

Source: stargate.finance

In less than a month after its launch, Stargate Finance’s total value locked (TVL) surged to over $3 billion, driven by significant capital and market interest. Recently, on May 28, Stargate Finance released its version 2 (v2), which introduced an AI planning module. This new version enables asset transfers using a lock + mint and burn + redeem mechanism, attracting more liquidity. As a result, the TVL has been steadily increasing and has now surpassed $600 million.

Source: stargate.finance

Currently, Stargate Finance has a stable daily transaction volume, with 27,231 transactions per day and a 24-hour transaction value exceeding $20 million.

Source: stargate.finance

Conclusion

Stargate Finance, supported by the LayerZero team, has garnered significant community influence. As the first composable cross-chain bridge built on LayerZero, it utilizes LayerZero’s information transmission capabilities to link liquidity across multiple public blockchains, enhancing capital efficiency. The Delta algorithm ensures instant verification and asset nativeness. The protocol has grown substantially, with a total value locked (TVL) exceeding $600 million, positioning it as a potential leader in the cross-chain bridge sector.