Key Insights

Background

ZetaChain was introduced on December 15, 2021, by an anonymous project team with experience at Coinbase and Basic Attention Token (BAT). Several former Coinbase employees also served as advisors to the project, including the company’s initial Head of People, Nathalie McGrath, and Juan Suarez, who held an internal counsel role at Coinbase for a decade.On March 9, 2022, the team released ZetaChain’s whitepaper and DevNet and closed its initial Seed Round that raised an unspecified amount of capital. Investors in this round consisted of Dan Romero, Sam Rosenblum, John Yi, JD Kanani, and HwiSang Kim. ZetaChain completed its second funding round in August 2023, raising $27 million from participants such as Blockchain.com, Human Capital, Vy Capital, Sky9 Capital, Jane Street Capital, VistaLabs, CMT Digital, Foundation Capital, Lingfeng Capital, GSR, among others.

ZetaChain's testnet, launched in August 2022, quickly garnered substantial user engagement, reaching 150,000 users in its inaugural month. By March 2023, this figure had escalated to 1 million users, a milestone that coincided with the introduction of incentives for validators. ZetaChain continues to operate in the testnet phase, with no official release date for its mainnet announced as of December 19, 2023.

Overview

ZetaChain is a Layer-1 blockchain that enables chain-agnostic interoperability. The network boasts a block time of approximately five seconds and finality without the need for confirmation or the ability to re-organize the transaction. Applications built on ZetaChain will be able to connect to any other application or blockchain, giving new and existing crypto users a singular access point to Web3. This is accomplished by utilizing omnichain smart contracts that read and write to any other blockchain, even blockchains that do not natively use smart contracts. Developers can also send data and value messages to any chain with simple function calls using ZetaChain’s Connector.

Technology and Architecture

EVM Layer

The ZetaChain network utilizes an Ethereum Virtual Machine (EVM) compatible execution layer named zEVM. This layer supports EVM features such as smart contract creation, interaction, and composition. It also enables external chains to call the contracts built on zEVM. zEVM contracts can also create outbound transactions on blockchains connected to ZetaChain.All developers building on ZetaChain create zEVM contracts, which can be standard Solidity contracts. However, in order to maximize the capabilities of the network, zEVM contracts must either follow the specific requirements set forth for omnichain contracts or utilize Cross-Chain Message Passing.

Omnichain Contracts

Source: ZetaDocs

Omnichain Contracts must implement cross-chain call execution and are only required to be deployed once on ZetaChain, after which it can be connected to external chains. The connected chains can also transfer digital assets to the contract’s address on ZetaChain. Assets transferred to ZetaChain take on the ZRC-20 token standard. Omnichain contracts allow for efficient implementation of popular existing protocols on Ethereum, such as Uniswap and Aave. They also enable integration with networks that do not support smart contracts, such as Bitcoin. Gas fees incurred by omnichain contracts are settled in the destination chain’s native gas token.

In sum, omnichain contracts on ZetaChain offer a future-proof approach to cross-chain functionality, with a one-time deployment that is subsequently accessible across all integrated networks. This model leverages a synchronous execution environment with immediate compatibility with any new chain supported by ZetaChain, avoiding the hassle of redeploying or recoding to accommodate different blockchains. As such, these contracts serve as a nexus for cross-chain interactions, improving the user experience by minimizing gas fees across chains.

The primary advantage of omnichain contracts lies in enabling a unified state and execution. In CCM and other similar systems such as LayerZero and Axelar, apps without said unified state often require complex workarounds. However, omnichain contracts allow for a cohesive, singular state, ensuring a smoother operation for most use cases. By minimizing inbound and destination gas fees and not relying on multiple messages, omnichain contracts stand as a native and accessible complement to CCM.

Cross-Chain Message Passing

The alternative to omnichain contracts is Cross-Chain Message (CCM) Passing. CCM is used to convey data and value messages across blockchains with ZetaChain as the middleman. Whereas developers deploy omnichain contracts on ZetaChain, CCM-enabled contracts are instead deployed on external chains. The contracts then call the ZetaChain Connector API, and ZetaChain relays the message to the destination chain, where a CCM-enabled contract receives the message. The state is stored on a set of CCM-enabled contracts on different chains.

CCM makes sense for applications that only need unidirectional and asynchronous logic/effects and that don't need or benefit from a unified state. CCM is primarily intended to augment existing applications on external chains with cross-chain functionality. Gas fees incurred by CCM-enabled contracts are denominated in ZETA tokens and must be sent to the Connector contract on the origin chain.

ZetaChain also uses a burn/mint mechanism to protect digital assets transferred with CCM-enabled contracts. Assets are burned on the origin chain and minted on the destination chain. This mechanism provides more security than either bridging or wrapping due to these methods holding the transferred assets.

Consensus Mechanism

ZetaChain was built using the Cosmos Software Development Kit (SDK), an open-source framework used to build permissionless public Proof-of-Stake (PoS) blockchains and permissioned Proof-of-Authority (PoA) blockchains. Cosmos SDK assists developers with building new blockchains, as well as launching, testing, and integrating the network once it is created.

The Cosmos SDK provides a modular framework that allows for the customization of new blockchains to meet specific user requirements. It also enables the operation of parallel chains to accommodate increasing throughput needs as user demand grows. Because the Cosmos SDK ensures interoperability, it allows digital assets and their values to be translated across different blockchains built using this framework. It also supports a Proof-of-Stake module for consensus and decentralized governance through community proposals and voting. On top of these features, the SDK includes security measures such as firewalls to protect the blockchain application. Thanks to its many features, the Cosmos SDK has been used to build several notable applications and blockchains, including BNB Chain, dYdX, Osmosis, and Celestia.

Source: Messari

Tendermint’s Consensus mechanism is an asynchronous, Byzantine Fault Tolerant (BFT) state machine operated by validators. Validators rotate through proposing and voting on blocks of transactions. One block is proposed at each height in the chain, and if the proposed block is not approved by the other validators, a new validator proposes a block for that height. In order for a block to be approved, it must complete two stages of voting. The stages are named “pre-vote” and “pre-commit,” and a block is finalized when more than two-thirds of the validators’ voting weight approve the same block in the same round.

Voting weight is determined according to the stake weight of the asset denominated by each specific blockchain. With ZetaChain, validator operators must stake ZETA tokens. Since ZetaChain is a Delegated Proof-of-Stake blockchain, ZETA tokenholders that do not operate validators can delegate ZETA tokens to existing validators. The proportion of tokens controlled (delegated and self-staked) by a single validator against the total number of tokens controlled by all validators determines the stake weight, and by extension, the voting weight.

Architecture

Source: ZetaDocs

ZetaChain’s architecture primarily consists of a decentralized network of validators that achieve consensus on external state and events, as well as being responsible for updating the external chain states via distributed key signing. Each validator contains a ZetaCore and ZetaClient, which are bundled together and run by the same operator. ZetaCore produces the blocks in the blockchain and maintains the replicated state machine, while ZetaClient observes events on the external chains and signs transactions being sent to those chains.

Validators within ZetaChain serve as either Basic Validators, Observers, or Threshold Signature Scheme (TSS) Signers.

Basic Validators

Basic Validators are identified by a specific consensus key and are responsible for voting on block proposals with the voting power created by staking ZETA. Basic Validators are required always to be online and available to participate in block production. In addition, running the following two validators, Observers and TSS Signers, also entails running a Basic Validator. By comparison, running a Basic Validator has significantly less overhead as far as software and hardware requirements.

Observers

Observers are responsible for reaching consensus on events and states for external chains. Observers monitor these external chains for transactions, events, and states at specific addresses operated by the full nodes of the respective external chain.

This type of validator is further divided into the Sequencer and Verifier roles. Sequencers observe relevant external actions and report the information to Verifiers, who then verify and vote on ZetaChain to achieve a simple-majority consensus regarding the external actions. For this process to be effective, numerous Verifiers are required; however, only one Sequencer is needed to report to the verifiers.

Threshold Signature Signers

TSS Signers on ZetaChain hold portions of ECDSA/EdDSA keys. A Threshold Signature Scheme (TSS) is a digital signature verification method used in Multi-Party Computation (MPC) cryptography. In MPC, a private key is created from “key fragments,” each of which is held by a separate party or node. The TSS allows the private key to be used if a set threshold of key fragments contributes instead of the full amount of fragments. For example, if there are nine parties holding key fragments, and the set threshold is five, the private key can be used as long as five of the nine (referred to as “t” of “n”) key fragment holders provide their share.

Keys for authenticated interaction with external chains are held throughout ZetaChain and are distributed to multiple signers in accordance with the TSS method described above. ZetaChain uses the tokens staked by validators as collateral against malicious validators to ensure TSS Signers do not sign messages on behalf of ZetaChain on external chains.

Architectural Challenges

There are inherent risks tied to modular system architectures. These systems could introduce escalations in complexity, security challenges, and composability dilemmas, while also potentially amplifying complications for developers. ZetaChain’s omnichain approach seems to address many of these concerns, but the underlying issues ingrained in the multichain world could limit demand for ZetaChain and its solutions.

In a similar vein, ZetaChain could face analogous perils to what bridges have repeatedly faced over the years. A keen analysis of the risks associated with bridges and interoperability will be instrumental in safeguarding the platform as it stakes its offering on an interconnected blockchain future.

Though ZetaChain’s PoS mechanism offers a robust security model, it risks creating a network overly reliant on a small contingent of validators. That said, ZetaChain’s round-robin selection system might be a counterbalance, even if its efficacy is yet to be fully assessed. ZetaChain is not alone in this struggle to bootstrap a reliable active validator set, as seen by relatively low Nakamoto coefficients across the board.

ZETA Token

Zetachain’s native token is ZETA, which will be launched alongside the ZetaChain mainnet. As of writing, no release date has been announced. Once ZETA and mainnet are live, the token will be primarily used for paying gas fees, calling smart contracts, and securing the network through staking.

Validators and token holders will be able to stake ZETA and earn incentives. ZETA will also be the main transfer of value on ZetaChain, allowing transfers between connected blockchains using a one-way peg mechanism. Under this mechanism, the number of ZETA tokens being transferred would be burned on the origin chain and minted on the destination chain. The staking parameters have not yet been specified, but the project has listed the hardware requirements to run a validator.No information about the total supply or specific allocations of ZETA has been released. The project team claims that ZETA will be one of the first multichain coins issued across multiple chains and layers.

Ecosystem

In today’s multichain universe, users have increasingly demanded seamless interactions across various networks. Rather than navigating the requirements of every bridge, chain, wallet, etc., multichain users might find themselves attracted to the omnichain approach championed by ZetaChain. This paradigm shift offers reduced transaction friction and enhanced security, while providing developers with the freedom to deploy applications on the best-suited chains.

ZetaChain’s nascent field of omnichain applications exemplifies this potential by introducing chain abstraction capabilities. Initiatives like Sushi's native Bitcoin (BTC) support highlight the largely untapped market for BTC within DeFi, especially considering the recent conversation around BTC ETFs. Moreover, it is feasible to suggest that facilitating smart contracts via ZetaChain's ZRC-20 standard could spur development across Web3, DeFi, and SocialFi applications. As of October, the ZetaChain ecosystem boasts 150 applications. As demonstrated in the infrastructure map below, the ZetaChain ecosystem has expanded its breadth to include a wide variety of unique players in different sectors.

Source: ZetaChain

As mentioned earlier, ZetaChain's testnet managed to reach 150,000 users in its first month after launching in August 2022. In less than a year, the metric grew to 1 million users, a milestone that coincided with the introduction of incentives for validators. As of writing, the testnet has seen over 37.6 million zEVM transactions and 14 million cross-chain transactions across more than 2.5 million unique zEVM addresses.

Competitive Landscape

As ZetaChain carves out its niche within the blockchain interoperability sector, it will have to deal with two forms of competition. First, ZetaChain’s relevance could be swayed by the outcome of the battle between monolithic and modular blockchains. Compared to the Interchain ecosystem, Ethereum’s rollup-centric approach has a significant lead in users, developers, and liquidity. But beyond this, ZetaChain faces some well-established competition from a variety of players.

Axelar

Axelar is crafted from the same foundational Cosmos SDK that underlies ZetaChain's technology. Axelar strives for full-stack interoperability, a holistic approach that encompasses not just asset bridging, but also permissionless cross-chain smart contract execution and dApp support. The Axelar community has taken a three-part strategy to expand its connected networks, currently at 55. This expansion is fueled by economic restructuring, the deployment of the Axelar Virtual Machine for frictionless connections, and the pursuit of more streamlined solutions like light clients. In contrast to Axelar’s comprehensive but potentially intricate system, ZetaChain’s offering of a unified execution environment could allow its users to enjoy a more simplified experience with reduced gas fees and messaging requirements.

LayerZero

Unlike Axelar, LayerZero stands out from ZetaChain due to its fundamental architecture. It isn't a blockchain, thus handing developers extensive flexibility when it comes to protocol implementation. Despite this, LayerZero relies on centralized oracles and relayers, which necessitate a higher level of trust, particularly owing to its operation on a dual-offchain entity multisig system. As such, LayerZero could experience some complications with its CCM-style interoperability, as seen with Axelar and other similar chains. By comparison, ZetaChain might position itself as a potentially more trust-minimized alternative, thanks to its onchain operations.

THORChain

THORChain represents another direct competitor to ZetaChain, as it has native integration into the Cosmos ecosystem and employs a similar toolkit for blockchain development. Like ZetaChain, THORChain is geared toward interoperability, enabling asset fluidity across different blockchains; however, its specific focus on liquidity and security via its unique mechanics creates a distinct niche.

THORChain is an automated market maker (AMM)-based protocol, similar to Uniswap, but with a twist. All assets in THORChain's system are paired with its native asset RUNE. In doing so, THORChain creates a DEX that prevents liquidity from fragmenting across pools and guarantees that any asset on THORChain can be swapped into any other asset. Comparatively, ZetaChain could potentially leverage its more decentralized validator mechanisms, a broader range of supported chains, or less stringent requirements for node operation. Also, THORChain is application-specific, while ZetaChain is a generalized smart contract platform. This gives ZetaChain users the ability to not only spin up a direct competitor to THORChain but also build applications and use cases beyond a DEX application.

Closing Summary

Overall, ZetaChain aims to provide seamless connectivity and accessibility for Web3 applications. To accomplish this, it leverages its Layer-1 blockchain infrastructure, Cosmos SDK, and Tendermint Consensus. With its omnichain smart contracts and cross-chain messaging capabilities, ZetaChain enables developers to connect and interact with any blockchain, including those that do not support smart contracts.

As a Delegated Proof-of-Stake chain, ZetaChain will enable further decentralization by way of its token ZETA. Aside from securing the network, ZETA will also be used to pay gas fees and as the primary transfer of value. As ZetaChain continues to progress towards its mainnet launch, it holds the potential to facilitate interoperability and enhance the functionality of the broader blockchain ecosystem.

Despite its potential, ZetaChain’s path to success is not without its challenges. As of writing, ZetaChain continues to be a relatively new Layer-1 that has not yet launched its mainnet. As with nearly all blockchains, reaching mainstream adoption is a difficult task, especially when there are significant incumbents at play.

According to the upcoming roadmap, the ZetaChain team plans to focus on increasing adoption at both a user and developer level. The roadmap emphasizes setting up more chain integrations, bringing more interoperability across dapps and diverse asset types (specifically the capability to support Bitcoin NFTs), and providing an SDK for omnichain dapp developers. At the same time, the team will be looking into ways to improve ZetaChain’s security and efficiency by upgrading some of the network’s features.

Ultimately, ZetaChain's positioning in a competitive landscape should accentuate its unique selling points — such as its architecture, validator mechanisms, or transaction efficiencies — as compared to the focus areas of Axelar, LayerZero, and THORChain. By doing so, ZetaChain can effectively delineate its place in the market, capitalizing on areas where it can deliver enhanced value to its users.