Crypto CEO – The traditional way of moving assets across blockchains is a ‘terrible construct’

Bryan Pellegrino is the co-founder and CEO of LayerZero Labs, the company behind the 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 in 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 using bitcoin to be able to deposit and withdraw money from some of the remaining poker sites.

I stopped playing poker in 2011 and started a company that was acquired two years later. I literally had no idea what I was going to do with 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.Ds who were working on something similar. They got really excited and said there’s someone you need to talk to – I called 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 professional baseball teams, started a customer relationship management company in the valley with the first engineer ever from Andreessen Horowitz and a couple of guys at Google called Hero.app. Two years later, the company was acquired by People.AI. I spent a year doing independent research with my two co-founders, who also started my first company with me. We were roommates in college. The next big thing was LayerZero and I’ve 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 necessarily trying to start a company. We did arbitrage and a bunch of chain trading. A lot of it is about getting into the right block placement on both chains; you must be able to enter the mempool (a list of pending transactions awaiting validation) in a perfect position. One day we started seeing transactions that bumped us into the mempool with zero gas (transaction fee) paid. Miners were just putting in their own transactions and I said they are literally colluding against us. There is nothing we can do. It’s a rigged game, so I knew the attempt was dead immediately. Then finally flashbots came in and commoditized this whole process.

At that time in the news cycle, I began to realize that Binance Smart Coin (BSC) has more volume and users than Ethereum. It really stood out because I had been around for a long time and there were a lot of other chains, but no one was using them. It was such a big outlier and we started thinking OK, what can you do? You have this other execution environment which is fast and cheap and then you have Ethereum which is secure but at the same time is getting more and more expensive and basically unusable. So we started saying let’s build ourselves a toy game and see what we could do. We designed a game at BSC where you want all your gaming in a fast, cheap environment. And once you won, you would put an NFT to Ethereum and the permanent NFT would live there. What we realized while building it was that we still had to have a central coordinator who sat outside and just triggered events on both contracts. It’s basically a completely centralized system, so why do we even use the blockchain? What is the point? Surely someone 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 is 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. What we were trying to build at the time were generic messages that didn’t transfer value, they fired an event to create an NFT. The first thing we did was design a better bridge. So we built a precursor, Stargate. In doing so, we realized that we still need to reinvent the transport layer to move the messages to do this bridging. And that’s clearly the more generalizable problem, and that became LayerZero.

Forbes: What was the biggest problem with decentralized bridges? And how did you fix the value transfer part of it?

Pellegrino: We were convinced that wrapped assets were just a terrible construct. When you use Uniswap, you take the risk of breaking the Uniswap protocol. But once you’ve traded, you’ve taken your risk, you get on with your day, and you never think about Uniswap again. You do not inherit more risk. When you move into a wrapped asset structure, you create this synthetic IOU and the user bears the risk in perpetuity, even if it is one year later. If they hold the asset and the bridge on the destination chain is hacked, the IOU is worth nothing. So keeping this risk in perpetuity totally changes the relationship the user has with the assets. And no one really understands that, on top of all the other problems.

One of the reasons we designed Stargate the way we did, and one of our underlying theses, is that risk must be shifted to the Liquidity Providers (LPs).

Forbes: What was the solution you came up with for it?

Pellegrino: There are two components here. We created LayerZero, which is a generalized messaging protocol; it does not know if it is bridging value or mutating NFT data. It’s just an arbitrary contract, like a package on the internet. A packet is primitive. A computer generates a set of bytes, sends it over and the computer on the other side receives the bytes and does something with it. We think of LayerZero identically. You have arbitrary contract calls, so invoke a contract, generate a set of bytes, move bytes, invoke another contract with those bytes. It was LayerZero, this pure generic messaging layer.

Forbes: Can you explain how Stargate, being the bridge for moving value, avoids the security risks associated with the more traditional bridges?

Pellegrino: LP’s deposit on both chains. So, LPs will put $300 million 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 change in balance, but they are always made of assets.

Forbes: What is AUM for 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 it is Stargate. Then you have the custom bridges, you have the Goerli bridge for testers. Then you have Avalanche’s wrapped bitcoin and DeFi realm, which is an NFT play, and it goes downhill from there.

Forbes: What are your thoughts on the controversy when Uniswap was looking to bridge to BSC where you lost a vote to Wormhole? How do you see yourself compared to Wormhole?

Pellegrino: When we built LayerZero, we were actually building a protocol, not a service. That means that once LayerZero was live, if our entire team disappeared from the face of the earth, this protocol will exist in perpetuity until the end of time. The other point is that if we wanted to be completely malicious, if our only goal was to try to exploit or manipulate an application, there are ways to do it so that there’s nothing we can do. When you look at existing messaging protocols, including Wormhole, they are really more of a third-party service. There are a few things they do. First, the contracts are fully upgradable. And this introduces massive underlying risk. If you have the ability to change the underlying code, it’s an existential risk to every single application built on top of that security suite because the team can make changes at any time. And at some point along the time scale, someone is going to make a mistake.

Forbes: Can’t things be upgraded? There’s a difference between upgrading all the time – it can introduce risk – but there have to be ways to, if nothing else, make sure things can be tweaked if necessary.

Pellegrino: I don’t think it 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 they had a simple button they could push 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 incubate all the underlying LP, and they would never become what Uniswap is now.

Forbes: What are your thoughts on the Goerli Bridge? (Goerli is Ethereum’s primary testnet.) What is the economic value of letting people switch between eth and goerli eth, especially since this is being retired in a few months?

Pellegrino: So Goerli has always been the testnet on which the applications actually live (Ethereum has multiple testnets, each serving 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 going to the 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 big applications were there. There came a point where goerli eth was so incredibly hard to come by. 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 counters. It was just insane to us that the way you would go and get this resource to even test was that you needed to know someone or you needed to go and beg. Nine months go by and we ask what could be most useful? And in the office what 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 will be doing around 1.5 million transactions this month. A lot of developers have come out and said this has helped us tremendously, but we didn’t make any money from this. We have lost a fair amount of money on it.

Forbes: What would be the thought process behind doing an airdrop, a hypothetical?

Pellegrino: We have never once said anything publicly about an airdrop, and anyone who says they know anything about an airdrop is completely wrong.

Forbes: Thank you.