Research on Liquidity Fragmentation Issues in the Era of Layer 2

With Ethereum shifting to Layer 2 core expansion solutions and the rise of tools like RaaS, many public chains are developing rapidly. Numerous entities wish to build their own chains to represent different interests and seek higher valuations. However, the emergence of many public chains makes it difficult for the ecosystem to keep up, leading to many projects breaking even at the time of TGE.

Currently, the funding and technical barriers for building a chain have been significantly lowered, with the monthly cost of operating a chain based on OP Stack being approximately $10,000. The future will undoubtedly be an era of multi-chain coexistence. Although these Layer 2 chains may choose EVM compatibility for interoperability, due to the large number of downstream applications from the underlying Web2 entities, it is difficult for them to build applications and reach consensus on the same chain.

The current multi-chain ecosystem has brought a new challenge: Liquidity and state dispersion. Since the existence of multi-chains is inevitable, interoperability is a field that must be explored and solved. There are currently many Liquidity solutions, such as chain abstraction, intent, Clearing Execution, Native CrossChain, ZKSharding, etc., but their core essence is the same.

We use the industry-recognized Cake architecture to introduce the core components of cross-chain abstraction from top to bottom:

Application Layer

This is the layer where users interact directly, and it is also the most abstract layer in liquidity solutions, as it completely shields the details of liquidity conversion. In the application layer, users interact with the front-end interface and may not necessarily understand the underlying liquidity conversion mechanisms.

Permission Layer

Located below the application layer, users connect their wallets to the dApp and request quotes to fulfill their trading intentions. Here, "intent" refers to the expected final trading outcome by the user, rather than the specific execution path of the trade.

Account Management and Abstraction Layer

Due to the existence of a multi-chain environment, a management and abstraction system that adapts to different chains is needed to maintain the unique account structures of each chain. For example, the object-centered account system of SUI is completely different from EVM. One Balance builds a trusted account system that does not require inter-chain consensus, only trusted commitments between existing account systems. Near Account achieves abstract management by generating multi-chain account wallets for users, greatly optimizing user experience and reducing UX fragmentation.

Solving Layer

This layer is responsible for receiving and executing user transaction intentions. The Solver role competes here to provide a better user experience, including faster transaction times and execution speeds. Based on this, intention-based projects like Anoma have built various intention-driven solutions. Derivatives of such intentions, such as the Predicate component, can realize user intentions under specific rules.

Settlement Layer

This is the middleware layer used to solve the layer for achieving user intent. The core components of the liquidity and state decentralization solutions include:

• Oracle: used to obtain state information from other chains
• Cross-chain bridge: responsible for the transfer of information and liquidity across chains
• Confirm the plan in advance: shorten the cross-chain confirmation time
• Data Availability: Providing accessibility to data

In addition, factors such as inter-chain liquidity, finality, and Layer 2 proof mechanisms need to be considered to ensure the efficient operation of the entire multi-chain system.

Solution

Currently, there are various solutions in the market to address liquidity fragmentation, mainly including:

1. Centered around RaaS: Similar to Rollup solutions like OP Stack, it assists in sharing liquidity and state for Rollups built on OP Stack by incorporating specific shared sequencers and cross-chain bridges.

2. Account-centric: Similar to NEAR, build a full-chain account wallet that supports signing and executing transactions across multiple blockchain protocols through "chain signature" technology.

3. Centered on the off-chain intention network: Users send intentions to the Solver network, and Solvers compete for quotes, providing the optimal completion time and transaction price.

4. Centered on on-chain liquidity networks: specifically optimizing cross-chain liquidity issues, building a liquidity layer, and developing applications on this layer to share liquidity across the entire chain.

5. Centered on on-chain applications: build high liquidity applications by integrating large MM or third-party applications.

Typical Project Cases

INFINIT

INFINIT has built a RaaS service in the DeFi space, providing the necessary components for directly building DeFi protocols, such as Oracle, Pool Type, IRM, Asset, etc., and also offers immediately usable components like Leverage Trading and Yield Strategy.

Khalani Network

Khalani has built three core components: the Intent Compatibility Layer, Validity, and the Universal Settlement Layer. External applications or the Intent Layer can publish intents to Khalani, and then Khalani's Intent Compatibility Layer can convert external intents into a format recognizable by the protocol Solver.

Liquorice

Liquorice is a decentralized application that enables auction-based price discovery and unilateral liquidity pools. Its main mission is to provide efficient inventory management tools for professional trading firms and to easily connect to core DeFi protocols when settling trades with intent.

Xion

Xion is built on the Comet BFT consensus protocol. Its cross-chain communication is based on Cosmos IBC, making it more native and secure than other cross-chain bridges.

=nil; Foundation

nil proposed the zkSharding solution, which uses ZK technology to horizontally scale the Ethereum mainnet, executing sharding parallel processing transactions and generating ZKP, while the main shard verifies data, communicates with Ethereum, and synchronizes network status among all validators.

ERC-7683

The core goal of the ERC-7683 standard is to establish a universal standard for cross-chain operations across L2 and sidechains, standardizing order and settlement interfaces to achieve seamless cross-chain execution. Its main core is a Filler, which can also be described as the Solver role in chain abstraction for payment.

OP Stack

The OP Stack addresses the issues of information transmission and Sequencer decentralization all at once by designing a complete multi Layer 2 solution. When using the OP Stack architecture, cross-chain contracts are automatically deployed, and there will be a Supervisor in place to challenge and prevent the transmission of false cross-chain information.

Summary

Solving the issue of cross-chain liquidity is a very complex field with many solutions. The future will certainly be multi-chain, and addressing the problem of fragmented liquidity is an inevitable challenge that the industry must face. There is vast room for growth in the integration of this all-chain liquidity, which could potentially build a new generation of infrastructure for the Web3 era.