Research on the Liquidity Play People for Suckers Issue in the Era of Layer 2

With Ethereum shifting to Layer 2-based scaling solutions and the emergence of tools like RaaS, a large number of public chains have rapidly developed. Many entities hope to build their own chains to represent different interests and seek higher valuations. However, the surge of numerous public chains has made it difficult for the development of the ecosystem to keep pace with the public chains, resulting in many projects facing difficulties early on.

With the help of technologies like OP Stack, several well-known companies and platforms have launched their own Layer 2 solutions. Nowadays, the capital and technical thresholds for building a chain have been significantly lowered, with the monthly cost of operating a chain based on OP Stack being around $10,000.

The future will undoubtedly be an era of coexistence of multiple chains. Although these Layer 2 chains may choose EVM compatibility for interoperability, it is difficult for them to build applications and reach consensus on the same chain due to the large number of downstream applications behind them.

The current multi-chain ecosystem presents a new challenge: liquidity and state fragmentation. Given that the existence of multiple chains is inevitable, interoperability is a field that must be explored and addressed. Currently, there are many liquidity solutions, but their core essence is similar.

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 hides the details of liquidity conversion. In the application layer, users interact with the front-end interface and may not be aware of 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 user's expected final trading outcome, rather than the specific execution path of the trade.

Key Management and Account Abstraction

Due to the existence of a multi-chain environment, an account management and abstraction system that adapts to different chains is needed to maintain the unique account structures of each chain. Some projects achieve abstract management by building a trusted account system or generating multi-chain account wallets for users, which greatly optimizes the user experience and reduces the fragmentation of UX.

Solver Layer

The layer is responsible for receiving and executing user trading intentions, where the Solver role competes to provide a better user experience, including faster transaction times and execution speeds. Some projects have built various intent-driven solutions that can realize user intentions under specific rules.

Settlement Layer

This is the middleware layer used to achieve user intentions at the Layer 2. The core components of 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 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 on the market to address liquidity fragmentation, mainly including:

1. Centered on RaaS: Assisting in sharing liquidity and state of Rollups built on specific architectures by joining specific shared sequencers and cross-chain bridges.

2. Account-centric: Build an account wallet that encompasses the entire chain, supporting the signing and execution of transactions across multiple blockchain protocols through "chain signature" technology.

3. Centered on the off-chain intent network: Users send intents to the Solver network, where Solvers compete with bids to provide the optimal completion time and transaction price.

4. Centered on on-chain liquidity networks: Build a liquidity layer on which applications are built to share full-chain liquidity.

5. Application-Centric: Build high liquidity applications by integrating large MM or third-party applications.

Solving the liquidity problem is a very important proposition. If a platform that integrates liquidity can be built, especially one that consolidates fragmented on-chain liquidity, it will have great potential.

The following are several typical blockchain abstraction concept projects:

INFINIT

INFINIT has built a RaaS service for DeFi, providing the necessary components for directly building DeFi protocols, such as Oracle, Pool Type, IRM, Asset, etc., and is also able to offer immediately available 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 that the protocol Solver can recognize.

Liquorice

Liquorice is a decentralized application that enables auction-based price discovery and unilateral liquidity pools. Its primary mission is to provide professional trading firms with efficient inventory management tools 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, execute sharding parallel processing of transactions, and generate ZKP, while the main shard verifies data, communicates with Ethereum, and synchronizes the network state among all validators.

ERC-7683

Ethereum is working to solve the cross-chain liquidity problem, and currently, multiple major platforms publicly support the ERC7683 standard. Its core goal is to establish a universal standard for cross-chain operations between L2 and sidechains, standardizing order and settlement interfaces to achieve seamless cross-chain execution.

OP Stack

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

Summary

Solving the problem of cross-chain liquidity is a very complex field with numerous solutions. From Layer 2 solutions to liquidity, state, and user experience fragmentation issues for all Layer 1s, there are different approaches to solving these problems. The future will definitely be multi-chain, and addressing the issue of fragmented liquidity is a challenge that the industry must face. The integration of overall chain liquidity has vast growth potential and could build important infrastructure for the Web3 era.