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

With Ethereum transitioning to Layer 2-based scaling solutions and the rise of related tools, many public chains have rapidly developed. Numerous entities hope to build their own chains to represent different interests and seek higher valuations. However, the emergence of many public chains has made it difficult for the ecosystem to keep pace with the public chain development, resulting in many projects failing in the early stages.

With the help of new technologies, several well-known companies have launched their own Layer 2 or blockchains. Nowadays, the funding and technical thresholds for building a chain have been significantly lowered, and the cost of operating a chain based on a specific tech stack is about $10,000 per month.

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

The current multi-chain ecosystem presents a new challenge: liquidity and state dispersion. Since the existence of multi-chains is inevitable, interoperability is a field that must be explored and addressed. There are currently many liquidity solutions, but their core essence is fundamentally similar.

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

1. Application Layer: The layer where users interact directly, completely shielding the details of liquidity conversion.

2. Permission Layer: Users fulfill their trading intentions by connecting their wallets to the application and requesting quotes.

3. Account management and abstraction layer: A suitable account management and abstraction system is needed to maintain the unique account structures of different chains.

4. Layer 2: Responsible for receiving and implementing the user's trading intentions, where relevant roles compete to provide a better user experience.

5. Settlement Layer: This is the middleware layer used by the solution layer to fulfill user intentions. Core components include oracles, cross-chain bridges, early confirmation schemes, and data availability, among others.

Currently, there are various solutions on the market to address liquidity fragmentation:

1. Centered around a specific tech stack: Systems built by incorporating specific shared sorters and cross-chain bridges to share liquidity and state.

2. Account-Centric: Build a full-chain account wallet that supports signing and executing transactions across multiple blockchain protocols.

3. Centered around the off-chain intent network: Users send intents to the network, and relevant roles compete with quotes, providing the optimal completion time and transaction price.

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

5. Application-centric: Build high liquidity applications by integrating large market makers or third-party applications.

Solving the liquidity problem is a very important proposition. If a platform that integrates liquidity across the entire chain can be built, it will have tremendous potential. Currently, multiple projects are exploring different solutions, such as INFINIT, Khalani Network, Liquorice, and Xion.

The Ethereum ecosystem is also actively addressing this issue. The ERC-7683 standard aims to establish a universal standard for operations across Layer 2 and sidechains. The OP Stack addresses the issues of information transmission and decentralization by designing a complete multi Layer 2 solution.

Overall, solving cross-chain liquidity is a complex area with various solutions. The future will definitely be multi-chain coexistence, and integrating full-chain liquidity will be a huge opportunity, potentially giving rise to important infrastructure for the Web3 era.