Research on the Liquidity Fragmentation Issue in the Era of Layer 2

Introduction

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

Today, the funding and technical barriers for building a chain have been significantly lowered, and the cost of operating a chain based on certain tech stacks is about $10,000 per month. 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 behind them, it is difficult for them to build applications and reach consensus on the same chain.

The current multi-chain ecosystem presents a new challenge: liquidity and state fragmentation. Due to the inevitability of multi-chains, interoperability is a field that must be explored and resolved. Currently, there are many liquidity solutions, such as chain abstraction, intents, liquidation execution, native cross-chain, ZK sharding, 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:

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

2. Permission Layer: Users connect their wallets to the dApp and request quotes to fulfill their trading intentions.

3. Account management and abstraction layer: A system for account management and abstraction that adapts to different chains is needed to maintain the unique account structures of each chain.

4. Solution Layer: Responsible for receiving and implementing users' trading intents, solvers compete here to provide a better user experience.

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

Solution

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

1. Centered on RaaS: Assisting in the construction of Rollup by joining specific shared sequencers 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 through "chain signature" technology.

3. Centered on the off-chain intention network: Users send intentions to the solver network, where solvers compete with bids, providing the optimal completion time and transaction price.

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

5. Centered on on-chain applications: Build high liquidity applications by integrating large market makers or third-party applications.

Solving the liquidity problem is a very important proposition, as liquidity often represents everything in the financial world. If a platform can be built to integrate liquidity, especially to consolidate scattered on-chain liquidity, it will have great potential.

Typical Project Analysis

1. INFINIT: Built a RaaS service in the DeFi space, providing the components needed for the direct construction of DeFi protocols.

2. Khalani Network: It has built three core components, namely the Intent Compatibility Layer, Validity, and the Universal Settlement Layer.

3. Liquorice: A decentralized application that enables auction-based price discovery and unilateral liquidity pools.

4. Xion: Built on the Comet BFT consensus protocol, using cross-chain communication based on Cosmos IBC.

5. =nil; Foundation: Proposed the zkSharding solution, using ZK technology to horizontally scale the Ethereum mainnet.

6. ERC-7683: Ethereum is working to address cross-chain liquidity issues, aiming to establish universal standards for cross-chain operations across L2 and sidechains.

7. OP Stack: A complete multi Layer 2 solution designed to address the issues of information transmission and Sequencer decentralization all at once.

Summary

Solving the problem of cross-chain liquidity is a very complex area with many solutions. The future will definitely be multi-chain, and addressing the issue of dispersed liquidity is a challenge that the industry must face. There is vast growth potential in the integration of full-chain liquidity, which could possibly build important infrastructure for the Web3 era.