Research on the Liquidity Fragmentation Issue in the Layer 2 Era

Introduction

With Ethereum's shift to Layer 2 scaling solutions and the rise of RaaS tools, a large number of public chains are rapidly developing. Many entities wish to build their own chains to represent different interests and seek higher valuations. However, the development of the ecosystem struggles to keep pace with public chains, leading many projects to encounter setbacks early on.

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

The future will undoubtedly be an era of multi-chain coexistence. Although these Layer 2 chains may choose EVM compatibility for interoperability, it is difficult 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 has brought new challenges of liquidity and state dispersion. Since the existence of multi-chain is inevitable, interoperability has become a field that must be explored and resolved. There are currently various liquidity solutions, such as chain abstraction, intent, liquidation execution, native cross-chain, and ZK sharding, but their core essence is similar.

The widely recognized Cake architecture introduces 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: Maintain the unique account structure of different chains.

4. Layer 2: Receive and implement user transaction intentions, the Solver role competes here to provide a better user experience.

5. Settlement Layer: The middleware layer that realizes user intentions, including components such as oracles, cross-chain bridges, early confirmation schemes, and data availability.

Solution

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

1. Centered around RaaS: For example, OP Stack assists Rollups in sharing liquidity and state through shared sequencers and cross-chain bridges.

2. Account-centric: Like NEAR, build a full-chain account wallet that supports signing and executing transactions across multiple blockchain protocols.

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

4. Centered on on-chain liquidity networks: specifically optimized for cross-chain liquidity issues, building a liquidity layer that shares liquidity across the entire chain.

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

Typical Projects

1. INFINIT: Building RaaS services for DeFi, providing the necessary components for protocols to build directly.

2. Khalani Network: Build three core components: Intent compatibility layer, Validity, and General Settlement Layer.

3. Liquorice: Decentralized application that achieves auction-based price discovery and unilateral liquidity pools.

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

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

6. ERC-7683: Establish a universal standard for cross Layer 2 and sidechain operations, enabling seamless cross-chain execution.

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

8. Unichain: Provides intent-based cross-chain bridges, verification networks, and Flashblocks functionalities through integration with the Superchain network.

Summary

Solving cross-chain liquidity issues is a complex field with many solutions. Layer 2 solutions include Ethereum's embedded cross-chain messaging and OP Stack's shared Sequencer. Outside of the Layer 2 context, all Layer 1 also face issues of liquidity, state, and user experience play people for suckers.

The fragmentation of cross-chain liquidity, state, and user experience is a problem for the entire blockchain industry. Thinking from a holistic perspective, a more abstract chain abstraction approach is needed as an entry point for Web3 to resolve user experience fragmentation while integrating liquidity and state in places where users are unaware.

The future will undoubtedly be a coexistence of multiple chains, and addressing the challenge of fragmented liquidity is a necessity for the industry. There is vast development space for the integration of cross-chain liquidity, which could give rise to giant enterprises in the Web3 era.