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

With Ethereum's shift towards Layer 2-centric scaling solutions and the rise of tools like RaaS, numerous public chains are rapidly developing. Many entities wish to build their own chains to represent different interests and seek higher valuations. However, the emergence of numerous public chains has led to the ecosystem's development struggling to keep pace, with many projects experiencing a significant drop in value at the time of TGE.

Currently, the funding and technical thresholds for building a chain have been greatly reduced. The monthly cost of operating a chain based on OP Stack is 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 presents a new challenge: liquidity and state dispersion. As the existence of multiple chains is inevitable, interoperability is a necessary area to explore and resolve. Currently, there are many liquidity solutions, such as chain abstraction, intention, Clearing Execution, Native CrossChain, ZKSharding, etc., but their core essence is the same.

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

Application Layer

This is the layer of direct interaction for users and the most abstract layer in liquidity solutions, completely shielding the details of liquidity conversion. Users interact with the front-end interface and may not understand the underlying liquidity conversion mechanism.

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 final trading outcome the user expects, rather than the specific execution path of the trade.

Key Management and Account Abstraction

A management and abstraction system for accounts that adapts to different chains is needed to maintain the unique account structures of each chain. One Balance and Near Account are representative projects in this field.

Solver Layer

Responsible for receiving and executing user trading intentions, the Solver role competes here to provide a better user experience. Intent-based projects like Anoma have built various intent-driven solutions.

Settlement Layer

This is the middleware layer used to achieve user intentions through solution layers. Core components include oracles, cross-chain bridges, pre-confirmation schemes, and data availability. Additionally, factors such as inter-chain liquidity, finality, and Layer 2 proof mechanisms must also be considered.

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

1. Centered on RaaS: For example, OP Stack assists in building Rollups by incorporating specific shared sequencers and cross-chain bridges to share liquidity and state.

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

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

4. Centered on the on-chain liquidity network: specifically optimizing cross-chain liquidity issues, constructing a liquidity layer, and building applications on this layer to share the overall chain liquidity.

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

Solving liquidity issues is an important proposition. If a comprehensive liquidity platform can be built, especially by integrating scattered liquidity across the entire chain, it will have enormous potential.

Here are several typical chain abstraction concept projects:

INFINIT

Built a RaaS service for the DeFi industry, providing the necessary components for the direct construction of DeFi protocols. Ultimately, liquidity is placed on Infinit's liquidity layer. Successfully raised $6 million in seed funding.

Khalani Network

Built three core components: Intent compatibility layer, Validity, and Universal Settlement Layer. External applications or intent layers can publish intents to Khalani, and the Intent compatibility layer converts external intents into a format recognizable by the protocol Solver. Secured $2.2 million in seed funding.

Liquorice

Decentralized applications that enable auction-based price discovery and unilateral liquidity pools. Provide professional trading firms with efficient inventory management tools and connect to core DeFi protocols. Secured $1.2 million in Pre-seed funding.

Xion

Upgraded from the Burnt brand, it utilizes cross-chain communication based on Cosmos IBC. It has undergone four rounds of financing, with investors including Animoca, Multicoin, and others.

=nil; Foundation

Propose a zkSharding solution, using ZK technology to scale the Ethereum mainnet. Build an embedded cross-shard communication architecture through a sharded Layer 2 architecture to address liquidity and state dispersion issues.

ERC-7683

Ethereum is working to address cross-chain liquidity issues. Arbitrum, OP, and Uniswap are the first to publicly support this standard, using an Intent-based cross-chain approach. The goal is to establish a universal standard for cross-chain operations across L2s and sidechains.

OP Stack

One of the solutions for the fragmentation of liquidity between Layer 2s within Ethereum. By designing a complete multi Layer 2 solution, it addresses the issues of information transmission and Sequencer decentralization at once.

Solving cross-chain liquidity issues is a complex field with many solutions. The future will definitely be multi-chain coexistence, and addressing the challenges of liquidity fragmentation is an inevitable challenge the industry will face. There is vast growth potential in the integration of full-chain liquidity, with the potential to build the Google of the Web3 era.