Research on the Liquidity Fragmentation Issue in the Layer 2 Era

With Ethereum's shift towards Layer 2-centric scaling solutions and the rise 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 emergence 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 encountering difficulties early on.

With the help of technologies like OP Stack, several well-known companies have launched their own Layer 2 networks. Today, the financial and technical barriers to building a chain have been significantly lowered, with the cost of operating a chain based on OP Stack being approximately $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, it is difficult for them to build applications and reach consensus on the same chain due to the large number of downstream applications from the Web2 entities behind them.

The current multi-chain ecosystem has brought about a new challenge: Liquidity and state dispersion. As the existence of multi-chains is inevitable, interoperability is a field that must be explored and solved. There are currently many liquidity solutions, but their core essence is the same.

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: 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 executing users' trading intentions.

5. Settlement Layer: This is the middleware layer used by the solution layer to realize user intentions. It mainly includes components such as oracles, cross-chain bridges, early confirmation schemes, and data availability.

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

1. RaaS-centered: Assist in sharing liquidity and state for Rollups built on the OP Stack by joining specific shared sequencers and cross-chain bridges.

2. Account-Centric: Build a full-chain account wallet that supports the signing and execution of transactions across multiple blockchain protocols through "chain signature" technology.

3. Centered around an off-chain intent network: Users send intents to the Solver network, which competes for quotes and provides 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 full-chain liquidity.

5. Application-centered on-chain: Build high liquidity applications by integrating major MM or third-party applications.

Solving liquidity issues is a very important proposition. If it is possible to build an integrated liquidity platform, especially one that consolidates scattered on-chain liquidity, it will have significant potential.

Currently, multiple projects are attempting to address this issue, such as INFINIT, Khalani Network, Liquorice, Xion, etc. Ethereum is also promoting the ERC-7683 standard, which aims to establish a universal standard for cross-chain operations across L2 and sidechains.

OP Stack, ERC-7683, and zkSharding are all solutions within Ethereum aimed at addressing the fragmentation of liquidity between Layer 2s, tackling the issue from the architecture layer, consensus layer, and application layer respectively.

Overall, the future will certainly be multi-chain, and addressing the issue of liquidity fragmentation is an inevitable challenge that the industry will face. The integration of cross-chain liquidity has vast development potential and could build important infrastructure for the Web3 era.