Research on the Liquidity Fragmentation Issue in the Layer 2 Era

With Ethereum shifting towards Layer 2-centric scaling solutions, combined with the rise of tools like RaaS, a large number of public chains have rapidly developed. Many entities wish to build their own chains to represent different interests and pursue higher valuations. However, the emergence of numerous public chains has made it difficult for the ecosystem's development to keep pace with the public chains, resulting in many projects failing to launch effectively at the TGE.

With the help of OP Stack technology, some large trading platforms have launched their own Layer 2 solutions. At the same time, with the aid of ZK technology, there are platforms that have introduced corresponding scaling layers. Nowadays, the capital and technical thresholds for building a chain have significantly decreased, with the monthly cost of operating a chain based on OP Stack being around 10,000 dollars.

The future will surely 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 a new challenge: liquidity and state fragmentation. As the existence of multiple chains is inevitable, interoperability is a field that must be explored and addressed. There are currently many liquidity solutions, such as chain abstraction, intentions, 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 trading intentions.

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. Solver Layer: Responsible for receiving and executing users' trading intentions, the Solver role competes here to provide a better user experience.

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

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

1. RaaS-centered solution
2. Account-Centric Solutions
3. A solution centered around the off-chain intention network
4. A solution centered around on-chain Liquidity networks
5. Application-centric solutions on the blockchain

Various solutions have their advantages and disadvantages, but essentially they all rely on some foundational components. Some typical chain abstraction concept projects include:

• INFINIT: Built a RaaS service in the DeFi sector
• Khalani Network: has built three core components: intent-compatible layer, validity layer, and universal settlement layer.
• Liquorice: A decentralized application that enables auction-based price discovery and unilateral liquidity pools.
• Xion: Based on the Comet BFT consensus protocol, using Cosmos IBC for cross-chain communication.
• =nil; Foundation: Proposed zkSharding solution
• ERC-7683: Ethereum is working on a standard to address cross-chain Liquidity issues.
• OP Stack: Ethereum's internal solution for the fragmentation of liquidity between Layer 2s.

Solving the problem of cross-chain liquidity is a complex field with many solutions. The future will inevitably be one of coexistence among multiple chains, and addressing the issue of fragmented liquidity is a challenge that the industry must face. There is vast potential for the integration of liquidity across chains, which may lead to the construction of important infrastructure in the Web3 era.