Written by: Gate Ventures
Introduction
Since Ethereum shifted to Layer 2-centric scaling solutions, along with the rise of tools like RaaS, many public chains have rapidly developed. Many entities aspire to build their chains to represent different interests and seek higher valuations. However, the influx of numerous public chains has made it challenging for ecosystem development to keep pace with the public chains, leading many projects to drop in value during their TGE.
With the help of OP Stack, Coinbase launched its own Base Layer 2, Kraken released Ink; leveraging ZK technology, OKX launched XLayer; Sony released Soneium, and LINE launched Kaia. Today, the funding and technical barriers to building a chain have significantly decreased, with the monthly cost of operating a chain based on OP Stack being about $10,000.
The future will inevitably 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 their Web2 entities, it is challenging for them to build applications and reach consensus on the same chain.
TVL Breakdown, source: Defillama
The current multi-chain ecosystem has introduced a new challenge: liquidity and state fragmentation. Given the inevitability of multi-chain existence, interoperability is a field that must be explored and solved. There are many liquidity solutions available today, such as we have heard of chain abstraction (Particle Network, Socket, XION, INFINIT, Borsa), intention (Anoma, Khalani), Clearing Execution (Connext), Native CrossChain (Cross), ZKSharding (=nil; Foundation), but their core essence is the same.
Chain Abstraction Stack, Source: Frontier Research
We use the industry-recognized Cake architecture to introduce the core components of cross-chain abstraction from top to bottom:
Application Layer
This is the layer of direct user interaction, and it is also the most abstract layer in liquidity solutions because it completely shields the details of liquidity conversion. In the application layer, users interact with the front-end interface without necessarily understanding the underlying liquidity conversion mechanisms.
Permission Layer
Located below the application layer, users connect their wallets to dApps and request quotes to fulfill their trading intentions. Here, 'intention' refers to the desired final trading outcome (i.e., output), rather than the specific execution path of the transaction.
Key Management and Account Abstraction
Due to the existence of a multi-chain environment, there is a need for an account management and abstraction system that adapts to the unique account structures of each chain. For example, the object-centered account system of SUI is completely different from EVM. One Balance is a representative project in this field, building a trusted account system that does not require inter-chain consensus, only trusted commitments between existing account systems. Near Account achieves abstract management by generating multi-chain account wallets for users, significantly optimizing user experience and reducing UX fragmentation. However, liquidity aspects mainly integrate existing public chains.
Solver Layer
This layer is responsible for receiving and implementing user trading intentions. The Solver role competes here to provide a better user experience, including faster transaction times and execution speeds. Based on this, intent-based projects like Anoma have built various intent-driven solutions. Derivatives of such intentions, like Predicate components, can realize user intentions under specific rules.
Settlement Layer
This is the middleware layer used by the Solver Layer to achieve user intent. The core components of solutions for liquidity and state fragmentation include:
Oracles: Used to obtain state information from other chains.
Cross-chain bridges: Responsible for the transmission of information and liquidity across chains.
Pre-Confirmation schemes: Shorten cross-chain confirmation times.
Data Availability (DA): Provide accessibility to data.
Additionally, factors such as inter-chain liquidity, finality, Layer 2 proof mechanisms, etc., must be considered to ensure the efficient operation of the entire multi-chain system.
Solutions
Currently, there are various solutions on the market to address liquidity fragmentation. After reviewing numerous solutions, we identified the following main approaches:
1. RaaS-Centric: Similar to Rollup solutions like OP Stack, it assists in building Rollups on OP Stack by adding specific shared sequencers and cross-chain bridges to share liquidity and state. This aims to address liquidity and state fragmentation at a higher level. A more segmented approach is the design of dedicated shared sequencers, which is more targeted at Layer 2 and lacks universality, such as Astria, Espresso, and Flashbots.
Chain Abstraction, source: NEAR
2. Account-Centric: Similar to NEAR, it builds a full-chain account wallet that supports signing and executing transactions across various blockchain protocols through a technology called 'chain signatures.' The core component is the MPC network, which replaces users to sign multi-chain transactions. This solution, while significantly solving UX fragmentation issues, involves complex backend implementations for developers and does not fundamentally address liquidity and state fragmentation.
3. Off-chain Intent Network-Centric: This refers to the Solver Network in our 'Introduction' cake architecture diagram. The core is that users send intents to the Solver network, where the Solver competes to provide optimal completion times and transaction prices. These Solvers can be AI Agents, CEXs, Market Makers, or even integrated protocols like Liquorice. Projects in this area include Anoma, Khalani, Enso, aori, and Valantis. While intentions can theoretically achieve arbitrarily complex cross-chain operations, sufficient liquidity Solvers are required for assistance. When encountering off-chain demands, there is the potential for fraud by Solvers. If fraud proofs and other measures are introduced, the implementation difficulty of the Solver Network will increase, and the threshold for running Solvers will also rise.
4. On-chain Liquidity Network-Centric: This direction specifically optimizes cross-chain liquidity issues but does not address other on-chain state fragmentation problems. Its core is to build a liquidity layer on which applications can be built to share full-chain liquidity. Some projects include: Raye Network, INFINIT, Everclear, Elixir, etc.
5. On-chain Application-Centric: Such applications build high liquidity applications by integrating large MM or third-party applications, such as Liquorice, Socket, Radiant Capital, 1inch, Hedgemony, etc. These projects require managing complex cross-chain processes, placing high demands on developers, and are therefore prone to hacking incidents.
Solving liquidity issues is a very important proposition. In the financial world, liquidity often represents everything. If a platform that integrates liquidity can be built, especially if it can bring together fragmented full-chain liquidity, it will have very great potential, and we have seen many different solutions.
In the above two classifications, we can see that according to the cake structure, the Settlement Layer is the most atomic level solution. Above these atomic solutions such as cross-chain, oracles, and Pre-Confirmation schemes, a more abstract layer is constructed: the Solver Layer, Permission Layer, and Application Layer. The various abstraction or liquidity solutions we have listed above can be understood as relationships between upstream and downstream. However, these solutions are still not atomic level solutions; the entire liquidity fragmentation problem has led to many complex derivative issues. Therefore, various solutions have emerged targeting interoperability. However, they fundamentally depend on these components. Next, we will discuss several typical projects of chain abstraction concepts to see how each addresses the liquidity fragmentation problem from their starting points.
INFINIT
INFINIT Structure, source: Infinit
INFINIT has built a RaaS service for the DeFi sector that can provide the necessary components for DeFi protocols, such as Oracles, Pool Types, IRMs, Assets, etc. It can also offer instantly deployable components for Leverage Trading and Yield Strategies. This is equivalent to other application building ends, but the final liquidity is placed in Infinit's liquidity layer. However, the underlying working principles are still undisclosed. Currently, INFINIT has secured $6 million in seed funding from investors such as Robot Ventures, Electric Capital, and Maelstrom Capital.
Khalani Network
Khalani Network Structure, source: Khalani Network
Khalani has built three core components: Intent compatibility layer, Validity, and universal settlement layer.
External applications or intent layers can publish intent to Khalani, and then Khalani's Intent compatibility layer can convert external intentions into a format recognizable by protocol Solvers, using the standardized format known as Validity language. Khalani nodes are responsible for submitting the final results to the universal settlement layer through cross-chain bridges and rapid settlement technologies. This project is still in the construction phase and has not disclosed more work details. In August, it secured $2.2 million in seed funding from Ethereal Ventures, Nascent, and Maelstrom Capital.
Liquorice
Liquorice Structure, source: Liquorice
Liquorice is a decentralized application that enables auction-based price discovery and unilateral liquidity pools. The main mission of Liquorice is to provide efficient inventory management tools for professional trading firms and to easily connect to core DeFi protocols like 1inch and Uniswap X when settling trades based on intent. Meanwhile, Liquorice has created a lending market for its lending transactions. This application focuses more on the trading itself. It is still in development, having announced in July that it secured $1.2 million in a pre-seed round led by GreenField.
Xion
Xion is an upgrade from the Burnt brand, which previously focused on consumer applications. The team discovered a significant fragmentation issue in on-chain interactions, leading to the creation of Xion to improve this problem. Xion is built on the Comet BFT consensus protocol. Its cross-chain communication is based on Cosmos IBC, making it more native and secure than other cross-chain bridges. It has gone through four rounds of financing, with investors including Animoca, Multicoin, Alliance DAO, and Mechanism.
=nil; Foundation
=nil is Ethereum's ZK computation market, ZK co-processor, and Layer 2 developer, with a team possessing a deep understanding of ZK technology. It proposed the zkSharding solution, which uses ZK technology to horizontally scale the Ethereum mainnet, executing sharding to process transactions in parallel and generate ZKP, while the main shard verifies data, communicates with Ethereum, and synchronizes network state among all validators. The main shard also manages the distribution of validators and accounts in the execution shard. The consensus protocol used by the validation committee is also Hotstuff, which is common in the latest parallel execution projects. =nil; L2 has embedded cross-shard communication into the protocol from the start. Cross-shard messages are validated as transactions by the validator committee of each shard.
The basic idea is to build a cross-shard communication architecture similar to IBC through a sharded Layer 2 architecture, which can solve liquidity and state fragmentation issues. However, the core idea is unreasonable because the problem of liquidity fragmentation is a multi-chain issue. Building a single Layer 2 means that to solve it, all chains must become one shard of ZK-sharding, which is difficult to achieve.
ERC-7683
ERC-7683, source: Across
Ethereum is also actively addressing this cross-chain liquidity problem. Currently, Arbitrum, OP, and Uniswap are the first to publicly support the ERC7683 standard, which uses an intent-based cross-chain approach. Its core goal is to establish a universal standard for cross-chain operations between L2 and sidechains, standardizing order and settlement interfaces to achieve seamless cross-chain execution. The main core is a Filler, which can also be described as the Solver role in chain abstraction that acts as a proxy for payment. This proposal is co-constructed by Uniswap and Across and is currently under review by the Cake working group.
OP Stack
Like OP Stack, ERC-7683, and zkSharding, these are solutions to liquidity fragmentation between Layer 2s within Ethereum, addressing the issue at the architectural, consensus, and application levels. OP Stack designs a complete multi-Layer 2 solution to simultaneously solve issues of information transmission and Sequencer decentralization. When you use the OP Stack architecture, cross-chain contracts are automatically deployed, and there is a Supervisor to challenge and avoid transmitting false cross-chain information. Currently, Coinbase, Uniswap, Kraken, and others use the OP Stack architecture.
One typical example is Unichain. Unichain mainly solves cross-chain liquidity fragmentation issues through integration with the Superchain network. This setup facilitates seamless liquidity movement by providing the following functionalities:
Intent-based cross-chain bridge: This bridge supports fast and reliable liquidity transfer between blockchains, allowing users to set intents, thereby helping the system automatically select the best path for liquidity movement. This method abstracts complexity for users, making cross-chain transactions smoother and faster.
Unichain Verification Network (UVN): This decentralized node operator network verifies cross-chain transactions, providing faster economic finality. Faster finality is crucial for ensuring efficient settlement of cross-chain transactions, thereby minimizing the risk of liquidity fragmentation due to delayed settlements.
Flashblocks and verifiable block building: By utilizing Flashblocks, Unichain significantly shortens block time, improves liquidity provider efficiency, and achieves more synchronized cross-chain markets. Flashblocks help ensure that liquidity is always available and reduce negative impacts caused by block confirmation delays, which may lead to liquidity fragmentation.
Summary
Addressing cross-chain liquidity issues is a complex field with many solutions. For example, Layer 2 solutions are divided into those that use embedded cross-chain messaging from Ethereum, especially ERC-7683, and Layer 2 solutions like OP that build OP Stack to share Sequencers. Outside the Layer 2 context, all Layer 1s face liquidity, state, and user experience fragmentation issues. There are specialized applications for liquidity-focused solutions, as well as off-chain solutions like the Solver Network, and even account-centered solutions like NEAR, but they also need to be based on off-chain roles like the Solver.
We recognize that the fragmentation of cross-chain liquidity, state, and user experience is a problem across the blockchain industry. Thinking from a holistic perspective requires a more abstract approach, similar to chain abstraction. This is essentially the true entry point for Web3, addressing fragmentation in user experience, while integrating liquidity and state in ways that users cannot perceive. How to integrate specifically is further divided into using off-chain Solver networks and atomic integration of cross-chain bridges and other facilities, all worth exploring. Overall, the future will definitely be multi-chain, and addressing liquidity fragmentation is an inevitable problem that the industry must face. The integration of full-chain liquidity has vast growth potential, with the possibility of building a Google of the Web3 era.
