Introduction
Since Ethereum shifted to a Layer 2-centric expansion plan, coupled with the rise of tools like RaaS, many public chains have developed rapidly. Many entities wish 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 ecosystem development to keep pace with the public chains, leading to many projects experiencing a collapse at TGE.
With the help of OP Stack, Coinbase launched its own Base Layer 2, Kraken released Ink; using ZK technology, OKX launched XLayer; Sony released Soneium, LINE launched Kaia, etc. Nowadays, the funding and technical barriers to building a chain have significantly decreased, and the cost of operating a chain based on OP Stack is about $10,000 per month.
The future will surely 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 difficult for them to build applications and reach consensus on the same chain.
TVL Breakdown, source: Defillama
The current multi-chain ecosystem has brought a new challenge: liquidity and state dispersion. As the existence of multiple chains is inevitable, interoperability is a field that must be explored and solved. There are currently many liquidity solutions, such as chain abstraction (Particle Network, Socket, XION, INFINIT, Borsa), intents (Anoma, Khalani), Clearing Execution (Connext), Native CrossChain (Cross), ZKSharding (=nil; Foundation), but their essence is the same.
Chain Abstraction Stack, Source: FrontierResearch
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 where users interact directly, and it is also the most abstract layer in the liquidity solution, as it completely masks the details of liquidity conversion. In the application layer, users interact with the frontend interface, not 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 expected final trading result (i.e., output), not the specific execution path of the trade.
Key Management and Account Abstraction
Due to the existence of a multi-chain environment, an account management and abstraction system that adapts to different chains is needed to maintain the unique account structures of each chain. For example, SUI's object-centered account system is completely different from EVM. One Balance is a representative project in this field that builds a trusted account system without establishing inter-chain consensus, only requiring trusted commitments between existing account systems. Near Account achieves abstract management by generating multi-chain account wallets for users, greatly optimizing the user experience and reducing UX fragmentation. However, in terms of liquidity, it mainly integrates existing public chains.
Solver Layer
This layer is responsible for receiving and implementing user trading intentions, where the Solver role competes to provide a better user experience, including faster transaction times and execution speeds. Based on this, intention-based projects like Anoma have built various intention-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 realize user intentions. The core components of the liquidity and state dispersion solutions include:
Oracle: Used to obtain state information from other chains.
Cross-chain bridges: Responsible for the transfer of information and liquidity across chains.
Pre-Confirmation solutions: Shorten cross-chain confirmation times.
Data Availability (DA): Provide accessibility to data.
In addition, 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 for liquidity fragmentation. After reviewing a large number of solutions, we found that there are mainly several approaches:
1. Centered around RaaS: Similar to Rollup solutions like OP Stack, by adding specific shared sequencers and cross-chain bridges to assist in building Rollups on OP Stack, shared liquidity and state can be achieved. This aims to address liquidity and state dispersion from a higher-level perspective. A more detailed aspect is the design of shared sequencers, which is more focused on Layer 2 and lacks universality, such as Astria, Espresso, and Flashbots.
Chain Abstraction, source: NEAR
2. Account-centered: Similar to NEAR, build a full-chain account wallet that supports signing and executing transactions across various blockchain protocols through a technology called 'chain signature.' The core component is the MPC network, which replaces users in signing multi-chain transactions. This solution greatly addresses the issue of UX fragmentation, but for developers, it involves complex backend implementation and does not fundamentally resolve liquidity and state dispersion.
3. Centered around off-chain intent networks: This refers to the Solver Network in our 'Introduction' cake architecture diagram, where users send intents to the Solver Network, and the Solver role competes to provide the optimal completion time and transaction price. These Solvers can be AI Agents, CEXs, Market Makers, or even integrated protocols themselves like Liquorice, etc. Projects in this area include Anoma, Khalani, Enso, aori, and Valantis. Although intentions can theoretically achieve arbitrarily complex cross-chain operations, in practice, there needs to be sufficient liquidity Solvers to assist, and when encountering some off-chain demands, there is a possibility of fraud from Solvers. If fraud proofs and other methods are introduced, the implementation difficulty of the Solver Network will become higher, and the threshold for running Solvers will also increase.
4. Centered around on-chain liquidity networks: This direction specifically optimizes cross-chain liquidity issues, but does not address the problem of dispersed on-chain states from other chains. The core concept is to build a liquidity layer on which applications can be built to share liquidity across the entire chain. Some projects include: Raye Network, INFINIT, Everclear, Elixir, etc.
5. Centered around on-chain applications: These applications build high-liquidity solutions 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 and have extremely high demands on developers, making them vulnerable to hacking incidents.
Solving the liquidity problem is a very important proposition; liquidity often represents everything in the financial world. If a platform that integrates liquidity can be built, especially one that brings together scattered full-chain liquidity, it will have 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 like cross-chain, oracle, and Pre-Confirmation solutions, a more abstract layer is constructed, which includes the Solver Layer, Permission Layer, and Application Layer. The various liquidity solutions we listed above, built in different directions, conform to this set of different levels and can be understood as an upstream/downstream relationship. However, these solutions are still not atomic-level solutions, and the entire liquidity fragmentation issue has led to the emergence of many complex derivative issues. Therefore, regarding interoperability, a wide variety of solutions have emerged. However, they still fundamentally rely on these components. Next, we will discuss several typical projects related to chain abstraction concepts to see how each addresses the problem of liquidity fragmentation from their starting points.
INFINIT
INFINIT Structure, source: Infinit
INFINIT has built a RaaS service in the DeFi space, which can provide components required for directly building DeFi protocols, such as Oracle, Pool Type, IRM, Asset, etc., and can also provide immediately usable components like Leverage Trading and Yield Strategy. This is equivalent to the application construction end, but the final liquidity is placed in Infinit's liquidity layer. However, it has not yet disclosed the underlying working principles. Currently, INFINIT has raised $6 million in seed funding from Robot Ventures, Electric Capital, and Maelstrom Capital.
Khalani Network
Khalani Network Structure, source: KhalaniNetwork
Khalani has built three core components: Intent compatibility layer, Validity, and Universal Settlement Layer.
External applications or intent layers can publish intents to Khalani, and then Khalani's Intent compatibility layer can convert external intents into a format that the protocol Solver can recognize, 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, rapid settlement technologies, etc. This project is still in the construction phase and has not disclosed more work details. In August, it received $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. Liquorice's main mission is to provide professional trading firms with efficient inventory management tools, allowing seamless connections to core DeFi protocols such as 1inch and Uniswap X when settling trades using intent. Meanwhile, Liquorice has created a lending market for conducting lending transactions. This application is more focused on the trading itself. It is still in the development stage and announced in July that it secured $1.2 million in Pre-seed funding led by GreenField.
Xion
Xion is an upgraded version of the Burnt brand, which used to focus on consumer applications. The team later discovered significant fragmentation issues in on-chain interactions, leading to the development 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, Mechanism, etc.
=nil; Foundation
=nil is Ethereum's ZK computing power market, ZK co-processor, and Layer 2 developer, with a strong foundation in ZK technology. It proposed the zkSharding solution, which uses ZK technology to horizontally scale the Ethereum mainnet, executing shard parallel processing of transactions and generating ZKPs, 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 validation committee of each shard.
The basic idea is to construct an embedded cross-shard communication architecture similar to IBC through a sharded Layer 2 architecture, thereby solving liquidity and state dispersion issues. However, the core idea is unreasonable because the problem of liquidity dispersion is a multi-chain issue, and this builds a single Layer 2, meaning that to solve it, all chains would need to become a shard of ZK-sharding, which is difficult to achieve.
ERC-7683
ERC-7683, source: Across
Ethereum is also addressing the issue of cross-chain liquidity. Currently, Arbitrum, OP, and Uniswap are the first to publicly support the ERC7683 standard, which also uses an Intent-based cross-chain approach. The core goal is to establish universal standards 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 acting as a payment agent. This proposal was jointly constructed by Uniswap and Across and is currently under review by the Cake working group.
OP Stack
OP Stack, ERC-7683, and zkSharding are all Ethereum's internal solutions for liquidity fragmentation between Layer 2s, addressing issues at the architectural, consensus, and application levels. OP Stack solves the problems of information transmission and sequencer decentralization in one go by designing a complete multi-Layer 2 solution. When you use the OP Stack architecture, cross-chain contracts will be automatically deployed, and there will be a Supervisor to challenge and avoid transmitting false cross-chain information. Currently, Coinbase, Uniswap, Kraken, etc., are using OP Stack architecture.
Among them, a typical example is Unichain. Unichain mainly solves the problem of cross-chain liquidity fragmentation through integration with the Superchain network. This setup facilitates seamless liquidity movement by providing the following functionalities:
Intent-based cross-chain bridges: This bridge supports fast and reliable liquidity transfer between blockchains, allowing users to set intents, thereby helping the system automatically select the optimal path for liquidity movement. This approach abstracts complexity away from 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 caused by delayed settlements.
Flashblocks and verifiable block building: By using Flashblocks, Unichain significantly shortened block time, improved the efficiency of liquidity providers, and achieved a more synchronized cross-chain market. Flashblocks help ensure that liquidity is always accessible and reduce the negative impacts caused by block confirmation delays, which could lead to liquidity fragmentation.
Summary
Solving cross-chain liquidity issues is a very complex field with many diverse solutions. For example, Layer 2 solutions are divided into those that use Ethereum's embedded cross-chain messaging, especially ERC-7683, as well as Layer 2 solutions like OP that build OP Stack to share Sequencer to address these issues. Beyond the context of Layer 2, all Layer 1 chains also face liquidity, state, and user experience fragmentation issues, with some solutions centered on liquidity applications, others based on off-chain Solver networks, and even account-centered solutions like NEAR, but they still need to be based on off-chain roles like Solvers.
We recognize that cross-chain liquidity, state, and user experience fragmentation is a problem for the entire blockchain industry. If we think from a holistic perspective, we need to approach it in a more abstract way, similar to chain abstraction, which is essentially the true entry point to Web3, solving user experience fragmentation while integrating liquidity and state in a way that users cannot perceive. Specifically, how to integrate is further divided into using off-chain solver networks and atomic integrated cross-chain bridges, among other facilities, which are all worth exploring. Overall, the future must be multi-chain, and solving the problem of liquidity dispersion is an issue that the industry will inevitably face. The integration of this full-chain liquidity has vast growth potential, possibly building the Google of the Web3 era.
