Article reproduced from: Gate Ventures
Introduction
Since Ethereum shifted to Layer 2-centric scaling solutions and the rise of tools like RaaS, many public chains have rapidly developed. 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 public chains, leading to many projects breaking 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, and LINE launched Kaia, etc. Today, the financial and technical barriers to building a chain have significantly lowered, making the monthly cost of operating a chain based on OP Stack around $10,000.
The future will undoubtedly be an era of multi-chain coexistence. Although these Layer 2 chains may choose EVM compatibility for interoperability, the presence of numerous downstream applications from Web2 entities makes it difficult for them to build applications and reach consensus on the same chain.
TVL Breakdown, source: Defillama
The current multi-chain ecosystem brings a new challenge: liquidity and state dispersion. Given the inevitability of multi-chain existence, interoperability is a field that must be explored and resolved. Currently, there are many liquidity solutions, such as Chain Abstraction (Particle Network, Socket, XION, INFINIT, Borsa), Intent (Anoma, Khalani), Clearing Execution (Connext), Native CrossChain (Cross), ZKSharding (=nil; Foundation), but their core 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 directly interact, 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 frontend interface and may not understand the underlying liquidity conversion mechanisms.
Permission Layer
Located below the application layer, users connect their wallets to dApps and request quotes to fulfill transaction intents. Here, "intents" refer to the expected final transaction results (i.e., outputs), rather than the specific execution path of the transaction.
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 entirely different from EVM. One Balance is a representative project in this field, building a trusted account system without establishing inter-chain consensus, relying only on trust commitments between existing account systems. Near Account achieves abstract management by generating multi-chain account wallets for users, greatly optimizing user experience and reducing UX fragmentation. However, liquidity aspects mainly integrate existing public chains.
Solver Layer
This layer is responsible for receiving and realizing users' transaction intents. The Solver role competes here to provide a better user experience, including faster transaction times and execution speeds. On this basis, intent-based projects like Anoma have built various intent-driven solutions. Derivatives of such intents, such as Predicate components, can realize user intents under specific rules.
Settlement Layer
This is the middleware layer used by the solver layer to realize user intents. The core components of solutions for liquidity and state dispersion 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: Shortening cross-chain confirmation time.
Data Availability (DA): Providing accessibility of data.
In addition, factors such as inter-chain liquidity, finality, and Layer 2 proof mechanisms need to be considered to ensure the efficient operation of the entire multi-chain system.
Solution
Currently, there are various solutions on the market for addressing liquidity fragmentation. After reviewing many solutions, we found that there are mainly these few methods:
1. RaaS-centered: Similar to the OP Stack Rollup solution, this aims to assist in building Rollup shared liquidity and states on OP Stack by incorporating specific shared orderers and cross-chain bridges. This hopes to address liquidity and state dispersion at a higher level. A more detailed aspect is the separate design of shared orderers, which is more targeted at Layer 2 and lacks universality, such as Astria, Espresso, and Flashbots.
Chain Abstraction, source: NEAR
2. Account-centered: Similar to NEAR, this builds a full-chain account wallet, supporting transaction signing and execution across various blockchain protocols through a technology called "chain signature." The core component is the MPC network, which signs multi-chain transactions on behalf of users. While this solution greatly addresses UX fragmentation issues, it involves complex backend implementations for developers and does not fundamentally solve liquidity and state dispersion.
3. Off-chain intent network-centered: This refers to the Solver Network in our "introduction" cake architecture diagram, where the core is that users send intents to the Solver network, and the Solver competes for quotes to provide optimal completion times and transaction prices. These Solvers can be AI Agents, CEXs, Market Makers, or integrated protocols like Liquorice. Projects in this area include Anoma, Khalani, Enso, aori, and Valantis. Although intents can theoretically achieve arbitrarily complex cross-chain operations, sufficient liquidity Solvers are needed for implementation, and there is a risk of fraud when encountering off-chain demands. If fraud proofs or similar measures are introduced, the implementation difficulty of the Solver Network will increase, raising the threshold for running Solvers.
4. On-chain liquidity network-centered: This direction specifically optimizes cross-chain liquidity issues but does not address other on-chain state dispersion issues. Its core is to build a liquidity layer on which applications are built to share full-chain liquidity. Some projects include: Raye Network, INFINIT, Everclear, Elixir, etc.
5. On-chain application-centered: These applications build high liquidity applications through integrating large MM or third-party applications, such as Liquorice, Socket, Radiant Capital, 1inch, Hedgemony, etc. Such projects require managing complex cross-chain processes, posing high demands on developers, and thus are prone to hacking incidents.
Addressing liquidity issues is a very important proposition; in the financial world, liquidity often represents everything. If a platform can be built to integrate liquidity, especially consolidating fragmented full-chain liquidity, it holds great potential. We have also reviewed many different solutions.
In the above two classifications, we can see that based on the cake structure, the Settlement Layer is the most atomic-level solution. Above these atomic solutions such as cross-chain, oracle, and Pre-Confirmation solutions, a more abstract layer is built, which includes the Solver Layer, Permission Layer, and Application Layer. The various solutions listed above, built in different directions to abstract or provide liquidity, fit into this different hierarchy and can be understood as upstream and downstream relationships. However, these solutions are still not atomic-level solutions, as the entire liquidity fragmentation issue has brought about many complex derivative problems, leading to a plethora of diverse solutions. However, it ultimately relies on these components. Next, we will discuss several typical projects that embody chain abstraction concepts to see how they each tackle the problem of liquidity fragmentation from their respective starting points.
INFINIT
INFINIT Structure, source: Infinit
INFINIT has built a RaaS service in the DeFi space, providing components necessary for direct construction of 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 other application construction ends, but the final liquidity is placed in Infinit's liquidity layer. However, it has not yet disclosed the underlying working principles. Currently, INFINIT has secured $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 recognizable by protocol Solvers, using a 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 fast settlement technologies. This project is still in the building phase and has not disclosed more work details. In August, it secured $2.2 million in seed funding from Ethereal Ventures, Nascent, Maelstrom Capital, etc.
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, while easily connecting to core DeFi protocols such as 1inch and Uniswap X during transaction settlement with intent. Meanwhile, Liquorice has created a lending market for its lending transactions. This application is more focused on the trading itself. It is still in the development phase and announced in July that it has secured $1.2 million in Pre-seed funding led by GreenField.
Xion
Xion is an upgrade from the Burnt brand, which previously focused on consumer applications. After discovering significant fragmentation issues in on-chain interactions, the team built Xion to improve this. 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 undergone 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 Layer2 developer team with a strong foundation in ZK technology. It proposed the zkSharding solution, which uses ZK technology to horizontally scale the Ethereum mainnet, execute 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 shards. 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 verified as transactions by the validator committee of each shard.
The basic idea is to build an integrated cross-shard communication architecture similar to IBC through a sharded Layer 2 architecture, which can solve liquidity and state dispersion issues. However, its core idea is not reasonable because the problem solved by liquidity dispersion is a multi-chain issue, while it constructs a single Layer 2, meaning that to solve it, all chains must become a shard of ZK-sharding, which is difficult to achieve.
ERC-7683
ERC-7683, source: Across
Ethereum is also working to address this cross-chain liquidity issue. Currently, Arbitrum, OP, and Uniswap are the first to publicly support the ERC7683 standard, which also employs an intent-based cross-chain method. Its core goal is to establish a universal standard for cross-chain operations across L2s and sidechains, standardizing order and settlement interfaces for seamless cross-chain execution. The main core is a Filler, which can also be considered the Solver role in chain abstraction. This proposal is co-developed by Uniswap and Across and is currently under review by the Cake working group.
OP Stack
OP Stack, ERC-7683, and zkSharding are all solutions addressing liquidity fragmentation between Layer 2s within Ethereum, tackled at the architecture, consensus, and application levels respectively. OP Stack aims to address information transfer and Sequencer decentralization issues by designing a complete multi Layer 2 solution. When using the OP Stack architecture, cross-chain contracts will be automatically deployed, and there will be a Supervisor to challenge and avoid the transmission of false cross-chain information. Current users of the OP Stack architecture include Coinbase, Uniswap, Kraken, etc.
A typical example is Unichain. Unichain primarily resolves cross-chain liquidity fragmentation issues by integrating with the Superchain network. This setup promotes seamless liquidity movement by providing the following functions:
Intent-based cross-chain bridge: This bridge supports fast and reliable liquidity transfers between blockchains, allowing users to set intents, helping the system automatically select the best path for liquidity movement. This method abstracts complexity for users, making cross-chain transactions smoother and quicker.
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 construction: By using Flashblocks, Unichain significantly shortens block time, improves liquidity provider efficiency, and achieves more synchronized cross-chain markets. Flashblocks help ensure liquidity is always available and reduce the negative effects caused by block confirmation delays, which can lead to liquidity fragmentation.
Summary
Addressing cross-chain liquidity issues is a very complex field with numerous solutions. For instance, Layer2 solutions include those from Ethereum embedding cross-chain messaging, especially ERC-7683, and Layer2 solutions like OP building OP Stack for shared Sequencer solutions. Outside of the Layer2 context, all Layer1 chains also face issues of liquidity, state, and user experience fragmentation. There are solutions centered around liquidity applications, off-chain Solver Network solutions, and account-centered solutions like NEAR, but these still rely on off-chain roles like Solvers.
We recognize that cross-chain liquidity, state, and user experience fragmentation are issues throughout the blockchain industry. From an overall perspective, a more abstract approach, similar to chain abstraction, is needed. This is equivalent to the true entry point of Web3, addressing user experience fragmentation 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 integrated cross-chain bridges, etc., all worth exploring. Overall, the future will undoubtedly be multi-chain, and addressing liquidity dispersion is an inevitable challenge that the industry will face. The integration of full-chain liquidity presents vast growth opportunities and may lead to the creation of a Google for the Web3 era.
