How does Ethereum solve the L2 liquidity decentralization problem?

Source: Vernacular Blockchain

Why must liquidity flow seamlessly?

Last weekend, all my Farcaster friends were talking about a hot new coin, DEGEN on Base. Feeling FOMO (fear of loss), I checked my Rabby wallet to see how much I could invest:

"Cool, I can put $500 into this coin and just need to sell some other assets. However, my portfolio looks like What does it look like?"

"Oh NO"
< /p>

Almost every Token is on a different second layer network. In order to get DEGEN, I have to perform multiplebridgings in sequence, and even though the fees are low, it's still a frustrating hour of bridging and swapping process.

We have to solve this problem, and our North Star is to make the entire Ethereum ecosystem feel like one network. Let’s see how unified liquidity, coupled with wallet upgrades, abstracts bridging and makes the cross-chain layer 2 experience feel like using a single chain.

1. Bridging should not need to be done this way

Why is the currentbridgingso bad? There are some drawbacks here:

You have to visit a separate website, connect the wallet, approve the transfer, transfer it and hope it gets to the other end...

Bridging is usually required It takes 5 to 30 minutes to complete, which is far too slow. Less than 10 seconds is achievable and ideal.

Mostbridgesrequire liquidity to be locked on both networks. The more layer 2 networks we have, the thinner the liquidity will be. Lack of liquidity makes it difficult to move large amounts of funds between chains, and results in lower prices.

Only certain liquid tokens can be bridged, for most networks this is ETH + stablecoins.

There is also an encapsulated Token bridge that does not require locking liquidity. It can support any Token. However, after bridging, you get a non-native version of the token you need, which must be exchanged with the real token to use any application on the new network, which requires liquidity, so we end up in the same predicament.

The bottom line is, if bridgingdoesn’t really need to be done, why are we collectively wasting millions of hours doing it? ?

2. Wallets and applications should automatically handle bridging

When you use a decentralized exchange or borrowing protocol, it should track your transactions on all chains Token. When you deposit a token from another chain, it should automatically bridge it to the correct chain in the background, making the entire process feel exactly like the Ethereum mainnet.

Apps and wallets want to achieve this, but the underlying infrastructure is not good enough yet. If thebridgingprocess takes 10 minutes and you lose 1% of your tokens in the process, most users will be dissatisfied with the experience.

Let’s dive into the infrastructure layer and see how to solve this problem.

How liquidity flows seamlessly

In the L2 network, liquidity can be unified in the following 3 main ways, and there is an enhanced way to Increase their speed. These approaches have different trade-offs but complement each other.

They are:

1) Shared Ecology Bridge : Achieve the entire ecosystem chain seamless aggregation of liquidity.

2) Minting/Destroying Token: Can be transferred between any supported chains with unlimited size.

3) LocalBridgeMutual Trust:Enable seamless aggregation of liquidity across ecosystems.

Shared EcosystemBridging

When you bridge from the Ethereum mainnet to any second layer network, the process goes something like this ：

Each bridge It's all a smart contract on Ethereum, which we call "local bridge". Whenyou bridge to the second layer network, your assets will be locked on L1 and a copy minted on L2. These networks have the right to mint unlimited amounts of any asset supported by their native bridge.

Although they have the same name and are explicitly not called wrapped assets, every asset bridged from Ethereum to any L2 via the chain's native bridge is actually a wrapped asset , because the contract address and sometimes even the code are different. On Ethereum, USDC’s contract address starts with 0xa0b8, while on Arbitrum it starts with 0xaf88, on Optimism it starts with 0x0b2c, and on Polygon zkEVM it starts with 0xa8ce.

The assets all look and feel the same because the wallet and app have an official asset list with official images for display, so users will never know the difference.

What if instead of having a bridge for each L2, they shared a bridge? Assets can be minted on a shared chain called the interop layer, which then mints them on their final destination, L2.

Polygon Call this new design a “converged blockchain.”

What is the use of this design? In this ecosystem, when moving assets from one chain to another, such as from Polygon zkEVM to OKX X1, there is no need to go through a traditional bridge or bridge back to Ethereum first. Instead, you can destroy the asset and have the interop layer mint the same amount of that asset on the target chain!

Pass Every asset that this interop layerbridgesis now identical on every chain in the ecosystem. Assuming the interop layer is free and fast (Polygon says theirs will be done in <20 seconds), you'll be able to transfer unlimited sizes between any L2 in the ecosystem for free in seconds. Bridging assets!

Both Polygon and zkSync are developing this interop layer design for their ecosystems, and judging from Optimism's design documents, they appear to be pursuing this design as well, although this has not yet been confirmed.

The disadvantage is that it only applies to one ecosystem and requires all chains to use a bridge which increases the risk, but in the ecosystem The rewards in the system of having liquidity flow seamlessly across all chains far outweigh this disadvantage.

Because all tokens are interchangeable between ecosystems, your wallet does not need to show which chain you are on or separate tokens by chain. Instead, your wallet can look like this:

A unified wallet on a unified chain

Execute transactions across multiple chains At this time, your wallet can simply show that you are using the "Polygon" network and perform all bridging operations automatically in the background.

If this design is so good, why wasn’t it implemented earlier? TZKproved that until recently it was fast and cheap enough to make this possible. The Interop layer uses ZK proofs for all mint/destroy operations, so it can be completed in seconds without any challenge period.

Advantages:

-Fast, simple, standard way to transfer Tokens between chains

-Any number can be moved Token, no slippage

-Possibly completely free to use

Disadvantages:

-Only works within a single ecosystem< /p>

-A bridge is a single point of failure/target of attack for the entire ecosystem

-Must be designed from the beginning and cannot be significantly changed within the existing ecosystem

3. Minting/Destroying Token

Unlike relying on shared ecological bridging, the chain can leave bridging to Token. Token needs to implement the minting/destroy function and allow users to destroy the token at any time and mint it on another chain.

Move DAI from zkSync to Polygon without using Ethereum mainnet

Move

strong>DAIMoving from zkSync to Polygon without using the Ethereum mainnet can be done through a network such as Layer Zero or Chainlink CCIP The middleware of the class sends these cast/destroy messages. Layer Zero is developing a project called Omnichain that will allow tokens to achieve this functionality.

Some Tokens have already implemented this system. Circle recently launched theirCross-ChainTransfer Protocol (CCTP), which does exactly this for USDC between 8 different networks.

Since USDC has high liquidity on many networks and has no cap on liquidity availability, it could be the perfect bridge to move assets between chains. The wallet can exchange the token you want to bridge to for USDC, use CCTP to bridge that USDC, and then exchange it back to the token you want on the target chain. This can be done automatically by the wallet and with minimal fees or slippage.

The disadvantage of leaving liquidity unified to tokens is that it is up to individual tokens to implement it, and wallets and applications must know which tokens can automaticallybridgeWhat doesn’t work?

This also requires the token to wait for the chain to be finalized before the token can be sent, which can take anywhere from minutes to hours, depending on how often data is written to Ethereum. If the Token does not wait for finalization, it may be doubled, that is, minted on the target chain, and then revoked in a reorganization on the sending chain.

Another risk to consider is that the security of the token relies on the security of each chain andrelaysystem. If an L2 is attacked, it may mint new tokens by sending malicious messages to other chains (e.g., claiming that it destroyed a token when it actually did not). The same situation may occur if the token's relay or oracle is attacked. This will cause the token to malfunction on all chains.

Achievedcross-chainToken with ICS-20 in the Cosmos ecosystem. It solves the problem of "one chain destroys the tokens on all chains" by tracking the path of the token to the current chain. If Token Still have value because they don't cross chain B. This creates the additional problem of token fungibility that wallets and applications will need to solve, but it is a solution.

Advantages:

-Tokens can be moved freely between any L2 chains

-Any number of Tokens can be moved, No slippage

Disadvantages:

-The chain must be safe, a compromised chain may destroy the Token on all chains