Building a Trustless Liquidity Network
Author: kokii.eth, summer capital
Co-Author: Alven Lin, summer capital
Imagine living in such a world of the internet, where two friends from Singapore and the US had to navigate different network protocols just to exchange messages, where gamers across Korea and the UK faced significant latency during an online game, and money transfer from Brazil to Hong Kong would require multiple currency exchanges before settlement. — — all these would be nightmares for users. Fortunately, we no longer face these difficulties anymore. Thanks to TCP/IP, Facebook users can share info and interact with friends anytime, generating billions of Likes every day; thanks to low-latency UDP communication protocol, billions of commands and state synchronization requests are processed on “League of Legends” every day; thanks to interbank protocols like SWIFT, billions of transactions are enabled every day via payment institutions like MasterCard and Alipay, while users only need to make one click on mobile apps; thanks to cloud service, ChatGPT processes over ten million queries every day and expect more.
Use cases drive the development of the internet. Demands and pain points incentivize the creation of simpler and more user-friendly interfaces and functions, hiding the complex technology and integrating different protocols behind the scenes. When users engage in high-frequency application scenarios such as social, payments, gaming, or other financial applications, they don’t need to worry about the underlying infrastructure. This concept is known as “Protocol Abstraction”. It builds user-end interconnectivity across different regions, ecosystems, and infrastructures, creating an efficient liquidity network.
Web3 is still in its early stages, lacking a unified protocol or interoperable liquidity network. To reach mass adoption, the blockchain ecosystem must achieve Protocol Abstraction to provide users with a seamless experience and provide applications with efficient liquidity. While Internet is driven by user traffics, Web3 hinges on the liquidity around assets, data, and protocols.
1. Current State of Web3: A Fragmented Network
Compared to the internet, the Web3 technology stack is inevitably moving towards diversion and complexity. The surface of Layer 1s, Rollups, Sidechains, and App Chains are cannibalizing each other after the initial glories. The fundamental reason is that blockchain technology is still in a relatively early stage, lacking unified standards and liquidity infrastructure. With more and more new blockchain projects created and aimed at new use cases and technology breakthroughs, each defines its own boundaries and business models, and the top applications would build their own infrastructure to support their users and drive volumes.
Such diversion and diversification have brought prosperity with complexity, reflecting the decentralization nature of blockchain, but also causing isolation for users, developers, and liquidity.
Users need to transact across different chains and middleware, facing high entry barriers and asset security risks:
- Entry barriers: Performing a simple interaction requires choosing a blockchain, and corresponding wallet, and obtaining sufficient target chain’s token to pay for its gas fee when doing cross-chains.
- Transaction friction: Manual operation of multi-wallets, addresses, and private keys across chains is required.
- Security risk: Each transaction takes multiple signature authorizations, which not only risks phishing attacks and/or protocol failures, but also does not provide the same level of protection as traditional banking networks.
Developers have to prioritize the selection of blockchain protocols and ecosystems before product design and user experience:
- Choice of Ecosystem: have to weigh on programmable language, developer tools, and community activeness.
- Choice of Liquidity: User and liquidity are dispersed across different ecosystems, and project teams are often distracted by deployment on different blockchains, leading to fragmented liquidity for products and low capital utilization for the project.
- Product Isolation: Products cannot naturally integrate or iterate smoothly with other products.
Every additional step of operations and technical knowledge required will continue to rule out new users and developers when they enter Web3. Although infrastructures are advancing rapidly, user experience and application layers progress slowly. Ultimately, only a few applications can withstand such high interaction and development thresholds, and most of applications concentrate on the DeFi space only.
2. Application Driven Infra Upgrade: Technology Abstraction
In the early days of Web2, users had to deal with complex underlying technologies, which would soon be replaced by the technology “Abstraction”, where users can focus only on the UI (User Interface) / UX (User Experience). Abstraction technology encapsulates modules, freeing up users and developers from messes caused by scattered primitive modules.
The Abstraction paves the way for applications’ explosive growth, where developers can focus on product design and user experience, and users can utilize applications seamlessly. Most importantly, all applications and users can access the universal ecosystem and liquidity network at same time. Users can instantly connect to the internet, complete tasks through graphical interfaces, browse web pages by simply entering URLs in the address bar, and log in to any application through unified authentication. Application developers can concentrate on business logic without worrying about underlying browser compatibility and DOM operations, while cloud virtual servers seamlessly integrate the underlying infrastructure of all applications (including storage, computation, etc.). The focus on Abstraction in blockchain infrastructure and UIUX is just at its beginning, but Web3 may expedite development and surpass the Web2 era, leveraging a mature abstraction framework that’s already established in Web2.
We believe that, in order to achieve Web3 mass adoption, Abstraction is inevitable for building technology innovation and infrastructure for super applications and a diversified user base, just like the Internet. We observed that the rise and thriving of many public blockchain infrastructures closely associated with the user growth from “Supper Apps”, e.g. Binance / Trust Wallet — BSC, Coinbase — Base, OKX / OK Wallet — X Layer, Telegram — TON, Metamask — Linea, Tether — Tron, Axie Infinity — Ronin, etc.
3. Chain Abstraction: Hiding Blockchain Complexity
Chain abstraction hides the complexity of blockchain technology, presenting only a simple and convenient user interface. It aims to integrate different modules in a composable way, bridging the gap between developers and users. This ensures that end-users can seamlessly browse and use Web3 applications without paying attention to underlying blockchain, cross-chain operations, gas payments, and other intricate details.
Chain abstraction is just a design philosophy based on integration of all kinds of solutions covering different layers of user interaction with the blockchain. The Access Layer is the front-end interface where users interact with the blockchain, responsible for providing a stable and user-friendly UI and UX, allowing users to interact with multiple blockchains seamlessly. The Interface Layer ensures the real construction of blockchain applications and provides a safe and reliable communication channel. The Functional Layer connects decentralized applications (Dapps) and blockchains, serving as the key to achieving interoperability among Web3 protocols, users, assets, and liquidity.
Multi-chain seems inevitable, and multi-chain communication is key to the chain abstraction of the functional layer. Early cross-chain bridges were able to achieve cross-chain token transfers, but they were cumbersome for users and could only meet the needs of asset transfers. The ability to pass messages between chains is crucial for building omni-chain Dapps to achieve more complex use cases, promoting omni-chain governance, token transactions, contract calls, and user experience. Currently, there are over 100 bridges connecting various homogeneous or heterogeneous chains, rooted in the interoperability trilemma:
- Trustlessness: security equal to the security of the underlying blockchain;
- Extensibility: the ability to be supported by any blockchain;
- Generalizability: capacity to handle arbitrary cross-chain data
Depending on the Speed, Cost, Security, and Other Requirements, there are many different Cross-Chain Communication Protocols and Verification Methods. The core of multi-chain communication is based on the assumption of mutual trust. The current blockchain consensus proof mechanism (e.g., already confirmed transaction blocks) can be used as a “proof” to verify other chains:
- Centralization Model: Relies on centralized external validators, usually through multi-signature schemes.
-Trust Assumption: Centralized entities are trustworthy and hence not easily compromised;
-Examples: Centralized exchanges, bridges (e.g., Wormhole who has only 19 validators), etc.
- Proof of Stake (PoS) Economics: also uses multi-signature schemes, but adds a staking mechanism as security;
-Trust Assumption: slashing mechanism to raise the cost of malicious behavior, besides credibility of trusted entities;
-Examples: PoS has various design schemes, such as implementing smart contract functionality on L1 based on Cosmos (Axelar, Zetachain), and providing security through ETH restaking (Omni Network), among others.
- Multi-parties Under Game Theory: PoS security, plus decomposing the verification process into two (or more) independent tasks completed by two (or more) independent entities, thus ensuring security by preventing entity collision.
-Trust Assumption: Besides trusting that external entities care about their reputation and economic incentives, this model relies on different entities operating independently without collusion.
-Examples: assigning cross-chain messaging and verification to different roles, such as Connext for OP-Rollup bridge (Optimism verification with the introduction of Watchers for whistleblowing mechanisms); Layerzero (Oracle + Relayer) with two-way verification, and Chainlink CCIP (Risk Management + Committing DON + Execution DON) extending to three parties.
- Math Proof: validate the target chain with rigorous mathematical proofs:
-Trust Assumption: Cryptographic proofs relying on the inherent security of the target chain and source chain;
-Examples: Hash Time-Locked Contracts (HTLC) in the BTC Lightning Network, light Node verification (Cosmos IBC), and ZK-Rollup bridges.
Security is the foundation of user experience but is usually compromised for scalability and generality. In theory, we hope to achieve high security based on mathematical verification, but it is difficult to scale and widely deploy based on such cross-chain communication protocols. Nevertheless, frequent hacking incidents have once again highlighted the importance of security. Developers should provide security guarantees at the underlying infrastructure and try to solve issues of speed, cost, and ecosystem fragmentation rather than simply transferring the risk to users.
The Fundamental Layer provides blockchain technology at the bottom layer and primarily involves architecture design for blockchain in order to optimize stability, security, cost, and speed. Through the relentless efforts of engineers, we believe that the performance of current monolithic chains has reached a fairly usable level, resulting in certain solutions developed to link multiple chains on the block construction level. The core of this layer of abstraction is scalability, and some directions for building at this level include:
- Shared Sequencer: Each L1 / Rollup needs to maintain its own Sequencer, responsible for collecting transactions, packaging them, and reaching consensus / submitting them to the mainnet. In a Shared Sequencer architecture, multiple chains share a common set of Sequencers, supporting interoperability. Due to the consensus mechanism of heterogeneous chains, there are significant differences in block structures. Currently, Shared Sequencers are mainly focused on serving Ethereum Rollups (Espresso). Rome utilizes Solana as the execution layer for the Shared Sequencer to achieve cross-chain liquidity between Solana and Ethereum Rollups.
- Aggregate Verification: unified cross-chain communication contract for Rollups is built on L1. In the aggregate layer, a dependency graph for blocks of different Rollups is constructed, aggregating cross-chain information from all chains through a zero-knowledge proof to achieve atomic interoperability. Polygon AggLayer is a cross-chain infrastructure provided for L2s built using Polygon CDK, aggregating ZK proofs from all connected Rollups and uploading them to the Ethereum mainnet.
Although different project teams share the same goal of providing users with a simple and intuitive way to manage omni-chain applications, they significantly differentiate in focus and implementation paths. These differences stem from their unique technical challenges, functional requirements, cost-benefit trade-offs, and market considerations.
Users often explicitly express their needs, such as asking for a “faster horse”, but their true need is to “reach the destination faster”. Automobile is the right solution, but its success was driven by the combined efforts of the industrial revolution, infrastructure development, and legal frameworks. Therefore, truly effective solutions need to start from first principles, focus on optimization at the most fundamental level, and be supported by comprehensive efforts across various aspects to ultimately succeed.
Therefore, we believe that the following points should be considered when designing chain abstraction solutions:
- Security Comes First: Any solutions designed at the cost of security are merely temporary measures and cannot achieve the goal of mass adoption and scalable on-chain applications. Decentralization is the most critical consideration for the security of blockchain protocols.
- Bottom-Up from the Base Layer: The upper layers of the stack depend on the design of the layers underneath. Transitional solutions will be replaced as the infrastructure iterates.
- Technology Aggregation for the Common Layer: as infrastructure continues to iterate, different layers such as wallets, liquidity, and cross-chain communication protocols need further aggregation to provide simple solutions.
Reference
https://www.cyclenetwork.io/whitepaper.pdf
https://medium.com/@l1g3nd/abstraction-the-key-to-efficient-programming-4d98a0499f45
https://web.cs.ucla.edu/classes/winter12/cs111/scribe/3a/
https://web3ux.design/the-levels-of-web3-user-experience
https://li.fi/knowledge-hub/trust-is-a-spectrum/
https://li.fi/knowledge-hub/bridge-aggregation-in-a-multi-chain-world/
https://docs.connext.network/concepts/background/verification-mechanisms
https://jim.mirror.xyz/a9PxnNed9o8DSpssUBQeZTvRASmDaY_HDAnGXOMyeFY
About Summer capital
Summer Ventures is an institutional VC aiming to empower Web3 builders and connect blockchain ecosystem with real world mass markets. Since 2018, it has invested in 40+ companies as lead and strategic investors across CeFi, DeFi, fintech, RWA, interoperable infrastructure, DePIN, and consumer applications. With its team’s strong network and experience in fintech, consumer, and hardware infrastructures, Summer Ventures is dedicated to supporting the future blockchain-enabled inclusive finance and data interoperability layer.
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