The Decentralized Finance (DeFi) sector is undergoing significant changes with the advent of the multi-chain era, marked by the introduction of highly optimized rollups and scalable Layer 1 (L1) chains. These developments, built on modular infrastructure and powered by high-performance virtual machines, are enabling a wave of innovation and the introduction of new use cases.

However, this growth is accompanied by a notable challenge: liquidity fragmentation. The expansion of new chains, Layer 2 (L2) solutions, and DeFi protocols led to the dispersal of liquidity across various ecosystems, creating a liquidity war between participants.

Envisioning a Cross-Chain Liquidity Layer

A practical solution to this issue is the development of a cross-chain liquidity layer, which aims to:

• Consolidate liquidity: By unifying liquidity pools, this layer aims to make liquidity abundant and readily accessible, removing obstacles to the free movement of assets.
• Facilitate access to liquidity for all applications: By providing a unified pool of liquidity, applications across any blockchain, be it L1 or L2, can easily access liquidity, aiding in the growth and innovation of the sector.

The introduction of a cross-chain liquidity layer serves as a real-world answer to the problems posed by liquidity fragmentation, aiming to create a more cohesive, efficient, and flourishing DeFi ecosystem.

The importance of finding a unified solution to address the issue of liquidity fragmentation has never been greater, as it represents a significant hurdle to the sector's progression.

Comparing DeFi with Traditional Finance's CME Group

In traditional finance, the Chicago Mercantile Exchange (CME) Group serves as a centralized liquidity source and clearinghouse, streamlining transactions and enhancing market efficiency for all brokers. This centralized model contrasts with the DeFi sector, where protocols individually act as their own sources of liquidity. Unlike the CME's consolidated liquidity pool, DeFi protocols independently hunt for liquidity, often necessitating self-incentivization to attract and maintain it.

Improving Capital Efficiency with Orderly Network's Liquidity Layer

The Orderly Network's Liquidity Layer addresses one of DeFi's most persistent puzzles: the issue of liquidity fragmentation. The absence of immediate liquidity incentives often means that new protocols take months, or even years, to achieve liquidity parity with their predecessors.

This is where the Liquidity Layer shines. Its adaptable and open framework ensures that liquidity remains consistent across protocol transitions. Thus, when users migrate from one protocol to another within the Liquidity Layer's ecosystem, the overall liquidity and rate stability are unaffected. This seamless fluidity ensures that the benefits of new features and protocol upgrades can be instantly harnessed by users without the typical pitfalls of liquidity fragmentation.

Behind the Hood

Orderly adopts an orderbook design and omnichain infrastructure that brings this Liquidity layer to life, characterized by three main layers;

• Asset Layer- These are asset vaults which reside on each Orderly supported chain responsible for cross-chain asset deposit/withdrawals
• Settlement Layer- Orderly’s native L2 chain, powered by OP stack, and responsible for on-chain trade settlement and storage of relevant trading data.
• Engine Layer- Home of orderbook management. This layer manages trade executions, matching engine, risk engine, and other order-related services.

Users deposit assets into the asset layer (via the asset vault) and initiate trades on any Orderly powered broker. The deposit and trading information (orders) are then relayed to the engine layer where they are matched. With orders from all brokers converging to the same orderbook, Orderly establishes a chain-agnostic liquidity landscape that unlocks cross-netting capabilities previously unavailable in DeFi, similar to the function of CME in TradFi.

After the orders are matched, the information is uploaded and settled on the Settlement layer, allowing for improved transparency and reducing the liquidity layer’s susceptibility to market manipulation.

With all orders now settled on-chain, the settlement layer then sends /receives all deposit/withdrawal instructions across all chains from the engine layer, which are in turn relayed to the asset layers, updating all users’ on-chain balances.

All the while, no assets have moved. Only relevant trading and user information are communicated across chains powered by Layerzero.

In essence, Orderly's liquidity layer is shared with all dApps hosted on our platform. Since the liquidity is pooled in a single place, traders have access to the same pool and orderbook regardless of the broker they use on Orderly Network.