How Accumulate Solves The Fragmentation Problem Between Blockchains

Written by TJ

On February 2, 2022

In a previous article, we covered the benefits of blockchains embracing a modular architecture over one that is monolithic. Modular architectures separate the execution, consensus, and data availability layers into specialized components through the use of sidechains, shards, and layer 2 scaling solutions.

In a broader context, the modular blockchain architecture is the ideal design for establishing a multi-chain world where hundreds of independent networks can co-exist while being optimized to solve for one or more components of the scalability trilemma (scalability, security, and decentralization).

One example of this would be a sidechain or L2 network that is optimized for scalability so that it can run a DEX, while leveraging Optimistic or zk-Rollups to attach a history of all transactions on its network to a more secure and decentralized mainchain in order to increase censorship resistance.

The Downside of the Modular Blockchain Architecture 

While a modular blockchain architecture seems to be the ideal solution to solving the scalability trilemma, it has two major flaws: 1) difficulty retrieving and verifying data across disparate networks and 2) the fragmentation of liquidity which leads to poor user adoption.

Fragmentation is a natural byproduct of decentralization. When operations are dispersed across multiple locations, coordinating and arriving at a consensus around what has happened and what is true only becomes more difficult. On a monolithic blockchain, the coordination problem is solved by consensus mechanisms and the use of light nodes to store the full history of all transactions on a single blockchain. 

As we move towards a multi-chain and modular blockchain world, we now have to contend with the problem of achieving unified consensus (i.e agreeing on what is true) between various multiple L1s, L2s, and sidechains while also forming a unified and tamper-proof record of the history of validated transactions within and between these networks.

Furthermore, one of the biggest hindrances to the adoption of decentralized applications besides the inability to scale is the lack of sufficient liquidity. Liquidity is defined as the efficiency or ease in which an asset can be converted into cash or another asset without having a major impact on its price. The level of available liquidity in a DeFi protocol is a critical marker for success because it determines whether or not large participants (institutions, etc) can efficiently trade positions of $1 million, $10 million, or more without losing money due to high slippage (the difference between the expected price of a trade and the price at which the trade is executed).

Without the adoption of these protocols by large players, the DeFi, NFT, and P2E gaming ecosystems will continue to remain a niche space for traders and investors who only have a limited amount of capital to deploy. This also hinders the ability for newer tokens to capture a larger market because of the high slippage costs and uncertainty around whether one can exit their position if they purchase a large amount of an illiquid token.

Accumulate’s Solution: Decentralized Aggregation under a Shared Framework 

Accumulate tackles both of these issues by serving as an aggregator for disparate blockchains and decentralized marketplaces using Accumulate Digital Identifiers (ADI’s) as the shared framework for communication, data auditing, and reconciliation. 

Accumulate Digital Identifiers (ADI) are human-readable addresses similar to website URLs that are chosen by individuals or assigned by organizations to represent their presence on the blockchain. One way to think about an ADI is as a wrapper for a token that enables that token to assume a new format and perform certain functions that are particular to another protocol that is different from its own. 

Those who use the Ethereum network will be familiar with Wrapped ETH or Wrapped BTC. These are versions of Ethereum’s native cryptocurrency ETH and Bitcoin that are inputted into a smart contract that enables a new type of token to emerge (WBTC and WETH) that is more compatible with the Ethereum network and its various decentralized applications.   

Wrapping allows users to lend their BTC on Ethereum based DeFi protocols like Aave and earn yield, despite the lack of compatibility between the Ethereum and Bitcoin network due to their different consensus mechanisms.

Similarly, ADIs can manage NFTs, cryptocurrencies, or tokens from different blockchains and marketplaces, allowing them to be seamlessly traded between each other and recorded on a unified and accessible ledger that is on Accumulate. 

This solution enables liquidity to be more widely dispersed between protocols and tokens, while also consolidating transaction data between disparate networks in order to solve the data availability problem (i.e improving the ability for nodes to download and audit the history of transactions between multiple blockchains in a way that is secure, transparent and tamper-proof). 

Solving the Liquidity Problem  

The aggregation of various Defi and NFT marketplaces under a single ADI-enabled communication layer creates an opportunity for liquidity to be more easily injected into the system in order to provide buyers and sellers with the best prices to enter and exit their positions. 

We can imagine a scenario where large financial institutions such as hedge funds may see an opportunity to put significant amounts of capital to work that can be used to provide liquidity and facilitate market-making amongst NFT, cryptocurrency, and gaming assets from various blockchains.

All entities and tokens would be registered as ADI’s. The hedge fund could assume the role of a market maker and offer to buy bundles of multi-chain NFT assets at a favorable discount from their average floor price, which it could then turn around to sell to other entities on Accumulate for a marginal profit. 

Similarly, the hedge fund could also purchase a variety of low cap tokens in large quantities at a discount in exchange for highly liquid assets like Bitcoin, ETH, or USDC. These bundles of low cap NFTs and tokens could be managed by a single ADI, making them easily transferable between other ADIs and even usable as a form of collateral to borrow other assets. 

Tying this structure together, oracle protocols would provide Accumulate with a real-time price feed of ADI-managed digital assets from their native chains. 

The end result would be an aggregation of digital assets from all corners of the Web3 space operating under the umbrella of Accumulate’s unified communication layer and supported by deep pockets of liquidity provided by the traditional financial system. 

Unifying Record-Keeping Across Disparate Networks 

Once the liquidity problem has been solved, the next big challenge is one of unified record keeping or data availability. Simply put, how do we enable nodes to download and audit the history of transactions between multiple blockchains in a way that is secure, transparent, and tamper proof.

This is where Accumulate’s unique architecture stands out. Accumulate consists of multiple sub-chains that are managed by account types:

  • We have Token Accounts for issuing tokens and tracking deposits and withdrawals
  • Data accounts for tracking and organizing data approved by an ADI
  • Staking Accounts for staking Accumulate’s ACME tokens to participate in consensus and secure the network and
  • Scratch Accounts for accruing data that is needed to build consensus across the Accumulate network and enabling the coordination of multisig validation.

Each account encodes large batches of transaction data between ADIs in the form of a hash. A hash allows you to verify the history of validated transactions within a Merkle tree (an expanding hierarchical data structure). 

Block Validator Networks or BVNs are responsible for producing the hashes, which are then summarized by a Directory Network (DN). Both BVNs and DNs are made up of an interconnected group of validators that stake ACME tokens in order to validate entries of new hashes onto a ledger and update the state of the broader Accumulate network.

The Directory Network is the final summation of all the transactions that have been formed between ADI’s on the Accumulate Network. It is considered to be a single and ever-evolving source of truth for the  Accumulate Network. 

As Accumulate grows in adoption and ADI’s grow to represent an increasing number of tokens and accounts from various blockchain networks, the Directory Network will naturally become a secure and tamper-proof source of truth for all activities that occur throughout the Web3 space, including the interactions between crypto-native and traditional entities, individuals and assets. 

Conclusion 

While the embrace of a multi-chain world and the adoption of a modular architecture comes with many benefits, there remain some downsides that have yet to be addressed by major protocols in our industry.

Networks of blockchains tend to suffer from increased fragmentation, resulting in a poor distribution of liquidity between protocols as well as an increase in the difficulty of receiving and auditing records in order to verify the broader state of all networks in aggregate. 

The answer to this problem is not more centralization but in fact better methods of aggregation between decentralized networks. This is the nuanced approach that Accumulate is providing. 

By aggregating disparate blockchains and decentralized marketplaces under a shared framework of ADI’s, Accumulate provides a gateway for centralized liquidity from within the traditional financial system to be captured and evenly distributed to multiple tokens, protocols, and marketplaces. 

Furthermore, the final accounting of all activities conducted within this shared framework is captured by Accumulates decentralized and transparent Directory Network, which serves as an ever-expanding summation of all transactions between multi-chain tokens and entities represented as ADIs. 

Ultimately, this innovative design is primed to deliver the value proposition of a multi-chain world without the drawbacks created by liquidity fragmentation and poor data availability between disparate and decentralized networks.  

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