Token Merge: Unifying Aggregated Assets From Ethereum & Ethereum Layer 2s On zkLink Nova

The cryptocurrency and blockchain industries have grown rapidly into an ecosystem that now encompasses hundreds of Layer 1 blockchains and Layer 2 Rollups, thousands of DApps, and millions of users. This rise to the mainstream inevitably spurred the need for high-throughput blockchains and scalable blockchain solutions. Ethereum, in particular, saw its scalability issues addressed through the creation of Layer 2s such as Arbitrum, Optimism, Starknet, zkSync, Polygon zkEVM, Linea, and Scroll. However, these developments resulted in an intricate, multi-chain and multi-rollup world, with many unresolved challenges.

In particular, zkLink recognized early on that one of the major painpoints of existing Layer 2s within the Ethereum ecosystem and the Web3 space more broadly is liquidity fragmentation.

Acknowledging that users and builders need a better way to navigate across various Ethereum Layer 2 networks, instead of creating a cross-chain bridge, zkLink Nova’s ground-breaking liquidity aggregation, unification, and token merge features provide users with the ability to directly deposit their ETH, native L2 tokens, and stablecoins from various integrated Layer 2s to zkLink Nova’s Layer 3 platform.

Aggregating Fragmented Liquidity & Unifying Aggregated Assets Through Token Merge

zkLink Nova aggregates fragmented liquidity by allowing ETH, native Layer 2 ERC-20 tokens, and selected stablecoins to be directly bridged from Ethereum and Ethereum Layer 2 Rollups to zkLink Nova and merged for standardization and interoperable trade. This feature is separated into three categories:

1. ETH Native Unification allows ETH from separate networks to be bridged to zkLink Nova’s Layer 3 and automatically unified into a single ETH token. In addition, users can withdraw their ETH to any connected network without the need of a third-party bridge. This fosters unified and aggregated liquidity, and provides for a seamless multi-chain user experience akin to a centralized exchange but without the counterparty risk.
2. ERC-20 Token Aggregation is where native Layer 2 assets that previously existed on separate networks (for example, ARB on Arbitrum and MNT on Mantle) can be deposited to zkLink Nova and traded with each other with interoperability. This newly-introduced interoperability among the different Ethereum Layer 2 native tokens significantly improves the capital efficiency for certain DeFi applications while unlocking new use cases. This ERC-20 native token aggregation feature also applies to yield-bearing assets such as LRTs and LSTs, meaning that users can find additional earning opportunities on zkLink Nova.
3. Stablecoin Merge allows for stablecoins, issued by the same project (such as Circle or Tether) to be aggregated and merged into a unified stablecoin currency on zkLink Nova. This multi-rollup stablecoin unification feature simplifies the process of utilizing stablecoins that exist on multiple rollups and reduces gas fees.

Put together, asset aggregation offers users and developers the ability to use assets that were previously siloed on separate networks, on a single platform. On zkLink Nova, over 80 tokens can already be deposited to the Layer 3 and aggregated for trading.

The Next Step To Achieving Complete Liquidity Aggregation: Token Merge

Features one and two, ERC-20 Token Aggregation and ETH Native Unification, have been achieved and are live for users to experiment with. For example, ETH deposited from different Layer 2s are automatically merged into the same ETH token on zkLink Nova’s L3. This is because Layer 2 Rollups that utilize ETH as the network’s gas token can be automatically merged into a unified ETH through zero-knowledge proofs.

However, the issue remaining is that identical ERC-20 tokens bridged from different networks cannot be automatically merged without external information or setup. This is because ERC-20 tokens of the same kind have different token contract addresses on different networks. For example, USDC bridged from Ethereum and Arbitrum are two different tokens — USDC.Ethereum and USDC.Arbitrum — and have different addresses on zkLink Nova’s platform because of their network of origin and contract address, which poses various challenges to the user experience on zkLink Nova.

To deal with this problem, zkLink has built a contract that’s able to merge multiple source tokens of the same value into one merged token. For example, source tokens like USDC.Ethereum and USDC.Arbitrum can now be merged into the same USDC token on zkLink Nova. After this process is complete, the merged USDC represents unified liquidity when being used on zkLink Nova’s L3.

In summary, Token Merge is the process where tokens issued on different blockchains by the same entity, and of equivalent value, are consolidated into a single merged token. Tokens on zkLink Nova go through a smart contract and governance process, enhancing the usability and liquidity of these assets within the zkLink Nova ecosystem.

The first round of Token Merge is now being deployed. During the first phase of Token Merge, four tokens will be made available for merging into a unified token: USDT, USDC, DAI, and wBTC. These stablecoins that are bridged from Ethereum and zkLink Nova’s integrated Layer 2s such as Arbitrum, Base, Linea, Manta, Mantle, Optimism, and zkSync, will be eligible for merging by depositing them into the token merge contract.

In the future, beyond stablecoins, zkLink Nova will begin work on merging and unifying liquidity from L2 native tokens, and even key LST and LRT tokens, with the possibility of merging various utility tokens.

How Does Token Merge Work? Technical Details, Governance Structure, & Security Overview

On zkLink Nova, an official smart contract has been created with the functionality to merge different ERC-20 tokens (source tokens) of the same value (for example, USDC deposited from Arbitrum and USDC deposited from Ethereum), into the same merged token.

By depositing source tokens into the merge contract, a user is able to receive the same amount of the merged token in return. By burning target tokens, a user could get the same amount of any source token deposited in the merge contract.

Since Nova is expanding its network of integrations, and there will be new token assets emerging from these connected networks, the merge contract has been made upgradable to meet future unification requirements.

Smart contracts for the token merge have been audited by zkLink’s security partner, Secure3.

To prevent the risk from malicious upgrading, the merge contract takes a governance structure by multi-party signature Safe Wallet. Members participating in the governance include:

• SIG
• USDV
• Ascensive Assets
• Republic Crypto
• Efficient Frontier
• Layerbank
• Wintermute
• Particle Network
• Skynet Trading
• Flowtraders
• Redstone Oracles
• Manta Network

It takes at least 2/3 of members’ approval that an upgrading proposal can be approved. Additionally, through a time-lock design, it takes another seven days to make an upgrading proposal for adding a new source token for a merged token effective after getting approval.

For further information regarding the details of Token Merge, see zkLink Nova’s documentation.

Join our newest campaign, Aggregation Parade Phase II — Token Merge Ceremony — to experiment with token merge on our Layer 3 and earn rewards while doing so. Users participating in the Token Merge Ceremony can receive additional Nova Points boosts by holding merged tokens: 2.5x for Merged wBTC and 3x for Merged Stablecoins.