Author: Jin Kwon, Co-founder and Chief Strategy Officer of Saga, CoinTelegraph
Translated by: Bai Shui, Jinse Finance
Crypto has made significant progress in improving transaction throughput. New Layer 1 (L1) and side networks offer faster and cheaper transactions. However, a core challenge has come into focus: liquidity fragmentation - capital and users scattered across a growing blockchain maze.
Vitalik Buterin recently emphasized in a blog post how scaling success leads to unforeseen coordination challenges. With so many chains and such dispersed value, participants face daily struggles of bridging, swapping, and wallet switching.
These issues affect not just Ethereum, but almost all ecosystems. No matter how advanced a new blockchain is, it risks becoming a liquidity "island" difficult to interconnect.
The True Cost of Fragmentation
Liquidity dispersion means traders, investors, or DeFi applications lack a single asset "pool" to leverage. Instead, each blockchain or side network has its own fixed liquidity. For users wanting to buy tokens or access specific lending platforms, this isolation creates multiple complications.
Switching networks, setting up dedicated wallets, and paying multiple transaction fees are far from seamless, especially for less tech-savvy individuals. Liquidity in each isolated pool is also weaker, leading to increased price variations and trading slippage.
Many users utilize bridges to transfer funds between chains, but these bridges are often attack targets, generating fear and distrust. If liquidity transfer becomes too cumbersome or risky, DeFi cannot gain mainstream momentum. Meanwhile, projects race to deploy across multiple networks or risk being eliminated.
Some observers worry that fragmentation might force people back to a few dominant blockchains or centralized exchanges, thereby undermining the decentralization ethos driving blockchain's rise.
Familiar Fixes, Remaining Gaps
Solutions to this challenge have emerged. Bridges and wrapped assets enable basic interoperability, but user experience remains cumbersome. Cross-chain aggregators can route tokens through a series of exchanges, but they typically don't merge underlying liquidity. They merely help users navigate.
Meanwhile, ecosystems like Cosmos and Polkadot have achieved interoperability within their frameworks, though they represent distinct domains in the broader crypto landscape.
The fundamental issue is that each chain considers itself unique. Any new chain or sub-network must "plug in" at the base level to truly unify liquidity. Otherwise, it adds another liquidity realm users must discover and bridge. This challenge becomes more complex because blockchains, bridges, and aggregators view each other as competitors, deliberately isolating themselves and making fragmentation more apparent.
Integrating Liquidity at the Base Layer
Base layer integration solves liquidity fragmentation by embedding bridging and routing functions directly into a chain's core infrastructure. This approach appears in certain Layer 1 protocols and dedicated frameworks where interoperability is viewed as a fundamental element rather than an optional add-on.
Validator nodes automatically handle cross-chain connections, allowing new chains or side networks to instantly launch and access liquidity from the broader ecosystem. This reduces dependence on third-party bridges that often introduce security risks and user friction.
The challenges Ethereum itself faces with heterogeneous Layer 2 solutions highlight integration's importance. Different participants - Ethereum as a settlement layer, L2 focused on execution, and various bridging services - each have their own motivations, leading to liquidity dispersion.
Vitalik's mention of this issue emphasizes the necessity for more cohesive design. The integrated base layer model incorporates these components at launch, ensuring funds can flow freely without forcing users to navigate multiple wallets, bridging solutions, or rollups.
Integrated routing mechanisms also consolidate asset transfers, simulating a unified liquidity pool behind the scenes. By capturing a small portion of overall liquidity flow instead of charging users per transaction, such protocols reduce friction and encourage capital movement across the network. Developers deploying new blockchains can immediately access shared liquidity foundations, while end-users can avoid using multiple tools or encountering unexpected fees.
This focus on integration helps maintain a seamless experience, even as more networks come online.
More Than Just an Ethereum Issue
While Buterin's blog post focuses on Ethereum's rollups, fragmentation is ecosystem-agnostic. Whether projects are built on Ethereum Virtual Machine-compatible chains, WebAssembly-based platforms, or other platforms, the fragmentation trap emerges if liquidity is isolated.
As more protocols explore base layer solutions - embedding automatic interoperability into their chain design - there's hope that future networks will help unify rather than further divide capital.
A clear principle emerges: without connectivity, throughput is meaningless.
Users don't need to consider L1, L2, or side chains. They simply want seamless access to decentralized applications (DApps), games, and financial services. Adoption will occur if stepping onto a new chain feels identical to operating on a familiar network.
Towards a Unified, Fluid Future
The crypto community's focus on transaction throughput reveals an unexpected paradox: the more chains we create to improve speed, the more we disperse our ecosystem's advantage of shared liquidity. Each new chain aimed at increasing capacity creates another isolated capital pool.
Building interoperability directly into blockchain infrastructure provides a clear path to addressing this challenge. When protocols automatically handle cross-chain connections and effectively route assets, developers can scale without fragmenting their user base or capital. The model's success stems from measuring and improving the smoothness of value flow across the entire ecosystem.
The technical foundations for this approach currently exist. We must carefully implement these measures and pay attention to security and user experience.
