Capital and users are scattered in an ever-growing blockchain maze.

Written by: Jin Kwon, Co-founder and Chief Strategy Officer of Saga, Cointelegraph

Translated by: Bai Shui, Golden Finance

Cryptocurrency has made significant progress in improving transaction throughput. New Layer 1 (L1) and side networks offer faster and cheaper transactions than ever before. However, a core challenge has come into focus: liquidity fragmentation—capital and users are dispersed in an ever-growing blockchain maze.

Vitalik Buterin highlighted in a recent blog post how successful scaling has led to unforeseen coordination challenges. With so many chains and so much value dispersed among them, participants face the daily hassle of bridging, swapping, and switching wallets.

These issues affect not only Ethereum but nearly every ecosystem. No matter how advanced a new blockchain may be, it risks becoming a liquidity "island" that is difficult to connect with others.

The True Cost of Fragmentation

Liquidity fragmentation means that traders, investors, or decentralized finance (DeFi) applications do not have a single asset "pool" to utilize. Instead, each blockchain or side network has its own fixed liquidity. This isolation creates multiple headaches for users looking to purchase tokens or access specific lending platforms.

Switching networks, opening dedicated wallets, and paying multiple transaction fees are far from seamless, especially for those who are less tech-savvy. The liquidity in each isolated pool is also weaker, leading to increased price discrepancies and trading slippage.

Many users utilize bridges to transfer funds between chains, but these bridges often become targets for attacks, triggering fear and distrust. If liquidity transfer is too cumbersome or risky, DeFi cannot gain mainstream momentum. Meanwhile, projects are racing to deploy across multiple networks, or risk being left behind.

Some observers worry that fragmentation may force people back to a few dominant blockchains or centralized exchanges, undermining the decentralized ethos that has driven the rise of blockchain.

Familiar Fixes, Yet Gaps Remain

Solutions to this dilemma have emerged. Bridges and wrapped assets achieve basic interoperability, but the user experience remains cumbersome. Cross-chain aggregators can route tokens through a series of swaps, but they often do not consolidate underlying liquidity. They merely help users navigate.

Meanwhile, ecosystems like Cosmos and Polkadot have achieved interoperability within their frameworks, although they exist in different realms within the broader crypto space.

The problem is fundamental: each chain considers itself distinct. Any new chain or subnetwork must "plug in" at the base level to truly unify liquidity. Otherwise, it adds another liquidity domain that users must discover and bridge. This challenge becomes more complex as blockchains, bridges, and aggregators view each other as competitors, leading to intentional isolation and making fragmentation more pronounced.

Integrating Liquidity at the Base Layer

Base layer integration addresses liquidity fragmentation by embedding bridging and routing functions directly into the core infrastructure of the chain. This approach has emerged in certain Layer 1 protocols and dedicated frameworks, where interoperability is seen as a foundational element rather than an optional add-on.

Validator nodes automatically handle cross-chain connections, allowing new chains or side networks to launch immediately and access the liquidity of a broader ecosystem. This reduces reliance on third-party bridges, which often bring security risks and user friction.

The challenges Ethereum itself faces with heterogeneous Layer 2 (L2) solutions highlight the importance of integration. Different participants—Ethereum as the settlement layer, L2 focused on execution, and various bridging services—have their own motivations, leading to liquidity fragmentation.

Vitalik's mention of this issue underscores the need for more cohesive design. An integrated base layer model brings these components together at launch, ensuring that funds can flow freely without forcing users to navigate multiple wallets, bridging solutions, or aggregators.

The integrated routing mechanism also consolidates asset transfers, simulating a unified liquidity pool behind the scenes. By capturing a small portion of overall liquidity flow rather than charging users for each transaction, such protocols reduce friction and encourage capital movement across the entire network. Developers deploying new blockchains can immediately access a shared liquidity base, while end users can avoid using multiple tools or encountering unexpected fees.

This emphasis on integration helps maintain a seamless experience, even as more networks come online.

Not Just an Ethereum Problem

While Buterin's blog post focuses on Ethereum's aggregation, fragmentation is not limited to any specific ecosystem. Whether a project is built on an Ethereum Virtual Machine-compatible chain, a WebAssembly-based platform, or another platform, fragmentation traps will arise if liquidity is isolated.

As more protocols explore base layer solutions—embedding automatic interoperability into their chain designs—there is hope that future networks will not further split capital but instead contribute to its unification.

A clear principle emerges: without connectivity, throughput is meaningless.

Users should not have to think about L1, L2, or sidechains. They simply want seamless access to decentralized applications (DApps), games, and financial services. If the experience of stepping onto a new chain feels the same as operating on a familiar network, adoption will follow.

Towards a Unified, Fluid Future

The crypto community's focus on transaction throughput reveals an unexpected paradox: the more chains we create to increase speed, the more dispersed the advantages of our ecosystem become, and that advantage lies in its 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 success of this model lies in measuring and improving the smoothness of value flow throughout the ecosystem.

The technical foundation for this approach already exists. We must earnestly implement these measures while paying attention to security and user experience.

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