Each chain is an isolated island, and Crypto Assets face a Liquidity crisis.

Author: Jin Kwon, Co-Founder and Chief Strategy Officer of Saga, CoinTelegraph

Compiled by: Bai Shui, Jin Se Cai Jin

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 become a focus: liquidity fragmentation—capital and users are scattered across an ever-growing maze of blockchains.

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

These issues affect not only Ethereum but nearly all ecosystems. Regardless of how advanced a new blockchain may be, it can potentially become 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 take advantage of. Instead, each blockchain or sidechain has its own fixed liquidity. This isolation brings multiple troubles for users who want to purchase tokens or access specific lending platforms.

Switching networks, setting up dedicated wallets, and paying multiple transaction fees is far from seamless, especially for those who are not very 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 of attacks, leading to fear and distrust. If the liquidity transfer is too cumbersome or carries too much risk, DeFi will not be able to gain mainstream momentum. At the same time, projects are scrambling to deploy across multiple networks, or they risk being eliminated.

Some observers are concerned 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 repairs still have gaps.

A solution has emerged to address this challenge. Bridges and wrapped assets have achieved basic interoperability, but the user experience remains cumbersome. Cross-chain aggregators can route tokens through a series of exchanges, but they often do not consolidate the underlying liquidity. They only assist users in navigation.

At the same time, ecosystems like Cosmos and Polkadot have achieved interoperability within their frameworks, even though they operate in different realms within the broader crypto space.

The problem is fundamental: each chain considers itself to be different. Any new chain or subnetwork must be “inserted” at the underlying level to truly unify liquidity. Otherwise, it will add another area of liquidity that users must discover and bridge. This challenge becomes more complex as blockchains, bridges, and aggregators see each other as competitors, leading to intentional isolation and making fragmentation more pronounced.

integrates liquidity at the base layer

The integration at the base layer addresses the issue of liquidity fragmentation by embedding bridging and routing functionalities directly into the core infrastructure of the chain. This approach is seen in certain Layer 1 protocols and dedicated frameworks, where interoperability is regarded as a fundamental element rather than an optional add-on.

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

The challenges faced by Ethereum itself in 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—each have their own motivations, leading to fragmented liquidity.

Vitalik’s mention of this issue emphasizes the necessity for a more cohesive design. The integrated base layer model combines these components 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 the 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 with more networks coming online.

is not just an Ethereum issue.

Although Buterin’s blog post focuses on Ethereum’s aggregation, fragmentation is unrelated to the ecosystem. Whether projects are built on chains compatible with the Ethereum Virtual Machine, platforms based on WebAssembly, or other platforms, fragmentation traps will occur if liquidity is isolated.

As more and more protocols explore foundational layer solutions—embedding automatic interoperability into their chain designs—there is hope that future networks will not further split capital, but instead contribute to unifying it.

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

Users do not need to consider 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, then adoption will occur.

Moving towards a unified and fluid future

The crypto community’s focus on transaction throughput reveals an unexpected paradox: the more chains we create to increase speed, the more decentralized our ecosystem’s advantage becomes, and that advantage lies in its shared liquidity. Each new chain designed to increase capacity creates another isolated pool of capital.

Building interoperability directly into the 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 comes from measuring and improving the smoothness of value flow throughout the ecosystem.

The technical foundation for this method already exists. We must implement these measures seriously and pay attention to security and user experience.