Fragmentation of Liquidity in the Encryption Field and Solutions

In recent years, the cryptocurrency sector has made significant progress in improving transaction throughput. New blockchain and sidechain networks provide faster and lower-cost transaction experiences. However, a core challenge that has emerged and garnered widespread attention in the industry is liquidity fragmentation—funds and users are dispersed across increasingly complex blockchain networks.

Ethereum founder Vitalik Buterin recently pointed out in an article that successful scaling has brought unexpected coordination challenges. Due to the large number of blockchains, with significant value dispersed across each chain, users face frequent issues such as cross-chain operations, token exchanges, and wallet switching on a daily basis.

These issues not only affect the Ethereum ecosystem but also exist in other blockchain networks. Even the most advanced emerging blockchains can become difficult to interconnect liquidity "islands."

The Real Impact of Fragmentation

Liquidity fragmentation means that traders, investors, or decentralized finance ( DeFi ) applications cannot take advantage of a unified asset pool. Instead, each blockchain or sidechain has its own independent liquidity pool. This isolation creates many inconveniences for users, especially when purchasing tokens or accessing specific lending platforms.

For users with lower technical skills, the process of frequently switching networks, creating dedicated wallets, and paying multiple transaction fees is far from a seamless experience. In addition, the shallow depth of each independent Liquidity pool leads to increased price volatility and trading slippage.

Although many users transfer funds between different chains through cross-chain bridges, these bridges often become targets for hacker attacks, causing panic and distrust among users. If the cross-chain transfer process is too cumbersome or the risks are too high, DeFi will struggle to gain mainstream adoption. At the same time, in order to avoid being eliminated from the market, many projects have to deploy on multiple networks simultaneously.

Some observers worry that fragmentation may force users to return to a few dominant regional chains or centralized exchanges, which goes against the original intention of blockchain decentralization.

Existing Solutions and Their Limitations

Currently, some solutions have emerged to address this issue. Cross-chain bridges and wrapped assets have achieved basic interoperability, but the user experience is still not smooth enough. Cross-chain aggregators can route tokens through multiple swaps, but they often fail to integrate underlying Liquidity, merely assisting users in navigating between different chains.

At the same time, some blockchain ecosystems have achieved interoperability within themselves, but they remain relatively independent fields in the broader encryption domain.

The root of the problem is that each chain sees itself as an independent entity. Any new chain or subnet must perform an "insertion" at the underlying level to truly unify liquidity. Otherwise, it will only add another liquidity domain that users need to discover and bridge. The competitive relationship among various blockchains, bridges, and aggregators leads to intentional isolation and exacerbates fragmentation, making this challenge even more complex.

Solutions for Integrating Liquidity at the Base Layer

Integrating at the base layer addresses the issue of liquidity fragmentation by embedding bridging and routing functions directly into the core infrastructure of the chain. This approach has already emerged in certain blockchain protocols and dedicated frameworks, viewing interoperability as a foundational element rather than an optional add-on.

Verification nodes automatically handle cross-chain connections, enabling new chains or sidechains to quickly launch and access a broader ecosystem of Liquidity. This reduces reliance on third-party bridges, lowering security risks and user friction.

The challenges faced by Ethereum in heterogeneous Layer 2 solutions highlight the importance of integration. Different participants—Ethereum as a settlement layer, Layer 2 focusing on execution, and various bridging services—all have their own motives, leading to fragmented Liquidity.

Vitalik's attention to this issue highlights the necessity of a more cohesive design. The integrated base layer model brings these components together at launch, ensuring that funds can flow freely without users having to switch between multiple wallets, bridging solutions, or aggregators.

The integrated routing mechanism also incorporates asset transfers, simulating a unified Liquidity pool in the background. By capturing a small portion of the overall Liquidity flow instead of charging users for each transaction, such protocols reduce friction and encourage the flow of capital throughout the entire network. Developers 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.

Universal Challenges Across Ecosystems

It is worth noting that the fragmentation issue is not limited to the Ethereum ecosystem. Regardless of whether a project is built on chains compatible with the Ethereum Virtual Machine, platforms based on WebAssembly, or other platforms, if liquidity is isolated, fragmentation traps will arise.

As more and more protocols explore foundational layer solutions and embed automatic interoperability into chain design, people hope that future networks will not further split capital, but rather help unify it.

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

Users do not need to consider the technical details of Layer 1, Layer 2, or sidechains. They only want seamless access to decentralized applications (DApps), games, and financial services. If the experience of using the new chain is similar to operating on familiar networks, then users are more likely to adopt it.

Looking Forward to a Unified Liquidity Future

The focus of the encryption community on transaction throughput reveals an unexpected paradox: the more chains we create to increase speed, the more the advantages of the ecosystem become dispersed, and this advantage lies precisely in its shared liquidity. Each new chain designed to enhance processing capacity creates another isolated capital pool.

Building interoperability directly into the blockchain infrastructure provides a clear path to addressing this challenge. When protocols automatically handle cross-chain connections and efficiently 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. The industry needs to seriously implement these measures and prioritize security and user experience to advance the encryption ecosystem towards a more unified and liquid future.