Fragmentation Issues of Crypto Assets Liquidity and Solutions

In recent years, the Crypto Assets field has made significant progress in improving transaction processing capabilities. New mainchain and sidechain networks offer faster and lower-cost transaction experiences. However, a core challenge has gradually emerged: Liquidity fragmentation—funds and users are dispersed across an increasingly complex blockchain network.

Ethereum founder Vitalik Buterin recently pointed out in an article that successful scaling has brought unexpected coordination challenges. With the numerous chains and the dispersion of significant value, participants face frequent issues such as cross-chain transactions, exchanges, and wallet switches every day.

These challenges affect not only Ethereum but also plague almost all blockchain ecosystems. Even the most advanced new blockchains can become difficult-to-interconnect liquidity "islands."

The actual impact of fragmentation

Liquidity fragmentation means that traders, investors, or decentralized finance ( DeFi ) applications cannot take advantage of a single asset "pool". Instead, each blockchain or sidechain has its own independent liquidity. This isolation creates many inconveniences for users who want to purchase tokens or use specific lending platforms.

The process of frequently switching networks, creating dedicated wallets, and paying multiple transaction fees is far from smooth, especially for users with weaker technical skills. The liquidity in each isolated pool is also relatively weak, leading to increased price differences and trading slippage.

Many users transfer funds across different chains through cross-chain bridges, but these bridges often become targets for hacker attacks, causing users to feel fear and distrust. If the Liquidity transfer is too cumbersome or the risks are too high, DeFi will struggle to gain mainstream development momentum. Meanwhile, various projects have to deploy on multiple networks, or they risk being eliminated.

Some observers are concerned that fragmentation may force users back to a few dominant regional blockchains or centralized exchanges, thereby contradicting the decentralized philosophy that promotes the development of blockchain.

Existing solutions and their limitations

Currently, there have been some solutions emerging to address this challenge. Cross-chain bridges and wrapped assets have achieved basic interoperability, but the user experience is still not user-friendly enough. Cross-chain aggregators can route tokens through a series of exchanges, but they often do not merge underlying Liquidity, merely assisting users in navigation.

At the same time, ecosystems like Cosmos and Polkadot have achieved interoperability within their frameworks, although they remain relatively independent fields in the broader Crypto Assets space.

The root of the problem lies in the fact that each chain believes it is unique. Any new chain or sub-network must "insert" itself at the base level to truly unify Liquidity. Otherwise, it will only add another area of Liquidity that users must discover and bridge. This deliberate isolation, as blockchain, bridges, and aggregators view each other as competitors, further exacerbates the fragmentation issue.

Basic Layer Liquidity Integration

The integration of 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 appears in certain main chain protocols and specialized frameworks, viewing interoperability as a fundamental element rather than an optional add-on.

The verification nodes automatically handle cross-chain connections, allowing new chains or sidechains to be launched immediately and access a broader ecosystem of Liquidity. This reduces reliance on third-party bridges, which often introduce security risks and user experience issues.

Ethereum itself faces challenges in heterogeneous Layer 2 solutions (L2), highlighting the importance of integration. Different participants—Ethereum as the settlement layer, L2 focusing on execution, and various bridging services—have their own motivations, leading to a dispersal of Liquidity.

Vitalik's focus on this issue highlights the need for more cohesive design. The integrated foundational layer model brings these components together at launch, ensuring that funds can flow freely without users having to switch back and forth between multiple wallets, bridging solutions, or aggregators.

The integrated routing mechanism also consolidates asset transfers, simulating a unified Liquidity pool in the backend. 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 shared Liquidity resources, 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 limited to the common issues of Ethereum.

Although Buterin's article mainly focuses on Ethereum's scaling solutions, the fragmentation issue is not specific to any ecosystem. Regardless of whether a project is built on a chain compatible with the Ethereum Virtual Machine, on a platform based on WebAssembly, or on another platform, as long as liquidity is isolated, it will fall into the trap of fragmentation.

As more and more protocols explore foundational layer solutions—embedding automatic interoperability into chain design—there is hope that future networks will not further fragment capital, but rather contribute to the unification of capital.

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

Users do not need to consider the main chain, layer two networks, or side chains. They just want to be able to seamlessly access decentralized applications (DApps), games, and financial services. If the experience with the new chain is the same as operating on familiar networks, then users will be more likely to accept it.

Moving towards a unified and liquid future

The focus of the crypto 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. Every new chain aimed at improving processing 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 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. We must implement these measures seriously and pay attention to security and user experience. The future direction of blockchain development should be to promote the unification of liquidity across the entire ecosystem, rather than continue to exacerbate fragmentation issues. Only in this way can we truly unleash the potential of blockchain technology, bringing convenience and value to users.