Every chain is an island, and cryptocurrencies face a liquidity crisis

By: Jin Kwon, Co-founder and Chief Strategy Officer of Saga, CoinTelegraph

Compiled by: Baishui, Golden Finance

Crypto has made great strides in increasing 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 scattered across the growing maze of blockchains.

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

These issues affect not only Ethereum, but almost all ecosystems. No matter how advanced a new blockchain is, it has the potential to become isolated “islands” of liquidity that are difficult to connect to each other.

The true cost of fragmentation

Fragmented liquidity means there is no single “pool” of assets that traders, investors, or decentralized finance (DeFi) applications can tap into. Instead, each blockchain or sidenet has its own fixed liquidity. This isolation creates multiple headaches for users who want to buy tokens or access a specific lending platform.

Switching networks, opening dedicated wallets, and paying multiple transaction fees are far from seamless, especially for those who are not very tech-savvy. Liquidity is also weaker in each isolated pool, leading to price differences and increased trading slippage.

Many users utilize bridges to move funds between chains, but these bridges are often targeted, sparking fear and distrust. DeFi cannot gain mainstream momentum if liquidity transfers are too cumbersome or risky. Meanwhile, projects scramble to deploy on multiple networks or risk being left behind.

Some observers worry that fragmentation could force a return to a few dominant blockchains or centralized exchanges, undermining the decentralization that fueled blockchain’s rise.

Familiar fixes, gaps still exist

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

Meanwhile, ecosystems like Cosmos and Polkadot enable interoperability within their frameworks, despite being distinct sectors within the broader crypto space.

The problem is fundamental: each chain thinks it is different. Any new chain or sub-network must be “plugged in” at the bottom layer to truly unify liquidity. Otherwise, it adds another universe of liquidity that users must discover and bridge. This challenge is compounded by the fact that blockchains, bridges, and aggregators view each other as competitors, leading to deliberate isolation and making fragmentation more apparent.

Integrating liquidity at the base layer

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

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

Ethereum’s own challenges with heterogeneous layer 2 (L2) solutions highlight the importance of integration. Different players — Ethereum as a settlement layer, L2 focused on execution, and various bridge services — all have their own incentives, leading to fragmented liquidity.

Vitalik’s mention of this issue highlights the need for a more cohesive design. An integrated base layer model brings these components together at launch, ensuring funds can flow freely without forcing users to navigate multiple wallets, bridge 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 flows rather than charging users for each trade, such protocols reduce friction and encourage capital movement across the 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.

It’s not just an Ethereum problem

While Buterin’s blog post focuses on Ethereum rollups, fragmentation is not about the ecosystem. Whether projects are built on Ethereum Virtual Machine-compatible chains, WebAssembly-based platforms, or other platforms, the fragmentation trap will occur if liquidity is isolated.

As more protocols explore base layer solutions — embedding automatic interoperability into their chain designs — the hope is that future networks will not further divide capital, but instead help unify it.

A clear principle emerges: throughput means nothing without connectivity.

Users don’t need to think about L1, L2, or sidechains. They just want seamless access to decentralized applications (DApps), games, and financial services. If the feeling of stepping onto a new chain is the same as operating on a familiar network, then adoption will occur.

Towards a unified, mobile future

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

Building interoperability directly into blockchain infrastructure provides a clear path to solving 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 how smoothly value flows throughout the ecosystem.

The technical foundations for this approach already exist today. We just have to implement them carefully, paying attention to security and user experience.