Saga co-founder: Every chain is an isolated island, and cryptocurrency is facing a liquidity crisis
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Saga co-founder: Every chain is an isolated island, and cryptocurrency is facing a liquidity crisis
Capital and users are scattered across an ever-growing maze of blockchains.
Navigating Web3 tides with focused insightsAuthor: Jin Kwon, Co-founder and Chief Strategy Officer of Saga, Cointelegraph
Translation: Baishui, Jinse Finance
Crypto has made significant strides in improving transaction throughput. New Layer 1 (L1) blockchains and side networks offer faster and cheaper transactions than ever before. However, one core challenge has come into sharp focus: liquidity fragmentation—the dispersion of capital and users across an ever-growing maze of blockchains.
Vitalik Buterin recently highlighted in a blog post how scaling success has led to unforeseen coordination challenges. With so many chains holding substantial value, participants face daily friction involving bridging, swapping, and wallet switching.
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's difficult to connect with others.
The True Cost of Fragmentation
Liquidity fragmentation means traders, investors, or decentralized finance (DeFi) applications cannot access a single, unified pool of assets. Instead, each blockchain or side network maintains its own isolated liquidity. For users wanting to buy tokens or access specific lending platforms, this isolation creates multiple hurdles.
Switching networks, setting up dedicated wallets, and paying multiple transaction fees are far from seamless—especially for less tech-savvy users. Liquidity within each isolated pool is also weaker, leading to price discrepancies and increased slippage.
Many users rely on bridges to move funds between chains, but these bridges are frequent targets of attacks, breeding fear and distrust. If moving liquidity becomes too cumbersome or risky, DeFi will struggle to gain mainstream traction. Meanwhile, projects rush to deploy across multiple networks or risk being left behind.
Some observers worry fragmentation could push the ecosystem back toward a few dominant blockchains or centralized exchanges, undermining the decentralization principles that fueled blockchain’s rise.
Familiar Fixes, Persistent Gaps
Solutions to this problem have emerged. Bridges and wrapped assets enable basic interoperability, but user experience remains clunky. Cross-chain aggregators can route tokens through a series of swaps, but they typically don’t unify underlying liquidity—they merely help users navigate.
Meanwhile, ecosystems like Cosmos and Polkadot achieve interoperability within their own frameworks, though they remain distinct domains within the broader crypto landscape.
The issue is fundamental: each chain sees itself as separate. Any new chain or subnet must be integrated at the foundational level to truly unify liquidity. Otherwise, it simply adds another liquidity domain that users must discover and bridge to. This challenge is further complicated by the fact that blockchains, bridges, and aggregators often view each other as competitors, leading to intentional silos that make fragmentation even more pronounced.
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 appears in certain Layer 1 protocols and specialized frameworks where interoperability is treated as a foundational element, not an optional add-on.
Validator nodes automatically handle cross-chain connections, allowing new chains or side networks to launch with immediate access to the broader ecosystem’s liquidity. This reduces reliance on third-party bridges, which often introduce security risks and user friction.
Ethereum’s own challenges with heterogeneous Layer 2 (L2) solutions underscore the importance of integration. Separate entities—Ethereum as the settlement layer, L2s focused on execution, and various bridging services—each have their own incentives, resulting in fragmented liquidity.
Vitalik’s commentary on the issue highlights the need for more cohesive design. Integrated base-layer models bundle these components together from launch, ensuring funds can flow freely without forcing users to navigate multiple wallets, bridging 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 flow instead of charging users per transaction, such protocols reduce friction and encourage capital movement across the network. Developers launching new blockchains gain immediate access to shared liquidity, while end users avoid juggling multiple tools or encountering unexpected fees.
This emphasis on integration helps maintain a seamless experience even as more networks come online.
Not Just Ethereum’s Problem
While Buterin’s blog focuses on Ethereum’s rollups, fragmentation is not ecosystem-specific. Whether a project builds on an Ethereum Virtual Machine (EVM)-compatible chain, a WebAssembly-based platform, or another framework, the liquidity trap emerges whenever liquidity is isolated.
As more protocols explore base-layer solutions—embedding automatic interoperability into their chain designs—there is hope that future networks will unify rather than further divide capital.
A clear principle emerges: without connectivity, throughput is meaningless.
Users shouldn’t need to think about L1s, L2s, or sidechains. They simply want seamless access to decentralized applications (DApps), games, and financial services. Adoption happens when operating on a new chain feels no different than using a familiar network.
Toward a Unified, Fluid Future
The crypto community’s focus on transaction throughput has revealed an unexpected paradox: the more chains we create to increase speed, the more we dilute the strength of our ecosystem—its shared liquidity. Every new chain designed to boost capacity creates yet another isolated pool of capital.
Building interoperability directly into blockchain infrastructure offers a clear path forward. 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 lies in measuring and improving how smoothly value flows across the entire ecosystem.
The technical foundation for this approach already exists. What remains is the serious implementation of these systems—with careful attention to security and user experience.
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