The Crypto Assets industry faces the challenge of Liquidity fragmentation

Crypto Assets have made significant progress in improving transaction processing capabilities. Emerging underlying blockchains and sidechain networks provide a faster and lower-cost transaction experience. However, a core issue is becoming increasingly prominent: Liquidity fragmentation—funds and users are dispersed across an ever-expanding blockchain network.

Recently, a well-known blockchain expert pointed out in a blog that the successful expansion has paradoxically brought unexpected coordination challenges. Due to the large number of blockchain networks and the decentralized value, participants have to deal with cumbersome operations such as cross-chain, exchanges, and switching wallets every day.

This issue affects not just a specific ecosystem but almost all blockchain ecosystems. Regardless of how advanced new blockchain technology is, there is a possibility of becoming a difficult-to-interconnect Liquidity "island."

The True Cost of Fragmentation

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

For users with weaker technical capabilities, switching networks, creating dedicated wallets, and paying multiple transaction fees is far from a seamless experience. The liquidity in each isolated pool is also relatively weak, leading to increased price differences and trading slippage.

Many users transfer funds between different chains through bridging protocols, but these bridging protocols often become targets of attacks, causing panic and distrust. If the Liquidity transfer is too cumbersome or carries too much risk, DeFi will struggle to achieve mainstream adoption. Meanwhile, projects have to deploy on multiple networks, or they risk being eliminated.

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

Existing solutions still have shortcomings.

There are already some solutions to this problem. Bridging and wrapping assets have achieved basic interoperability, but the user experience is still not smooth enough. Cross-chain aggregators can route tokens through a series of exchanges, but they usually do not merge the underlying liquidity, merely helping users navigate.

At the same time, certain ecosystems have achieved interoperability within their frameworks, even though they remain relatively independent areas within the broader Crypto Assets space.

The root of the problem lies in: each chain regards itself as an independent entity. Any new chain or subnet must "insert" itself at the underlying level to truly unify liquidity. Otherwise, it will only add another liquidity domain that users need to discover and bridge. As blockchain, bridging protocols, and aggregators view each other as competitors, this challenge becomes more complex, leading to intentional isolation and exacerbating fragmentation.

integrates liquidity at the base layer

The integration of 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 appears in certain underlying protocols and specialized frameworks, treating interoperability as a fundamental element rather than an optional additional feature.

The validator nodes automatically handle cross-chain connections, allowing new chains or sidechains to be launched immediately and access the liquidity of a broader ecosystem. This reduces dependence on third-party bridging, which often introduces security risks and user friction.

The challenges faced by a well-known blockchain in heterogeneous layer two expansion solutions highlight the importance of integration. Different participants—underlying blockchain as the settlement layer, layer two focusing on execution, and various bridging services—have their own motivations, leading to fragmented Liquidity.

The expert's mention of the issue emphasizes the necessity for a more cohesive design. The integrated base layer model integrates these components 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 consolidates 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 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 as more networks come online.

is not just a problem of a single ecosystem.

While the aforementioned experts' blogs focus on the scaling of a specific ecosystem, fragmentation is a widespread issue. Whether projects are built on Ethereum Virtual Machine-compatible chains, WebAssembly-based platforms, or other platforms, if Liquidity is isolated, they will fall into the trap of fragmentation.

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 fragment capital, but instead contribute to the unification of capital.

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

Users do not need to consider layer one, layer two, or sidechains. They just 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 will accept it.

Toward a unified and liquid future

The attention of the encryption community to trading throughput reveals an unexpected paradox: the more chains we create to increase speed, the more the advantages of the ecosystem are dispersed, and this advantage lies in its shared liquidity. Each 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 diluting 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 must earnestly implement these measures and pay attention to security and user experience.