Saga co-founders: Each chain is an island, Crypto Assets face a Liquidity crisis.

Capital and users are dispersed in the ever-growing Blockchain maze.

Written by: Jin Kwon, co-founder and Chief Strategy Officer of Saga, CoinTelegraph

Compiled by: Baishui, Golden Finance

Cryptography has made significant progress in improving transaction throughput. New Layer 1 (L1) and side networks offer faster and cheaper transactions than ever before. However, a core challenge has emerged: liquidity fragmentation—capital and users are dispersed across an increasingly complex Blockchain maze.

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

These issues affect not only Ethereum but also nearly all ecosystems. No matter how advanced a new Blockchain is, it can become a liquidity "island" that is difficult to connect.

The True Cost of Fragmentation

Liquidity fragmentation means that traders, investors, or decentralized finance (DeFi) applications do not have a single asset "pool" to take advantage of. Instead, each Blockchain or sidechain has its own fixed liquidity. For users wanting to purchase tokens or access specific lending platforms, this isolation can create multiple troubles.

Switching networks, setting up dedicated wallets, and paying multiple transaction fees are far from seamless, especially for those who are not technically savvy. The liquidity in each isolated pool is also weaker, leading to increased price discrepancies and trading slippage.

Many users transfer funds between chains using bridges, but these bridges often become targets of attacks, causing fear and distrust. If the transfer of liquidity is too cumbersome or poses too much risk, DeFi cannot gain mainstream momentum. Meanwhile, projects compete to deploy on multiple networks, or they risk being eliminated.

Some observers worry that fragmentation may force people back to a few dominant Blockchains or centralized exchanges, undermining the decentralized ethos that has driven the rise of Blockchain.

Familiar fixes, still gaps exist

A solution to this problem has already emerged. Bridges and wrapped assets have achieved basic interoperability, but the user experience remains cumbersome. Cross-chain aggregators can route tokens through a series of exchanges, but they typically do not consolidate the underlying liquidity. They only assist users in navigation.

At the same time, ecosystems such as Cosmos and Polkadot have achieved interoperability within their frameworks, even though they are different domains within the broader cryptocurrency space.

The problem is fundamental: each chain believes it is different. Any new chain or subnet must be "inserted" at the underlying level to truly unify liquidity. Otherwise, it will add another area of liquidity that users must discover and bridge. As Blockchains, bridges, and aggregators view each other as competitors, leading to intentional isolation and making fragmentation more apparent, this challenge becomes even more complex.

Integrating Liquidity at the Base Layer

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 emerges in certain Layer 1 protocols and dedicated frameworks, where interoperability is seen as a fundamental element rather than an optional add-on.

Validator nodes automatically handle cross-chain connections, allowing new chains or side networks to be launched immediately and access the liquidity of a broader ecosystem. This reduces reliance on third-party bridges, which often bring security risks and user friction.

The challenges that Ethereum itself faces in heterogeneous Layer 2 (L2) solutions highlight 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 fragmented liquidity.

Vitalik's mention of this issue emphasizes the necessity for more cohesive design. The integrated base layer model brings these components together at launch, ensuring that funds can flow freely without forcing users to navigate multiple wallets, bridging solutions, or aggregators.

The integrated routing mechanism also consolidates asset transfers, simulating a unified liquidity pool behind the scenes. 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 throughout the entire network. Developers deploying new Blockchains can immediately access shared liquidity resources, while end users can avoid the use of multiple tools or encountering unexpected fees.

This emphasis on integration helps maintain a seamless experience, even as more networks go live.

Not just an Ethereum issue

Although Buterin's blog post focuses on the aggregation of Ethereum, fragmentation is unrelated to the ecosystem. Whether a project is built on a chain compatible with the Ethereum Virtual Machine, a WebAssembly-based platform, or other platforms, fragmentation traps will occur if liquidity is isolated.

As more and more protocols explore foundational layer solutions—embedding automatic interoperability into their chain designs—people hope that future networks will not further divide capital, but rather contribute to the unification of capital.

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

Users do not need to consider L1, L2, or sidechains. They simply want seamless access to decentralized applications (DApps), games, and financial services. If the experience of stepping onto a new chain feels the same as operating on a familiar network, then adoption will occur.

Moving Towards a Unified and Fluid Future

The crypto community's focus on transaction throughput reveals an unexpected paradox: the more chains we create to increase speed, the more decentralized our ecosystem's advantage becomes, and that advantage 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 addressing this challenge. When protocols automatically handle cross-chain connections and effectively route assets, developers can scale without dispersing their user base or capital. The success of this model comes from measuring and improving the smooth flow of value throughout the ecosystem.

The technical foundation for this method already exists. We must implement these measures seriously, paying attention to security and user experience.