Saga Co-founder: Each chain is an island, Crypto Assets are facing a Liquidity crisis.

Author: Jin Kwon, Co-founder and Chief Strategy Officer of Saga, CoinTelegraph; Translated by: Bai Shui, Golden Finance

Cryptocurrency 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 come into focus: liquidity fragmentation—capital and users are dispersed across an ever-growing maze of blockchains.

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 switching wallets.

These issues affect not only Ethereum, but almost all ecosystems. No matter how advanced a new blockchain is, it has the potential to become a liquidity “island” that is difficult to connect with others.

The True Cost of Fragmentation

Liquidity fragmentation means that traders, investors, or decentralized finance (DeFi) applications do not have a single asset “pool” to utilize. Instead, each blockchain or sidechain has its own fixed liquidity. This isolation poses multiple challenges for users looking to purchase tokens or access specific lending platforms.

Switching networks, setting up dedicated wallets, and paying multiple transaction fees is far from seamless, especially for those who are not very tech-savvy. The liquidity in each isolated pool is also weaker, leading to increased price differences 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 risky, DeFi will struggle to gain mainstream momentum. Meanwhile, projects are rushing to deploy on multiple networks, or they risk being eliminated.

Some observers are concerned that fragmentation may force people back to a few dominant blockchains or centralized exchanges, thereby undermining the decentralized philosophy that has driven the rise of blockchain.

Familiar fixes still have gaps

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

At the same time, ecosystems like Cosmos and Polkadot have achieved interoperability within their frameworks, even though they are distinct domains within the broader crypto space.

The problem is fundamental: each chain believes it is different. Any new chain or sub-network must be “inserted” at the underlying level to truly unify liquidity. Otherwise, it will add another liquidity domain that users must discover and bridge. This challenge becomes more complex as blockchains, bridges, and aggregators view each other as competitors, leading to intentional isolation and making fragmentation more apparent.

Integrating Liquidity at the Base Layer

The integration of the base layer addresses the issue of liquidity fragmentation by embedding bridging and routing capabilities directly into the core infrastructure of the chain. This approach appears in certain Layer 1 protocols and dedicated frameworks, where interoperability is regarded 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 introduce 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 of a more cohesive design. The integrated base layer model combines these components 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 instead of charging users for each transaction, such protocols reduce friction and encourage capital flow throughout 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 to maintain a seamless experience, even with more networks coming online.

It’s not just an Ethereum problem

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

As more and more protocols explore foundational layer solutions—embedding automatic interoperability into their chain designs—people 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 L1, L2, or sidechains. They just 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 it will be adopted.

Towards a Unified and Fluid Future

The focus of the crypto community on trading throughput reveals an unexpected paradox: The more chains we create to improve speed, the more the advantages of our ecosystem become dispersed, and this advantage lies in its shared liquidity. Every new chain designed to increase 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 effectively 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. We must seriously implement these measures and pay attention to safety and user experience.