Saga Co-Founders: Crypto World Liquidity Fragmentation, How Do We Rebuild the "New Continent"?

Original Article Title: "Saga Alliance: Every Chain is an Island, Cryptocurrency Faces Liquidity Crisis"

Original Article Author: Jin Kwon, Saga Co-Founder and Chief Strategy Officer, CoinTelegraph

Original Article Translation: Baishui, 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 scattered across a growing blockchain labyrinth.

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

These issues not only affect Ethereum but nearly all ecosystems. No matter how advanced a new blockchain is, it can become a liquidity "island" that is challenging to interconnect.

The True Cost of Fragmentation

Fragmented liquidity means traders, investors, or decentralized finance (DeFi) applications do not have a single asset "pool" to tap into. Instead, each blockchain or side network has its own fixed liquidity. This isolation poses multiple troubles for users looking to buy tokens or access specific lending platforms.

Switching networks, setting up dedicated wallets, and paying multiple transaction fees are far from seamless, especially for the less technically inclined. Liquidity in each isolated pool is also weaker, leading to price discrepancies and increased trade slippage.

Many users use bridges to transfer funds between chains, but these bridges often become targets for attacks, sparking fear and mistrust. If liquidity transfers are too cumbersome or risky, DeFi cannot gain mainstream momentum. Meanwhile, projects rush to deploy on multiple networks to avoid being left behind.

Some observers worry that fragmentation may force people back to a few dominant blockchains or centralized exchanges, undermining the decentralized ideal that underpins the rise of blockchain.

Familiar Fixes, Yet Gaps Remain

Solutions to this challenge have 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 often do not pool underlying liquidity. They merely aid in user navigation.

Meanwhile, ecosystems like Cosmos and Polkadot have achieved interoperability within their frameworks, despite being in different realms within the broader crypto space.

The issue is fundamental: each chain sees itself as distinct. Any new chain or subnetwork must "plug in" at the base layer to achieve true composability. Otherwise, it adds another liquidity silo that users must discover and bridge. As blockchains, bridges, and aggregators see each other as competitors, intentional isolation leads to increased fragmentation, making this challenge even more complex.

Integrating Liquidity at Layer One

Base-layer integration addresses liquidity fragmentation by embedding bridging and routing capabilities directly into a chain's core infrastructure. This approach is seen in certain Layer 1 protocols and dedicated frameworks where interoperability is considered a foundational element rather than an optional add-on.

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

Ethereum itself has faced challenges in the realm of heterogeneous Layer 2 (L2) solutions, highlighting the importance of integration. Different stakeholders – Ethereum as the settlement layer, L2 focusing on execution, and various bridging services – each have their own incentives, resulting in liquidity fragmentation.

Vitalik's mention of this issue underscores the need for a more cohesive design. The integrated base-layer model launches with these components already integrated, ensuring capital can flow freely without forcing users to navigate multiple wallets, bridging solutions, or aggregators.

The integrated routing mechanism also incorporates asset transfers, simulating a unified liquidity pool behind the scenes. By capturing a small portion of the overall liquidity flow instead of charging users per transaction, such protocols reduce friction and encourage capital flow across the entire network. Developers deploying new blockchains can immediately access shared liquidity infrastructure, while end-users can avoid juggling multiple tools or encountering surprise fees.

This emphasis on integration helps maintain a seamless experience even as more networks come online.

Not Just an Ethereum Issue

While Buterin's blog post focuses on Ethereum's aggregation, fragmentation is ecosystem-agnostic. Whether projects are built on chains compatible with the Ethereum Virtual Machine, WebAssembly-based platforms, or other platforms, if liquidity is isolated, a liquidity trap emerges.

As more and more protocols explore base-layer solutions—embedding automatic interoperability into their chain designs—people are hopeful that future networks won't further fragment capital but will instead aid in unifying it.

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

Users shouldn't have to think about L1, L2, or sidechains. They just want seamless access to decentralized applications (DApps), games, and financial services. If stepping onto a new chain feels the same as operating on a familiar network, then adoption will follow.

Towards a Unified, Liquid Future

The crypto community's focus on transaction throughput has revealed an unexpected paradox: the more chains we create for speed, the more we dilute the network effects of our ecosystem, which hinge on shared liquidity. Each new chain designed to increase capacity creates another isolated capital pool.

Embedding interoperability directly into blockchain infrastructure offers a clear path to addressing 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 lies in measuring and improving the smooth flow of value throughout the entire ecosystem.

The technical foundation for this approach already exists. We must now diligently implement these measures, with a focus on security and user experience.

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