Fragment Liquidity problems

As decentralized finance continues to incorporate additional layer-1s and layer-2s, the market becomes increasingly fragmented. Since this is inherently undesirable, there are a number of potential solutions currently being tested by the market.

Some blockchains such as Polkadot and Cosmos tout their inter-blockchain communication credentials, but in reality, this interoperability is between layer-2s co-existing on the same layer-1 network. Inter-blockchain communication is significantly harder between layer-1s.

Alternatively, wrapped tokens such as Wrapped Bitcoin (WBTC) allow the trading of Bitcoin on the Ethereum network. Almost every major blockchain has some version of wrapped tokens.

There are also cross-chain bridges that seek to bridge one layer-1 chain to another. The complex problem of fragmentation has thus far created quite a complex picture of differing solutions.

As the modular future becomes a reality, more specialized appchains and L2/L3 will be born, exascerbating the liquidity fragmentation.