DeFi was founded on the premise that there did not need to be an intermediary such as a bank. However, with time and as the number of blockchain and Layer 2 networks continued to grow, yet another issue began to become apparent: liquidity has been split up among many different parties.
Liquidity can now be segregated by different blockchains, protocols, trading pairs, and applications instead of being concentrated in one big capital pool available to the user. While the asset may be available in several networks at once, these do not have equal amounts of liquidity necessarily. According to the BIS, the rise in different Layer 1 and Layer 2 networks has resulted in fragmentation of the infrastructure, assets, and liquidity of crypto.
This is important because liquidity is crucial for trade and DeFi operations. As the liquidity becomes thinner, the price effect of any large transaction will become higher. Having different networks increases options, but it also leads to capital dilution.
The situation becomes more obvious when considering decentralized exchanges. The automated market maker needs liquidity deposited in pools, where traders can trade against the pool. When the liquidity is centralized, it can be used quite efficiently. However, when similar tokens and transactions are distributed among several pools and networks, the users and liquidity providers are not dealing in one consolidated market.
This situation can result in price and liquidity differences between venues and can give some opportunities for arbitrageurs. At the same time, liquidity providers will face a choice of where to place their funds rather than having to work in every market automatically.
Moreover, the very first idea of Uniswap included routing transactions via a common asset and pointed out that such an approach had to cause additional expenses for liquidity providers.
The general idea is that the addition of new chains does not lead to additional liquidity automatically. On the contrary, it creates more places where liquidity can be found but becomes less accessible as one consolidated pool.
Fixing the issue will require more than just the creation of yet another bridge. The movement of assets or messages across networks is itself a topic with certain technical and security implications. The BIS observed back in 2026 that bridges and native multichain issuance have the potential to decrease fragmentation but also bring additional dependencies based on trust, governance, and resilience.
There are also other issues surrounding the development of the Decentralized Finance ecosystem. Given the existence of liquidity pools, applications, and assets on each and every blockchain, users might end up interacting with a number of different financial markets rather than a single interconnected system.
In my opinion, this is one of the most intriguing dilemmas of DeFi. The existence of multiple blockchains allows creating diversity and better scalability; however, fragmentation might negatively affect the network effects that are so typical of financial markets.
Thus, the task will not be merely the creation of additional chains or liquidity pools. Rather, the task will be in making liquidity already created easily accessible.
