Liquidity Fragmentation
Although layer 1 and layer 2 solutions successfully address the problems they set out to resolve, their advent has been accompanied by another, perhaps a more serious issue - liquidity fragmentation. With a slew of protocols striving to claim the top spot in the emerging Web 3.0 paradigm, and none having done so conclusively, the DeFi sector is faced with the prospect of a fragmented market with widely dispersed liquidity and developer communities. To put things into perspective, the DeFi sector currently encapsulates over a trillion dollars, spread across a crypto ecosystem that consists of over 5,000 cryptocurrencies operating in isolated infrastructures that cannot access the liquidity offered by one another. As liquidity fragments between these isolated pools, it loses efficiency & velocity and becomes increasingly difficult to utilize. To address this scenario, there is a growing requirement for a mechanism to port liquidity across blockchains and increase capital efficiency in the system. Futhermore, as more and more institutional investors enter crypto, the need for better efficiency and flexibility grows almost exponentially.
Copy link