The Quest to Reduce Crypto Fragmentation
Fragmentation describes the action or process of breaking something into small parts – and it’s an apposite term with which to sumarize the multichain landscape today. Where once there were a few smart contract chains that could handle everything, now there are many and where once there was a single layer on which transactions were settled there are now several.
From L1 to L3 and from EVM to Solana, crypto has rapidly fragmented, its parts spinning away from one another like particles of an expanding universe. While the balkanization of the multichain landscape isn’t inherently bad – it’s a natural process that’s to be expected due to the proliferation of competing blockchain technologies – it does have its drawbacks, with liquidity being the greatest casualty of this trend.
As a recent Chainlink blog post observes, “The lack of connectivity between individual instances of a multi-chain application is a large problem for decentralized finance (DeFi) applications specifically because it fragments this liquidity. In the current paradigm, multi-chain DeFi applications have separate liquidity pools for each blockchain, fragmenting the liquidity available to the end user.”
Web3 architects are powerless to prevent the creation of yet more L1s, L2s, DEXs, appchains, and DeFi protocols. But they do have the power to mitigate the effects of this fragmentation by engineering solutions to the diminished liquidity this trend has brought about. A new wave of interoperable solutions is coming onstream that promise to unite the chains, allowing data, liquidity, assets, and messaging to flow seamlessly between them.
Defragging DeFi
Most home computer owners are familiar with the concept of periodically defragging a hard drive. As files are created, modified, and deleted, the data on the hard drive can become fragmented, resulting in pieces of a single file being spread across different physical locations on the disk. Defragmentation reorganizes this data, placing the fragments of each file closer together so that they can be accessed more efficiently.
It’s a good metaphor for visualizing the way in which web3 imagineers are orchestrating ways to defragment the onchain landscape. This has entailed engineering solutions that can route liquidity as well as other core DeFi assets such as data to where it’s needed on demand.
One of the most successful ways of doing so entails the creation of yet more networks, in this case Layer 3 chains, that are interoperable with leading L1 and L2 ecosystems such as EVM and Solana. Rather than exacerbating fragmentation, however, these dedicated L3s reduce it by efficiently routing liquidity between chains.
One of the leading architects of this trend, Orbs, has seen significant adoption for its L3 liquidity layer that is now integrated into multiple DEXs. It enables onchain protocols to tap into external liquidity sources including CEXs to access CeFi-tier pricing. This not only results in a superior trading experience for end users, but it allows nascent networks to bootstrap through tapping into readily available liquidity.
Once Orbs expands its service to more blockchains, and similar layers come onstream, there’s a very real prospect of onchain liquidity being materially improved for the benefit of all DeFi users. The challenge in designing these solutions is ensuring that they can route liquidity with sufficient speed to ensure a seamless trading experience. If optimally implemented, the user experience should be no different to that of executing a conventional DEX swap.
Enjoying the Best of Both Worlds
Many of the blockchain networks that have emerged in the last few years have been designed to solve specific problems such as transaction bottlenecks, high fees, or inability to scale satisfactorily. They have in many cases succeeded in these goals, resulting in the deployment of chains that can support thousands of transactions per second and that can pull in rich troves of data from on- and off-chain sources.
The availability of improved tooling has also simplified dapp development, allowing project teams to bring concepts to market faster. Meanwhile, improvements in modular design have made it easier to access pre-built DeFi services such as oracles, fiat pipelines, NFT marketplaces, and decentralized data storage and indexing.
Layer 3 networks that deliver core services, particularly in terms of liquidity and cross-chain data, form the final piece of this puzzle. They provide a plug-and-play solution that can be slotted into existing DeFi platforms with just a few lines of code. Thanks to these innovations, web3 users no longer need to concern themselves with where the liquidity’s coming from, freeing them to explore emerging chains and ecosystems in search of the best yield, airdrops, and other incentives.
Blockchains were never meant to be siloed, but the unfettered ambition to build new things has sent builders off in wildly different directions pursuing ideas that may share the same overarching goal but are reliant on incompatible architecture. There’s no putting the multichain genie back in the bottle now, but that doesn’t mean the industry is consigned to fragmentation into ever more isolated parts. The technology is here to reunite the omnichain landscape. The onus is on DeFi projects to integrate it and deliver a user experience that delivers deep liquidity – regardless of the asset, swap size, and network in question.
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