DeFi liquidity is fragmented—scalable blockchain is the solution

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When I first heard about decentralized finance (DeFi), I was highly skeptical. However, as the years have rolled on and I’ve learned more, I now believe that, done right, it has revolutionary potential with hugely beneficial implications for financial inclusion, transparent lending and borrowing, and remittances, to name a few things.

However, DeFi has a problem. With Total Value Locked recently surpassing $120 billion, liquidity is fragmented across dozens of unscalable blockchains tied together by a tangled web of bridges. Worse yet, these blockchains have different consensus mechanisms, data structures, and smart contracting formats that inhibit interoperability.

This is inefficient and costly, ruins the user experience, and introduces security vulnerabilities that need not exist. Let’s take a closer look at these and some other issues before exploring how a single scalable blockchain can solve them.

Fragmented liquidity and its discontents

Fragmented liquidity is a problem for DeFi in and of itself: just as the United States dominates the world financial system because of its deep capital markets, easy accessibility, and the network effects of the U.S. Dollar, DeFi would benefit from something similar. However, the fragmented state of DeFi and the need to transfer between incompatible blockchains causes several other problems, some of which slow the adoption of the technology.

Reduced efficiency – Anyone who has traded on so-called decentralized exchanges knows about and likely loathes the term slippage. Essentially, it’s when a trade is executed at a different price than the one requested. One of the main reasons for slippage is thin liquidity, caused by providers spreading their capital across multiple protocols and blockchains.

Increased costs – While blockchains like Solana, Tron, and BNB have respectable Total Value Locked figures in the billions, Ethereum has the most by far, with over $65 billion locked. Transacting on Ethereum isn’t cheap—I was charged $34 for a swap recently. Aside from this transaction cost, hopping between blockchains leads to bridge tolls, and transactions often fail. As you’ll soon see, there’s no need for any of these costs to exist.

Compromised user experience – Simply trying to bridge up to Polygon from Ethereum to make a bet on Polymarket recently had me cursing out loud and swearing never to use that blockchain again. That’s not good for technology adoption, and truthfully, many would be put off even trying. Familiarizing oneself with multiple interfaces, wallets, and derivatives of tokens is intimidating, and that’s never a good thing. The user experience needs to be as hassle-free and seamless as possible if DeFi is ever to be adopted.

Reduced network effects – Remember what I said earlier about the USD? It has global network effects. People will accept it everywhere, from Thailand to Tunisia to Bolivia and beyond. The fragmented DeFi ecosystem dampens network effects and reduces user bases around any given protocol. More people using one or two protocols on a single blockchain means faster growth, innovation, deeper liquidity, tighter spreads, less slippage, and many other benefits.

Increased security risks – You probably don’t need me to tell you about the infamous blockchain bridge hacks. Their centralized components and complex architecture leave them vulnerable, and with security experts spread thin across multiple protocols, it’s much easier for a vulnerability to slip by. Add to this smart contracts trying to communicate across incompatible protocols, and the risk becomes much greater.

These aren’t the only problems with fragmented DeFi liquidity, but they’re the major ones. Let’s examine how a single, scalable public blockchain can solve some of them.

Enter the original Bitcoin protocol

In case you don’t know, Bitcoin was designed to scale unboundedly. Satoshi Nakamoto told developer Mike Hearn it “never really hits a scaling ceiling.” He envisioned a future where professional nodes in data centers processed billions of transactions.

There’s no need to rehash what happened and how it went wrong here. Needless to say, BTC is nothing like that today, and the original functionality of Bitcoin being switched off led to the proliferation of Ethereum and the thousands of other blockchains, and hence the DeFi fragmentation and all of the associated problems outlined above.

Yet, the original Bitcoin isn’t dead—it exists today as BSV. It recently reached one million transactions per second, has fees of $0.000001 per transaction, and many of the original opcodes have been restored. High-level smart contracting languages like sCrypt have made it possible to develop all kinds of applications on BSV. Everything from supply chain monitoring apps like Trace App to revolutionary cybersecurity solutions like Sentinel Node have been developed and are live on BSV today.

DeFi needs one global, unifying blockchain. Let’s face it; it’s not going to be Ethereum, Avalanche, Cardano, Ripple, and all of the others aren’t up to the task. For DeFi to reach its potential, it needs to scale to millions of transactions daily, then hourly, then per minute, and they need to be seamless and virtually free.

Imagine how far along DeFi could be today if all the liquidity fragmented across different blockchains was concentrated on one. Sure, there would still be many different protocols (competition is good), but they would be fully interoperable and compatible, making moving between them as easy as clicking the Buy Now button on Amazon (NASDAQ: AMZN).

As the liquidity deepened and the savings on fees were realized, a virtuous adoption cycle lead to more liquidity and increased competition, leading to even lower costs and more adoption would take-off. Add in the potential for microfinance and the whole developing world will be able to get involved because of the tiny fees, and the sky would be the limit!

Honestly, as an initial skeptic turned DeFi believer, I fear that the unpleasing user experience, fragmented liquidity, and high costs will limit it to wealthier markets or cause vast numbers to give up on it entirely. That would be a shame because, despite some wrinkles that still need to be ironed out regarding regulatory compliance and related matters, DeFi does have the potential to change the world for the better. Developers should look closer at scalable blockchains like BSV before the window of opportunity closes.

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